Department of Finance

Private Sector Merger Briefing - 26 September 2013

Summary of major discussion pointsMerger Implementation Group

Merger of Synergy and Verve Energy

©  State of Western Australia

Merger Implementation Group

Major points of discussion Capital valuation Efficient spot price: breaking down the

portfolio curve Credit rating mechanismo Transparencyo Credit rating of the merged entity Penalties regime o Market-based reportingo Deterrence

Merger Implementation Group

Non-discrimination Current policieso Per legislative requirements, the state-owned electricity corporations interact on

an arm’s length basiso 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 auditingo The merged entity is not a dominant player in the gas market – there is no

requirement to offer gas as a standardised producto Short Run Marginal Cost bidding in the Short-Term Energy and Balancing

Markets will be maintained

Merger Implementation Group

Gas

Optimisation of gas utilisationo It is likely that the merged entity will optimise its position,

if it has gas in excess of its requirementso This will not be subject to any new regulationo 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 informationo 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 contractso 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 marketo This is considered to be outside the scope of the merger

processo 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 basiso 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 mechanismo 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 reportingo 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 Deterrenceo Contravention of regulatory obligations will be subject to a civil penalties

regimeo 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