So you’re thinking of closing a power station?

4 mins  11.10.2018 Justin Oliver

You are going have a lot of things to think about. Competition law is not usually high on this list.

You are going have a lot of things to think about. Competition law is not usually high on this list. After all, the ACCC sees nothing illegal in AGL’s decision to close its Liddell power station, but is it possible to conceive of a situation where the owner of a power station might breach the Competition and Consumer Act (CCA) by deciding to close a power station?

At the end of the day, it's your power station. If you decide its more profitable to scrap the asset than it is to run it or sell it, you normally can. But the right of a firm to deal with its assets as it sees fit is not unqualified. There have been cases where a refusal to deal has constituted a misuse of market power.

In 2008, the EU investigated German generator E.ON over concerns it had abused its dominant position by temporarily withdrawing capacity when it would have been profitable to dispatch it. As a remedy, the EU accepted commitments from E.ON to divest its interests in several power stations.

If it is an abuse of dominance to temporarily withhold capacity from a generation market, might it not also be anti-competitive to permanently withdraw capacity from the same market by closing a power station?

A unilateral decision to close a power station would be tested under section 46. This applies where a firm with a substantial degree of market power engages in conduct that has the purpose, or is likely to have the effect, of substantially lessening competition in the market in which the firm has market power or any market in which it operates.

Market power is crucial. It is difficult to imagine a situation where the owner of a single generating unit would breach section 46 by making a unilateral decision to close that unit. In 2003, the Federal Court found that generators in the NEM did not possess market power. However, such findings always depend heavily on the facts, and markets can change over time. If a firm had sufficient market share that it knew its capacity was needed to meet demand on a regular basis, a court might find it was free to act, on a sustained basis, without being constrained by competitive forces.

If the generator does have substantial market power the outlook is different. It is possible to imagine a scenario where a generator with market power might withdraw capacity from one unit to push up the spot price paid for its other units in periods of high demand.

This is still not, however, the same as closing a power station permanently. Even if this was done by a firm with market power, it will be illegal only if it has the purpose, or is likely to have the effect, of substantially lessening competition. Whether a plant closure would have this effect would be judged by comparing the future state of competition with the impugned conduct against the future state of competition without it. This means the reasons for closing the plant are relevant.

It is doubtful that closing a power station at the end of its life will lessen competition in the relevant market, no matter its size. One way or another the power station is going to cease operating, whether it is closed or allowed to run until it fails.

But what if there is still life in the plant? What if someone else thinks the plant can be made to run profitably, and is prepared to pay for the privilege of trying? Is there really a difference, from a competition standpoint, between temporarily withdrawing the capacity of an otherwise functioning plant, and permanently withdrawing the capacity of a plant that could continue to function if it were sold to someone else?

So is it illegal or not?

Most of the time no, but this will require more thought if you:

  • have a sizeable market share;
  • are closing a power station that is not at the end of its life; and
  • will still have generation in the market once the power station is closed.

As Australia's base load generators continue to age, this question may become more than a thought experiment. A firm that is contemplating the closure of a power station in the future would be wise to at least consider whether they need to add competition law to their list of issues to consider.

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