Application by DBNGP (WA) Transmission Pty Ltd (No 3)

[2012] ACompT 14

AUSTRALIAN COMPETITION TRIBUNAL

Application by DBNGP (WA) Transmission Pty Ltd (No 3) [2012] ACompT 14

Citation:

Application by DBNGP (WA) Transmission Pty Ltd (No 3) [2012] ACompT 14

Review from:

Economic Regulation Authority of Western Australia

Parties:

DBNGP (WA) TRANSMISSION PTY LTD ON ITS OWN BEHALF AND ON BEHALF OF DBNGP (WA) NOMINEES PTY LTD AS TRUSTEE OF THE DBNGP WA PIPELINE TRUST, AND DBNGP (WA) NOMINEES PTY LTD AS TRUSTEE OF THE DBNGP WA PIPELINE TRUST

File number:

ACT 2 of 2012

Tribunal:

MANSFIELD J (PRESIDENT)
MR R DAVEY (MEMBER)
PROFESSOR D ROUND (MEMBER)

Date of decision:

26 July 2012

Catchwords:

COMPETITION LAW – review of determination by the Economic Regulation Authority of Western Australia (ERA) – whether the ERA made reviewable errors in making Access Arrangement Decision – in particular:

(a)    whether the ERA applied NGR rule 87 correctly – whether NGR rule 87(1) requires the ERA to go beyond the figure determined in accordance with NGR rule 87(2)(b) – NGR rule 87(1) informs application of NGR  rule 87(2)(b) – the ERA not required to adjust the rate of return determined in accordance with NGR r 87(2)(b);

(b)   whether the ERA erred in determining the rate of return on capital – whether components of rate of return incorrect – whether the ERA erred in using five-year government bonds to determine the risk free rate of return – whether the ERA’s determination of the market risk premium (MRP) was not supported by evidence having regard to current financial market conditions – whether the ERA erred in determining the value of imputation credits – whether the ERA erred in estimating debt risk premium (DRP) – whether the ERA erred in determining the inflation rate by using the average of forecast inflation for a period of five years rather than for a period of ten years – whether the ERA should have based its determination of DRP on evidence of total cost of debt funding submitted by the Applicant – whether the ERA’s bond yield approach was in error – whether the ERA erred in determining the allowance for debt raising costs – whether the ERA erred incorrectly relied on regulatory precedent in determining the values of the components of the rate of return model;

(c)    whether the ERA erred in determining the value of the opening capital base – whether the ERA erred in escalating previous capital expenditure using a national measure of inflation rather than a local measure of inflation – whether the ERA erred in determining that a project management retainer fee was not conforming capital expenditure – whether the ERA erred in determining the value of conforming capital expenditure of a pipeline lease – whether the ERA erred in determining the depreciation period for a pipeline lease;

(d)   whether the ERA erred in failing to allow the full amount of claimed regulatory expenses;

(e)    whether the ERA erred in specifying the reference services for the access arrangement – whether the ERA erred in failing to include a full haul service as the only reference service – whether the ERA erred in including a full haul service, a part haul service and a back haul service as reference services – whether the ERA erred in defining the part haul reference service – where the total capacity of the pipeline was already fully contracted for the access arrangement period; and

(f)     whether the ERA erred in determining that the access arrangement would apply to any incremental services provided as a result of increases in the expansion of the pipeline unless the Applicant could demonstrate that such application was inconsistent with the national gas objective.

Legislation:

Gas Pipelines Access (South Australia) Act 1997 (SA)
National Gas (South Australia) Act 2008 (SA)
National Gas Access (WA) Act 2009 (WA)
Gas Pipelines Access (South Australia) Law
National Gas Access (WA) Law
National Gas Law
National Electricity Law
National Gas Rules
National Electricity Rules

Cases cited:

Re Judiciary and Navigation Acts (1921) 29 CLR 257
Registrar of Titles (WA) v Franzon (1975) 132 CLR 611
R v Australian Broadcasting Tribunal; Ex parte Hardiman (1980) 144 CLR 13
Philip Morris Inc v Adam P Brown Male Fashions Pty Ltd (1981) 148 CLR 457
Fencott v Muller (1983) 152 CLR 570
East Australian Pipeline Pty Ltd v Australian Competition and Consumer Commission (2007) 233 CLR 229
Geographical Indications Committee v O’Connor (2000) 64 ALD 325
Bankstown City Radio Co-operative Ltd v Australian Communications and Media Authority [2007] FCA 2053
Re Epic Energy South Australia Pty Ltd [2002] ACompT 4
Re East Australian Pipeline Limited [2005] ACompT 1
Application by ElectraNet Pty Limited (No 3) [2008] ACompT 3
Application by Energex Limited (No 2) [2010] ACompT 7
Application by Energy Australia [2009] ACompT 8
Application by ActewAGL Distribution [2010] ACompT 4
Application by Ergon Energy Corporation Limited (Street Lighting Services) (No 6) [2010] ACompT 14
Application by Energex Limited (Gamma) (No 5) [2011] ACompT 9
Application by Jemena Networks (No 5) [2011] ACompT 10
Application by United Energy Distribution Pty Ltd [2012] ACompT 1
Application by Envestra (No 2) [2012] ACompT 4
Application by DBNGP (WA) Transmission Pty Ltd [2012] ACompT 6
Application by United Energy Distribution Pty Limited (No 2) [2012] ACompT 8
Application by WA Gas Networks Pty Ltd (No 3) [2012] ACompT 12
Macedon Ranges Shire Council v Romsey Hotel Pty Ltd and Anor (2008) 19 VR 422

Dates of hearing:

16 April, 21-25 May 2012

Place:

Adelaide (via video link with Perth)

Category:

Catchwords

Number of paragraphs:

622

Counsel for the Applicant:

M Sloss SC and J Thomson

Solicitor for the Applicant:

Clayton Utz

Counsel for the Economic Regulation Authority:

M O’Bryan SC

Solicitor for the Economic Regulation Authority:

Lavan Legal

Counsel for the Intervener BHP Billiton Nickel West Pty Ltd:

M Darian-Smith

Solicitor for the Intervener BHP Billiton Nickel West Pty Ltd:

King & Wood Mallesons

Counsel for the Intervener Electricity Generation Corporation trading as Verve Energy:

D Jackson

Solicitor for the Intervener Electricity Generation Corporation trading as Verve Energy:

Clifford Chance

Counsel for the Intervener Alinta Sales Pty Ltd:

D Jackson

Solicitor for the Intervener Alinta Sales Pty Ltd:

Clifford Chance

Counsel for the Intervener APT Parmelia Pty Ltd as trustee for the Parmelia Gas Trust:

S Horgan SC and M Borsky

Solicitor for the Intervener APT Parmelia Pty Ltd as trustee for the Parmelia Gas Trust:

Gilbert + Tobin

IN THE AUSTRALIAN COMPETITION TRIBUNAL

ACT 2 of 2012

RE:	APPLICATION UNDER SECTION 245 OF THE NATIONAL GAS ACCESS (WESTERN AUSTRALIA) LAW FOR A REVIEW OF THE DECISION MADE BY THE ECONOMIC REGULATION AUTHORITY OF WESTERN AUSTRALIA TO GIVE EFFECT TO ITS PROPOSED REVISIONS TO AN ACCESS ARRANGEMENT FOR THE DAMPIER TO BUNBURY NATURAL GAS PIPELINE, PURSUANT TO RULE 64 OF THE NATIONAL GAS RULES
BY:	DBNGP (WA) TRANSMISSION PTY LTD ON ITS OWN BEHALF AND ON BEHALF OF DBNGP (WA) NOMINEES PTY LTD AS TRUSTEE OF THE DBNGP WA PIPELINE TRUST, AND DBNGP (WA) NOMINEES PTY LTD AS TRUSTEE OF THE DBNGP WA PIPELINE TRUST Applicants

TRIBUNAL:	MANSFIELD J (PRESIDENT) MR R DAVEY (MEMBER) PROFESSOR D ROUND (MEMBER)
DATE OF ORDER:	26 JULY 2012
WHERE MADE:	ADELAIDE (VIA VIDEO LINK WITH PERTH)

THE TRIBUNAL ORDERS THAT:

1.The Decision of the Economic Regulation Authority of Western Australia (the ERA) made on 22 December 2011 and titled the Economic Regulation Authority’s revised access arrangement determination for the Dampier to Bunbury Natural Gas Pipeline be set aside and be remitted to the ERA, for the purposes of making the said decision again, limited to giving effect to the reasons for decision of the Tribunal on:

(a)the Debt Risk Premium, in particular to determine a value for the Debt Risk Premium using its bond-yield approach in accordance with the Tribunal’s reasons; and

(b)the correct valuation of capital expenditure in respect of the Burrup Extension Pipeline, in particular to adjust the Base Rent in accordance with clause 4.3 of the Burrup Extension Pipeline Lease to the commencement of the lease.

2.The ERA, in making the Decision again, do:

(a)determine a value for the Debt Risk Premium using its bond-yield approach in accordance with the Tribunal’s reasons including having regard to the Tribunal’s criticisms of the simple averaging process adopted; and

(b)determine the valuation of capital expenditure in respect of the Burrup Extension Pipeline by adjusting the Base Rent in accordance with clause 4.3 of the Burrup Extension Pipeline Lease to the commencement of the lease; and

(c)make the amendments to the said Decision consequential upon the changes effected in accordance with (a) and (b) hereof.

3.The parties, including the interveners, have liberty to apply in relation to the implementation of Order 1 hereof.

4.The said Decision is otherwise affirmed.

TABLE OF CONTENTS

BACKGROUND ……………………………………………………………………...	[1]
Decision under review ……………………………………………………………...	[7]
Functions and powers of the ERA …………………………………………….......	[14]
GROUNDS OF REVIEW …………………………………………………………....	[40]
RATE OF RETURN ISSUES ..………………………………………………………	[47]
Construction of rule 87 of the National Gas Rules ………………………………	[47]
Input issues …………………………………………………………………………	[104]
Risk free rate …………………………………………………………………..	[104]
Market Risk Premium………………………………………………………….	[139]
Gamma ………………………………………………………………………...	[164]
Inflation Rate ………………………………………………………………….	[228]
Debt Risk Premium ……………………………………………………………	[257]
Debt Raising Costs…………………………………………………………..…	[314]
Regulatory Consistency …………………….…………………………………	[331]
CAPITAL BASE ISSUES ……………………………………………………………	[339]
National CPI or Perth CPI ………………………………………………………...	[339]
Project Management Retainer Fee ………………………………………………..	[366]
Burrup Extension Pipeline Lease …………………………………………………	[396]
Value of Conforming Capital Expenditure …………………………………...	[407]
Depreciation …………………………………………………………………...	[441]
OPERATING EXPENDITURE ISSUE ...…………………………………………..	[466]
REFERENCE SERVICE ISSUES …………………………………………………..	[490]
Proposed R1 Reference Service v Proposed T1, P1 and B1 Reference Services………………………………………………………………………….....	[491]
Definition of Part Haul Services …………………………………………………	[557]
Issues in Standard Shipper Contracts……… …………………………………...	[586]
COVERAGE OF EXTENSIONS AND EXPANSIONS……………………………	[590]
CONCLUSIONS ……………………………………………………………………...	[619]

IN THE AUSTRALIAN COMPETITION TRIBUNAL

ACT 2 of 2012

RE:	APPLICATION UNDER SECTION 245 OF THE NATIONAL GAS ACCESS (WESTERN AUSTRALIA) LAW FOR A REVIEW OF THE DECISION MADE BY THE ECONOMIC REGULATION AUTHORITY OF WESTERN AUSTRALIA TO GIVE EFFECT TO ITS PROPOSED REVISIONS TO AN ACCESS ARRANGEMENT FOR THE DAMPIER TO BUNBURY NATURAL GAS PIPELINE, PURSUANT TO RULE 64 OF THE NATIONAL GAS RULES
BY:	DBNGP (WA) TRANSMISSION PTY LTD ON ITS OWN BEHALF AND ON BEHALF OF DBNGP (WA) NOMINEES PTY LTD AS TRUSTEE OF THE DBNGP WA PIPELINE TRUST, AND DBNGP (WA) NOMINEES PTY LTD AS TRUSTEE OF THE DBNGP WA PIPELINE TRUST Applicants

TRIBUNAL:	MANSFIELD J (PRESIDENT) MR R DAVEY (MEMBER) PROFESSOR D ROUND (MEMBER)
DATE:	26 JULY 2012
PLACE:	ADELAIDE (VIA VIDEO LINK WITH PERTH)

REASONS FOR DECISION

BACKGROUND

1. This is an application under s 245(1) of the National Gas Access (WA) Law (NGL) to the Australian Competition Tribunal for review of the decision of the Economic Regulation Authority of Western Australia (ERA) to give effect to its proposed revisions to an access arrangement for the Dampier to Bunbury Natural Gas Pipeline (DBNGP), pursuant to rule 64 of the National Gas Rules (NGR).

2. The DBNGP is a gas transmission pipeline stretching over 1,500 kilometres underground originating at the North West Shelf Joint Venture’s domestic gas plant on the Burrup Peninsula in the Pilbara region of Western Australia and terminating at Clifton Road, north of Bunbury in the south west region of Western Australia.

   Note:  This redacted copy of the Reasons for Decision is a revised version of the version previously published reflecting the applicant’s claim to confidentiality. The confidential version may not be inspected except by leave of the President of the Tribunal.

3. DBNGP (WA) Nominees Pty Ltd, as trustee for the DBNGP WA Pipeline Trust, owns the DBNGP.  DBNGP (WA) Transmission Pty Ltd is contracted to operate the pipeline.  The owner and operator of the DBNGP are joint applicants (together, DBP). 

4. The DBNGP is an old scheme covered pipeline, a scheme pipeline and a covered pipeline under the National Gas Access (WA) Act 2009 (WA) (NGA WA Act) the NGL and the NGR. The NGL operates by virtue of s 7 of the NGA WA Act as it applies the text that results from modifying the National Gas Law as set out in the Schedule to the National Gas (South Australia) Act 2008 (SA), to give effect to s 7A(3) and (4) and Schedule 1, as a law of Western Australia.

5. Section 26 of the NGL gives the NGR the force of law in Western Australia.

6. The NGA WA Act and the NGL are administered by the ERA in Western Australia, whereas the NGL is administered by the Australian Energy Regulator (AER) in other jurisdictions.

   Decision under review

7. On 1 April 2010, DBP submitted to the ERA an access arrangement revision proposal for the DBNGP for approval by the ERA under the NGR.

8. On 14 March 2011, pursuant to rule 59 of the NGR, the ERA made a draft decision, the Draft Decision on Proposed Revisions to the Access Arrangement for the Dampier to Bunbury Natural Gas Pipeline – Submitted by DBNGP (WA) Transmission Pty Ltd (Draft Decision), not to approve the access arrangement revision proposal.  The Draft Decision included a statement of the reasons for the decision and set out 109 amendments to the proposed revised access arrangement that would be required before the ERA would be prepared to approve the access arrangement revision proposal.

9. On 18 April 2011, pursuant to rule 60 of the NGR, DBP submitted revisions to the access arrangement revision proposal.  On 20 May 2011, 11 August 2011 and again on 8 September 2011, DBP submitted further revised versions of the access arrangement proposal that incorporated corrections to several errors in the reference tariff calculation.  This included corrected versions of the access arrangement, access arrangement information and tariff model.

10. On 31 October 2011, pursuant to rule 62 of the NGR, the ERA made a final decision, the Final Decision on Proposed Revisions to the Access Arrangement for the Dampier to Bunbury Natural Gas Pipeline – Submitted by DBNGP (WA) Transmission Pty Ltd (Final Decision of 31 October 2011) not to approve the revised access arrangement proposal as ultimately submitted by DBP on 8 September 2011.  The Final Decision included a statement of the reasons for the decision and set out 73 amendments that the ERA required to be made to the revised access arrangement proposal.  

11. By notice issued by the ERA on 1 December 2011, the ERA gave notice of its intention to amend the Final Decision of 31 October 2011 (exercising power under clause 20 of Schedule 2 to the NGL).  The ERA invited submissions on its proposed amendments to the Final Decision of 31 October 2011, which specifically related to the forecast of operating expenditure, the extension and expansion requirements and correction of minor errors of fact in the Final Decision of 31 October 2011.  

12. On 13 December 2011, DBP submitted to the ERA Submission 73 entitled “DBP Response to the ERA Final Decision on Proposed Revisions to the Access Arrangement for the DBNGP” (Submission 73) plus attachments and, on 16 December 2011, submitted to the ERA Submission 74 entitled “Further DBP Response to the ERA Final Decision on Proposed Revisions to the Access Arrangement for the DBNGP” (Submission 74) and attachments.  Only sections 10 and 11 of Submission 73 were responsive to the proposed amendments to the Final Decision.

13. On 22 December 2011, the ERA published its Amended Final Decision (Final Decision) together with, pursuant to rule 64 of the NGR, its own access arrangement giving effect to its proposed access arrangement revisions, the Economic Regulation Authority’s revised access arrangement determination for the Dampier to Bunbury Natural Gas Pipeline (Access Arrangement Decision).

    Functions and powers of the ERA

14. The power to make the Access Arrangement Decision is governed by rule 64 of the NGR.

15. Relevantly, rule 64(2) provides that the ERA’s proposal for an access arrangement was to be formulated with regard to:

    (1)       the matters that the NGL requires an access arrangement to include;

    (2)       the service provider’s access arrangement proposal; and

    (3)       the ERA’s reasons for refusing to approve that proposal.

16. Rule 64(2) of the NGR provides that the ERA may, but is not obliged to, consult on its proposal.  In this matter, the ERA did not consult on making the Access Arrangement Decision (having consulted on making the Draft Decision and the Amended Final Decision).

17. The making of the Access Arrangement Decision was an ERA “economic regulatory function or power”.  Accordingly, the ERA was required to make the Access Arrangement Decision in a manner that was likely to contribute to the achievement of the national gas objective: s 28(1) of the NGL.  Rule 100 of the NGR requires that the provisions of an access arrangement be consistent with the national gas objective.

18. The national gas objective is defined in s 23 of the NGL as follows:

    23 – National gas objective

    The objective of this Law is to promote efficient investment in, and efficient operation and use of, natural gas services for the long term interests of consumers of natural gas with respect to price, quality, safety, reliability and security of supply of natural gas.

19. The ERA was also required to take into account the revenue and pricing principles as defined in s 24 of the NGL when making those parts of the Access Arrangement Decision that relate to a reference tariff: s 28(2)(a) of the NGL.  The ERA was permitted to take into account the revenue and pricing principles when exercising any other ERA “economic regulatory function or power” (for example, determining terms and conditions of the Access Arrangement Decision that did not relate to a reference tariff) if the ERA considered it appropriate to do so: s 28(2)(b) of the NGL. 

20. The revenue and pricing principles are set out in s 24 of the NGL as follows:

    24 – Revenue and pricing principles

    (1)The revenue and pricing principles are the principles set out in subsections (2) to (7).

    (2)A service provider should be provided with a reasonable opportunity to recover at least the efficient costs the service provider incurs in –

    (a)       providing reference services; and

    (b)complying with a regulatory obligation or requirement or making a regulatory payment.

    (3)A service provider should be provided with effective incentives in order to promote economic efficiency with respect to reference services the service provider provides.  The economic efficiency that should be promoted includes –

    (a)efficient investment in, or in connection with, a pipeline with which the service provider provides reference services; and

    (b)the efficient provision of pipeline services; and

    (c)the efficient use of the pipeline.

    (4)Regard should be had to the capital base with respect to a pipeline adopted –

    (a)       in any previous –

    (i)        full access arrangement decision; or

    (ii)decision of a relevant Regulator under section 2 of the Gas Code;

    (b)in the Rules.

    (5)A reference tariff should allow for a return commensurate with the regulatory and commercial risks involved in providing the reference service to which that tariff relates.

    (6)Regard should be had to the economic costs and risks of the potential for under and over investment by a service provider in a pipeline with which the service provider provides pipeline services.

    (7)Regard should be had to the economic costs and risks of the potential for under and over utilisation of a pipeline with which a service provider provides pipeline services.

1. In Application by Energy Australia [2009] ACompT 8 (Energy Australia), the Tribunal considered the revenue and pricing principles in s 7A of the National Electricity Law (NEL) which is in similar terms to s 24(2) of the NGL and the reference, in those principles, to the service provider being given an opportunity to recover “at least” its efficient costs incurred.  It said at [81]:

   It might be asked why the NEL principles require that the regulated NSP be provided with the opportunity to recover at least its efficient costs.  Why ‘at least’?  The issue of opportunity is critical to the answer.  The regulatory framework does not guarantee recovery of costs, efficient or otherwise.  Many events and circumstances, all characterised by various uncertainties, intervene between the ex ante regulatory setting of prices and the ex post assessment of whether costs were recovered.  But if, as it were, the dice are loaded against the NSP at the outset by the regulator not providing the opportunity for it to recover its efficient costs (eg, by making insufficient provision for its operating costs or its cost of capital), then the NSP will not have the incentives to achieve the efficiency objectives, the achievement of which is the purpose of the regulatory regime.

2. An application for review by the Tribunal is limited in that:

   (1)the applicant must demonstrate that the ERA made an error of one of the four kinds described in section 246(1) of the NGL;

   (2)the applicant must not raise any “matter” (by way of evidence or submissions) that was not “raised in submissions in relation to the reviewable regulatory decision before that decision was made”: s 258(2) of the NGL; and

   (3)the Tribunal must not consider any material other than that specified in section 261(1) and (2) of the NGL, which essentially comprises the material that was before the ERA, except for the purpose of determining the orders to be made by the Tribunal: s 258(3).

3. Each of those provisions attracted submissions in the course of the hearing of this application.  It is convenient at this point to make some brief observations about them.

4. The grounds of review to which the applicants are limited by s 246(1) of the NGL are that:

   (1)the ERA made an error of fact in its findings of facts, and that error of fact was material to the making of the decision;

   (2)the ERA made more than one error of fact in its findings of facts, and those errors of fact, in combination, were material to the making of the decision;

   (3)the exercise of the ERA’s discretion was incorrect, having regard to all the circumstances;

   (4)the ERA’s decision was unreasonable, having regard to all the circumstances.

5. Consequently, the Tribunal’s task is not to substitute a decision which the Tribunal may prefer to make on the material before the ERA: Application by ElectraNet Pty Limited (No 3) [2008] ACompT 3 (ElectraNet (No 3)) at [64] and [69]; Energy Australia at [70].

6. Section 258(2) of the NGL prohibits any party other than the decision maker from raising “any matter that was not raised in submissions in relation to the reviewable regulatory decision”.

7. In the context of s 258(2), the word “matter” is in a practical sense a synonym for “issue”.  The effect of section 258(2) is therefore to restrict the issues that an applicant can raise in a review: Application by Envestra (No 2) [2012] ACompT 4 (Envestra (No 2)) at [118]. If an issue cannot be identified as arising out of a matter that an applicant raised in a submission considered by the ERA, it is not permitted to be raised by the applicant in the review: Application by Ergon Energy Corporation Limited (Street Lighting Services) (No 6) [2010] ACompT 14 (Ergon (No 6)) at [36] and [37] regarding a similar provision of the Gas Pipelines Access (South Australia) Law (GPAL); Re Epic Energy South Australia Pty Ltd [2002] ACompT 4 (Epic Energy) at [24] and [25] regarding the GPAL; Re East Australian Pipeline Limited [2005] ACompT 1 (EAPL) at [2] to [4] and [9] and [10] regarding the GPAL.  However, the identification or definition of a matter or issue in some circumstances may not be an easy one.  That question is discussed later in these reasons.

8. Section 261 of the NGL regulates the matters that are required, and permitted, to be considered by the Tribunal in reviewing a reviewable regulatory decision.

9. The relevant provisions of section 261 are as follows:

   261 – Matters to be considered by Tribunal in making determination

   (1)Subject to this section, the Tribunal, in reviewing a reviewable regulatory decision, must not consider any matter other than review related matter.

   (2)       The Tribunal, in reviewing a reviewable regulatory decision, must

   (a)       in all cases, have regard to any document –

   (i)prepared, and used, by the original decision maker for the purpose of making the reviewable regulatory decision; and

   (ii)       that the decision maker has made publicly available; and

   (b)       …

   (3)In addition, if in a review, the Tribunal is of the view that a ground of review has been established, the Tribunal may allow new information or material to be submitted if the new information or material –

   (a)       would assist it on any aspect of the determination to be made; and

   (b)        was not unreasonably withheld from –

   (i)in all cases, the original decision maker when the decision maker was making the reviewable regulatory decision; and

   …

   (6)In the case of a review of a reviewable regulatory decision of the AER that is a decision to make a full access arrangement decision in place of an access arrangement that the AER did not approve, the Tribunal may consider the reasons of the AER for its decision not to approve the access arrangement.

   (7)       In this section review related matter means –

   (a)the application for review and submissions in support of the application; and

   (b)the reviewable regulatory decision and the written record of it and any written reasons for it; and

   (c)in the case of a reviewable regulatory decision that is an applicable access arrangement decision—any document, proposal or information required or allowed under the Rules to be submitted as part of the process for the making of the decision; and

   (d)any written submissions made to the original decision maker before the reviewable regulatory decision was made …; and

   (e)any reports and materials relied on by the original decision maker in making the reviewable regulatory decision …; and

   (f)       any draft of the reviewable regulatory decision …; and

   (g)       any submissions on—

   (i) the draft of the reviewable regulatory decision or the reviewable regulatory decision itself considered by the original decision maker; or

   (ii)        …; and

   (h)the transcript (if any) of any hearing conducted by the original decision maker for the purpose of making the reviewable regulatory decision.

10. In short, the Tribunal’s review is confined to the material that was before the ERA in making its decision.

11. As noted above, the ERA undertook consultations before making the Final Decision under rule 62, and undertook further consultations before amending the Final Decision. The ERA did not engage in consultation after the final publication of the Final Decision (amended ultimately on 22 December 2011) before making the Access Arrangement Decision under rule 64. Accordingly, the ERA did not consider Submission 74 and those parts of Submission 73 that did not respond to the proposed amendments to the Final Decision (being all parts other than sections 10 and 11).  However, Submissions 73 and 74 may be “review related matter” as they come within the scope of section 261(7)(d) because they were received by the ERA before the Access Arrangement Decision, even though not considered by it. 

12. If the Tribunal is satisfied that a ground of review is established, the Tribunal may consider whether to allow new information or material to be submitted for the purpose specified in s 261(3) if the new information would assist the Tribunal and was not unreasonably withheld from the ERA when it was making its decision.

13. Once the Tribunal has had the opportunity to consider any new material and the parties’ submissions with respect to that material, the Tribunal must make a determination.

14. Section 259(2) of the NGL provides the Tribunal with four options; it may:

    (1)       affirm the decision;

    (2)       set aside the decision;

    (3)       vary the decision; or

    (4)remit the matter to the ERA to reconsider the matter in accordance with any direction or recommendation the Tribunal considers appropriate.

15. There are two particular, but in a sense incidental, matters to note.

16. In participating in this proceeding, the ERA has pointed out that it is mindful of the principles stated in R v Australian Broadcasting Tribunal; Ex parte Hardiman: (1980) 144 CLR 13 (Hardiman) especially at [54] per Gibbs, Stephen, Mason, Aickin and Wilson JJ. The manner in which the Hardiman principles are to be applied in a given case depends upon a number of factors, including the presence of a contradictor, whether the matter is likely to be remitted to the initial decision maker, the nature of the review proceedings and the statutory scheme concerned.

17. Where there is no natural contradictor on an issue in the application, a decision maker may need to participate in the proceedings in order to assist the Tribunal.  In addition, if the statutory regime is consistent with the decision maker taking an active role in the proceedings, it is then appropriate for the decision maker to respond substantively to the review application.  The role that the decision maker takes in merits review proceedings is also different to the role taken in actions for judicial review. In the case of merits review, there is a more limited application of the Hardiman principles because the decision maker, as “administrator” of the particular statutory regime, is uniquely placed to assist in that it has an in-depth knowledge of the scheme: Macedon Ranges Shire Council v Romsey Hotel Pty Ltd and Anor (2008) 19 VR 422 at [30]; Bankstown City Radio Co-operative Ltd v Australian Communications and Media Authority [2007] FCA 2053 at [6]; Geographical Indications Committee v O’Connor (2000) 64 ALD 325 at [35].

18. On this application, the ERA took a somewhat confined role, in particular where a particular intervener or interveners assumed the position of an active contradictor.  The Tribunal nevertheless received extensive and helpful submissions from the ERA on a number of matters. 

19. The second incidental matter concerns the background to existing access to the DBNGP.  The present firm full haul capacity of the DBNGP is approximately 845 terajoules per day.  The actual transmission capacity from time to time varies depending on ambient temperature, gas temperature and composition and other factors.  However, all of that capacity is contracted with various users under access contracts, the durations of which extend beyond the period of the Access Arrangement Decision.  These access contracts between the DBP and users of the DBNGP, namely the DBNGP shipper contracts, are currently substantially independent of the access terms and reference tariffs set under the prior access arrangement for the DBNGP (being the access arrangement for the period 2005 to 2010).  With the exception of an access contract with one user (Alcoa of Australia Limited), the current shipper contracts with the major users of the DBNGP take the form of the standard shipper contract (SSC) that was negotiated between DBP and major users in 2004.  Pursuant to clause 20.5 of the SSC, until 31 December 2015, the tariff under the SSC is set at a rate that is independent of the tariff in the access arrangement.  However, from 1 January 2016, pursuant to clause 20.5 of the SSC, the tariff under the SSC transitions to the reference tariff for the reference service that is the most similar to the service provided under the SSC.  Accordingly, the capacity of the pipeline which could otherwise be accessed by customers contracting for the firm full-haul reference service established by the Access Arrangement Decision is currently fully contracted by the shippers.

    GROUNDS OF REVIEW

20. Under s 245 of the NGL, DBP or any other affected or interested person or body may apply to the Tribunal for review of the Access Arrangement Decision, with the leave of the Tribunal.  DBP made such an application, and received leave to apply from the Tribunal by decision of 15 March 2012: Application by DBNGP (WA) Transmission Pty Ltd [2012] ACompT 6.

21. The grounds of review are limited to those identified by DBP and in respect of which leave has been given.  In this matter, they are described by DBP in the following way:

    (1)Rate of Return Issue – whether the appropriate rate of return on capital for the Revised Access Arrangement should be 5.74% (real, pre-tax), as determined by the ERA and as stated in the Revised Access Arrangement Information, or whether it should be some higher figure such as 10.03% (real, pre-tax), as proposed by DBP. This ground of review raised the following issues:

    (a)whether the ERA’s construction of rule 87 of the NGR was correct;

    (b)whether the ERA’s choices of the following inputs for the WACC modelling were in error:

    (i)Risk free rate of return;

    (ii)Market risk premium (MRP);

    (iii)Gamma;

    (iv)Inflation rate;

    (v)Debt risk premium (DRP);

    (vi)Debt raising costs; and

    (vii)Regulatory consistency.

    (2)Capital Base Issues – whether the ERA correctly adjusted the DBNGP capital base for the purposes of calculating a reference tariff in the following respects:

    (a)whether the opening capital base used for the Access Arrangement Decision should be escalated using a national or local rate of inflation (the selection of the appropriate inflation rate also affects certain other calculations relevant to the overall determination of the appropriate reference tariff);

    (b)whether a Project Management Retainer Fee paid to a related company in respect of certain pipeline expansion works should be counted as conforming capital expenditure;

    (c)as to the correct valuation of certain capital expenditure made by DBP in respect of the Burrup Extension Pipeline (BEP) for the purposes of the Revised Access Arrangement, having regard to:

    (i)the capital value of DBP’s lease over the BEP (BEP Lease); and

    (ii)the temporal basis for depreciation of the asset.

    (3)Operating Expenditure Issue – whether the ERA should have taken into account the full amount of certain regulatory expenses which the ERA reduced in calculating the reference tariffs.

    (4)Reference Service Issues – concerning the specification of:

    (a)whether the ERA ought to have accepted the R1 Service which DBP proposed, as opposed to requiring DBP to offer T1, P1 and B1 Services (incorporating two grounds of review); and

    (b)if, contrary to DBP’s contentions, the ERA was correct in rejecting the R1 Service, whether the definition of the P1 Service should be altered.

    (5)Terms and Conditions Issue (concerning Behavioural Limits in Standard Shipper Contracts) – whether the ERA ought to have adopted certain, more stringent, behavioural limits in the terms and conditions applicable under a reference service, which would mean that DBP did not have to set a lower amount as the available capacity of the DBNGP to provide pipeline services.

    (6)Coverage of Expansions Issue – whether any further expansions to the capacity of the DBNGP should automatically be covered by the Revised Access Arrangement, unless DBP demonstrates to the ERA’s satisfaction that coverage is not consistent with the national gas objective contained in s 23 of the NGL.

22. The Tribunal will address the grounds of review under those headings and in that sequence.

23. On certain of those issues, entities which had made submissions to the ERA on the topic were given leave to intervene before the Tribunal.  Where an intervener acted as a contradictor, the ERA took a confined role.  Where there was no intervener acting as a contradictor, the ERA took a somewhat more expanded role to assist the Tribunal in its consideration.

24. BHP Billiton Nickel West Pty Ltd (BHP) intervened and made submissions in relation to the Rate of Return Issue and on the Reference Service Issues.

25. Electricity Generation Corporation trading as Verve Energy (Verve) also intervened in relation to the Rate of Return Issue and Verve and Alinta Sales Pty Ltd (Alinta) intervened in relation to the Reference Service Issues.

26. APT Parmelia Pty Ltd (a wholly owned subsidiary of Australian Pipeline Ltd) as trustee for the Parmelia Gas Trust (APA Group) also intervened in relation to the Reference Service Issues.

    RATE OF RETURN ISSUE

    Construction of rule 87 of the National Gas Rules

27. The issue as to the proper construction of rule 87 of the NGR raised by DBP is, in essence, the same issue as that raised by WA Gas Networks Pty Ltd (now known as ATCO Gas Australia Pty Ltd) (ATCO) in Application by WA Gas Networks Pty Ltd (No 3) [2012] ACompT 12 (WAGN).

28. ATCO, in an application heard by the Tribunal at much the same time as the present application, sought review of a regulatory reviewable decision of the ERA made on 28 April 2011 entitled Economic Regulation Authority’s revised access arrangement for the WA Gas Networks Pty Ltd Mid-West and South-West Gas Distribution Systems (the ERA ATCO decision).

29. Both DBP in this matter and ATCO contended that the ERA had failed properly to apply rule 87 of the NGR in determining the rate of return on capital.  The issue arises in the following way:

    (1)The ERA made a calculation using a well accepted approach (a weighted average cost of capital (WACC)) incorporating the cost of equity and the cost of debt. For the purposes of estimating the cost of equity, the ERA used the Capital Asset Pricing Model (CAPM), and for the purposes of estimating the cost of debt the ERA summed the nominal risk free rate, the debt risk premium and debt raising costs. It then adopted the output of those processes for the purposes of its determination.  DBP says that the models (and indeed modelling generally) are based on simplifying assumptions (as to risk and other parameters) and that there are a number of limitations as to the utility of their outcome.

    (2)DBP stresses that rule 87(1) requires that the determination which the ERA makes is one which is to be commensurate with prevailing conditions in the market for funds and the risks in providing reference services.

    (3)DBP says that the ERA did not consider and apply the requirement of rule 87(1) so as to determine a rate of return which is truly commensurate with prevailing market conditions and the actual risks of providing the reference services, but confined its approach to the calculation produced by the modelling it selected in accordance with rule 87(2), when that calculation should have been but a step in the process.

    (4)DBP then argues that the evidence available to the ERA established that a higher rate of return than that derived from the ERA’s modelling was necessary in order to be commensurate with prevailing conditions in the market for funds and the risks involved in providing reference services; and consequently, it contends that the ERA ought to have made an adjustment (upwards) to the rate produced by the WACC modelling so as to satisfy the requirements of rule 87(1).  This approach is also said to have been required by the revenue and pricing principles, in particular to afford DBP a reasonable opportunity to recover at least the efficient costs it incurs of providing the reference services and of complying with its regulatory obligations.

30. Because that issue was common to this review, and the review of the ERA ATCO decision, the commencement of the hearing of this review was brought forward so that the contentions of DBP on this issue on its review and those of ATCO on its review of the ERA ATCO decision were heard successively and before a decision on the common issue was given.

1. The Tribunal has made its determination on its review of the ERA ATCO decision (there were, broadly speaking, seven issues to address, including the issue as to the proper construction and application of rule 87 of the NGR): WAGN, delivered on 8 June 2012.  It dealt with this issue at [39]-[71].

2. In this matter, the Tribunal adheres to its conclusion in WAGN that the ERA did not misconstrue or misapply rule 87 of the NGR in determining the rate of return for the purposes of the Access Arrangement Decision.  It also adheres to its reasons for that conclusion.  As this matter is, of course, in a somewhat different factual context, and the contentions of counsel for DBP did not mirror those of counsel for ATCO (or, more accurately, the reverse is the case as the DBP submissions on the issue preceded those of counsel for ATCO) it is desirable to explain why the Tribunal reached that view.  There will inevitably be substantial overlap and repetition in the two sets of reasons.  The following also takes into account the submissions of BHP and Verve.

3. Under rule 76 of the NGR, total revenue is to be determined for each regulatory year of the access arrangement period using a “building block” approach in which the building blocks are:

   (1)a return on the projected capital base for the year;

   (2)depreciation on the projected capital base for the year;

   (3)if applicable, the estimated cost of corporate income tax for the year;

   (4)increments or decrements for the year resulting from the operation of an incentive mechanism to encourage gains in efficiency; and

   (5)a forecast of operating expenditure for the year.

4. The return on the projected capital base is calculated as the product of:

   (1)the rate of return; and

   (2)the projected capital base at the beginning of each year of the access arrangement period. 

5. The rate of return to be applied in determining real pre-tax total revenue is a real pre-tax rate of return.  A nominal pre-tax rate of return is calculated using a formula, to which it is not necessary to refer for present purposes.

6. Rule 87 of the NGR prescribes how the rate of return on capital is to be assessed by a regulator.  It provides:

   (1)The rate of return on capital is to be commensurate with prevailing conditions in the market for funds and the risks involved in providing reference services.

   (2)       In determining a rate of return on capital:

   (a)       it will be assumed that the service provider:

   (i)        meets benchmark levels of efficiency; and

   (ii)uses a financing structure that meets benchmark standards as to gearing and other financial parameters for a going concern and reflects in other respects best practice; and

   (b)a well accepted approach that incorporates the cost of equity and debt, such as the Weighted Average Cost of Capital, is to be used; and a well accepted financial model, such as the Capital Asset Pricing Model, is to be used.

7. The respective contentions of DBP on the one hand and the ERA on the other concerned the interaction of rule 87(1) and (2).  Before turning to that construction issue, it is helpful to identify how DBP put its submissions to the ERA and how the ERA addressed them.

8. DBP’s initial proposal of 1 April 2010 calculated revised reference tariffs using a real pre-tax rate of return of 10.76%, supported by a detailed submission of 14 April 2010.  The method of determining the debt risk premium, which is one component of the rate of return on capital, is clearly a matter of general significance.  On 1 December 2010, the ERA published for submissions a discussion paper “Measuring the Debt Risk Premium: A Bond-Yield Approach”.  DBP, and others, responded to that discussion paper.  It will be necessary to discuss the consideration of the debt risk premium separately.

9. On 14 May 2011, the Draft Decision was published.  It did not adopt DBP’s proposed rate of return, but instead required the adoption of a real pre-tax rate of return on equity of 7.16%. 

10. There followed further submissions, and the ERA’s Final Decision of 22 December 2011 which required the adoption of a real pre-tax rate of return on equity of 5.74%.

11. Throughout its submissions DBP put its position in principle in the following way.

12. For the purpose of estimating the cost of equity, the derivation of the real pre-tax WACC under rule 87(2) then to be used to determine the rate of return, DBP used the Sharpe-Lintner CAPM.  There is no dispute that the use of the Sharpe-Lintner CAPM conforms with the requirements of rule 87(2)(b).

13. The inputs to the WACC and the Sharpe-Lintner CAPM are separately addressed below.

14. As was the case with ATCO, the outcome of the modelling under s 87(2)(b) was not – in DBP’s submission – the end of the process of selecting a rate of return.

15. It argued that after a WACC figure is arrived at, rule 87 requires consideration of whether that WACC figure is commensurate with prevailing conditions in the relevant market for funds and the risks involved in providing reference services.  If it is, and it is thought to be, or to represent, the best forecast or estimate possible in the circumstances, then the WACC figure should be adopted as the rate of return determined for the purposes of rule 87.  However, if the WACC figure is not commensurate with prevailing conditions in the relevant market for funds and the risks involved in providing reference services, then the WACC figure requires adjustment in order to ensure that the rate of return is so commensurate.  That is required, DBP argues, to meet the objective provided by rule 87(1).

16. In addition, DBP says that the modelling is almost inherently likely to produce an unreliable outcome.  That is because the use of a financial model such as the Sharpe-Lintner CAPM and, more generally, use of an approach involving the calculation of a WACC incorporating the cost of equity and the cost of debt, requires the making of estimates for the parameters to be used in that model, or for the parameters to be used with that approach.  Use of any specific financial model, and specific approach, involves simplification and approximation.  It also involves error in parameter estimation.  Simplification, approximation and estimation error allow the possibility that the result obtained is not, of itself, commensurate with prevailing conditions in the market for funds and the risks involved in providing reference services.  DBP pointed out in greater detail what it said were the weaknesses in such modelling.  In the end, at [79] of its outline of submissions concerning rate of return, it firmly asserted that the result required by rule 87(1):

    cannot be achieved solely by reliance on the inputs and parameters of a well accepted approach and a well accepted financial model

    and at [82] it asserted that such modelling will not provide an adequate forecast of an appropriate WACC to satisfy rule 87(1).

17. DBP therefore assessed the estimate of cost of equity provided by the Sharpe-Lintner CAPM against:

    (1)estimates of the cost of equity obtained from using three other asset pricing models (Black’s Capital Asset Pricing Model, the Fama-French three factor model and the zero beta version of the Fama-French three factor model); and

    (2)market based evidence on the cost of equity derived from advice provided by equity analysts to prospective investors in similar infrastructure businesses,

    supported by a report of NERA Economic Consulting (NERA) in relation to the other models, and a report of Strategic Finance Group Consulting (SFG) in relation to market based evidence.

18. It then adjusted the modelled estimate of the cost of equity so that the estimate was consistent with the estimates of the cost of equity obtained from the other asset pricing models and from the equity analysts’ reports, thereby ensuring its commensurability with prevailing conditions in the market for funds and with the risks involved in providing reference services.

19. In reaching that result, it also adjusted certain of the input parameters into the WACC and the Sharpe-Lintner CAPM.  As noted, whether the correct inputs were used is a separate issue.

20. In the Draft Decision, the ERA at [343] recognised the contention of DBP that the outcome of the modelling permitted by rule 87(2) does not dictate the outcome to the fixing of the rate of return on capital, but merely produces a guide or provisional result then to be tested and adjusted as required to give effect to the prescriptive standard of rule 87(1).  It noted the contrast drawn between the more prescriptive approach of the National Electricity Rules (NER) and the NGR.  It agreed at [352] that, in terms of rule 87(2)(b), there may be more than one well accepted CAPM; but it said that the Sharpe-Lintner CAPM is a well accepted financial model.  It then discussed in detail at [362]-[395] the four different CAPM models proposed by DBP and explained why it chose to use the Sharpe-Lintner CAPM model.  The ERA noted that it is the model used by other regulators in Australia.

21. As noted, DBP accepts that the ERA decision to use the Sharpe-Lintner CAPM model as a well accepted model for the purpose specified in rule 87(2)(b) is an available one.  It is also the starting point for the DBP calculation.

22. The ERA then, in the Draft Decision, considered the other means of determining the cost of equity in the submissions of DBP.  As ATCO had done, DBP had provided reports from SFG and NERA to suggest alternative methods of estimating the cost of equity, either as a check or as a substitute for the modelled outcome: the dividend yield technique, and the residual income model. The ERA explained why it did not accept those alternatives, even if their consideration were permitted under rule 87.

23. In the Final Decision at [601], [608] and [612], the ERA adhered to those views, notwithstanding the further submissions of DBP and the updated reports of SFG and NERA.  It also adhered to its approach as discussed in the Draft Decision, to arrive at the real pre tax rate of return on capital of 5.74% at [615]-[620].  That conclusion was carried through to the Access Arrangement Decision.  It is also reflected in the ERA’s Access Arrangement Information for the Dampier to Bunbury Natural Gas Pipeline document of 22 December 2011.

24. DBP submitted, for much the same reasons as ATCO: see WAGN at [54]-[59], that the modelled outcome under rule 87(2)(b), assuming sound inputs, should be a starting point or a preliminary step in the determination of the rate of return on equity, so that the more generally expressed standard in rule 87(1) should then be applied to test and, if appropriate, to adjust the modelled outcome.

25. Rule 72(1)(g) requires the access arrangement information for a full access arrangement proposal (see rules 42, 43 and 46) to include:

    the proposed rate of return, the assumptions on which the rate of return is calculated and a demonstration of how it is calculated.

    It is clear that the fixing of the rate of return is a critical element in ensuring the objective of the NGL and in satisfying the revenue and pricing principles.  The material provided by DBP includes a table showing the impact of the selection of different rates of return.  The range between the figure proposed by DBP in its response to the Draft Decision and that adopted by the ERA in the Final Decision is very significant, both in terms of the value of the return on capital during the access arrangement period, and in terms of the reference tariffs which will apply at 31 December 2015 (after which the next regulatory period will come into operation).

26. There is no challenge to the validity of rule 87, but it is said by DBP it must reflect the national gas objective and the revenue and pricing principles contained in the NGL, ss 23 and 24 respectively. DBP notes that the rule making power in s 291 of the NGL empowers the rule maker Australian Energy Market Commission (AEMC) only to make a rule if it is satisfied that the rule “will or is likely to contribute to the achievement of the national gas objective”, and that s 293 also requires the AEMC to take into account the revenue and pricing principles in making a rule which relates to topics specified in Schedule 1 (which include this topic). Indeed, rule 100 requires the provision of an access arrangement to be consistent with the national gas objective. The Tribunal does not consider that those considerations in any real way advance the question of the proper construction of rule 87.

27. Inevitably, a regulator such as the ERA has a public watchdog function.  It is directed by the applicable rules such as ss 23 and 24 of the NGL and rule 87(1) of the NGR to attend to the proper interests of (in this case) the covered pipeline service provider on the one hand, but on the other hand it is required to be mindful of the long term interests of consumers of natural gas with respect to price, quality, safety, reliability and security of supply of natural gas and the concept of economic efficiency in setting tariffs under an access arrangement.  Thus, for instance, rule 87(2)(a) requires that the service provider is assumed to be efficient and meets the benchmark standards and best practices of a going concern.  In respect of capital expenditure, rule 79 imposes similar limiting criteria.  So too does rule 91 in relation to operating expenditure.  The national gas objective itself in s 23 of the NGL refers to promoting efficiency for the long term interests of consumers of natural gas (inter alia) with respect to price.  That objective, focused on the interests of consumers, is balanced and informed also by the revenue and pricing principles to be applied by the regulator, but still in the context of ensuring the covered pipeline service provider acts efficiently:  see also s 28 of the NGL.

28. In East Australian Pipeline Pty Ltd v Australian Competition and Consumer Commission (2007) 233 CLR 229 Gleeson CJ, Heydon and Crennan JJ, in the context of s 8.10 of the Gas Code said at [49]:

    The framework for third party access to natural gas pipelines set out above directs attention to the multiple objectives of an approved access regime.  Stripped to essentials, such a regime is at least intended to allow efficient costs recovery to a service provider and at the same time ensure pricing arrangements for the consuming public which reflect the benefits of competition, despite the provision of such services by monopolies.  The balancing of those objectives properly has a natural flow-on effect for future investment in infrastructure in Australia.

29. Their Honours at [50] also said that “the greater the degree of uncertainty and unpredictability in the regulatory process, the greater will be the perceived risk of investment”.

30. Their Honours’ observations would apply with equal force to the NGL and the NGR.

31. For the reasons given in WAGN, the Tribunal does not accept that, on the proper construction of rule 87, the two stage process suggested by DBP is the correct one.  The following is, in essence, simply a repetition of the Tribunal’s reasons in that decision at [60]-[71].

32. In the Tribunal’s view subrules 87(1) and (2) operate together in the following way.

33. Rule 87(1) describes the objective when the ERA is determining the rate of return on capital. It is an objective which is of course consistent with the national gas objective and with the revenue and pricing principles.  It contains no guidance as to how the objective is to be achieved.  In the interests of regulatory consistency, it is desirable that such guidance be provided.

34. Rule 87(2) provides that guidance.  In particular, rule 87(2)(b) describes how the rate of return on capital is to be determined.  It does so by prescribing the use of a “well accepted approach” and a “well accepted financial model”.  The explicit criticisms of modelling in the DBP submissions must be minimised, if not negated, by the requirement that the approach and the model used must be well accepted by those who undertake and use such approaches and models for that purpose. It is almost inherently contradictory then to say that the approach or the model is not likely to produce a reliable output – assuming the inputs are appropriate – if that approach and that model are well accepted.

35. In this matter, DBP accepts that the WACC approach is well accepted.  It also accepts that the Sharpe-Lintner CAPM is a well accepted model.

36. Of course, the inputs into the model are critical.  On that aspect, too, rule 87(1) informs the appropriateness of the inputs.  That is one of the two explanations offered by DBP through SFG for an output which may be counter-intuitive.  The inputs, too in this matter have been criticised by DBP.  They form alternative grounds of review on this application and are addressed below.

37. The selection of the appropriate input parameters is a critical step in ensuring that the well-accepted approach using a well accepted financial model produces an outcome which accords with the objective expressed in rule 87(1).  For the purposes of the construction argument, it is valid to assume appropriate input parameters.  As noted, some of those used by the ERA are in dispute.  But there is no reason to conclude that it was contemplated by the drafters of rule 87(2)(b) that with appropriate input parameters it would not produce an outcome consistent with the objective.

38. That conclusion also reflects the mandatory expressions in rule 87(2)(b): “is to be used”.  The words of rule 87(2)(b) are clear.  There is nothing which suggests that the outcome generated by the proper application of rule 87(2)(b) is but a starting point, or is somehow provisional.  If that were intended, it could clearly have been expressed.  The proper construction gives appropriate work to both rule 87(1) and (2).  It avoids the suggestion that the rule 87(2)(b) process – as a preliminary or provisional step – has no real utility. 

39. At a more general level, that construction avoids the suggestion that the selection of the rate of return on capital is to be done by the ERA under rule 87(1) without any real guidance.  The measure of prevailing conditions in the market for funds, and of the risks involved in providing reference services – without prescribing finally how that is done – would be fraught and vulnerable to an evolutionary and possibly idiosyncratic series of regulatory decisions.  It would provide less certainty.  It would expose the process of selection of the rate of return on capital to the risk of prolonged debate about the relevant factors, their empirical measurement and their weighting.

40. Senior counsel for DBP placed considerable weight on the way in which rule 87 in the NGR came to be adopted, and its comparison with the more prescriptive provisions to fix a rate of return under the NER.  It is argued that those two considerations support the two-stage process under rule 87 for which DBP contends.

41. It may be accepted, as DBP pointed out, that the historical derivation of the current NER is more clearly traced to the process of privatisation of state-owned electricity transmission and distribution lines, whereas the NGR and Gas Code emanated from long-standing private ownership of covered pipeline systems.

42. It is clear enough that the present form of rule 87 of the NGR appears to derive from ss 8.30 and 8.31 of the earlier Gas Code.

43. The “Review of the Gas Access Regime”, Productivity Commission Report No.3, 2004, recognised that there is a range of plausible values which can be generated for the regulatory rate of return using the WACC CAPM approach.  That Report also discussed the use of the CAPM (including the Sharpe-Lintner CAPM) in that context.  The views of the Productivity Commission that its use was too formulaic, and based on debatable assumptions, led to the Expert Panel on Energy Access Pricing convened by the Ministerial Council on Energy expressing concern about those views.  The 2006 Comprehensive Legislative Package: Overview and Response to Expert Panel on Energy Access Pricing, November 2006, of the Standing Committee of Officials of the Ministerial Council on Energy, in turn considered and responded to those views, including on the rate of return.

1. Rule 35 of the draft NGR released for consultation in November 2006 was simply expressed: proposed rule 35(1) was in terms not dissimilar from rule 87(1) and proposed rule 35(2) prescribed the use of a well accepted financial model, such as the CAPM, in determining a rate of return on capital.  There was no provision like rule 87(2)(a).  The draft rule was revised in July 2007 and again in March 2008 before its emergence as rule 87 in its present form.

2. That material, in the view of the Tribunal, does not assist in the proper construction of rule 87.

3. EAPL, in the view of the Tribunal, does not assist the construction of rule 87 either. It concerned the role of the Tribunal in reviewing a decision of the Australian Competition and Consumer Commission (ACCC) under the Code. The Tribunal set aside an ACCC prescribed access review because the ACCC had erred by substituting an access arrangement which included the calculation of the capital value of the pipeline assets at variance with the methodology prescribed by the Code. The ACCC had its decision restored on judicial review in the Federal Court because, it was found, there had been no reviewable error in the ACCC decision in terms of s 39(2) of Schedule 1 to the Code, the then equivalent of s 246(1) of the NGL. The High Court (Gleeson CJ, Heydon and Crennan JJ and in a separate concurring judgment Gummow and Hayne JJ) restored the decision of the Tribunal. The High Court concluded that the term “unreasonable having regard to all the circumstances” (see also s 246(1)(d) of the NGL) covered the case where the failure to exercise a discretion properly may be inferred from the character of the result in the sense that it is unreasonable or plainly unjust: see per Gummow and Hayne JJ at [80]; the plurality agreed at [13].

4. Although the plurality reasons discuss at some length the role of the ACCC as the regulatory decision-maker having regard to the then (more or less equivalent) Reference Tariffs and Reference Tariff Policy, the Tribunal does not consider that there is anything in those reasons which is of particular assistance in addressing the construction of rule 87(1) and (2) of the NGR.  Nor, in the Tribunal’s view, do the reasons of Gummow and Hayne JJ about the meaning of s 8.10 of the Code (set out at [25] of their Honours’ reasons) assist.  The structure and terms of s 8.10 are quite different from rule 87 of the NGR.  Indeed, their Honour’s remarks at [50] and [59] suggest the desirability of a reasonably certain process to select a rate of return on investment for regulatory purposes. 

5. As senior counsel for DBP argued, there are clear differences in the terms of the NER and the NGR relating to the determination of the rate of return on equity.  Rule 6A.6.2 of the NER is considerably more detailed.  However, as pointed out in WAGN at [70], rule 6A.6.2(j)(1) of the NER provides that, in undertaking a review concerning the return on capital, the regulator must have regard to:

   … the need for the rate of return calculated for the purposes of paragraph (b) to be a forward looking rate of return that is commensurate with prevailing conditions in the market for funds and the risk involved in providing prescribed transmission services;

6. In the Tribunal’s view, that general direction – albeit in a different position than rule 87(1) of the NGR and in a more detailed set of rules – indicates that conceptually the aims of the NER and the NGR are the same or similar.

7. It is clearly inappropriate to follow slavishly the approach to the determination of rate of return under the NER.  The differences in wording are enough to make good that proposition.  The NER prescribe a different procedure to determine a rate of return, and substantively somewhat different steps.  The differences are explained in detail in DBP’s Submission 67 to the ERA of 13 September 2011.  The fact that, over a long period of consultation, there has been no precise alignment of the NER and the NGR on this topic does not, on the other hand, point to a particular meaning for rule 87.  It indicates simply that rule 87 must be construed and applied according to its own terms.  The lack of alignment does not of itself point to a particular way in which rule 87 should be construed and applied.

8. There is no reason why the comparison of the NER and the NGR should lead to a strained construction of the NGR.  Rule 87 of the NGR should be construed in its own context, and by consideration of the full terms of the NGR.  Even if, as a principle of construction, it is legitimate to discern the meaning of rule 87 of the NGR by comparison with the quite differently expressed NEL, it must be borne in mind that each of those sets of rules has the common direction in rule 87(1) of the NGR and in rule 6A.6.2(j)(1) of the NER.

9. In view of the conclusion the Tribunal has reached, it is not necessary to comment on the alternative methods suggested in the SFG reports.  It is, however, necessary to note that the selection of the brokers, the quality of their reports, the analyses of the so-called comparable infrastructure firms, the quality of their dividend yield forecasts and capital gain forecasts, and the compatibility of their recent capital raisings are all not fully argued or justified or, if those things were assessed by SFG, it is not transparent how that was done.  Such matters would, or may, require very careful analysis on a case-by-case basis before a fair independent assessment acceptable to a regulator could be provided and such analysis would be necessary to satisfy rule 87(1). 

10. For those reasons, the Tribunal rejects the contention of DBP about the proper construction of rule 87.

    Input issues

    Risk free rate

11. In estimating the cost of equity to be used in the determination of the real pre-tax WACC under rule 87(2), both the ERA and DBP agreed that the Sharpe-Lintner CAPM was appropriate. A key underlying parameter in this model is the nominal risk free rate of return.

12. DBP estimated the risk free rate of return as the average of the daily yields on Commonwealth Government bonds with a ten-year term to maturity for the 20 trading days ending on 18 March 20l1, as reported by the Reserve Bank of Australia (RBA).  This yield was 5.48%.

13. In contrast, the ERA in both its Draft Decision (at [687] to [715]) and Final Decision (at [467] to [475]) determined, in part of the basis of advice provided to the NSW Independent Pricing and Regulatory Tribunal (IPART) by Professor Kevin Davis, that it was preferable to base the estimate of the risk free rate of return on Commonwealth Government bonds with a five-year term to maturity.  Professor Davis advanced the argument (summarised in the Draft Decision at [692] to [695]) that the maturity of debt relevant to the determination of the risk free rate of return should be the same as the length of the regulatory period. Support for this view was also found in the work of Associate Professor Martin Lally, in the AER’s WACC Review of 2008/2009, and in a Draft Decision made by IPART dated February 2011. (The Tribunal notes that on 17 August 2011 Professor Davis was appointed as a part-time Member of the Tribunal; naturally the Tribunal as presently constituted has formed its independent views and has not discussed this application with him.)

14. In the Draft Decision, using the 20-day trading period ending on the same date as that chosen by DBP, the ERA’s estimate of the risk free rate of return was 5.46%.  That is, the difference between the five- and ten-year estimates was a mere 0.02 percentage points, i.e. two basis points.

15. In the Final Decision the ERA examined the debt issued by private- and government-owned energy network firms in Australia, and concluded that 52.5% of the total debt instruments of the former had an average term to maturity of under five years, and that for the latter some 44% of total debt instruments had an average term of less than five years. The ERA also considered trading in futures contracts for Commonwealth bonds for both a three-year and ten-year term to maturity, and found that both were actively traded, but that investors showed a preference for the shorter dated contracts.

16. Therefore, in the Final Decision, using a 20-day trading period ending 30 September 2011, a date that was as practical as could be expected to allow the timely issue of the Final Decision on 31 October, the ERA at [475] determined a risk free rate of return of 3.80%. This was based on bonds with a five-year term to maturity, a term which the ERA said was proper for “compelling reasons” at [462].

17. DBP contended that the ERA was in error in its determination of the risk free rate of return for two reasons:

    (1)it wrongly used bonds with a five-year term to maturity; and

    (2)its method of estimating the risk free rate of return was not consistent with the basis on which it estimated the MRP, as this parameter was estimated by considering a long-term average of historical equity yields relative to the yields on Commonwealth Government bonds with a term to maturity of ten years.

18. DBP relied on research conducted for it by AMP Capital Investors (AMPCI), a firm which had been involved in procuring debt funding for it. DBP said that this research showed that when properly interpreted, the data on terms to maturity indicated that energy network firms issue debt with a term to maturity of longer than five years. However, it acknowledged that three-year bond futures were more heavily traded than ten-year futures, and that it could be inferred that the traded volumes of both three- and five-year futures contracts implied that an efficient market was in operation.

19. Given these inconclusive findings, DBP submitted that some other criteria needed to be found to help decide on whether a five-year or ten-year term to maturity should be used to establish the risk free rate of return.

20. In its April 2011 report at page 6, AMPCI recommended that a ten-year term to maturity should be adopted as this bond “is able to ‘look through’ temporary anomalies in business cycles, interest rate cycles and inflationary cycles and thus produce a more consistent measure of the true risk free rate over time”. Consequently, in paragraph 6.3 of Attachment 1 to its Submission 55: Rate of Return to the ERA dated 20 May 2011 (Submission 55), DBP argued that the longer time frame was better as “recently reported yields incorporate the latest market information and expectations about future rates, but they also contain a random component (‘noise’)”.

21. It was also submitted by DBP that use of bonds with a ten-year term to maturity, the longest issue of a Commonwealth Government bond, was appropriate for long-lived assets like those owned by DBP.

22. The ERA submitted that DBP’s submissions in favour of the risk free rate of return being based on bonds with a ten-year term to maturity were recitations that did not demonstrate any error in its reasoning.

23. The Tribunal notes here that the risk free rate of return is a clearly defined, if abstract, concept. It measures the return on a bond that carries no risk for the investor.   It is widely accepted that the closest approximation to such a bond will be government debt.  The appropriate term to maturity of such debt, which will yield the best estimate of the risk free rate of return is not, however, written in stone. It is a calculation about which reasonable minds differ, and is one which may well differ depending on the date at which the rate must be identified.

24. DBP asks the Tribunal to find error in ERA’s determination of the risk free rate of return, this error being “the unreasonable and incorrect use of yields on Commonwealth Government bonds with terms to maturity of 5 years”.  It does so on the basis of a different opinion on the appropriate term to maturity advanced by its adviser AMPCI.

25. It is not for the Tribunal to substitute another estimate for that chosen by the ERA, unless error or misuse of discretion or unreasonableness can be demonstrated. In both the Draft Decision and the Final Decision the ERA carefully explained its reasoning in coming to its chosen risk free rate of return based on bonds with a five-year term to maturity. It clearly did consider the report produced by AMPCI for DBP after the release of the Draft Decision (Final Decision at [463] to [465]).  It chose not to accept what AMPCI recommended.

26. In its Draft Decision the ERA spent some time discussing the appropriate term to maturity. At [691] it discussed the reasons why, traditionally, regulatory practice had been to use a ten-year term to maturity when estimating the risk free rate of return.  At [700] it referred to the AER’s WACC Review in 2008/09 in which the AER expressed some concern that a risk free rate of return based on a ten-year term to maturity might not be correct and could lead to overcompensation, and noted in [703] that, its concerns notwithstanding, the AER had nevertheless retained a ten-year term to maturity in its ensuing determination of WACC parameters for electricity and distribution network service providers.

27. The main issue raised by DBP concerning the risk free rate of return was that the ERA was inconsistent, and therefore in error, in the way it estimated this parameter, compared with its determination of the MRP, where its estimate was based on the long-term average of excess returns relative to ten-year Commonwealth Government bonds.

28. This inconsistency arises, DBP submitted, because in the CAPM formula used to calculate the rate of return on equity, the risk free rate of return effectively appears twice – once in its own right and again as a component in the calculation of the premium for equity risk, calculated as the product of the MRP and the equity beta.  Simply put, in its own right the risk free rate of return was based on five-year bonds, but when used as an input into another parameter it was based on ten-year bonds.

29. It is true that in a formula like the CAPM, where the same concept appears twice, it is desirable that it should be estimated consistently. The ERA did not dispute this principle. However, it submitted that its methodology did not involve any inconsistencies for two main reasons.

30. First, it estimated the MRP from several different sources that were clearly noted in its Draft Decision (at [730] to [744]), including the work of Associate Professor Handley, who based his estimates on ten-year Commonwealth Government bonds; other regulatory decisions, including those of the AER, IPART and the Queensland Competition Authority; surveys of market risk practice; and qualitative information on the state of the Australian financial market. The Tribunal notes here that the MRP estimates derived from the last three sources were clearly not expressly derived on the basis of a risk margin above ten-year Commonwealth Government bonds.

31. In reply, DBP submitted that ERA provided no indication how it used the non-quantitative information listed in [123] to modify the estimate provided by Associate Professor Handley, so the error relating to inconsistency that it had identified remained.

32. Second, the ERA argued that any estimate of the MRP will be subject to estimation error, and by implication any one specific point estimate will be subject to this error.

33. On this second point, the ERA submitted that the estimation error underlying the determination of the MRP value is substantially in excess of the difference between the nominal risk free rate of return derived from Commonwealth Government bonds with five-year and ten-year terms to maturity. The Draft Decision at [685] and [714] reveals that DBP’s initial estimate of the risk free rate of return on ten-year bonds was 5.48% over the relevant trading period, compared with the ERA’s estimate of 5.46% using five-year bonds.

34. Such a direct comparison is not possible from the Final Decision as DBP and the ERA chose different time periods as the basis for their estimates. Based on the 20 trading days prior to 28 February 2011 for ten-year bonds, DBP derived an estimate of 5.71%, while the ERA’s estimate based on five-year bonds for the 20 days ending 30 September 2011, close to the date of its Final Decision and therefore more apposite as it better reflected the current market conditions, was 3.80%.

35. An indication of how sensitive the estimation of the risk free rate of return can be to both the period used to calculate it and the term to maturity of the bond chosen for the calculation is illustrated by the response to a question by the Tribunal. In response to that question the ERA calculated that the difference in the estimate based on bonds with a five-year term to maturity and that based on ten-year bonds was 45 basis points, that is, the ERA’s estimate was 0.45 percentage points below the figure of 4.25% determined by DBP on the basis of ten-year bonds.  This difference is considerably greater than the one estimated at the time of the Draft Decision.

36. In response to the Draft Decision, DBP argued that ERA’s arguments relating to estimation error were not related to its inconsistency submission. Rather, it said, the point was that inconsistency between the different terms to maturity used as the basis for estimating the two components of the cost of equity under the CAPM meant that the ERA’s estimated cost of equity could not be regarded as the best possible estimate in the circumstances, as required by rule 74(2)(b) of the NGR.

37. It goes without saying that the estimation of market financial parameters that are specified in theoretical finance models is contentious.  Empirical methods, time periods and data can take on many dimensions and different degrees of relevance. No one empirical estimation method, period or data set can lay claim to absolute superiority.  Counsel for the ERA accepted that “this is an area of debate”. What is best in any one situation will depend on many conflicting and debatable assumptions and empirical factors.

38. The ERA clearly believed, as does the Tribunal, that the period over which the risk free rate of return should be estimated should be the same as that over which the DRP is estimated: Final Decision at [458].

39. This consistency is important, as the DRP is in effect a risk premium for debt added to the risk free rate of return. A lack of consistency between the five-year term to maturity used to estimate the risk free rate of return and the term to maturity of the sample of bonds used to estimate the DRP would be of concern (the Tribunal will return to this issue later in this decision).  The DRP is a much more granular parameter in the calculation of the WACC that is based on actual market data relating to issued bonds, and long-dated bonds are not especially common in Australia. In contrast, the MRP is a parameter relating to the equity market as a whole and is based much more on a very long-term average of excess market returns over a risk free rate. 

40. DBP, on the other hand, argued that this consistency was “largely irrelevant in this context”, but that consistency between the risk free rate of return and the MRP was relevant.

41. DBP went on to argue that the ERA, by not being consistent in its estimation of the risk free rate of return with the term used to estimate the MRP, had not satisfied its own standards for consistency in estimating the WACC parameters. 

42. The Tribunal notes, however, that DBP in its submissions on the MRP appears to place more emphasis on the currency of the estimate (it argues that allowance should be made for the continuing impact of the recent GFC) rather than on taking a longer-term perspective, and argues that estimates should reflect prevailing market conditions.

43. The ERA had to use its discretion to determine an appropriate term to maturity for Commonwealth bonds over which to estimate the risk free rate of return. In the opinion of the Tribunal it carefully considered all the relevant material and arguments, including those of AMPCI. In its Draft Decision, it stated clearly its reasons for selecting the five-year term to maturity as the basis for its estimate of the risk free rate of return, to be consistent with the five-year bond term to maturity that it had chosen to use in order to estimate the DRP. DBP has not advanced any arguments which convince the Tribunal that the ERA’s assessment involved reviewable error.

1. On the other hand, if accepted, DBP’s contentions would, the APA Group submitted, deny the efficient utilisation of the MGSF because its proposed definition for a part haul service would not explicitly provide for transportation to outlet points downstream of compressor station 9 (to the wider Perth area).  Rather, the DBP’s proposal would have the definition remain unchanged from the definition in the 2005 access arrangement’s P1 service.  The APA Group contended that the definition should not be so limited and should explicitly provide for transportation to outlet points downstream of compressor station 9 to the wider Perth area as well as receipt points below main line valve 31.

2. The APA Group, noting the following statement in DBP’s Submission 64: Response to Third Party Submissions, submitted 20 July 2011 (Submission 64), in response to the Draft Decision:

   … While DBP is still not in receipt of formal access requests for services for the proposed MGSF facility, DBP [has] been approached by 3 parties that have made initial enquiries regarding the interconnection between the MGSF and the DBNGP, which if they were to result in in [sic] excess of 100 TJ/day being delivered to the relevant outlet point.

   submitted that it, along with another statement that DBP was “… currently discussing appropriate commercial service options with prospective customers”, provided evidence that pipeline services that would provide for the delivery of gas into and out of the MGSF were likely to be sought by a significant part of the market.

3. Notwithstanding that the first statement was somewhat qualified by subsequent paragraphs in Submission 64 and the second was in response to a submission by the APA Group that customers who wish to use the MGSF in combination with the pipeline would face twice the transport costs if there were but a full haul service alone, the Tribunal is of opinion that the statements do provide hard information pointing to the likelihood of a part haul service being sought by a significant part of the market: cf rule 101(2). 

4. The APA Group challenged DBP’s submission that the ERA redefined the Pl reference service in a manner that fundamentally changed the previous definition of the service.  On the contrary, it submitted that the part haul service as defined in the reviewable regulatory decision operates to clarify and remove any ambiguity that was otherwise apparent in the definition in the 2005 access arrangement.

5. The APA Group also submitted that Required Amendment 4:

   (1)makes clear that the Pl reference service will facilitate delivery of gas from any number of inlet points along the pipeline to any outlet point along it and from any outlet point to any number of delivery points along the pipeline that are downstream from the inlet point; and

   (2)is consistent with the ERA's decision to specify the P1 service as a reference service on the basis that it is likely to be sought by a significant part of the market pursuant to rule 101(2).

6. The APA Group attacked DBP’s reliance on its Submission 73 because it:

   …. was submitted significantly after the ERA's final decision and only shortly before the Reviewable Regulatory Decision, no party, including APA Group was able to respond to that material (and is not permitted to introduce new material seeking to respond to that material in this merits review process).  In order to properly respond to that material, APA Group and other parties, including the ERA, would require further information to test the data relied upon and the corresponding assertions made.

7. As counsel for the APA Group put it:

   … the applicant had every opportunity to make submissions about the clarification of the definition of the P1 part haul service – the clarification of the definition so as to avoid the possibility of shippers into and out of Mondarra having to pay twice the full haul tariff.

8. Submissions leading to the Draft Decision, the Draft Decision itself and subsequent third party submissions may be fairly summarised as raising the issue of the efficient use of the MGSF and whether a shipper into and out of the facility might have to pay the full haul tariff twice and whether the definition of the P1 service should be clarified. 

9. Prior to the Final Decision, DBP had the opportunity to respond to the Draft Decisions and to the third party submissions made in response to the Draft Decision.

10. Counsel for the APA Group contends that DBP’s Submission 64, which followed the Draft Decision, failed to address the issue of the efficient use of the MGSF and the related questions summarised above.  The APA Group’s written submissions say, in effect, that DBP should not be allowed to rely on its Submission 73 which, DBP submits, addresses the efficient use of the MGSF and Required Amendment 3.

11. For reasons outlined above, the Tribunal accepts the APA Group’s submissions.  As observed above, the ERA chose to exercise its discretion not to consider Submission 73 insofar as it was not responsive to its invitation and there was no error on its part in its exercise of its discretion in the present circumstances.  That leaves the questions whether counsel for the APA Group is right in his contention that Submission 64 failed to address the efficient use of the MGSF and Required Amendment 3.

12. The Tribunal's has made a full considered assessment of Submission 64.  While Submission 64 did address the use of the MGSF and the questions whether a shipper into and out of the facility might have to pay the full haul tariff twice and whether the definition of the P1 service should be clarified, Submission 64 did not advance hard information sufficient for the Tribunal to conclude that the ERA erred in incorporating in its s 64(1) access arrangement the definition in Required Amendment 4. 

    Issues in Standard Shipper Contracts

13. By letter dated 15 May 2012, DBP’s solicitors informed the Tribunal and the parties that if it were unsuccessful in respect of having its proposed R1 reference service restored as the only reference service, it would not pursue its contention in [448(3)] above.  The letter suggested that if DBP were successful in having the proposed R1 reference tariff restored, issues in relation to the terms and conditions might be resolved by way of agreement between the parties or, failing that, might be addressed at a further hearing.

14. For reasons appearing above, DBP has not succeeded in having the proposed R1 reference tariff restored.  Accordingly, it is not necessary to decide whether the terms and conditions issues might be resolved as suggested by DBP’s solicitors.  The Tribunal notes that, for the following reasons advanced by counsel for Verve and Alinta, they had reservations about adopting the suggestion:

    (1)DBP and interveners have no power to agree what should be in the terms of a regulated access arrangement; and

    (2)while the ERA might be able to determine the terms and conditions at a later date as a result of a variation application under rule 65 of the NGR or remittal under s 259 of the NGL, the ERA's power to determine the terms and conditions was exhausted when it made its Final Decision; and

    (3)s 259 of the NGL does not readily admit to an interpretation that would allow the Tribunal to, in effect, make a staged determination of the issues raised by Ground 6 and Ground 9.

15. The Tribunal does not need to consider the correctness of those concerns.

16. For reasons outlined above, the Tribunal :

    (1)finds no merit in DBP’s grounds of review; and

    (2)affirms the ERA's access arrangement proposed pursuant to rule 64(1) insofar as it was put in issue by DBP on those grounds..

    COVERAGE OF EXTENSIONS AND EXPANSIONS

17. One of the requirements for the Access Arrangement Decision is that it set out the extension and expansion requirements: rule 48(1)(g) of the NGR.

18. Section 2 of the NGL defines “extension and expansion requirements” to include the circumstances when an extension or expansion of a covered pipeline is to be treated as forming part of that pipeline and to include whether the extension or expansion will be subject to the applicable access arrangement applying to the pipeline services.

19. The Access Arrangement Decision provided that its terms would apply to incremental services to be provided as a result of any expansion in the capacity of the DBNGP, except in instances where DBP could demonstrate to the ERA’s reasonable satisfaction that application of the access arrangement terms to such services is inconsistent with the national gas objective.  The position which DBP put to the ERA, and which the ERA declined to adopt, was that any expansion of the DBNGP should not be covered by the Access Arrangement Decision at the election of DBP.

20. An expansion is the enhancement of the capacity to deliver gas within the geographic range of the DBNGP, such as by the addition of a loop or a compressor.

21. It should be noted that the issue raised on this review by DBP does not apply to extensions (as distinct from expansions) of the DBNGP, that is, where the geographical range of the DBNGP has been extended.  The Final Decision of the ERA in relation to extensions is not challenged.  It remains a matter at the option of DBP whether any extension to the DBNGP during the Access Arrangement Decision period becomes part of the DBNGP and so subject to the access terms.

22. At the time of the Access Arrangement Decision there was no evidence of any predicted expansion of the DBNGP during the period covered by the Access Arrangement Decision.  There was also no allowance for any forecast capital expenditure for any expansion in the period of the Access Arrangement Decision.

23. The Revised Access Arrangement Proposal that DBP submitted to the ERA on 8 September 2011 suggested that it should give notice to the ERA of any proposal to expand or extend the DBNGP, and the extension or expansion should become part of the covered pipeline (and so subject to the Access Arrangement Decision) unless DBP elected that it would not become part of the covered pipeline.  It also specified some factors to which DBP may have regard in considering whether to treat an extension or expansion as part of the covered pipeline.

24. In the first version of the Final Decision of 31 October 2011, the ERA accepted that proposal.  However, by notice of 1 December 2011, the ERA indicated that it was then proposing to amend that decision in relation to expansions to the position that it had adopted in the Final Decision of 22 December 2011 and confirmed in the Access Arrangement Decision, and invited consultation on that issue.  The notice of 1 December 2011 gave reasons for that changed view.

25. DBP, as invited, made a further detailed submission on the topic on 13 December 2011.  As its contentions in that submission are reflected to a significant degree in its present contentions, it is not necessary to record them in detail at this point.

26. The revised Final Decision and the Access Arrangement Decision adhered to the ERA’s foreshadowed ruling.  It did not accept that, in respect of any expansions to the DBNGP, it was appropriate to allow DBP in effect an unfettered discretion (Final Decision at [1627]) to elect whether the expansion should be covered by the Access Arrangement Decision.  It observed that the result would entitle DBP to take account only of its own commercial interests.

27. The ERA then referred in the Final Decision to the two decisions of the Western Australian Electricity Review Board on proposed revisions to the access arrangement for the Goldfields Gas Pipeline of 22 November 2011:  see BHP Billiton Nickel Wet Pty Ltd v Southern Cross Pipelines Australia Pty Ltd & Ors (Application No 1 of 2010) and Southern Cross Pipelines Australia Pty Ltd & Ors v BHP Billiton Nickel West Pty Ltd & Anor (Application No 2 of 2010).  That decision was based upon somewhat different provisions in the Gas Code.  The ERA did not follow that decision unthinkingly, but said at [1630] that aspects of the reasoning, including those rejecting the service provider’s proposed extensions/expansions policy “may have implications” for its approach.

28. Thus, the ERA’s approach did derive some underpinning from those decisions. But, at least as a starting point, it cannot be shown to have erred in that regard. The underpinning first caused the ERA to remind itself of the unexceptional proposition that it should have regard to the national gas objective in making a decision on DBP’s proposed extensions and expansions provisions when addressing the requirements of rules 48(1)(g) and 104 of the NGR: Final Decision at [1633].

29. The real issue between DBP and the ERA is whether error in terms of s 246 of the NGL is shown by the way in which the ERA applied the national gas objective, in the context of the overall provisions of the NGL.

30. The ERA’s reasons for its decision are best identified in [1634]-[1636] of the Final Decision.  They provide:

    1634.The Authority also considers that, in the current circumstances of the DBNGP, an election by DBP not to include an expansion of capacity as part of the covered pipeline is likely to result in outcomes that are contrary to the National Gas Objective and the coverage criteria under section 15 of the NGL(WA).  The next significant expansion in capacity of the DBNGP is likely to be achieved by the completion of looping of the pipeline between compressor stations.  The result of this is likely to be a decrease in the average cost of gas transmission when the increment to capacity becomes fully utilised.  In the event that the expansion in capacity does not form part of the covered pipeline, there is a risk that the benefits of the expansion (in a reduced average cost of gas transmission) will not be passed on to all pipeline users with adverse consequences for competition in energy markets in Western Australia.

    1635.The Authority is therefore concerned that the treatment of expansions under the proposed extension and expansion requirements is inconsistent with the National Gas Objective.

    1636.The Authority considers that it would be more appropriate for the extension and expansion requirements to provide that the access arrangement will apply to incremental services to be provided as a result of any expansion in capacity of the DBNGP, except in instances where DBP can demonstrate to the Authority’s reasonable satisfaction that application of the access arrangement to such services is inconsistent with the National Gas Objective.  If DBP were to take the view at any time that an expansion of capacity should not form part of the covered pipeline, it is open to DBP to seek revocation of coverage of the relevant part of the DBNGP under the coverage provisions of the NGL(WA).

31. As noted above, there are no expansions forecast to take place during the operative period of the Access Arrangement Decision.  DBP says that there was, therefore, no basis for presuming that the particular circumstances of a particular expansion should be treated as part of the covered pipeline.  Allied with that proposition, it says that because the National Competition Council first has the role of recommending to the Minister whether a particular pipeline should be declared as a covered pipeline (in accordance with the criteria in s 15 of the NGL), the criteria in s 15 should by inference also be considered by the ERA in deciding whether to reject the DBP’s proposed expansions proposal.

32. The fact that no particular extensions were planned for the regulatory period in issue does not relieve DBP or the ERA from proposing and providing respectively for how any such extensions should be addressed.  It involved no error on the ERA’s part to do so, and subject to the other contentions of DBP, to do so in a manner which conformed with its discretion under rule 40(3) of the NGR.

33. The Tribunal also does not accept that each of the pipeline coverage criteria in s 15 of the NGL must be considered by the ERA when deciding the terms for extensions and expansions in a revised access arrangement.  Their context is different.  The declaration of a pipeline as a covered pipeline obviously requires the existence of a pipeline, and the criteria in s 15 then specify a series of criteria which include the effect on competition of it being declared, the relative cost of an alternative pipeline being constructed (rather than access being granted) and the public interest.  Section 18 of the NGL then applies in the event that a covered pipeline is extended or expanded: it directs attention to the “extension and expansion requirements” under the applicable access arrangement.  They are defined in s 2 of the NGL.  They are decided by the relevant regulator.  There is no provision directing the regulator to consider the criteria in s 15.

34. The wider considerations concerning the public interest (beyond those expressed in the national gas objective) are not necessarily within the compass of the role of a regulator. Nor are, necessarily, the broader issues relating to competition, including overseas competition, or the economic capacity of a potential user of the expanded capacity of a covered pipeline to develop another pipeline to secure that capacity.  Such matters extend beyond the role of the regulator, including the regulatory discretions under rule 40, and the regulatory limits on what a regulator may require under rule 104.  Moreover, there is no basis to support the proposition, which is at least implicit in the DBP argument, that the ERA could not make a decision in the terms it did because it assumes that coverage should apply to an expansion without regard to the particular circumstances of the expansion.  Rule 104(1) appears to contemplate such a determination, otherwise it would require that where no particular expansion is in contemplation, the requirements could not include coverage of the incremental services covered by an expansion, but (at least) must allow for later determination of that question.  Rule 104(1) provides:

    Extension and expansion requirements may state whether the applicable access arrangement will apply to incremental services to be provided as a result of a particular extension to, or expansion of the capacity of, the pipeline or may allow for later resolution of that question on a basis stated in the requirements.

35. Rule 104(2) would also be otiose in those circumstances, or rather not apply until the later determination.

36. Alternative submissions by DBP are based on the use of the word “particular” in rule 104(1).  It is said firstly that the decision of the ERA could not have been made because it does not provide for the circumstances of any particular (presently uncontemplated) expansion, and secondly that it effectively reverses the onus which otherwise would apply so that DBP must show that it is consistent with the national gas objective that the Access Arrangement Decision should not apply to that particular expansion.  The onus is reversed because, it is said, the starting point is for the ERA to decide whether coverage should extend to an expansion, rather than for DBP to persuade the ERA that it should not.  That submission, if accepted, would not necessarily lead to the Tribunal substituting the proposed extensions and expansions term put forward by DBP.

37. As to the first of those contentions, for similar reasons to those already given, the Tribunal considers that the Access Arrangement Decision could have addressed in the extensions and expansions requirements how expansions presently unidentified should be dealt with.  It is clear that those requirements must be addressed, even though no particular extension or expansion is contemplated at the time.  Otherwise, rules 48(1)(g) and 104 would have been expressed differently, and the definition of the “extensions and expansions” requirements in s 2 of the NGL would also have been expressed differently, to distinguish between extensions and expansions which are planned to be made during an access arrangement period, and those which occur during that period but were not planned at the start of that period.  To state that is really to demonstrate that no such intention existed.  The word “particular” in rule 104(1) will accommodate (as happens in this instance) the different treatment of extensions on the one hand and expansions on the other, as well as permitting differential provisions for different geographical areas or different types of expansions or in other respects.  In the Tribunal’s view, rule 104(1) does not preclude the ERA from making a provision which in fact applies equally to any and all extensions during a regulatory period.

1. Having taken that step, it is still necessary to determine whether error is made out in the manner in which the ERA prescribed how each expansion during the regulatory period would be addressed, that is by including it within the operation of the Access Arrangement Decision unless DBP satisfies the ERA that its coverage in that way is not consistent with the national gas objective.  That stipulation, placing that onus on DBP, is said to be unreasonable and also contrary to the policy and intention of the NGL and the NGR, so that the discretion under s 40(3) miscarried.

2. In the view of the Tribunal, the ERA’s decision does not involve reviewable error on that basis.  Rule 104(1) of the NGR contemplates a provision in the Access Arrangement Decision which enables the ERA to prescribe whether and how the access terms will apply to any particular expansion – when and if one is undertaken – or to provide for the later resolution of such questions.  In the event of a later resolution, DBP would be required to present material to the ERA in the light of which (and other material received by the ERA) the ERA would make a decision on those questions.  The present ruling achieves no more than that.  It is expressed in terms of DBP having the opportunity to claim that the particular expansion should not be included within the access arrangement terms, and then the onus of satisfying the ERA that its inclusion within those terms would be inconsistent with the national gas objective.

3. For the reasons the ERA gave, it could properly conclude that – as a starting point – the application of those terms to an expansion of the DBNGP would be consistent with the national gas objective.  That is because the overall terms imposed by the Access Arrangement Decision (subject to other issues raised on this review) can reasonably be taken as consistent with that objective and the revenue and pricing principles.  There is no reason why the ERA, in that context, should regard its starting point as a disincentive to efficient investment in, and efficient operation and use of, any expansion of the DBNGP.  It has, however, preserved to DBP the opportunity to claim to the contrary in respect of any particular expansion, and to show to the ERA that in the particular circumstances the subjection of that expansion to the terms of the access arrangement would not be consistent with the national gas objective.  So understood, the ERA has simply left the door open to DBP, if it contemplates an expansion during the access arrangement period, to present material to it which it may then review and decide whether, on the whole of the material, the national gas objective is not served by the inclusion of expansions in the scope of operation of the Access Arrangement Decision.  As the ERA noted, DBP may also seek a coverage revocation determination under Part 4 Division 2 of the NGL in any event.  Given the starting point of the ERA, the Tribunal does not consider that the ERA’s decision in that respect is unreasonable or that it involves an incorrect exercise of its discretion.

4. Finally, the Tribunal notes the specific matters relied on by DBP which DBP argues, whether alone or collectively, demonstrate that the decision on the extensions and expansions requirements is unreasonable or involved incorrect exercise of the ERA’s discretion.

5. The Tribunal has already rejected the proposition that the ERA could not have made its determination in the terms it did because it started with a “coverage” ruling, and then allowed itself to reconsider that starting point.  That is first a matter of construction of the relevant provisions.  It does not turn on any undue weight being given to decisions in the other cases referred to, although it may be observed that a similar result was reached in those cases on somewhat different regulatory provisions.

6. Nor does the Tribunal accept that it is erroneous for the ERA to have observed what is really self-evident, namely that the acceptance of the DBP alternative proposed would give it an unfettered discretion to include or exclude an expansion from the scope of the Access Arrangement Decision, with the risk that DBP’s decision may result in an outcome not consistent with the national gas objective.  That is not to attribute to DBP any sinister motives, but to point to a simple fact. Under the national gas objective and the NGL and NGR, the regulator is given specified responsibilities as an independent entity which, if DBP’s proposal were accepted, it would be excluded from fulfilling in relation to any expansion during the regulatory period.

7. The observation of the ERA at [1634] of the Final Decision about the likely next significant expansion of the DBNGP also does not demonstrate reviewable error on its part.  The ERA left open the consideration of any actual expansion when and if it occurs.  If the circumstances of an expansion warrant it, then the use of that expansion and the capacity it offers may be excluded from the scope of the Access Arrangement Decision.

8. In the Tribunal’s view, for those reasons, the ERA’s decision on this topic does not involve reviewable error.

   CONCLUSIONS

9. For the reasons given, DBP has succeeded in satisfying the Tribunal of error only in one respect, other than the error which it has acknowledged in the course of submissions.

10. The Tribunal found that the ERA was correct in using a bond-yield approach to determine the DRP, but erred because its choice of a value for the DRP based on its averaging procedure constitutes an incorrect exercise of its discretion, or was unreasonable: at [311]. For the reasons given, the Tribunal remits the Access Arrangement Decision to the ERA, to determine a value for the DRP using its bond-yield approach confined to its averaging procedure to conform to the reasons for decision of the Tribunal. The ERA and DBP are each given liberty to apply to the Tribunal for further directions on that issue. Naturally, the ERA will make such consequential alterations to the Access Arrangement Decision as are necessary as a consequence of any changed DRP input into the modelling required by rule 87(2) of the NGR.

11. The Tribunal accepts that the ERA, as it acknowledged, failed to determine correctly the present value of the minimum lease payments by adjusting the Base Rent in accordance with clause 4.3 of the BEP Lease to commencement of that lease.  The Tribunal remits the Access Arrangement Decision to the ERA to correctly determine the present value of those minimum lease payments to give effect to that adjustment.  Again, the remittal of the matter extends to the ERA making such consequential alterations to the Access Arrangement Decision as are necessary.

12. In all other respects the Tribunal affirms the decision of the ERA.

I certify that the preceding six hundred and twenty-two (622) numbered paragraphs are a true copy of the Reasons for Decision herein of the Honourable Justice Mansfield (President) and Mr R Davey (Member) and Professor D Round (Member).

Associate:

Dated:        26 July 2012