Merger of Synergy and
Verve Energy
Private Sector Merger Briefing - 26 September 2013
Summary of major discussion points
Merger Implementation
Group
Department of Finance
© State of Western Australia
Major points of discussion

Non-discrimination principle
o Current policies
o Product offerings

The availability of excess gas
o Price suppression

Restrictions on the use of commercially
sensitive information
o Ring-fencing requirements

Cost allocation
o New and existing customers
o Relationship between the
contestable and franchise markets

Capital valuation

Efficient spot price: breaking down the
portfolio curve

Credit rating mechanism
o Transparency
o Credit rating of the merged entity

Penalties regime
o Market-based reporting
o Deterrence
Merger Implementation Group
Non-discrimination

Current policies
o Per legislative requirements, the state-owned electricity corporations
interact on an arm’s length basis
o The corporations deal with third parties in accordance with normal
commercial drivers and competition law

Post-merger
o Non-discrimination principles apply to all electricity-related product offerings.
This process is subject to independent auditing
o The merged entity is not a dominant player in the gas market – there is no
requirement to offer gas as a standardised product
o Short Run Marginal Cost bidding in the Short-Term Energy and Balancing
Markets will be maintained
Merger Implementation Group
Gas

Optimisation of gas utilisation
o It is likely that the merged entity will optimise its
position, if it has gas in excess of its requirements
o This will not be subject to any new regulation
o As the merged entity is not a dominant player in the
gas market, there is not the same necessity for
concern in respect of competition issues
Merger Implementation Group
Commercially sensitive information

Restricted information
o Ring-fencing will restrict the retail and generation
divisions from accessing certain information that
could provide them with an unfair commercial
advantage
o The wholesale division will have unfettered access
to the merged entity’s contractual and trading
information. It will, however, be subject to transfer
pricing, standard product requirements and a
buy/sell spread
Merger Implementation Group
Cost allocation

Between wholesale and retail – servicing new and existing customers
o Contracts between Verve Energy and Synergy will be replaced by new
internal arrangements that have regard to the terms of existing contracts
o When serving new customer load the retail division will undertake an
assessment of its relevant risk policy. It will then be up to the retail division
as to how it backs this arrangement – through customised or standardised
products ‘purchased’ from the wholesale division
• New customer loads include existing contracts which are
subsequently renewed

Between the franchise and contestable customers
o There will be no cross-subsidisation between franchise and contestable
customers with regard to cost of goods sold
• This will be ensured through transfer pricing
Merger Implementation Group
Capital valuation and unit bidding


Capital valuation
o The buy/sell spread is intended to discourage the
potential for the merged entity to inflate the value of its
assets (and attempt to recover this through excessive
pricing)
Facility bidding into the wholesale market
o This is considered to be outside the scope of the
merger process
o The Independent Market Operator is understood to be
considering this matter
Merger Implementation Group
Credit rating mechanism


Transparency
o Any credit-based discrimination must be made on a fair and
reasonable basis
o A credit rating mechanism is being developed and all decisions
will be subject to auditing
o No decision has yet been made in respect of a detailed
mechanism
o In general practice, the relevant standard methodology is
disclosed but individual decisions remain commercially
confidential
Credit assessment of retail division of the merged entity
o This matter is being considered
Merger Implementation Group
Penalties regime

Market-based reporting
o If a market participant alleges that the merged entity engaging in
behaviour which is not consistent with the regulatory regime, a
complaint can be lodged directly with the Minister for Energy or with
the Public Utilities Office
o A more formal reporting process is also being considered

Deterrence
o Contravention of regulatory obligations will be subject to a civil
penalties regime
o In addition to financial penalties, the negative sentiment stemming
from incurring a civil penalty is intended to place pressure on the
merged entity’s board, executive and those officers implicated in the
matter
Merger Implementation Group