Department of Finance Private Sector Merger Briefing - 26 September 2013 Summary of major discussion points Merger Implementation Group Merger of Synergy and Verve Energy © State of Western Australia

Merger Implementation Group 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