Key highlights: A landmark decision by the ACCC for Brookfield / Origin deal
On 10 October 2023, the ACCC conditionally approved Brookfield and MidOcean’s $18.7 billion acquisition of Origin Energy after a 4-month ACCC review process.
The ACCC authorised the deal despite finding a material risk that the vertical integration of Origin with Brookfield’s networks business, Ausnet, would give rise to a likely substantial lessening of competition.
Of particular concern to the ACCC was the fact that the deal may provide Ausnet with the incentive to discriminate in favour of Origin in the future in relation to the planning and operation of Ausnet’s Victorian electricity transmission and distribution network assets and, particularly, in relation to the connection of new renewable projects. Some concerns were also expressed regarding Brookfield’s 50% stake in the smart meter provider, IntelliHub.
After extensive negotiations, the parties provided detailed s87B behavioural undertakings that supplemented and expanded upon the existing regulatory regime, as well as offering additional renewable investment reporting obligations. These were, however, not found to be sufficient to fully mitigate the competition risks.
Nonetheless, the ACCC gave the green light on the basis that the competition concerns were outweighed by public benefits associated with commitments by Brookfield to invest ~$20-30bn in approximately 14GW of renewable generation and storage projects, and an associated decrease in Origin Energy Markets’ emissions intensity (being ~10GW more than the 4GW that Origin was otherwise proposing to invest in renewables over the period). It is the first time that environmental or carbon reduction benefits have been determinative in a merger decision in Australia, and one of the first times this has occurred globally.
Why does the Brookfield / Origin deal matter?
The Brookfield / Origin authorisation involves a collision between long-held ACCC structural concerns about vertical integration in energy markets and the more recent politics of carbon reduction and the associated urgency of renewables investment.
The outcome is important for a number of reasons:
The decision follows a number of decisions by the ACCC to block or to refuse to authorise complex deals , including Telstra / TPG , ANZ / Suncorp and Transurban / Horizon . The decision reflects a successful merger authorisation process at a point where the benefits and utility of the authorisation process have been coming under increased scrutiny.
The decision is a rare example of public benefits overcoming competition concerns - and is the first time that environmental benefits have been decisive. It is uncommon for the ACCC to find that the public benefits associated with a deal are sufficient to overcome material competition concerns (although it did this recently in Armaguard / Prosegur). The decision is the first time that environmental or carbon reduction benefits have been decisive in a decision by the ACCC to authorise a merger.
The ACCC was prepared to accept the likelihood of increased investment in renewables, based on commercial incentives and not legally binding commitments. The renewable investment plans of Brookfield remain at an early stage and it has not yet made any formal or binding commitments regarding the speed or specific amount of investment. However, the ACCC was prepared to accept that this was likely, given the nature of fund mandates and the reputational importance of delivery for Brookfield and its executives.
The competition concerns highlight the ongoing focus of the ACCC on vertical and other complex theories of harm. This case reflects an increasing focus of regulators globally (see, for example, the Federal Trade Commission’s draft guidelines) on vertical and coordinated effects, and other more complex theories of harm.
The decision shows the ACCC to be sceptical of the value of passive investors in funds to restrain the incentives or ability of a merged entity, where one of the parties operates as an active manager. The fact that Ausnet and Origin were to be held within different funds, with separate mandates and passive investors, was not sufficient to overcome the competition concerns associated with Brookfield’s active management of both. The ACCC was also sceptical of regulation to prevent subtle forms of discrimination.
The ACCC accepted behavioural undertakings, but with some difficulty. The ACCC has expressed strong views about its reluctance to accept long-term, behavioural undertakings as a remedy in complex mergers. This decision is perhaps the exception that proves the rule. In this case, undertakings were a necessary but not sufficient part of the ‘package’ associated with authorisation and the final, highly detailed ring-fencing rules were substantially amended and extended over the course of the ACCC process, involving extensive negotiations with the ACCC. The ACCC had expressed significant concerns about two earlier versions that were both consulted on during the process.
The ACCC used the opportunity to distance itself from the strict approach taken by the Tribunal in Telstra / TPG to causation in merger authorisation cases. The Tribunal in Telstra / TPG had taken a narrow and technical approach to identifying whether public benefits were ‘caused’ by a merger, or merely coincident with it. This had been a concern expressed by the ACCC also in the ANZ / Suncorp decision. In this case, however, the ACCC reverted to a more traditional approach to causation and was largely untroubled in accepting that the claimed increase in renewables investment was ‘caused’ by the deal, even if the extent of the benefit was challenged.
Nature and commercial rationale for the Brookfield / Origin deal
The transaction involves the acquisition via scheme of arrangement of Australia’s largest integrated gas and electricity retailer and generator, Origin Energy, by the global asset manager Brookfield. In a subsequent on-sale, the upstream interests held by Origin in LNG export joint venture, APLNG, would be acquired by the MidOcean Group, which is an investment vehicle established by EIG Partners.
Origin would be acquired by a fund controlled by the Brookfield Group Global Transition Fund (BGTF). The BGTF is a fund established with a mandate to invest in global renewable energy assets. Other co-investors in Origin, alongside BGTF, are investment entities of Temasek Holdings and GIC.
Because of the nature of Brookfield’s wider Australian interests, the deal raised a number of complex vertical relationships that were explored by the ACCC. Most importantly, Brookfield, through its infrastructure unit, owns AusNet , which is the largest diversified energy network business in Victoria. AusNet’s Victorian assets include:
an electricity distribution network supplying eastern and north-eastern Victoria and north and east Melbourne (one of five in Victoria);
the main Victorian electricity transmission network (accounting for approximately 99% of Victoria’s shared transmission network assets); and
a gas distribution network supplying central and western Victoria and western Melbourne (one of three in Victoria).
As well as the Ausnet assets, Brookfield also owns a 50% stake in the smart meter provider, IntelliHub .
The BGTF is a specific Brookfield vehicle focused on investments in renewable power and transition. At the core of the transaction rationale was that BGTF would invest approximately $20-30bn in renewable generation projects in Australia (wind, solar and storage) to develop approximately 14GW of capacity. Investment at this scale would be possible because it would be backed by Origin’s substantial retail customer base, which is substantially “short” on generation.
Brookfield argued that the ability to utilise the demand profile of Origin, coupled with its global scale, access to capital and procurement relationships, would both increase and accelerate renewable investment in Australia and improve the prospects of meeting the Commonwealth Government’s carbon reduction targets.
Nature of ACCC competition concerns: vertical integration
Before the ACCC can grant authorisation, it must be satisfied that the proposed conduct:
would not have the effect, or be likely to have the effect, of substantially lessening competition (the Competition Test ); or
would result, or be likely to result, in a benefit to the public that would outweigh the detriment to the public that would result, or be likely to result, from the Proposed Acquisition (the Public Benefit Test ).
The merger authorisation test is now established as involving a higher and more discretionary standard than the standard generally applicable to clearance under s 50. The requirement to “satisfy” the ACCC requires the regulator to reach an “affirmative belief” that no substantial lessening of competition would be likely to occur.
The central competition concern of the ACCC was that integration between the monopoly transmission network and Origin’s electricity generation business could lead to discriminatory behaviour by AusNet in favour of Origin. For example, AusNet could favour Origin when connecting new renewables projects or in the way it operates the network.
The ACCC accepted that there were a number of factors that could limit, but would not eliminate completely, these anti-competitive dynamics, including:
the roles of AEMO as the NEM and system operator and as the Victorian transmission network planner;
economic regulation and enforcement of ring-fencing rules by the AER;
the role of minority investors in the relevant entities;
the degree of separation between the Brookfield funds making the investments; and
the s87B undertakings made by the Brookfield Parties, the Ausnet Parties and the MidOcean Parties, which are a condition of authorisation.
The ACCC found at [6.226]:
The regulations may restrict obvious and blatant discrimination, but more subtle and difficult to detect discrimination is a commercially realistic possibility despite these regulations. Even such subtle discrimination (such as finding seemingly legitimate reasons to delay a connection application) could have a major impact on competition in respect of competitive effects.
Other, less central vertical concerns involved:
Vertical integration between AusNet’s electricity distribution business and Origin.
Vertical integration between Intellihub and Origin, which is likely to impact competition in smart-meter and behind the meter services. While the ACCC did not see this relationship as likely to effect competition in the retail market, it was not satisfied that there was no likely lessening of competition in the market for smart meters.
However, the ACCC considered the competition impacts associated with these issues to be less significant compared to the vertical integration of electricity transmission and generation.
Finally, the ACCC was concerned about the horizontal effects associated with MidOcean Group’s ownership interests in two of the three major Queensland LNG export joint ventures, QCLNG and APLNG. MidOcean would hold a 1.25% stake in QCLNG as well as acquiring a 25.1% interest in APLNG through the transaction, following a transaction currently underway in which MidOcean is acquiring the minority gas assets of Tokyo Gas. It is the first time that there would be a common shareholding in more than one of the Queensland LNG projects.
While MidOcean does not operate or market gas from either APLNG or QCLNG, the ACCC was concerned that the common shareholding may facilitate information sharing that resulted in a risk of coordinated conduct across the projects.
The Undertakings offered by Brookfield, Ausnet and MidOcean
Section 87B undertakings were offered by Brookfield, Ausnet and MidOcean.
In the course of the process, significant negotiation occurred around the scope of the behavioural undertakings offered to respond to the competition concerns. This was reflected in two iterations of the Brookfield commitments being filed, before a final form was offered, which was not published by the ACCC until its final decision.
The experience highlights the reluctance of the ACCC to accept behavioural remedies in merger matters, where the ACCC concerns are structural, and the challenge of negotiating such undertakings.
In this case, the commitments offered by Brookfield focused both on reinforcing and extending the ring-fencing obligations already in place under network regulation, as well as reporting obligations around the “Green Build Out” renewable investment program - to reinforce and hold Brookfield publicly accountable to the delivery of the claimed public benefits.
Notable features of the remedies include:
in relation to the Brookfield commitments, ring-fencing was required both at the asset level (between Ausnet and Origin) as well as the fund level (between Brookfield Infrastructure and Brookfield Renewables, being the funds within Brookfield responsible for the infrastructure and energy assets, respectively);
the extent of ring fencing was significant and addressed systems, staffing, physical buildings and remuneration;
the Brookfield undertaking restricts it from selling more than 10% of both Ausnet and Origin to the same party on exit;
Brookfield must publish information about any connections sought by Origin to the Ausnet transmission network, in order to improve transparency around treatment of Origin in the connection process; and
the Brookfield undertaking sets out the “Green Build Out” commitments associated with the investment and requires it to deploy the resources required to enable Origin to achieve those objectives, coupled with annual progress reporting.
Despite these extensive undertakings, the ACCC nonetheless was not satisfied that the proposed transaction would not give rise to a substantially lessening of competition by virtue of the vertical integration concerns.
ACCC's focus on public benefits
Ultimately authorisation turned therefore on the public benefits that the ACCC found arose by virtue of increased and accelerated investment in renewables that would be caused by the deal.
At its core, the ACCC was prepared to accept that the deal would lead to a substantial and accelerated investment by Origin in renewable projects (wind, solar and storage). Brookfield and Origin had submitted that this would be ~10GW more than would have been likely to be achieved by Origin absent the transaction.
The ACCC noted that Brookfield had not made any specific commitments regarding the amount of renewable capacity or value of investment. However, the ACCC accepted that BGTF fund mandates and the reputational importance of delivery to Brookfield and its executives created strong incentives for it to deliver. These were supplemented by commitments and annual reporting obligations in the Brookfield s87B undertaking. The ACCC also accepted that Brookfield would obtain the benefit of global scale, capital and procurement expertise that may not otherwise be available to Origin.
During the authorisation process, the ACCC had asked the parties to consider the decision of the Tribunal in Telstra / TPG , which had proposed a novel and narrow test of whether public benefits were relevantly caused by the deal. Ultimately, the ACCC appears to have stepped back from this narrow approach and applied a more traditional “with and without” analysis, without dealing with the issue in detail.
The ACCC tempered its view on public benefits by considering the extent to which the transaction may ‘crowd out’ investment by others, and whether the bottleneck to investment were factors other than access to capital, notably delays in the connection process. It also found that if the acquisition did not eventuate, some of Brookfield’s proposed renewable investments would likely be made by others. While the ACCC accepted that these factors may reduce the overall level of benefits, it accepted overall that the acquisition will result in the accelerated build out of renewables in Australia.
The ACCC dismissed other public benefits that Brookfield claimed would result from the deal, including:
decreased energy prices or volatility in pricing;
the earlier and cheaper development and delivery of new technologies;
the development and delivery of the Australian renewables industry in the form of local supply chains and on-shore manufacturing;
increased direct and indirect employment; and
the acceleration of behind the meter solutions.