Power in ACCC's Hands
Allan Fels, in his last month at the ACCC, left a poisoned chalice to successor Graeme Samuel. Fels opposed a consortium's acquisition of the giant Loy Yang generator, putting at risk the resolution of its financial distress.
Loy Yang is one of the lowest cost electricity generators in Australia. But former Treasurer Alan Stockdale got a great price for the asset, a price paid by buyers who expected electricity prices to rise. Instead they fell and the firm has spent three years dancing on the edge of bankruptcy.
A consortium comprising AGL, Tokyo Electric and the Commonwealth Bank is the only white knight offering to prevent this. In opposing the move, the ACCC wants to see an electricity market with retailers, line companies and generators under separate ownership. It argues that with the takeover of Loy Yang AGL would become an integrated generator and retailer of electricity, which would be followed by Origin and TXU seeking similar liaisons. The upshot would mean restricted opportunities for new players to break in.
It is doubtful that the ACCC should place itself in the position of imposing its own favoured industrial structure on a sector but, that aside, its opposition is harmful to the industry and consumers.
Loy Yang's parlous financial state makes it a classic "failing firm". Although it is not about to cease producing electricity, its financial distress means that retailers are somewhat cautious in taking out longer term contracts with it. In his prime at the ACCC, Allan Fels argued forcefully that a "failing firm" made a strong case for overriding opposition to mergers that bring greater concentration. Such a firm, as well as denying value to shareholders and others, means a poorly working market.
In addition, the ACCC failed to understand the changes taking place in the electricity industry. Retailers have taken energetic steps to operate at arms length from other producers in the electricity chain, even where they have common ownership. AGL's retailer Agility is fully autonomous from the rest of the company, while Powercor actually sold its own host retailer to Origin.
These developments stem from the retail manager's need to minimise the risk of inadequate electricity contract cover. Prices can suddenly increase a hundred fold and the uncontracted retailer can face enormous losses. The retail manager therefore requires the maximum available sources of energy of energy contracts and cannot afford to jeopardise supplier arrangements. Favouring a particular source, divulging contract information, etc. will make others reluctant to deal. Hence though regulation requires "chinese walls" between different company activities, separation is now driven by commercial factors.
It must also be remembered that AGL is only taking a 35 per cent stake. The acquisition's co-owners would not allow AGL to obtain better value from the shares than they get for themselves. AGL would, therefore, readily offer any assurances that it would operate its interests independently, because it automatically faces these same disciplines from its own and its partners' self interest.
But all this requires some means by which Graeme Samuel can avoid the Fels poisoned chalice and not emerge looking like a pansy.