FEDERAL COURT OF AUSTRALIA
ActewAGL Distribution v The Australian Energy Regulator [2011] FCA 639
Citation: ActewAGL Distribution v The Australian Energy Regulator [2011] FCA 639 Parties: ACTEWAGL DISTRIBUTION, A PARTNERSHIP BETWEEN ACTEW DISTRIBUTION LIMITED AND JEMENA NETWORKS (ACT) PTY LIMITED v THE AUSTRALIAN ENERGY REGULATOR File number(s): NSD 1252 of 2010 Judge: KATZMANN J Date of judgment: 8 June 2011 Catchwords: ADMINISTRATIVE LAW – Application for review under s 5 of the Administrative Decisions (Judicial Review) Act 1977 (Cth) – National Electricity Law – National Electricity Rules – decisions relating to the regulation of the wholesale price of electricity in the ACT – whether the Australian Energy Regulator had the power to vary a decision about the averaging period to be used to determine the nominal risk-free rate of capital after the period had been specified – application filed well outside statutory period – whether extension of time should be granted – whether discretion should be exercised under s 10(2)(b)(ii) of the Administrative Decisions (Judicial Review) Act to refuse to grant the application Legislation: Acts Interpretation Act 1901 (Cth) s 33(1)
Administrative Decisions (Judicial Review) Act 1977 (Cth) ss 5, 5(2)(j), 10(1)(a), 10(2)(b), 10(2)(b)(ii), 11
Competition and Consumer Act 2010 (Cth) ss 37, 42, 44AE
Electricity (NationalScheme) Act 1997 (ACT) s 5
Federal Court of Australia Act1976 (Cth) ss 37M
Federal Court Rules O 54 r 7(2)
Judiciary Act 1901 (Cth) ss 37, 39B, 42
NationalElectricity (South Australia) Act 1996 (SA) Sch, National Electricity Law ss 9, 34, 71B(1), 71C, 71D, 71P(2) 71P(5), 71Q(1), Sch 1 cll 7, 7A(2)
National Electricity Rules cll 6.13(a), 6.5.2Cases cited: Aerolineas Argentinas v Federal Airports Corporation (1995) 63 FCR 100
Application by EnergyAustralia [2009] ACompT 8
Associated Provincial Picture Houses Ltd v Wednesbury Corporation [1948] 1 KB 223
Australian Competition and Consumer Commission (ACCC) v Australian Competition Tribunal (2006) 152 FCR 33
British Oxygen Co v Board of Trade [1971] AC 610
Bragg v Secretary, Department of Employment, Education and Training (1995) 59 FCR 31
Chapman v Reilly, unreported, Federal Court of Australia, 9 December 1983
Comcare v A’Hearn (1993) 45 FCR 441
Dickson v Whiddett [2001] FCA 585
Re Drake and Minister for Immigration and Ethnic Affairs (No. 2) (1979) 2 ALD 634
Edelsten v Minister for Health (1994) 58 FCR 419
FAI Insurances Ltd v Winneke (1982) 151 CLR 342
Federal Airports Corporation v Aerolineas Argentinas (1997) 76 FCR 582
Hunter Valley Developments Pty Ltd v Cohen (1984) 3 FCR 344
Kelly v Coats (1981) 35 ALR 93
Kimberly-Clark Ltd v Commissioner of Patents (1988) 83 ALR 714
Lucic v Nolan (1982) 45 ALR 411
McGowan v Migration Agents Registration Authority (2003) 129 FCR 118
Minister for Aboriginal Affairs v Peko-Wallsend Ltd (1986) 162 CLR 24
Minister for Immigration and Ethnic Affairs v Wu Shan Liang (1996) 185 CLR 259
Minister for Immigration and Multicultural Affairs v Bhardwaj (2002) 209 CLR 597
Minister for Immigration and Multicultural Affairs v Kurtovic (1990) 21 FCR 193
Neat Domestic Trading…
Keep reading for free
Create a free CaseChat account to read ActewAGL Distribution v Australian Energy Regulator and more:
- Read every judgment in full
- Ask AI and get answers linked to paragraphs
- See how each paragraph was cited in later cases
- Download judgments as PDF or Word
One click creates your free account or signs you in.
By continuing you agree to the Terms and Privacy Policy.
Details
- Case
- [2011] FCA 639
- Decision Date
CaseChat Overview and Summary
ActewAGL Distribution sought judicial review of decisions made by the Australian Energy Regulator (AER) regarding the wholesale price of electricity in the Australian Capital Territory. The primary dispute revolved around the AER's authority to alter the averaging period used to determine the nominal risk-free rate of capital after it had been initially specified, and whether an extension of time should be granted for filing the application. The case was heard in the Federal Court of Australia.
The legal issues before the court included whether the AER had the authority to change the averaging period for determining the nominal risk-free rate post the initial specification and if the court should exercise its discretion to grant an extension of time for filing the application. The court also needed to determine whether the application should be dismissed under section 10(2)(b)(ii) of the Administrative Decisions (Judicial Review) Act 1977 (Cth).
The court found that the AER did have the power to vary the averaging period based on regulatory practice and finance theory, and rejected the argument that the specified period was unreasonable. The court held that the AER's decision to maintain the averaging period close to the start of the next regulatory control period was consistent with the capital asset pricing model and economic theory. Additionally, the court dismissed the application for an extension of time, finding that the applicant did not provide sufficient grounds for the extension. Consequently, the court ruled that the application should be dismissed, and ordered that the applicant pay the respondent's costs.
The legal issues before the court included whether the AER had the authority to change the averaging period for determining the nominal risk-free rate post the initial specification and if the court should exercise its discretion to grant an extension of time for filing the application. The court also needed to determine whether the application should be dismissed under section 10(2)(b)(ii) of the Administrative Decisions (Judicial Review) Act 1977 (Cth).
The court found that the AER did have the power to vary the averaging period based on regulatory practice and finance theory, and rejected the argument that the specified period was unreasonable. The court held that the AER's decision to maintain the averaging period close to the start of the next regulatory control period was consistent with the capital asset pricing model and economic theory. Additionally, the court dismissed the application for an extension of time, finding that the applicant did not provide sufficient grounds for the extension. Consequently, the court ruled that the application should be dismissed, and ordered that the applicant pay the respondent's costs.
Orders
Orders of the court
1. The application be dismissed.
2. The applicant pay the respondent’s costs.
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
Background
Background to the litigation
“Building block proposal” is defined for a distribution network service provider as “the part of the provider’s regulatory proposal relevant to the regulation of standard control services”. Clause 6.2.3C(a) deems a distribution service provided by ActewAGL to be classified as both a direct control service and a standard control service. Clause 6.8.2 of the transitional rules provides that a “regulatory proposal for direct control services classified as standard control services” must include a building block proposal. As I mentioned earlier, the contents of the building blocks are set out in cl 6.4.3(a).BACKGROUND TO THE DECISIONS UNDER REVIEW On 2 June 2008 ActewAGL lodged with the AER its regulatory proposal for the five-year regulatory control period commencing 1 July 2009. In that regulatory proposal, ActewAGL proposed that the period of time to be used to determine the nominal risk-free rate be the period of 20 business days ending on 30 June 2008 (“the original proposed averaging period”). On 8 July 2008 the AER wrote to ActewAGL rejecting its original proposed averaging period. The letter stated, amongst other things:The AER does not agree with the averaging period proposed by ActewAGL as the starting date of ActewAGL’s proposed averaging period is almost 12 months prior to the commencement of the regulatory control period. In this regard, the AER considers that the starting date of the proposed period is too far removed from the date by which the AER is likely to publish ActewAGL’s final determination, which is expected to be in April 2009, and the commencement of the 2009—14 regulatory control period. The averaging period proposed by ActewAGL is contrary to accepted regulatory practice as reflected in previous AER and ACCC determinations; the ACCC’s Statement of Regulatory Principles and previous jurisdictional AER’s determinations, all of which apply a nominal risk free rate averaging period considerably closer to the final determination date.The AER’s regulatory practice is supported by accepted expert views in the economics and finance literature. Capital Asset Pricing Model (CAPM) theory suggests that, ideally, the nominal risk free rate input will be calculated on the day of the final determination. The CAPM is an ex ante model and therefore the most up to date information should be used if available.Further, applying an averaging period which is closely aligned to the date of the final determination provides an unbiased rate of return that is consistent with the market conditions at the time of the final determination. I interpolate that the reference to “an unbiased rate of return” involves making a prediction about interest rates which although too high or too low at any particular point in time, is on average correct. In its letter, the AER proposed a different period (20 days starting on 23 February 2009 and ending on 20 March 2009) and went on to invite ActewAGL to nominate an alternative averaging period between 1 February 2009 and 20 March 2009 if it disagreed with the AER’s proposal.
Evidence
Evidence Before The Court
Full text does not contain this section.
Decision
Reasons for decision
The third and final decision under challenge was the decision made on 28 April 2009 to reject the revised averaging period proposal.THE REASONS FOR THE DECISIONS The AER set out its reasons for disagreeing with ActewAGL’s original proposal in its letter of 8 July 2008, part of which is extracted above at [38]. In short, its reasons were:(a)The starting date for the proposed averaging period (20 business days ending 30 June 2008) was too far removed from the start of the regulatory control period (1 July 2009) and too far removed from the date the AER is likely to publish its final determination (April 2009), and such an approach was contrary to accepted regulatory practice, which, it noted, was supported by recognised experts. It footnoted the letter with references to examples of articles and reports.(b)Applying an averaging period closely aligned to the date of the final determination provides an unbiased rate of return consistent with market conditions at the time of the final determination. The AER noted ActewAGL’s concern about the volatility in debt markets and the need for certainty in order to manage its commercial risks. But it voiced its disagreement that certainty is relevant to applying an averaging period, the purpose of which, it stated, is to address the possible daily volatility in financial markets. It asserted that the publication of the regulatory determination provides a distribution network service provider with certainty about the rate of return which would apply during the ensuing regulatory control period and, in any event, that information is provided before the start of the regulatory control period. In the letter to ActewAGL of 20 August 2008 the AER merely accepted the period nominated by ActewAGL in its letter of 14 August 2008 and, accordingly, specified the period to be used in the final determination as the 20 business days commencing 2 February 2009. The reasons for the decision not to accept the revised averaging period proposal are summarised in Chapter 12 and detailed in Appendix I of the Final Decision. The AER referred to the arguments of both ActewAGL and all other network service providers who had made similar revised proposals. All were providers caught, like ActewAGL, by the transitional provisions of the NER. They were the applicants in the proceedings in the Tribunal. The AER said that it had considered the key arguments put forward in the revised regulatory proposals and the additional material, that is to say, the submissions and the consultants’ reports furnished with them. In rejecting them, it also defended the decision it had made in August 2008. In summary the AER made the following points:(a)As the CEG report was applicable to the NSW distribution network service providers, Transgrid and Transend, it should be taken into account in connection with their proposals.(b)The decision to withhold agreement was reasonable and the averaging period specified in August 2008 is consistent with finance theory, regulatory practice, the NER and the NEL. The use of an averaging period “as close to the start of the next regulatory control period as practically possible is consistent with the forward looking nature of the capital asset pricing model (CAPM) and is correct in finance theory”. (c)“[G]iven the evidence at the time, the additional material contained in the revised regulatory proposal does [scil.] not justify a conclusion that the AER’s decision to withhold agreement … was inconsistent with regulatory practice”. (No doubt this was a response to a point CEG had made and to which the AER had referred on the previous page of its report that previous regulatory decisions in Australia, the UK and the US had adjusted the averaging period for the risk-free rate to account for specific events.)(d)ActewAGL’s argument that there was an insufficient return on equity was based on the view that the market risk premium (MRP) of 6 per cent, which is prescribed in the rules, is out of line with current variations in the MRP and for that reason there should be adjustments to the risk-free rate. The AER maintained that this would “circumvent WACC parameters prescribed … in the NER [and] would undermine the intended certainty under the regulatory regime which results from these values being prescribed”. (e)The fact that the Commonwealth Government Securities (“CGS”) are at or close to historical lows does not of itself mean that they cannot be used. Interest rates move all the time and reflect the market’s assessment of the price of money at a particular time. If ActewAGL can lock in an averaging period that it considers provides the most advantageous rate of return early in the regulatory process based on its view about future interest rates “then it may create opportunities for ‘gaming’ the regulator if its view transpires to be disadvantageous”. (f)The material provided by ActewAGL in support of its revised regulatory proposal does not reasonably justify the conclusion that an averaging period before September 2008 is better than a period as close as practically possible to the start of the next regulatory control period. The averaging period specified in August 2008 did not exclude the downward movement of the CGS yield and was not abnormal. Setting the risk-free rate using this period (that is, the period commencing 2 February 2009) is consistent with the NEL objective of efficient investment, with the forward looking nature of the CAPM and with economic theory.THE GROUNDS OF REVIEW
Ratio Decidendi
Legal Principle Established
Full text does not contain this section.