Background to the ACCC's Determination

Following a four-month review process, on 10 October 2023, the Australian Competition and Consumer Commission (ACCC) made a determination under section 88 of the Competition and Consumer Act 2010 (Cth) (the Act) authorising the proposed acquisition of Origin Energy Limited (Origin) (Proposed Acquisition) by the Brookfield LP and MidOcean consortium (Determination).

However, following the Determination, Origin shareholders ultimately voted to reject the takeover bid (which had been revised by Brookfield and MidOcean following the Determination to increase the proposed share price).

Despite the Proposed Acquisition being rejected by shareholders, the Determination is undoubtedly a landmark in terms of how actions which address the significant threat posed by climate change can be central to the application of competition law.

Summary of the ACCC's determination

Under the Act, the ACCC must not grant authorisation unless it is satisfied in all the circumstances that the proposed acquisition would not be likely to substantially lessen competition, or that the likely public benefits would outweigh the likely public detriments. In summary:

• Despite the ACCC's concerns that the Proposed Acquisition would have a material impact on competition, primarily due to the potential anti-competitive effects of vertical integration between electricity transmission and generation businesses, the ACCC found that the public benefit outweighed the detriment to the public that would result, or be likely to result, from the Proposed Acquisition. This is in itself one of the few examples of merger authorisations based on net public benefits.
• The ACCC recognised that the acceleration of renewable generation and storage development and a decrease in Origin Energy Markets’ emissions intensity constituted a material public benefit. This is the first time that investment in renewable energy and/or a reduction in emissions has been the decisive factor for the ACCC in a merger authorisation.
• Although the ACCC is often reluctant to accept behavioural undertakings, in this case the ACCC accepted a range of behavioural undertakings, including court enforceable undertakings focusing on separation and ring-fencing, explicitly accepting that they may reduce the likelihood of some public detriments, as well as undertakings to increase the likelihood of the public benefits actually occurring.

We have previously written about the application of competition law to sustainability initiatives and more recently in 'Loosening the Handbrake: Competition Law and Sustainability Initiatives' by Haydn Flack and Paul Schoff, but the Determination is a significant advance. Even though analysis of any future transaction or type of conduct will be highly fact dependent, the Determination demonstrates that the ACCC will accept that likely material emissions reductions, if they can be adequately proven, can offset likely anti-competitive detriments for the purposes of merger authorisation.

Set out below is a summary of the Determination and further analysis of its implications.

Competition assessment of proposed acquisition

Brookfield already has a 45.4% stake in AusNet, which owns the majority of the electricity transmission network in Victoria, one of five electricity distribution networks in Victoria, and one of three gas distribution networks in Victoria. In addition, Brookfield has a 50% stake (through related entities) in Intellihub, a smart metering company.

The ACCC's key concern with the Proposed Transaction was the vertical integration arising from bringing together Brookfield's existing electricity transmission assets with Origin's generation interests. In particular, the ACCC was concerned that if the Proposed Acquisition proceeded, AusNet would have the ability to operate its transmission network to benefit Origin Energy Markets' generation business. The ACCC was also concerned with whether Brookfield would have the ability and incentive to use its position in monopoly infrastructure to anti-competitively foreclose rivals in other markets.

Despite the ACCC recognising a number of factors that would mitigate the anti-competitive impact, the ACCC considered that some risks relating to anti-competitive behaviour had not been eliminated. For example, the ACCC noted that the separate fund structures of AusNet and Origin Energy Markets was not in itself sufficient to allay its concerns. Likewise, the ACCC was not convinced that the role of minority shareholders in Origin Energy Markets and AusNet would limit opportunities to engage in anti-competitive behaviour. However, the ACCC's concerns were assisted by the s 87B undertakings provided by Brookfield, AusNet and MidOcean, which focused on the separation of personnel and information between the relevant parties and imposed additional reporting obligations.

The ACCC held similar, albeit lesser, concerns regarding the vertical integration of Intellihub. Overall, the ACCC was not satisfied in all the circumstances that the Proposed Acquisition would not have the effect, or would not be likely to have the effect, of substantially lessening competition in three relevant markets.

The recognition of the complex competitive detriments that can result in the energy transition space was foreshadowed in comments made by ACCC Chair Gina Cass-Gottlieb at the National Press Club earlier this year. The Chair highlighted that the ACCC will be closely monitoring anti-competitive behaviour "as the green transition unfolds" to ensure that anti-competitive behaviour does not "distort market incentives and investment signals, which may in turn hinder the development of market based responses to environmental challenges". In addition, the Chair noted that "assessment of mergers in key transitioning industries will also be critical."

In the same address, the Chair concluded by highlighting that the authorisation regime enables the regulator to take into account "real, verifiable and significant environmental benefits", those are the things which proved to be decisive in this instance.

Net public benefit test

The ACCC undertook an orthodox forward looking comparison of the future 'with and without' the Proposed Acquisition. The ACCC ultimately found that the Proposed Acquisition would lead to:

• an acceleration of renewable generation and storage development for Origin Energy Markets;
• additional renewable generation and storage development for Origin Energy Markets; and
• a decrease in Origin Energy Markets’ emissions intensity.

These benefits would largely be driven by the fact that Brookfield's internal governance, investor expectations and financial modelling require Brookfield to achieve specific ‘impact targets’ for its renewables build-out and Paris-aligned emissions reduction targets. Notably, these commitments are not binding on Brookfield, but the ACCC was prepared to accept that Brookfield was unlikely to renege given the financial and reputational stakes. To support that conclusion, Brookfield provided a s 87B undertaking that it would publish annual reports on the progress of Origin in meeting the objectives of the proposed renewables.

Even though the ACCC concluded that Origin would likely continue to invest in renewable energy without the Proposed Acquisition, it would not be subject to the same incentives as Brookfield. Additionally, it lacks Brookfield's capacity to swiftly access and allocate capital into a diverse range of investments – key factors in ensuring an effective renewables build out.

Notably, the ACCC anticipated that the Proposed Acquisition would accelerate the build-out of renewable generation and storage in Australia more generally which in turn would lead to a faster and more significant reduction of Australian greenhouse gas emissions, compared to a future without the Proposed Acquisition. The ACCC recognised that, as Origin is a significant emitter of greenhouse gases, the acquisition would help Australia mitigate its contribution to climate change and assist in meeting or exceeding national emissions reduction targets.

The ACCC considered that without the Proposed Acquisition, the degree of investment by other market participants in renewable generation and storage projects is unclear, recognising that although there are government mechanisms in place to incentivise the development of new projects, it is unclear to what extent these will increase the speed at which investment will occur.

The ACCC did reject some public benefits suggested by the applicants, such as decreased energy prices and volatility in price as well as increased direct and indirect employment.

Overall, the ACCC considered the public benefit from reduced emissions outweighed the public detriment, namely the material competitive detriment arising is in connection to vertical integration of electricity generation and transmission. The ACCC highlighted the importance of the acceleration of renewable generation and storage build-out for Australia as a whole:

"[t]he ACCC considers there are material public benefits likely to result from the Proposed Acquisition in the form of accelerated and additional renewables development for Origin, leading to a reduction in emissions intensity. The ACCC considers these public benefits to be highly valuable and important to Australians in the context of the need to reduce greenhouse gas emissions to assist in global efforts to avoid the most severe impacts of climate change. Accordingly, the ACCC has given significant weight to these public benefits."

Implications for competition law

The Determination is a significant development in terms of how action to address climate change can be accommodated by, and indeed central to, the application of competition law. In this instance, a proposed merger which the parties were able to prove would accelerate renewable generation and storage and decrease emissions intensity was allowed to proceed notwithstanding long-held ACCC structural competition concerns arising from vertical integration of electricity generation and transmission businesses. In the weighing exercise required by competition law, the ACCC made an 'evaluative judgment' that the urgency of renewable generation and storage developments for the transition to net zero outweighed perceived risks of anti-competitive behaviour. It highlighted the importance of accelerating renewable generation and storage build-out for Australia as a whole. The ACCC recognised that there is material public benefit in the context of Australia's transition to net zero – consistent with Australia's legislated greenhouse gas emission targets of net zero by 2050 and its interim emission reduction target of 43% (2005 baseline) by 2030.

In addition, as Origin shareholders' ultimately rejected the bid, the ACCC's conclusions in relation to the 'with and without' test (i.e. the counterfactual of a world without the Proposed Acquisition) can be examined. In particular, it will be interesting to track the accuracy of the ACCC's prediction that without the Proposed Acquisition the degree of investment by other market participants in renewable generation and storage projects will be marked by uncertainty. The Federal Government is in the process of trying to remedy market uncertainty and fragmentation, with Commonwealth Treasury recently releasing a 'Sustainable Finance Strategy' consultation paper seeking feedback on a broad range of reform options to effectively mobilise private capital to facilitate Australia's transition to net zero (amongst other things).

The Determination is also significant in some respects for competition law aficionados:

• Significantly, this is the second of only two authorisations under the merger authorisation regime decided on net public benefits grounds – the first being the Armaguard / Prosegur merger determined earlier this year in relation to cash-in-transit services. Public benefits are currently relevant only under the merger authorisation process, not the ACCC's informal merger clearance process. However, with proposed merger reforms on the horizon, the process and potentially the test for merger clearance and the role of public benefits may well change.
• The Determination is another example of circumstances in which the ACCC accepted behavioural undertakings, noting that the ACCC is often reluctant to accept behavioural (instead of structural) undertakings. It recognised in this instance that the likelihood of the competitive detriment occurring would be mitigated, to some extent, by the proposed undertakings. This was an explicit factor in the weighing of benefits and detriments.

Please get in touch with us if you have any questions or you would like to discuss the issues raised in this landmark decision.