Commission Grants Clearance For Contact’s Proposed Acquisition Of Manawa

The Commerce Commission has granted clearance for Contact Energy Limited to acquire up to 100% of the shares in Manawa Energy Limited.

In reaching its decision, the Commission considered the potential impact of the proposed acquisition on the wholesale supply of physical electricity and the supply of shaped hedges (contracts that reduce financial exposure to electricity spot market prices during certain periods). These are the two main areas of overlap between Contact and Manawa.

The Commission initially raised concerns about the acquisition, but after further investigation, Chair Dr John Small said the Commission is satisfied that the acquisition is unlikely to substantially lessen competition in any New Zealand market.

“Ultimately, we do not believe that the acquisition will push electricity prices up for consumers, increase coordination between generators in the market for the wholesale supply of physical electricity or reduce the supply of new shaped hedges.

“We looked carefully at the supply of shaped hedges because they are important products, particularly for independent electricity retailers. The evidence we received showed that, even if the acquisition did not go ahead, Manawa is unlikely to have the ability to sell more than a small amount of new shaped hedges and that it would have little commercial incentive to sell these products. This is because Manawa’s business strategy is to take on more debt to grow its generation capacity and offering shaped hedges presents a risk to Manawa in being able to service that debt. Consistent with this strategy, Manawa has not supplied new shaped hedges for some time.

"As a result, we concluded that the acquisition would not in fact remove future competition between Manawa and Contact in the supply of shaped hedges. We therefore are satisfied that there is unlikely to be a substantial lessening of competition in this area,” Dr Small said.

The Commission also considered the impact of the proposed acquisition on the wholesale supply of physical electricity given the acquisition would increase the total amount of electricity Contact could supply. While the Commission expressed initial concerns that this could potentially increase Contact’s ability and incentive to increase the spot price of electricity or that it could change market conditions to make coordination more likely, it is now satisfied that this will not be the case.

“Part of our assessment looked at whether the acquisition would increase the ability and incentive for Contact to increase electricity prices on the spot market. Our analysis shows that the acquisition will only increase the frequency of Contact’s ability and incentive to raise electricity prices by a negligible amount, which is unlikely to have an impact on competition,” Dr Small said. “Further, while Contact would have the ability to withhold some of its electricity output at certain times in an attempt to increase electricity prices, we have found that it would not be profitable to do so.

“Finally, we are also satisfied that the acquisition will not increase coordination between generators in the market for the wholesale supply of physical electricity. While the market has some features that make it vulnerable to coordination, on balance, these features are outweighed by characteristics that make it less vulnerable to coordination. We also do not consider that the acquisition will change conditions in the market such that coordination is more likely.

“We know there are concerns about whether competition in the electricity industry is working as well as it could, and that the Commission has expressed such concerns in the past. There are a range of initiatives underway to address these concerns, including a government review of the electricity industry and the work of the Energy Competition Task Force (of which the Commission is a member). However, for a clearance application, the law requires us to only look at such broader factors to the extent they affect whether or not the proposed acquisition would lead to a substantial lessening of competition. So, we must take the current state of competition as given and focus on whether or not the proposed acquisition is likely to substantially lessen that level of competition, and, in this instance, we found that it would not.”

A public version of the written reasons for the decision will be available within a week on the Commission's case register. The executive summary of these written reasons will be available on the case register shortly.

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