AGL, an electricity retailer, sought to acquire, as part of a consortium, the Loy Yang A Power Station Business (LYP), a Victorian electricity generation business. The acquisition would have given AGL a 35% share in LYP, the maximum permitted by the Electricity Industry (Prohibited Interests) Regulations 2003. AGL sought an informal clearance from the ACCC for the proposed acquisition. This was denied by the ACCC and the ACCC indicated that, should the acquisition proceed, the ACCC would 'seek appropriate remedies from the Federal Court, including divestment' (see Press Release).

Following this opposition from the regulator, AGL instituted proceedings in the Federal Court seeking a declaration that the proposed acquisition would not infringe s 50 of the TPA, which prohibits mergers which substantially lessen competition. This represented the first instance in which a party had challenged, in the courts, an informal clearance ruling of the ACCC and the first case which considered the current merger test.

The ACCC opposed the application. It first argued that there was no jurisdiction for the court to grant a declaration, because there was no 'matter' before the court that could appropriately be the subject of a declaration. They further argued that even if such jurisdiction existed, the declaration should not be granted because the merger would substantially lessen competition.

Justice French first held that there was a 'matter' before the Court that could be the subject of a declaration. At para's 45-56 of his ruling on jurisdiction, Justice French stated:

Section 50 prohibits acquisition of shares or assets conditionally. The condition is that the effect or likely effect of the acquisition will be to substantially lessen competition in a market. That condition necessarily imports uncertain judgments about the post-acquisition state of competition in the market whether those judgments are required to be made before or after acquisition and whether in the context of claims for declaratory or injunctive or other relief. Such judgments may require consideration of the likely responses of other actors or potential actors in the market. The uncertainty does not render the section non-justiciable. Uncertainty is an inescapable aspect of the operation of a section based upon likelihoods which have to be assessed in determining whether the condition upon which acquisition is prohibited is satisfied.

In my opinion the Court is apprised of a real controversy with real consequences depending upon its resolution. It is not therefore deprived of jurisdiction for want of a `matter' in this case.

Justice French granted a declaration that the merger would not substantially lessen competition. The declaration was subject to certain structural undertakings made to the Court.

More detail on the reasons for the decision and key implications of the decision will follow shortly

Justice French first ruled on the issue of jurisdiction in Australian Gas Light Company (ACN 052 167 405) v Australian Competition & Consumer Commission (No 2) [2003] FCA 1229:

[Para 37] ‘The High Court in In Re Judiciary and Navigation Acts (1921) 29 CLR 257 at 265 required that a matter ordinarily be concerned with ‘some immediate right, duty or liability to be established by the determination of the Court’. … Consistently with what the Court said in that case, declaratory relief cannot be claimed as a way of securing legal advice from the Court or answering an hypothetical question divorced from real controversy.’

[Para 39] ‘It is well established that a declaration can be made to the effect that a proposed course of conduct will not be unlawful.’

[Para 40] ‘The making of a declaration as to the lawfulness of future conduct has long been accepted as an exercise of judicial power. The fact that declaratory relief relates to future conduct does not place it outside the bounds of federal jurisdiction. If the claim for the declaration arises out of a contemporary controversy in which a party’s freedom of action is challenged in some way, that controversy can constitute a matter for the purposes of the exercise of federal jurisdiction. Whether or not there is a real controversy is a question of judgment. In the present case, in my opinion, there is a real controversy about the right or freedom of AGL to proceed with the proposed acquisition in relation to the Loy Yang A power station and the coal mine. Its freedom to do so has been challenged in a very practical way by the regulator in correspondence and most explicitly in its defence where it denies that the proposed acquisitions would not contravene s 50 of the Trade Practices Act. Reservations about or opposition to a proposed acquisition expressed by the regulator can have very concrete commercial consequences and may in some, if not most, cases effectively prevent an acquisition from proceeding’

[Para 45] ‘Section 50 prohibits acquisition of shares or assets conditionally. The condition is that the effect or likely effect of the acquisition will be to substantially lessen competition in a market. That condition necessarily imports uncertain judgments about the post-acquisition state of competition in the market whether those judgments are required to be made before or after acquisition and whether in the context of claims for declaratory or injunctive or other relief. Such judgments may require consideration of the likely responses of other actors or potential actors in the market. The uncertainty does not render the section non-justiciable. Uncertainty is an inescapable aspect of the operation of a section based upon likelihoods which have to be assessed in determining whether the condition upon which acquisition is prohibited is satisfied.’

Justice French revisited the issue of declarations in the principal case:

[Para 355] ‘AGL seeks declarations in the present case that the relevant acquisitions would not have the effect or would not be likely to have the effect of substantially lessening competition in a market in contravention of s 50. Those being the declarations that AGL seeks it is necessary for it to establish, on the balance of probability, what it seeks to have declared. It will succeed in that task if it establishes, on the balance of probability, that each of the relevant acquisitions would not be likely to have the effect of substantially lessening competition in the relevant markets. That is to say, AGL must negative the existence of any real chance, in the sense discussed earlier, of a commercially relevant or meaningful lessening of competition flowing from the acquisition’

[Para 356] ‘The question of onus gives rise to the interaction between the standard of persuasion which is on the balance of probabilities, and the facts required to be proved, which is the absence of a real chance of a substantial lessening of competition. The interaction is analogous to that which arises between standard of proof and the nature of the finding required in determining whether damages can be awarded for loss of a future commercial benefit or opportunity. … The ACCC submits that AGL must satisfy the Court that its hypothesis against any likely substantial lessening of competition in any relevant market is more probable than the competing hypotheses which are advanced to suggest a real chance of competition being substantially lessened in any such market. I accept that formulation of the approach which should be taken in this case. I accept also the proposition advanced by the ACCC that AGL is not entitled to relief if: (a) the Court is left in a position of uncertainty about the competing hypotheses; or (b) the Court concludes that the hypotheses suggesting a real chance of competition being substantially lessened are more probable than the opposing hypotheses. I should add that in so describing the ACCC’s submission, which I accept, I have substituted the term ‘real chance’ for ‘real possibility’ which in my opinion may set the bar too high.’

[Para 600] ‘The ACCC submitted that for a number of reasons the Court should decline, in the exercise of its discretion, to make the declarations sought by AGL. The first reason advanced was that the scheme of the Trade Practices Act in connection with merger matters makes it inappropriate for a proposed acquirer of shares or assets, concerned about a possible contravention of s 50, who has not sought authorisation, to apply for declaratory relief against such a future potential risk. The ACCC argued that the scheme of the Act is that such a proposed acquirer should either seek authorisation under Pt VII of the Act, including if necessary, exercising the rights of review given under Pt IX, or alternatively should make the acquisition unless restrained by an injunction under s 80.’

[Para 612] ‘Notwithstanding my conclusions about the question of discretion in the present case, there may be cases in which discretion would bar the grant of declaratory relief. A corporation would be unlikely to succeed in persuading the Court to grant it a declaration on the basis of a transaction merely in contemplation absent any controversy. A justiciable controversy can arise, as in this case, where the proposed acquirer has approached the ACCC which after consideration of the proposed transaction, which is real and not merely hypothetical, has stated its opposition to it and its intention to act against it. A like controversy could arise by reason of the opposition of a third party. Each case will fall to be decided on its own facts. In this case the opposition of the ACCC is unequivocal. It has not proceeded to claim injunctive relief but has threatened post-acquisition divestiture action. It is not in the least surprising that AGL would not wish to enter into this major transaction with that sword of Damocles hanging over it and the other members of the consortium. Indeed it is difficult to see how, if the transaction were to proceed in the face of such a threat, the public interest would be served with such uncertainty hanging over the operation of a major public utility.’

[Para 608] ‘I conclude that the availability of the authorisation procedure affords no discretionary bar to the right of a corporation to claim a declaration with respect to a proposed acquisition.’

[Para 609] ‘When writing to AGL on 12 June 2003 the ACCC said it had ‘conducted a thorough investigation so as to determine the likely effect of the transaction on both the generation and retail sectors of the electricity supply chain’. In its letter of 5 September, the ACCC expressed its ‘significant reservations’ and that it reserved its right to take action for contravention of s 50 including penalty and divestiture action.’

[Para 610] ‘In its press release of 8 September 2003, the ACCC was ‘… firmly of the view that the proposed acquisition creates substantial competition concerns which are potentially in breach of s 50 of the Trade Practices Act 1974.’ It stated unequivocally that the acquisition ‘… would lead to a less competitive and less efficient market structure in Victoria and potentially, in the National Electricity Market’. It stated that the ACCC would oppose AGL acquiring an interest in LYP, that it remained ‘strongly opposed to this transaction’, and would ‘continue to build its enforcement case should AGL, the Commonwealth Bank and TEPCo decide to close the transaction without providing undertakings satisfactory to the ACCC.’ In the light of these statements it is difficult to understand why the ACCC should now complain that it is deprived of the opportunity to wait up to three years before bringing a divestiture action.’

[Para 611] ‘In my opinion there is no ‘arguably illegitimate forensic or juridical advantage’ accruing to AGL by reason of bringing these proceedings nor is there any unfair loss of a juridical or forensic advantage to the ACCC.’

[Para 612] ‘Notwithstanding my conclusions about the question of discretion in the present case, there may be cases in which discretion would bar the grant of declaratory relief. A corporation would be unlikely to succeed in persuading the Court to grant it a declaration on the basis of a transaction merely in contemplation absent any controversy. A justiciable controversy can arise, as in this case, where the proposed acquirer has approached the ACCC which after consideration of the proposed transaction, which is real and not merely hypothetical, has stated its opposition to it and its intention to act against it. A like controversy could arise by reason of the opposition of a third party. Each case will fall to be decided on its own facts. In this case the opposition of the ACCC is unequivocal. It has not proceeded to claim injunctive relief but has threatened post-acquisition divestiture action. It is not in the least surprising that AGL would not wish to enter into this major transaction with that sword of Damocles hanging over it and the other members of the consortium. Indeed it is difficult to see how, if the transaction were to proceed in the face of such a threat, the public interest would be served with such uncertainty hanging over the operation of a major public utility.’

[Para 378] ‘The concept of market describes, in a metaphorical way, an area or space of economic activity whose dimensions are function, product and geography. A market may be defined functionally by reference to wholesale or retail activities or a combination of both. The concept of product encompasses goods and services and, having regard to the definition of ‘market’ in s 4E, includes the range of goods or services which are substitutable for or competitive with each other.’

[Para 379] ‘The process of market definition was expounded in QCMA where the Tribunal defined ‘market’ as the area of close competition between firms and observed that substitution occurs within a market between one product and another, and between one source of supply and another in response to changing prices …’

‘So a market is the field of actual and potential transactions between buyers and sellers amongst whom there can be strong substitution, at least in the long run, if given a sufficient price incentive.’ (at 190)

In Re Tooth Co Ltd and Tooheys Ltd (1979) 39 FLR 1, the Tribunal identified the task of market analysis as involving:

(1) Identification of the relevant area or areas of close competition.

(2) Application of the principle that competition may proceed through substitution of supply source as well as product;

(3) Delineation of a market which comprehends the maximum range of business activities and the widest geographic area within which, if given a sufficient economic incentive, buyers can switch to a substantial extent from one source of supply to another and sellers can switch to a substantial extent from one production plan to another.

(4) Consideration of longrun substitution possibilities rather than shortrun and transitory situations recognising that the market is the field of actual or potential rivalry between firms.

(5) Selection of market boundaries as a matter of degree by identification of such a break in substitution possibilities that firms within the boundary would collectively possess substantial market power so that if operating as a cartel they could raise prices or offer lesser terms without being substantially undermined by the incursions of rivals.

(6) Acceptance of the proposition that the field of substitution is not necessarily homogeneous but may contain sub-markets in which competition is especially close or especially immediate. This is subject to the qualification that competitive relationships in key sub-markets may have a wide effect upon the functioning of the market as a whole.

(7) Identification of the market as multi-dimensional involving product, functional level, space and time.’

[Para 427] 'The concept of market power was explained by the Trade Practices Tribunal in Re QCMA …

‘… the antithesis of competition is undue market power, in the sense of the power to raise prices and exclude entry. That power may or may not be exercised. Rather, where there is significant market power the firm … is sufficiently free from market pressure to ‘administer’ its own product and selling volume at its own discretion’. (at p 188)

[Para 428] 'In Queensland Wire Industries Pty Ltd v Broken Hill Pty Co Ltd (1989) 107 CLR 177, market power was described by Mason CJ and Wilson CJ as the ability of a firm to increase prices above supply cost without rivals taking away customers in due time (at 189). Dawson J said the term was ‘ordinarily to be taken to be a reference to the power to raise prices in a sustainable way’ allowing that it had aspects ‘other than influence upon the market price’ (200). The majority in Melway Publishing Pty Ltd v Robert Hicks Pty Ltd (2001) 205 CLR 1 said at 21:

‘The notion of market power as the capacity to act unconstrained by the conduct of competitors is reflected in the terms of s 46(3).’

See also Boral Besser Masonry Ltd v Australian Competition and Consumer Commissioner (2003) 195 ALR 609 at 635 (Gleeson CJ and Callinan J) and 664 (McHugh J). ... Although no doubt market power does have aspects other than pricing behaviour it was with respect to pricing behaviour that issue was joined in the present case.'

[Para 429] ‘AGL contends that, absent market power on the part of at least one of the participants in a vertical merger, there is virtually never any anti-competitive effect. It is part of its case that neither Loy Yang nor AGL enjoys any significant market power in their respective markets.’

[Para 432] 'The market behaviour of Loy Yang Power in the summer of 2000/2001 was relied upon by the ACCC in support of its contention that the Loy Yang Partners had market power and that they had exercised that market power to raise spot prices in that summer. There is no doubt that Loy Yang’s bidding and rebidding significantly increased spot prices in the market at that time. But while the ACCC pointed to this as an indicator of market power, AGL characterised Loy Yang’s behaviour in 2000/2001 as a high risk strategy under pressure imposed by its loan covenants and successful due to abnormally hot weather and other fortuitous events.'

[Para 448] 'On 20 February 2001, demand across Victoria, New South Wales and South Australia reached approximately 20,000MW and prices reached $3,681.22/MW in Victoria. Forward hedge prices rose in response to the increase in prices. Announcements were made of new generation plants by various entities. They started in March 2001. Following the announcements the rise in forward contract prices stopped. Hedge prices for 2002 and beyond began to fall and the hedge price for each subsequent year was lower than its predecessor. So much was indicative, in my opinion, of a competitive market at work.'

[Para 453] 'In my opinion the market tactics here being discussed assume the character of something that looks less like the exercise of market power than moderately well informed betting on the market. ... There is no doubt that LYPM did affect spot prices and forward contract prices by reason of its bidding strategy in summer 2000/2001. I am not satisfied that it has adopted that as a general strategy subsequently or that such a strategy could be relied upon, at the level of confidence necessary for commercial decision-making, to work in conditions other than those which fortuitously came together in that summer. ... No doubt, as Victoria’s largest generator, it is in a position opportunistically to respond to supply/demand imbalance in very short time intervals and if all the variables are in the right place, to affect both spot and forward contract prices. The question is whether the existence of such opportunities and the fact that it responds to them from time to time reflects the existence of market power. There is here a distinction to be drawn between what was referred to as ‘transient market power’ and ‘persistent but intermittent’ market power. It may also be that that distinction is able to be reflected in the concept of temporal sub-markets and what is elsewhere described as the inter-temporal variation of market power.'

[Para 49e] ‘...LYP does not have market power in the sense of an ability to secure price increases free of competitive response. I might add that success at ‘gaming’ in the market during limited periods of high demand does not reflect market power even if it results in a high forward contract price.’

[Para 493] ‘The ACCC has made subsequent submissions about price spikes said to derive from economic withholding by LYP. I am prepared to accept that there are periods of high demand where a generator may opportunistically bid to increase the spot price. I do not accept that such inter-temporal market power reflects more than an intermittent phenomenon nor does it reflect a longrun phenomenon having regard to the possibilities of new entry through additional generation capacity and the upgrade of interconnections between regions. It does not amount to an ongoing ability to price without constraint from competition.’

[Para 556] ‘Mr Fraser in his second affidavit offered a commercial perspective. He said that he had never previously encountered or contemplated the idea that a passive equity interest of 35% held by a retailer in a generator would lead to de-contracting by the retailer. Subject to the AGL risk management policy and the direction of the Board, he and his Energy Trading Team at AGL are responsible for managing pool price exposure. He had no plan and to his knowledge there was no plan within AGL to reduce contract cover if they acquire a 35% equity interest in LYP. Based upon his knowledge of AGL’s business and the electricity industry he could not envisage it having a lower level of contract cover in Victoria by reason of that acquisition because to do so would involve increased risks.’

[Para 558] ‘Although Mr Fraser was a witness who was in a sense an advocate in his own cause, his evidence on this issue had a ring of commercial reality about it. It certainly seemed to reflect the untidy realities of decision-making in this marketplace and the pressures in favour of risk management which would not be significantly mitigated by the natural hedge.’

[Para 342] ‘The collocation ‘likely to have the effect’ is capable of bearing two meanings. One is that the proposed acquisition will ‘more probably than not’ have the requisite effect. The other is that there is a sufficiently high finite probability that the acquisition will have that effect. The latter construction is sometimes expressed by saying that there is a ‘real chance’ of a substantial lessening of competition resulting from the acquisition. The first construction renders the prohibition imposed by s 50 narrower than the second. In the Second Reading Speech for the 1992 amendments the Attorney-General said that mergers can lessen competition and on the other hand can be a valuable source of increased efficiency or other public benefits. He said: ‘Such possible benefits require that a line be drawn between those mergers which are likely to be beneficial and those which are likely to be detrimental to the community as a whole.’ Although it seems plausible that the word ‘likely’ in that passage was being used in the sense of ‘more probable than not’, such speculation is not a useful guide to construction.’

[Para 343] 'In my opinion, having regard to the statutory context provided by the other sections of Pt IV the correct construction is that ‘likely’ refers to a significant finite probability or ‘a real chance’ rather than ‘more probable than not’. Although there has been some divergence in the construction of ‘likely’ in various provisions of the Act, the weight of authority supports the wider view. In Tilmanns Butcheries Pty Ltd v Australasian Meat Industry Employees Union (1979) 42 FLR 331, Deane J thought the word ‘likely’ in the secondary boycott provision, s 45D of the Act, referred to ‘a real chance or possibility’ that the conduct if pursued would cause damage. Bowen CJ, with whom Evatt J agreed, did not think it necessary to decide the question. But in Global Sportsman Pty Ltd v Mirror Newspapers Pty Ltd (1984) 2 FCR 82 at 87, the Full Court, dealing with the construction of s 52 of the Act, cited Deane J and said:

‘Conduct is likely to mislead or deceive if that is a “real or not remote chance or possibility regardless of whether it is less or more than 50%.”’

In News Limited v Australian Rugby League Football Ltd (1996) 64 FCR 410, the Full Court referred to the use of the word ‘likely’ in s 4D(1) and adopted the construction used by Deane J. In the Full Court in Munro Topple & Associates Pty Ltd v Institute of Chartered Accountants in Australia (2002) 122 FCR 110, Heerey J, with whom Black CJ and Tamberlin J agreed, observed at [111], with respect to s 47(10):

‘“Likely” does not mean “more likely than not”.’

His Honour referred to Deane J in Tilmanns Butcheries stating that his reasoning with respect to s 45D was equally applicable to the concept of likely effect in s 47(10).’

[Para 347] 'The collocation ‘… would have the effect, or be likely to have the effect, of substantially lessening competition’ appears in similar and identical versions in other provisions of Pt IV. It appears in ss 45, 45A, 45B, 45C, 47(10) and 50A. In my opinion that formulation is intended to have the same construction throughout Pt IV. Neither language nor policy mandates a variation in its construction from section to section. In any event as a matter of construction if ‘likely’ simply meant more probable than not, it would be difficult to distinguish the application of that limb of the formula from the application of the first limb which, having regard to the onus of proof applicable in proceedings under Pt IV, could be established on the balance of probabilities.'

[Para 348] ‘The meaning of ‘likely’ reflecting a ‘real chance or possibility’ does not encompass a mere possibility. The word can offer no quantitative guidance but requires a qualitative judgment about the effects of an acquisition or proposed acquisition. The judgment it requires must not set the bar so high as effectively to expose acquiring corporations to a finding of contravention simply on the basis of possibilities, however plausible they may seem, generated by economic theory alone. On the other hand it must not set the bar so low as effectively to allow all acquisitions to proceed save those with the most obvious, direct and dramatic effects upon competition. By the language it adopts and the function thereby cast upon the Court and the regulator in their consideration of acquisitions s 50 gives effect to a kind of competition risk management policy. The application of that policy, reflected in judgments about the application of the section, must operate in the real world. The assessment of the risk or real chance of a substantial lessening of competition cannot rest upon speculation or theory. To borrow the words of the Tribunal in the Howard Smith case, the Court is concerned with ‘commercial likelihoods relevant to the proposed merger’. The word ‘likely’ has to be applied at a level which is commercially relevant or meaningful as must be the assessment of the substantial lessening of competition under consideration – Rural Press Limited v Australian Competition and Consumer Commission [2003] HCA 75 at [41].’

[Para 349] 'The term ‘competition’ was the subject of consideration in the decision of the Trade Practices Tribunal in QCMA at 188-189. The Tribunal regarded ‘rivalrous market behaviour’ as the expression of competition. It is a ‘process rather than a situation’. It requires ‘both that prices should be flexible, reflecting the forces of demand and supply, and that there should be independent rivalry in all dimensions of the price-product-service packages offered to consumers and customers’.

[Para 350] 'Competition in a market is not assessed by a snapshot view of participant behaviour at a particular time. The theatre of competition is a theatre of real actors and shadow actors. The shadows are cast by the potential for new entry. The competitive process is informed by the rivalry of the participants and the potential rivalry of potential participants. Competition so understood is conceptually distinct from the idea of the market and the elements of market structure which may constrain or facilitate it. Those structural elements are referred to, inter alia, in the factors set out in s 50(3) of the Act.'

[Para 351] 'The word ‘substantial’ in ‘substantial lessening of competition’ is another term requiring qualitative judgment which suggests that the use of analogues such as ‘large’ or ‘weighty’ would misdirect. It applies to ‘lessening’ which encompasses hindering or preventing competition (s 4G). As I said in Stirling Harbour Services Pty Ltd v Bunbury Port Authority (2000) ATPR 41-752 there is only limited assistance to be gained by replacing the words used in the Act with other words. A description of the kind of judgment required by the word ‘substantially’, which appears recently to have been approved in the High Court, is that the effect of the acquisition be ‘meaningful or relevant to the competitive process’ – Rural Press Ltd at [41]. It is also relevant to the present case to bear in mind that in determining whether the acquisition is likely to have the effect of a substantial lessening of competition, the Court will give little if any weight to short term effects readily corrected by market processes – Universal Music Australia Pty Ltd v Australian Competition and Consumer Commission (2003) 201 ALR 636 at [242].

[Para 352] 'In determining whether it could be said that there is likely to be a substantial lessening of competition in a market it is necessary to consider the future state of the relevant market with and without the proposed acquisition – Dandy Power Equipment Pty Ltd v Mercury Marine Pty Ltd (1982) 64 FLR 238 at 259; Outboard Marine Australia Pty Ltd v Hecar Investments (No 6) Pty Ltd (1982) 44 ALR 667 at 669-70. The parties are ad idem on the appropriateness of that test in principle. The closing submissions for AGL indicated that it was content to assume that the future state of competition would fall to be judged on the basis that LYP would continue to operate and that it would be controlled either by its existing owners, the syndicate of banks who have financed them or a new purchaser.'

[Para 501] 'The uncertainties of judging and predicting market place behaviour are particularly acute where, as in the present case, the market is relatively immature and where the rules are still changing, albeit the actors are developing experience and increased sophistication. Para 520: ‘...There is no doubt that at certain intervals of supply/demand imbalance there are opportunities for the kind of game playing in which LYP engaged in the summer of 2000/2001 which can lead to substantial price increases for short periods. As already discussed in the context of that summer strategy it does not follow that this reflects an ability to raise prices profitably on a sustained basis. ’

[Para 548] ‘...He accepted that for an acquisition to lead to a substantial lessening of competition it must normally be the case that the lessening of competition is not transitory short-lived. To the extent that lessening of competition would be reflected in a significant increase in the spot price of electricity the lessening of competition would be substantial only if the increase in the spot price of electricity was not transitory and short-lived. That increase would be short-lived if entry by new generation facilities quickly eroded the ability of LYP or other generators to raise the spot price. In such a situation it would be unlikely that there would be a substantial lessening of competition.’

[Para 354] 'It is necessary next to consider the matters that, pursuant to s 50(3), must be taken into account in determining whether the acquisition would be likely to have the effect of substantially lessening competition in the market. Brief observations can be made with respect to each of these:

(a) The actual and potential level of import competition in the market. As the Explanatory Memorandum for the Trade Practices Legislation Amendment Bill 1992 set out, this matter refers to import competition from outside Australia. It did not figure explicitly in the present case although it may have application indirectly by reference to potential market participants from outside Australia interested in establishing generation capacity within the NEM. It is notable, in that context, that a very substantial international energy company is a major participant in the proposed consortium and that the alternative acquirer of LYP may be a Malaysian consortium.

(b) The height of barriers to entry to the market. This is a well-known economic concept. The term is referred to in the Explanatory Memorandum as ‘any feature of a market that places an efficient prospective entrant at a significant disadvantage compared with incumbent firms, including, for example, the presence of economies of scale or scope, control over essential inputs or government regulations which restrict entry into the market. The term encompasses barriers to exit, such as high ‘sunk’ costs. It represents the ease with which new firms can enter or leave the market now or in the future. It is a metaphor for economic disincentives for new entrants into an existing market.

(c) The level of concentration in the market. In assessing whether or not a proposed acquisition is likely to substantially lessen competition in the market, its existing concentration and any increase in that concentration, by reduction of the number of competitors or the accrual of significant additional market share to one of them, will be relevant.

(d) The degree of countervailing power in the market. As set out in the Explanatory Memorandum the concept of countervailing power ‘… refers to the extent to which market power held by the merged firm could be offset by market power held by customers or suppliers’. As appears later in these reasons that power may not be limited to direct economic power but may be exercised through price sensitive regulators or even political mechanisms, particularly where essential facilities are concerned.

(e) The likelihood that the acquisition would result in the acquirer being able to significantly and sustainably increase prices or profit margins. This factor, according to the Explanatory Memorandum, may be an indicator of the extent to which the merged firm would acquire market power sufficient to allow it to raise prices significantly above costs which would not be neutralised by the competitive responses of competitors, new entrants or imports. There is a slight dissonance between the explanation and the language which looks to the post-acquisition power of the acquirer rather than the merged firm. It may be that this factor is drawn upon the assumption of a complete acquisition of one firm by another resulting in an enhancement of market power for the acquiring firm. The competition argument advanced by ACCC rests upon the premise that LYP already has the requisite ability and that its incentive to exercise that power would be increased by the acquisition.

(f) The extent to which substitutes are available in the market or are likely to be available in the market. The Explanatory Memorandum, in respect of this matter, observes that the availability of substitute products in a market where a merger takes place allows consumers to purchase alternative products if the merged firm seeks to raise its price. There is no relevant substitute suggested, in the context of this case, for electricity in the wholesale market. To the extent that there is a product market for derivative contracts, the availability of different forms of hedge cover may be relevant.

(g) The dynamic characteristics of the market, including growth, innovation and product differentiation. This factor requires a consideration of change in the market place. The Explanatory Memorandum refers to markets being dynamic in the sense that demand for products may increase or decrease over time with changes in taste, quality and incomes. The language is not so limited. The dynamic characteristics of the Electricity Markets may extend to the evolving rules under which they operate and the increasing sophistication and experience of their participants.

(h) The likelihood that the acquisition would result in the removal from the market of a vigorous and effective competitor. As stated by the Explanatory Memorandum the removal of a vigorous and effective competitor, even one with a small market share, may have a significant impact on the level of competition in the market. This may not be of significance and concern where barriers to entry are low or where meaningful import competition exists. (i) The nature and extent of vertical integration in the market. The Explanatory Memorandum states that vertical mergers can lessen competition where, prior to the merger, one of the firms has substantial market power at one level which can be exploited in the relevant upstream or downstream market as a result of the merger, eg by denying downstream competitors access to essential inputs. This matter is relevant to one of the two primary competition issues raised by the ACCC in this case, namely the apprehended increase in the extent of vertical integration following from the proposed acquisition.'

[Para 388] 'Matters to be Considered Under Section 50(3)

AGL and the ACCC both made submissions on the market characteristics which must be considered under s 50(3).'

[Para 389] 'In respect of import competition s 50(3)(a) addresses imports from outside Australia. As was observed earlier in these reasons that appears to have little or no application in the present case other than the possibility of international corporations entering or acquiring interests in the wholesale market, as exemplified in the present case. If s 50(3)(a) has a wider application there was in any event no question of imports of electricity in to the NEM-wide wholesale market. Importation was discussed solely in the context of the transmission of electricity between regions within the NEM.'

[Para 390] 'The next matter under s 50(3)(b) concerns barriers to entry. It was submitted for the ACCC that the construction of major new generating plant involves high capital costs and a significant lead-time. Capital costs are sunk costs as the plant and its component parts cannot be redeployed to any use other than generating electricity from the fuel source available at the relevant site. This, as the ACCC said, is particularly true of the Victorian brown-coal burning base load plants like Loy Yang A. Entry barriers to the market however are not to be judged by reference to base load brown-coal burning generators alone although there was evidence from Dr Price that Victorian brown-coal plant has the lowest fuel cost of any of the new generation options in different regions of the NEM.'

[Para 391] 'AGL referred to a number of matters to demonstrate that entry barriers are low. The matters to which it pointed were:

(a) evidence from Dr Price that gas turbines are able to be commissioned in under two years;

(b) the fact that since the start of the NEM 552MW of gas-fired generation operating as peaking plant has been introduced into Victoria;

(c) Dr Price’s evidence of the commissioning of 4,780MW of capacity into the NEM since its commencement;

(d) Dr Price’s evidence of 5,000MW of generation capacity currently proposed for development in the NEM;

(e) the existence of new projects indicating a range of parties are considering investment options in various regions of the NEM;

(f) the significant increase of new entrants into the market by generators and potential generators in 2001 following the upward movement in spot prices. This is discussed subsequently in consideration of the market response to spot price increases in the summer of 2000/2001.

(g) the existence of a very significant amount of commercial information available to generators which allows them to make informed decisions about how and when to enter the wholesale electricity market;

(h) Mr Fraser’s evidence that:

• AGL has been able to commission generating plants being the Somerton plant and the Hallett plant;
• if AGL or any other market participant were having difficulties in obtaining hedge contracts this would ultimately trigger participants adding new capacity to the grid;

(i) the evidence of Mr Lee of Energex that a retailer would consider investing in peaking generation as an alternative to investing in hedge products and that the demand for hedge products is related to the cost of investing in peaking plants.

In my opinion, having regard to the above matters and the response of potential new entrants to price signals in the summer of 2000/2001, it cannot be said that barriers to entry into the NEM-wide wholesale market are such as significantly support or contribute to market power on the part of any of the market participants.'

[Para 392] 'The next matter, which is identified by s 50(3)(c), relates to the level of concentration in the wholesale market. On the basis that the relevant geographic wholesale market covers the entire NEM, Loy Yang A has 5.3% of total NEM capacity. That is 2,000MW out of a total of 37,769MW. Moreover, it has less than half the generating capacity of the largest generator, which is Macquarie Generation, which has 12.4% of NEM capacity. In Victoria, Loy Yang A has a share of generation capacity which is 18.8% which, as AGL points out, is less than the capacity which can come into Victoria from other regions in the NEM at any given time. Although Loy Yang is the third biggest generator in the NEM, it generates 8.6% of the electricity.'

[Para 393] 'The ACCC relied upon evidence that the three base load generators, Loy Yang A, Hazelwood and Yallourn accounted for 75% of actual generation in Victoria in 2002 and that Loy Yang A accounted for 30%. On that basis it was submitted that there is a higher degree of concentration in the Victorian market. AGL responded that the figure is not meaningful because it does not have regard to the electricity imported into and exported from Victoria across interconnectors nor the fact that there is a net export from Victoria of electricity to other regions.'

[Para 394] 'Having regard to my view of the definition of the wholesale market there is not, in the NEM-wide wholesale market as earlier defined, a degree of concentration of suppliers that could be said to support the subsistence of market power on the part of Loy Yang A or any of the major generators.'

[Para 395] 'Section 50(3)(d) requires consideration of the degree of countervailing power in the market. The ACCC argued that the absence of countervailing power of consumers and retailers was reflected in the inelasticity of the demand for electricity. It was accepted by all witnesses that demand is almost completely price inelastic. The consequence of this is that a generator such Loy Yang has the opportunity during periods in which supply and demand balance is reasonably tight to increase prices substantially with a potential increase of up to 300 times average spot prices.

[Para 396] 'It is probably correct to say that in an economic sense there is not a high degree of countervailing consumer power which can be brought to bear upon the pricing practices of generators. There is however some scope for demand side management and perhaps of particular significance in the NEM is the reality that high electricity prices can very quickly become a political or regulatory issue. While countervailing power may not be exercised economically it can be exercised politically or by the regulator as proxy for consumers. LYP’s own sensitivity, in devising its Summer Strategy for 2001 to regulatory and political responses is an indicator of the reality of those considerations. The Security Trust Deed held by LYP’s current bankers and referred to earlier requires risk management practices that have regard to the possibility of regulatory intervention. The statutory frameworks within which the various regions of the market operate and the bidding rules themselves provide mechanisms for the exercise of that countervailing power.'

[Para 397] 'Section 50(3)(e) requires consideration of the likelihood that the acquisition would result in the acquirer being able to significantly and sustainably increase prices or profit margins. It is not clear how this factor has application in the present case. The acquirer is AGL. The focus of the market power debate has been on LYP’s ability to increase prices and profit levels. Moreover, it does not appear to be the ACCC’s case that LYP would increase its market power as a result of its acquisition by AGL and the other consortium members. Rather it is that LYP would have a greater incentive to use the market power that it presently has. That incentive, on the ACCC case, will arise by virtue of AGL reducing its contract cover on account of the natural hedge conferred on it through its equity in LYP. For reasons, which are set out later, I do not accept that scenario as a likely one.'

[Para 398] 'The matter to be considered under s 50(3)(f) is the extent to which substitutes are available in the market or are likely to be available in the market. In the present proceedings there are no substitutes in the wholesale market for electricity. There is however considerable flexibility in the hedging arrangements into which parties may enter, albeit the most popular form of hedge is the swap contract. Consideration of that flexibility has some analogy to substitution analysis. A party unable to obtain one form of hedge contract may be able to obtain protection in another form. Overall, however, substitution analysis did not play a significant part in the case.'

[Para 399] 'In relation to the dynamic characteristics of the market referred to in s 50(3)(g), it is plain that the wholesale market for electricity and derivative contracts is dynamic. The rules that regulate bidding, dispatch and pricing change as the market evolves. It is a characteristic of electricity markets, identified in the writings of the ACCC expert Professor Wolak, that as flaws in market design emerge the rules can be changed. The introduction of a new rule requiring good faith in the lodgment of bids and rebids, referred to later in these reasons, exemplifies this evolutionary character. The increasing sophistication of market participants is another relevant factor. By way of example there was evidence that market participants negotiating forward contract strike prices will not readily be misled by transient price spikes designed only to endeavour to increase the forward contract price. They are also showing flexibility in the way in which they deal with spot price volatility, not only by the use of hedge contracts but also by the acquisition or construction of peaking generators.'

[Para 400] 'As to the question, raised by s 50(3)(h), whether the acquisition would result in the removal from the market of a vigorous and effective competitor, there was no evidence to suggest that that would be an outcome of this acquisition.'

[Para 401] 'The nature and extent of vertical integration falls for consideration under s 50(3)(i). There is already some degree of vertical integration, either virtual or actual, in the wholesale market. Origin Energy and Energex, both substantial retailers, have integrated generators and retail businesses. Yallourn, a Victorian generator, has a retail business conducted through AusPower. AGL already has control of two peaking plants, one at Somerton and one at Hallett. Stanwell Corporation is a Queensland generator with a retail licence in Queensland. Delta Electricity, a New South Wales generator, has a retail licence in New South Wales and Tarong Energy is a Queensland generator with retail licences in Queensland and South Australia. In addition, TXU, which is a substantial retailer, has a ‘virtual’ vertical integration with the supplier Ecogen by way of a dispatch hedge arrangement. NRG Flinders, a South Australian generator, has a retail licence in South Australia. The question whether vertical integration will increase as a result of the acquisition is considered in other parts of these reasons.'

[Para 402] 'None of the characteristics of the market, identified by reference to s 50(3) of the Act, in my opinion supports the conclusion that LYP has and exercises substantial market power or that the proposed acquisition is likely to cause a substantial lessening of competition in the wholesale market. Those matters of course are not exhaustive of the matters that have to be considered. The evidence required closer consideration of the question whether LYP has market power and would, as a result of the acquisition, acquire an incentive to use it, which it would not otherwise have.'

[Para 590] 'The ‘informal’ model proffered by Dr Small is no doubt a useful starting point for analysis of vertical integration in the electricity industry. But it describes a very simple case, that of duopoly in the wholesale and retail sectors, albeit it imposes a capacity constraint condition specific to the industry. A qualitative leap from analysis of vertical integration in a duopoly to its analysis in an oligopoly or a multi-participant competitive market is somewhat analogous to the difference between writing an equation to describe the motion of two bodies in a plane and writing an equation for the motion of many bodies in three dimensions. In the electricity market many actors operate in a ‘high dimensional strategy space’. Dr Small accepted in cross-examination that the New Zealand market is inherently oligopolistic and that his theory was likely to say little or nothing about an oligopoly.'

[Para 594] '... Considering the wholesale market for electricity and derivative contracts with and without the proposed acquisition, I do not consider there to be any real chance that the acquisition will make any difference to the trend to vertical integration in the variety of ways which is already apparent.'

[Para 599] 'On the basis of the findings which I have made concerning the position in the relevant markets with and without the acquisition, I am satisfied on the balance of probabilities that the proposed acquisition would not be likely to have the effect of substantially lessening competition in any market. ...'

Click here for full case at AustLII
Australian Gas Light Company (ACN 052 167 405) v Australian Competition & Consumer Commission (No. 3) [2003] FCA 1525 (19 December 2003)

Click here for decision relating to practice and procedure (dealing with ACCC opposition to the application)
Australian Gas Light Company ACN 052 167 405 v Australian Competition & Consumer Commission [2003] FCA 1101 (8 October 2003)

Click here for decision relating to jurisdiction of the court to hear the application for declaration (inc whether there was a 'matter' arising under the Act)
Australian Gas Light Company (ACN 052 167 405) v Australian Competition & Consumer Commission (No 2) [2003] FCA 1229 (31 October 2003)

ACCC opposes AGL acquiring a stake in Loy Yang Power
Press Release MR 119/03 (13 June 2003)

ACCC Maintains Opposition to AGL Acquiring Stake in Loy Yang Power
Press Release MR 192/03 (8 September 2003)

David Brewster and Beth Griggs, 'Competition Issues in the Electricity Industry - The Australian Gas Light Company v Australian Competition and Consumer Commission' [2004] AURELawJl 36; (2004) 23(1) Australian Resources and Energy Law Journal 98

Stephen G Corones, 'Informal merger clearance process under scrutiny: Australian Gas Light Company v ACCC' (2004) 32(2) Australian Business Law Review 147-151 (abstract only)

Rajat Sood, ‘Implications of AGL v ACCC – Market Power and Competition in the National Electricity Market’ (2004) 32 Australian Business Law Review 375

David Young, 'Acquiring power: The ACCC's Loy Yang Power decision and the legacy of Australian Gas Light Company v ACCC (No 3) (2013) 20 Competition & Consumer Law Journal 227