Vertical integration and market power in electricity

Frontier (Melbourne & Sydney) advised the successful protagonist of the first major vertical merger in the Australian National Electricity Market (NEM). Australian Gas Light Company (AGL), a substantial retailer and distributor of energy in the NEM, entered into an agreement to acquire a 35% stake in the 2,000 MW Loy Yang A power station, a major generator located in Gippsland, Victoria. The competition regulator, the Australian Competition and Consumer Commission (ACCC), opposed the transaction on the basis that it would substantially lessen competition in the wholesale electricity contract market and lead to higher power prices, in violation of the Trade Practices Act (TPA). AGL sought a court declaration that the transaction would not breach the TPA

In a judgement released on 19 December 2003 the court agreed with AGL that the merger would not substantially lessen competition in a relevant market. The court also rejected the use of electricity market models that did not take account of potential supply-side responses to generator bidding behaviour.

Frontier’s SPARK model meets this latter requirement and Frontier (Melbourne & Sydney) has subsequently worked with the ACCC on two other electricity mergers, as well as supporting China Light and Power in its acquisition of Singapore Power’s merchant energy business. Related competition work has also been conducted by Frontier (London & Cologne) in a range of high profile competition cases in Europe.

For more information, please contact Marita O’Keeffe at m.okeeffe@frontier-economics.com or call on +61 (0)3 9620 4488.

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