AGL Energy moves to head off feared break-up push

AGL Energy has moved to avert any push from Canberra to break up the company amid speculation that an expected attack by the competition watchdog on anti-competitive electricity supply will be seized on by politicians under pressure over power prices.

Chief financial officer Brett Redman said that forcing a split between the power generation and retailing activities of companies such as AGL would only hinder the much-needed investment in new supply that would bring down electricity prices.

“The market badly needs new generation,” Mr Redman told The Australian Financial Review. “Breaking up vertical integration will dramatically reduce the chances of this coming from private investment.”

Mr Redman’s comments come ahead of a public address by competition chief Rod Sims next week on the energy crisis, where he is expected to expand on his views that the increased integration between power production and retailing has worked against consumer interests and helped to drive up electricity prices.

A week later, the impact of so-called “vertical integration” is expected to be a theme of the Australian Competition and Consumer Commission’s interim findings from its inquiry into electricity retail competition. Mr Sims said earlier this week he believed AGL’s 2014 takeover of Macquarie Generation, which owned Liddell coal fired power plant was “anti-competitive”.

Federal treasurer Scott Morrison declined to comment on Mr Sims’ contribution regarding AGL, but is most unlikely to act.

The government is not happy with the situation but believes it would be a step too far to retrospectively separate AGL or any other company.

But the Treasurer made it clear he could block such situations from arising again, moreover if that was what the ACCC recommends in its forthcoming report.

“I’d always take careful consideration of what the ACCC would advise on any future transaction,” he told the Financial Review.

The debate comes as Western Australia’s Alinta Energy took its most decisive step yet to try to challenge the dominance of the “Big 3” integrated retailers – AGL, Origin Energy and EnergyAustralia.

Alinta, which is expanding on the east coast, is thought to have lodged a bid on Thursday for the circa $1 billion Loy Yang B coal generator in Victoria, which would back up its growing retail customer base.

Prime Minister Malcolm Turnbull is already piling pressure on AGL, which is both the country’s largest generator and one of its biggest power and gas retailers, to sell its Liddell plant to a rival that would keep it running past its slated 2022 closure date.

As neither Origin Energy or EnergyAustralia is in the market for further investment in coal power generation, such a move would transfer a chunk of generation capacity to a separate player, creating more competition in the wholesale supply of power.

The ACCC attempted to block AGL’s takeover of Macquarie Generation but was overruled by the Competition Tribunal. The regulator argues that joining generation and retailing allows the larger players to tie up the wholesale market, making it harder for smaller retailers to get access to the hedge contracts they need to compete effectively.

The discussion around Liddell and the broader competitiveness of electricity supply has fuelled speculation in the market that the government could pursue radical measures to reduce the market power of the “Big 3”, with some sources speculating AGL may be forced into a break-up.

Splitting generation and retailing at AGL would see the country’s biggest power production business, comprising about 11,000 megawatts of thermal and renewable generation capacity, separated from the huge retailing arm with its 3.65 million customers. The two parts of the business are run together within AGL’s Energy Markets business, the powerhouse of its $802 million profit in 2016-17.

Matthew Blumberg at Watermark Funds Management said he expected Mr Sims to highlight the negative impact vertical integration has had on competition and power prices over recent years. He said it was unclear whether he would go as far as explicitly recommending the separation of “gentailers”, which would in any case likely take an act of Parliament.

But encouraging more competition into the market could also be effective, he said, pointing to the ambitions of Alinta.

“Another way to counteract these problems is to create a ‘fourth pillar’ where Alinta could compete with the incumbents AGL, Origin and Energy Australia, and this would help alleviate the issues in the market by bringing down retail prices,” Mr Blumberg said.

Alinta’s main competitor for Loy Yang B is Delta Electricity, the private player half-owned by Trevor St Baker that also said it could bid for Liddell if AGL put it up for sale.

Energy investors and bankers warn that reversing the vertical integration trend would only increase risks for retailers and so send power prices up rather than down.

“They could force separation between generation and retail,” said one energy analyst. “That’s a legitimate avenue because the system wasn’t designed to be vertically integrated and it causes distortion in the way generators bid.”

But several industry sources backed AGL’s stance, pointing to the severe financial difficulties periodically faced by either merchant power producers with no retail business, or by retailers that have not access to their own power production so cannot protect themselves from volatile and high wholesale prices.

AGL itself is said to have been suffered a $30 million hit just a week after buying its retail business in South Australia when it did not have power generation to call on during a hot, dry period in Adelaide. That drove its subsequent investment in the Torrens Island gas generator near Adelaide.

More recently, junior retailers Go Energy and Urth Energy collapsed after being unable to avoid a squeeze from rising wholesale power prices because they had no access to power generation.

AGL is among energy suppliers urging the federal government to put in place a long-term energy and climate policy that would enable them to proceed with larger investments in new power plants.

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