Application by United Energy Distribution Pty Limited
[2012] ACompT 1
•6 January 2012
AUSTRALIAN COMPETITION TRIBUNAL
Application by United Energy Distribution Pty Limited [2012] ACompT 1
Citation: Application by United Energy Distribution Pty Limited [2012] ACompT 1 Review from: Australian Energy Regulator Parties: UNITED ENERGY DISTRIBUTION PTY LIMITED (ABN 70 064 651 029)
SPI ELECTRICITY PTY LIMITED (ABN 91 064 235 776)
CITIPOWER PTY (ABN 76 064 651 056)
powercor australia limited (abn 89 064 651 109)
JEMENA ELECTRICITY NETWORKS (VIC) lTD (ACN 064 651 083)
File numbers: ACT 6 of 2010
ACT 7 of 2010
ACT 8 of 2010
ACT 9 of 2010
ACT 10 of 2010Tribunal: FOSTER J (DEPUTY PRESIDENT), MR G LATTA AM AND PROFESSOR D ROUND Date of decision: 6 January 2012 Legislation: Acts Interpretation Act 1901 (Cth)
Competition and Consumer Act 2010 (Cth), s 44AAF
Corporations Act 2001 (Cth)Electricity Safety (Bushfire Mitigation) Amendment Interim Regulations 2010
Electricity Safety Act 1998 (Vic) s 113A of Div 2A of Pt 10Electricity Safety (Electric Line Clearance) Regulations 2005, cll 9, 9.1, 9.3, 12, reg 10
Electricity Safety (Electric Line Clearance) Regulations 2010, Table 2
Interpretation of Legislation Act 1984 (Vic), s 27, s 28(2)
National Electricity Law, ss 2, 2B, 2C, 2D, 3, 5, 7, 7A, 8, 9, 11(2), 14B, 15, 16, 16(1)(b), 18, 28D, 28ZC, 57B, 71B, 71C, 71C(1), 71C(1)(c), 71C(1)(d), 71C(2), 71J(b), 71L, 71M, 71N, 71O, 71O(2), 71P, s 71P(2)(a), 71R, 71R(3), 71R(3)(b), 71R(4), 71R(5), 71R(6), Part 4 Div 1, Part 6 Div 3A, Part 3 Div 6, Part 7, Schedule 1, Schedule 2
cll 1, 1(2), 2, 7, 8, 11, 12, 13, 15, 17, 19, 23–26, 31–34, 39, 42 and 43
National Electricity (South Australia) Act 1996, ss 11, 12 and 15
National Electricity (Victoria) Act 2005, ss 3, 16(4)(b), s 23
National Electricity (Victoria) Amendment Act 2007, s 5
National Gas Law, s 245
Electricity Safety (Electric Line Clearance) Regulations 2005, cl 9
National Electricity (Economic Regulation of Distribution Services) Amendment Rules 2007
National Electricity Rules (Version 39) Chapter 6,
Ch 10 Glossary, Pt C and Pt E of Ch 6, Sch 6.1 and Sch 6.2 to Ch 6, cll 1.7.1, 6.2.5(b)(4), 6.3.1(a), 6.3.1(b), 6.3.1(c)(1), 6.3.1(c)(2), 6.4.1, 6.4.2, 6.4.2(a), 6.4.2(b)(1), 6.4.2(3), 6.4.2(4), 6.4.3, 6.4.3(a), 6.4.3(a)(1), 6.4.3(a)(2), 6.4.3(a)(5), 6.4.3(a)(6), 6.4.3(a)(7), 6.4.3(b)(1)(i), 6.4.3(b)(2), 6.4.3(b)(5), 6.4.3(b)(6), 6.4.3(b)(7), 6.5.1, 6.5.1(a), 6.5.1(e), 6.5.1(e)(3), 6.5.1(f), 6.5.2, 6.5.2(a), 6.5.2(b), 6.5.2(c), 6.5.2(d), 6.5.2(e) ,6.5.3(b)(2), 6.5.6, 6.5.6(a), 6.5.6(b), 6.5.6(c), 6.5.6(d), 6.5.6(e), 6.5.7(a), 6.5.7(b), 6.5.7(c), 6.5.7(d), 6.5.7(e), 6.5.8, 6.6.1(a), 6.6.1(c), 6.6.1(d), 6.6.1(e), 6.6.1(i), 6.6.1(j), 6.6.2, 6.6.2(a), 6.6.3, 6.12, 6.12.1, 6.12.1(2), (3) and (4), 6.12.1(4)(ii), 6.12.1(5), 6.12.1(6), 6.12.1(11), 6.12.1(12), 6.12.1(13), 6.12.1(14), 6.12.1(18), 6.12.2, 6.12.3, 6.12.3(a), 6.12.3(f), 6.14, 6A.7.3, S6.1.2, S6.2.1, S6.2.1(a)(1), S6.2.1(a)(2), S6.2.1(b), S6.2.1(c), S6.2.1(c)(1), S6.2.1(c)(2), S6.2.1(c)(3), S6.2.1(d), S6.2.1(e), S6.2.1(e)(1), S6.2.1(f), S6.2.2, S6.2.3, S6A.2.1(f)(1), 9.29.5(b)(2)
Victorian Public Lighting Code, cl 2.1(c)Cases cited: Application by ActewAGL Distribution (2010) ATPR 42-324
Application by Energex Limited (Gamma) (No 5) (2011) ATPR 42-356
Application by EnergyAustralia and Ors (2009) ATPR 42-299
Application by Epic Energy South Australia Pty Ltd (2003) ATPR 41-932
Application by Jemena Gas Networks (NSW) Ltd (No 5) (2011) ATPR 42-360
Australian Competition and Consumer Commission v Australian Competition Tribunal (2006) 152 FCR 33Dates of hearing: 20, 21, 22, 23 and 27 June 2011; 4, 5, 6, 7, 12, 22 and 25 July 2011 Date of last submissions: 21 December 2011 Place: Sydney Category: No Catchwords Number of paragraphs: 671 Counsel for United Energy Distribution Pty Limited: Mr AC Archibald QC and Mr SR Horgan SC
Mr C Furnell (Streetlight issues only)Solicitor for United Energy Distribution Pty Limited: Johnson Winter & Slattery Counsel for SPI Electricity Pty Limited: Mr D Farrands and Mr A Weinstock
Mr C Furnell (Streetlight issues only)Solicitor for SPI Electricity Pty Limited: SP AusNet Counsel for Citipower Pty and Powercor Australia Limited: Mr M Connock SC and Mr M Rush
Mr C Furnell (Streetlight issues only)
Mr S Lockhart SC and Mr C ArchibaldSolicitor for Citipower Pty and Powercor Australia Limited: DLA Piper Australia Counsel for Jemena Electricity Networks (Vic) Ltd: Mr AJ Myers QC and Mr MI Borsky
Mr C Furnell (Streetlight issues only)Solicitor for Jemena Electricity Networks (Vic) Ltd: Gilbert + Tobin Counsel for the Australian Energy Regulator: Ms M Sloss SC, Mr S Lloyd SC, Mr P Gray, Mr D Star, Dr V Priskich, Mr T Clarke and Mr L Merrick
Solicitor for the Australian Energy Regulator: Corrs Chambers Westgarth Counsel for the Minister for Energy and Resources for the State of Victoria (Intervener): Mr P Hanks QC and Mr G McCormick
Solicitor for the Minister for Energy and Resources for the State of Victoria (Intervener): Minter Ellison Counsel for Streetlight Group of Councils (Interveners): Mr G Nash QC
Solicitor for Streetlight Group of Councils (Interveners): McKean Park
IN THE AUSTRALIAN COMPETITION TRIBUNAL
NO: ACT 6 of 2010
RE: application under section 71B of the national electricity law for a review of a distribution determination made by the australian energy regulator in relation to UNITED ENERGY DISTRIBUTION PTY LIMITED pursuant to clause 6.11.1 of chapter 6 of the national electricity rules
by: UNITED ENERGY DISTRIBUTION PTY LIMITED (ABN 70 064 651 029)
TRIBUNAL:
JUSTICE foster (deputy PRESIDENT),
MR G LATTA AM AND PROFESSOR D ROUNDDATE OF ORDER:
6 JANUARY 2012
WHERE MADE:
SYDNEY
THE TRIBUNAL:
1.Pursuant to s 71P(2)(a) of the National Electricity Law, hereby varies the Final Distribution Determination dated October 2010 in respect of the 2011–2015 regulatory control period applicable to the applicant (United Energy Distribution Pty Limited) (the final determination) by:
(a)Replacing the figure “3.74%” for the debt risk premium in Table 13 of the final determination with the figure “3.89%”; and
(b)Replacing the figure “0.5” as the value for gamma with the figure “0.25” as the value for gamma when used as an input into the calculation of the cost of corporate income tax.
2.Grants liberty to apply to the applicant and to the Australian Energy Regulator in respect of the consequences of the Tribunal’s decision in respect of the indexation of the regulatory asset base of Jemena Electricity Networks (Vic) Ltd made this day (6 January 2012) in proceeding No ACT 10 of 2010, Application by Jemena Electricity Networks (Vic) Ltd (ACN 064 651 083).
3.Pursuant to s 71P(2)(b) of the National Electricity Law, remits the final determination to the Australian Energy Regulator to be remade upon a basis which does not involve the application of the methodology for closing out the ESCV “S” Factor Scheme devised by the Australian Energy Regulator and applied by it in arriving at the final determination but which, subject to the variations made in par 1 above and to the grant of any additional relief resulting from the exercise of the liberty to apply in par 2 above, otherwise proceeds upon the basis of the final determination as published by the Australian Energy Regulator in October 2010.
IN THE AUSTRALIAN COMPETITION TRIBUNAL
NO: ACT 7 of 2010
RE: application under section 71B of the national electricity law for a review of a distribution determination made by the australian energy regulator in relation to spi electricity pty limited pursuant to clause 6.11.1 of the national electricity rules
BY: SPI ELECTRICITY PTY LIMITED (ABN 91 064 235 776)
TRIBUNAL:
JUSTICE foster (deputy PRESIDENT),
MR G LATTA AM AND PROFESSOR D ROUNDDATE OF ORDER:
6 JANUARY 2012
WHERE MADE:
SYDNEY
THE TRIBUNAL:
1.Pursuant to s 71P(2)(a) of the National Electricity Law, hereby varies the Final Distribution Determination dated October 2010 in respect of the 2011–2015 regulatory control period applicable to the applicant (SPI Electricity Pty Limited) (the final determination) by:
(a)Replacing the figure “4.05%” for the debt risk premium in Table 14 of the final determination with the figure “4.22%”; and
(b)Replacing the figure “0.5” as the value for gamma with the figure “0.25” as the value for gamma when used as an input into the calculation of the cost of corporate income tax.
2.Grants liberty to apply to the applicant and to the Australian Energy Regulator in respect of the consequences of the following decisions made by the Tribunal this day (6 January 2012):
(a)The decision in respect of the closeout of the ESCV “S” Factor Scheme made in proceeding No ACT 6 of 2010, Application by United Energy Distribution Pty Ltd (ABN 70 064 651 029); and
(b)The decision in respect of the indexation of the regulatory asset base of Jemena Electricity Networks (Vic) Ltd in proceeding No ACT 10 of 2010, Application by Jemena Electricity Networks (Vic) Ltd (ACN 064 651 083).
3.Subject to the variations made in par 1 above, subject to the remitter in par 2 of the relief granted by the Tribunal in Application by SPI Electricity Pty Limited [2012] ACompT 2 and to the grant of any additional relief resulting from the exercise of liberty to apply in par 2 above, pursuant to s 71P(2)(a) of the National Electricity Law, otherwise affirms the final determination.
IN THE AUSTRALIAN COMPETITION TRIBUNAL
NO: ACT 8 of 2010
RE: application under section 71B of the national electricity law for a review of a distribution determination made by the australian energy regulator in relation to CITIPOWER PTY pursuant to clause 6.11.1 of the national electricity rules
by: CITIPOWER PTY (ABN 76 064 651 056)
TRIBUNAL:
JUSTICE foster (deputy PRESIDENT),
MR G LATTA AM AND PROFESSOR D ROUNDDATE OF ORDER:
6 JANUARY 2012
WHERE MADE:
SYDNEY
THE TRIBUNAL:
1.Pursuant to s 71P(2)(a) of the National Electricity Law, hereby varies the Final Distribution Determination dated October 2010 in respect of the 2011–2015 regulatory control period applicable to the applicant (CitiPower Pty) (the final determination) by:
(a)Replacing the figure “3.74%” for the debt risk premium in Table 14 of the final determination with the figure “3.89%”; and
(b)Replacing the figure “0.5” as the value for gamma with the figure “0.25” as the value for gamma when used as an input into the calculation of the cost of corporate income tax.
2.Grants liberty to apply to the applicant and to the Australian Energy Regulator in respect of the consequences of the following decisions made by the Tribunal this day (6 January 2012):
(a)The decision in respect of the closeout of the ESCV “S” Factor Scheme made in proceeding No ACT 6 of 2010, Application by United Energy Distribution Pty Ltd (ABN 70 064 651 029); and
(b)The decision in respect of the indexation of the regulatory asset base of Jemena Electricity Networks (Vic) Ltd in proceeding No ACT 10 of 2010, Application by Jemena Electricity Networks (Vic) Ltd (ACN 064 651 083).
3.Pursuant to s 71P(2)(b) of the National Electricity Law, remits the final determination to the Australian Energy Regulator to be remade in light of a reconsideration by the Australian Energy Regulator of the applicant’s claims in accordance with the National Electricity Rules in respect of the vegetation management opex step change claimed by the applicant, such reconsideration to, subject to the variations made in par 1 above and to the grant of any additional relief resulting from the exercise of the liberty to apply in par 2 above, otherwise proceed upon the basis of the final determination as published by the Australian Energy Regulator in October 2010.
IN THE AUSTRALIAN COMPETITION TRIBUNAL
NO: ACT 9 of 2010
RE: application under section 71B of the national electricity law for a review of a distribution determination made by the australian energy regulator in relation to powercor australia limited pursuant to clause 6.11.1 of the national electricity rules
by: powercor australia limited (abn 89 064 651 109)
TRIBUNAL:
JUSTICE foster (deputy PRESIDENT),
MR G LATTA AM AND PROFESSOR D ROUNDDATE OF ORDER:
6 JANUARY 2012
WHERE MADE:
SYDNEY
THE TRIBUNAL:
1.Pursuant to s 71P(2)(a) of the National Electricity Law, hereby varies the Final Distribution Determination dated October 2010 in respect of the 2011–2015 regulatory control period applicable to the applicant (Powercor Australia Limited) (the final determination):
(a)By replacing the figure “3.74%” for the debt risk premium in Table 14 of the final determination with the figure “3.89%”;
(b)By replacing the figure “0.5” as the value for gamma with the figure “0.25” as the value for gamma when used as an input into the calculation of the cost of corporate income tax;
(c)By replacing the annual revenue requirements for 2011–2015 set out in Table 6 of the final determination with annual revenue requirements for 2011–2015 that have been recalculated by excluding therefrom the 2001–2005 negative carryover arising under the Office of the Regulator-General (Vic)’s 2001–2005 efficiency carryover mechanism applied in respect of the applicant and also by excluding therefrom the 2006–2010 efficiency carryover amount under the Essential Services Commission of Victoria’s 2006–2010 electricity efficiency carryover mechanism applied in respect of the applicant; and
(d)Also otherwise as required in order to give effect to the variations made in subpars (a) to (c) above.
2.Grants liberty to apply to the applicant and to the Australian Energy Regulator in respect of the consequences of the following decisions made by the Tribunal this day (6 January 2012):
(a)The decision in respect of the closeout of the ESCV “S” Factor Scheme made in proceeding No ACT 6 of 2010, Application by United Energy Distribution Pty Ltd (ABN 70 064 651 029); and
(b)The decision in respect of the indexation of the regulatory asset base of Jemena Electricity Networks (Vic) Ltd in proceeding No ACT 10 of 2010, Application by Jemena Electricity Networks (Vic) Ltd (ACN 064 651 083).
3.Pursuant to s 71P(2)(b) of the National Electricity Law, remits the final determination to the Australian Energy Regulator to be remade in light of a reconsideration by the Australian Energy Regulator of the applicant’s claims in accordance with the National Electricity Rules in respect of the vegetation management opex step change claimed by the applicant, such reconsideration to, subject to the variations made in par 1 above and to the grant of any additional relief resulting from the exercise of the liberty to apply in par 2 above, otherwise proceed upon the basis of the final determination as published by the Australian Energy Regulator in October 2010.
IN THE AUSTRALIAN COMPETITION TRIBUNAL
NO: ACT 10 of 2010
RE: application under section 71B of the national electricity law for a review of a distribution determination made by the australian energy regulator in relation to JEMENA ELECTRICITY NETWORKS (VIC) LTD pursuant to clause 6.11.1 of chapter 6 of the national electricity rules
BY: JEMENA ELECTRICITY NETWORKS (VIC) lTD (ACN 064 651 083)
TRIBUNAL:
JUSTICE foster (deputy PRESIDENT),
MR G LATTA AM AND PROFESSOR D ROUNDDATE OF ORDER:
6 JANUARY 2012
WHERE MADE:
SYDNEY
THE TRIBUNAL:
1.Pursuant to s 71P(2)(a) of the National Electricity Law, hereby varies the Final Distribution Determination dated October 2010 in respect of the 2011–2015 regulatory control period applicable to the applicant (Jemena Electricity Networks (Vic) Ltd) (the final determination) by:
(a)Replacing the figure “3.70%” for the debt risk premium in Table 14 of the final determination with the figure “4.34%”; and
(b)Replacing the figure “0.5” as the value for gamma with the figure “0.25” as the value for gamma when used as an input into the calculation of the cost of corporate income tax;
(c)Including in the forecast capital allowance for the applicant for the 2011–2015 regulatory control period an allowance in the amount confidentially agreed between the Australian Energy Regulator and the applicant in respect of the Broadmeadows project, such amount being recorded in confidential Joint Submissions made to the Tribunal in writing by the solicitors for the Australian Energy Regulator and the solicitors for the applicant and dated 11 July 2011; and
(d)Allowing the amounts claimed by the applicant in its revised regulatory proposal in the enterprise support function cost centres described as:
(i)Energy Investment;
(ii)Financial Strategy; and
(iii)Investment Analysis
as allowances in the forecast operating expenditure of the applicant.
2.Grants liberty to apply to the applicant and to the Australian Energy Regulator in respect of the consequences of the decision made by the Tribunal this day (6 January 2012) in respect of the closeout of the ESCV “S” Factor Scheme made in proceeding No ACT 6 of 2010, Application by United Energy Distribution Pty Ltd (ABN 70 064 651 029).
3.Pursuant to s 71P(2)(b) of the National Electricity Law, remits the final determination to the Australian Energy Regulator to be remade upon a basis which conforms to the requirements of the National Electricity Rules in respect of the indexation of the regulatory asset base of the applicant for inflation in accordance with these Reasons for Decision but which, subject to the variations made in par 1 above and to the grant of any additional relief resulting from the exercise of the liberty to apply in par 3 above, otherwise proceeds uupon the final determination as published by the Australian Energy Regulator in October 2010.
IN THE AUSTRALIAN COMPETITION TRIBUNAL
nO: act 6 of 2010
RE: application under section 71B of the national electricity law for a review of a distribution determination made by the australian energy regulator in relation to UNITED ENERGY DISTRIBUTION PTY LIMITED pursuant to clause 6.11.1 of chapter 6 of the national electricity rules
by: UNITED ENERGY DISTRIBUTION PTY LIMITED (ABN 70 064 651 029)
IN THE AUSTRALIAN COMPETITION TRIBUNAL
nO: act 7 of 2010
RE: application under section 71B of the national electricity law for a review of a distribution determination made by the australian energy regulator in relation to spi electricity pty limited pursuant to clause 6.11.1 of the national electricity rules
BY: SPI ELECTRICITY PTY LIMITED (ABN 91 064 235 776)
IN THE AUSTRALIAN COMPETITION TRIBUNAL
nO: act 8 of 2010
RE: application under section 71B of the national electricity law for a review of a distribution determination made by the australian energy regulator in relation to CITIPOWER PTY pursuant to clause 6.11.1 of the national electricity rules
by: CITIPOWER PTY (ABN 76 064 651 056)
IN THE AUSTRALIAN COMPETITION TRIBUNAL
nO: act 9 of 2010
RE: application under section 71B of the national electricity law for a review of a distribution determination made by the australian energy regulator in relation to powercor australia limited pursuant to clause 6.11.1 of the national electricity rules
by: powercor australia limited (abn 89 064 651 109)
IN THE AUSTRALIAN COMPETITION TRIBUNAL
nO: act 10 of 2010
RE: application under section 71B of the national electricity law for a review of a distribution determination made by the australian energy regulator in relation to JEMENA ELECTRICITY NETWORKS (VIC) LTD pursuant to clause 6.11.1 of chapter 6 of the national electricity rules
BY: JEMENA ELECTRICITY NETWORKS (VIC) lTD (ACN 064 651 083)
tribunal:
foster j (deputy president),
mr g latta am and professor d roundDATE:
6 January 2012
PLACE:
SYDNEY
TABLE OF CONTENTS
INTRODUCTION ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........
[1]
THE LEGISLATIVE SCHEME ........ ........ ........ ........ ........ ........ ........ ........ ........ ........
[15]
BUILDING BLOCK DETERMINATIONS ........ ........ ........ ........ ........ ........ ........ ......
[62]
DRAFT AND FINAL DETERMINATIONS BY THE AER ........ ........ ........ ........ ...
[84]
ISSUE 1—PUBLIC LIGHTING ISSUES ........ ........ ........ ........ ........ ........ ........ ........ .
SGC’s Contentions ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ......
Decision ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........
[91]
[100]
[101]
ISSUE 2—UED OPEX AND INTERNAL AND RELATED PARTY COSTS
Introduction ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .
UED’s Complaints ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ......
The Regulatory Process ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ......
UED’s Contentions ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .....
Decision ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........
[126]
[131]
[133]
[173]
[180]
ISSUE 3—CLOSEOUT OF THE ESCV’S “S” FACTOR SCHEME
Introduction ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .
The Victorian Position for the 2006–2010 Period ........ ........ ........ ........ ........ ....
The AER’s Decision ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ....
A Brief Summary of the AER’s Position before the Tribunal ........ ........ .......
The Contentions of UED and SP AusNet ........ ........ ........ ........ ........ ........ ........ .
The AER’s Position ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .....
The Minister’s Submissions ........ ........ ........ ........ ........ ........ ........ ........ ........ .......
Decision ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........
Conclusion ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ...
[200]
[202]
[214]
[226]
[229]
[235]
[239]
[241]
[247]
ISSUE 4—ESTABLISHMENT OF THE REGULATORY ASSET BASE (CAPITALISED RELATED PARTY MARGINS)
Introduction ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .
The Relevant Provisions of the NER ........ ........ ........ ........ ........ ........ ........ ........ .
The Present Question ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .
The AER’s Draft and Final Decisions ........ ........ ........ ........ ........ ........ ........ .......
The Minister’s Contentions ........ ........ ........ ........ ........ ........ ........ ........ ........ .......
The DNSPs’ Contentions ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ....
Decision ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........
[248]
[251]
[267]
[271]
[280]
[286]
[288]
ISSUE 5—ESTABLISHING THE REGULATORY ASSET BASE AS AT 1 JANUARY 2016 (DEPRECIATION)
Introduction ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .
The Final Decision ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ......
The Minister’s Submissions ........ ........ ........ ........ ........ ........ ........ ........ ........ .......
The DNSPs’ Submissions ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ...
The AER’s Submissions ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .....
Decision ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........
[314]
[320]
[323]
[325]
[329]
[330]
ISSUE 6—INDEXATION OF THE REGULATORY ASSET BASE FOR INFLATION
The Relevant Steps in the Regulatory Process and the Present Question .....
The Relevant Provisions of the NER ........ ........ ........ ........ ........ ........ ........ ........ .
The Correct Approach ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .......
Conclusions ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ..
[338]
[363]
[379]
[384]
ISSUE 7—DEBT RISK PREMIUM (ANNUALISATION AND METHODOLOGY)
Introduction ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .
The JEN DRP Methodology Ground ........ ........ ........ ........ ........ ........ ........ ........
The AER’s Submissions ........ ........ ........ ........ ........ ........ ........ ........ ........ .....
JEN’s Submissions ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .....
Decision ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .......
Other Issues ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........
The relative weights ........ ........ ........ ........ ........ ........ ........ ........ ...
The APT bond trading period ........ ........ ........ ........ ........ ........ ....
Conclusion ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ..
[387]
[392]
[412]
[421]
[427]
[443]
[450]
[461]
ISSUE 8—JEN CAPITAL EXPENDITURE (BROADMEADOWS RELOCATION PROJECT) ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .......
[463]
ISSUE 9—DISALLOWANCE OF CERTAIN ENTERPRISE SUPPORT FUNCTION COST CENTRES (JEN)
Introduction ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .
The Relevant Provisions of the NER ........ ........ ........ ........ ........ ........ ........ ........ .
JEN’s Regulatory Proposal and Subsequent Responses ........ ........ ........ ........ .
The AER’s Draft Decision ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ..
JEN’s Revised Regulatory Proposal ........ ........ ........ ........ ........ ........ ........ ........ .
The Final Decision ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ......
JEN’s Contentions before the Tribunal ........ ........ ........ ........ ........ ........ ........ ....
The AER’s Submissions ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .....
Decision ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........
[466]
[474]
[480]
[483]
[485]
[488]
[491]
[498]
[504]
ISSUE 10—GAMMA ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ...
[512]
ISSUE 11—MATERIALITY THRESHOLD FOR NOMINATED PASS THROUGH EVENTS (SP AUSNET)
Introduction ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .
SP AusNet’s Contentions ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ...
The AER’s Submissions ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .....
Decision ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........
[518]
[524]
[527]
[528]
ISSUE 12—THE INSURANCE EVENT ISSUE (SP AUSNET) ........ ........ ........ .....
[533]
ISSUE 13—EFFICIENCY CARRYOVER MECHANISM (VEGETATION MANAGEMENT OPEX) (POWERCOR) ........ ........ ........ ........ ........ ........ ........ ........
[540]
ISSUE 14—VICTORIAN BUSHFIRE ROYAL COMMISSION NOMINATED PASS THROUGH EVENT (CITIPOWER AND POWERCOR)
Introduction ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .
The Contentions of CitiPower and Powercor ........ ........ ........ ........ ........ ........ ..
The AER’s Submissions ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .....
Decision ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........
[547]
[559]
[567]
[568]
ISSUE 15—2001–2005 ACCRUED NEGATIVE CARRYOVER (POWERCOR)
Introduction ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .
Powercor’s Contentions........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ......
The AER’s Submissions ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .....
Decision ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........
[593]
[596]
[611]
[613]
ISSUE 16—VEGETATION MANAGEMENT OPEX STEP CHANGE (CITIPOWER AND POWERCOR)
Introduction ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .
The Contentions made by CitiPower and Powercor ........ ........ ........ ........ .......
The AER’s Submissions ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .....
Decision ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........
[620]
[630]
[655]
[660]
SUMMARY OF CONCLUSIONS
[671] REASONS FOR DECISION
INTRODUCTION
On 29 October 2010, the Australian Energy Regulator (AER) published its final determination and its reasons for that determination (the final decision) as to the basis upon which electricity distribution services in the State of Victoria will be provided by the registered distribution network service providers in that State (DNSPs) for the period 2011–2015. The final decision was made under the National Electricity Law (NEL) and the National Electricity Rules (Version 39) (NER). At the same time, the AER made five separate distribution determinations (one for each of the DNSPs) by which it gave effect to the final decision.
The final decision constituted the first electricity determination made by the AER on the price control regime to apply to the DNSPs. The previous determination (ie that which applied for the regulatory period 2006–2010) had been made by the Essential Services Commission of Victoria (ESCV).
The final decision and the individual distribution determinations took effect on 1 January 2011.
The final decision provided for combined increases in forecast opex and capex for the DNSPs in respect of the regulatory control period 2011–2015 of $4.7 billion for capex and $2.7 billion for opex over expenditure in the same categories for the 2006–2010 period.
There are five registered DNSPs in Victoria. These are:
(i)CitiPower Pty (CitiPower);
(ii)Powercor Australia Limited (Powercor);
(iii)Jemena Electricity Networks (Vic) Ltd (JEN);
(iv)SPI Electricity Pty Limited (SP AusNet); and
(v)United Energy Distribution Pty Limited (UED).
Each of those DNSPs has the exclusive right for the relevant regulatory period to provide electricity distribution services in a specific (but limited) geographical area. Attached to these Reasons as Attachment “A” is a map of Victoria showing the particular geographical area allocated to each DNSP.
Each of the DNSPs was dissatisfied with aspects of the final decision and consequently with the distribution determination which gave effect to it. Each DNSP has made application to the Tribunal pursuant to s 71B of the NEL for a review of its distribution determination. The Tribunal granted leave to each of them to do so. Each DNSP is entitled to raise the grounds of review specified in its review application. Pursuant to s 71J(b) of the NEL, the Victorian Minister for Energy and Resources (the Minister) was joined as an intervener to each of the review applications made by the DNSPs. Pursuant to s 71L of the NEL, the Streetlight Group of Councils (SGC) was given a limited right to intervene in the DNSPs review applications in relation to certain public lighting issues.
There is no dispute that, in each case, the distribution determination made by the AER is a reviewable regulatory decision within the meaning of that expression in s 71B.
There are, therefore, five applications before the Tribunal. These are:
(i)ACT 6 of 2010 (Application by UED);
(ii)ACT 7 of 2010 (Application by SP AusNet);
(iii)ACT 8 of 2010 (Application by CitiPower);
(iv)ACT 9 of 2010 (Application by Powercor); and
(v)ACT 10 of 2010 (Application by JEN).
UED has also instituted judicial review proceedings in the Federal Court of Australia (VID 989 of 2010).
Each review applicant before the Tribunal has raised a number of complaints about the final decision. Some complaints are raised by more than one DNSP. In the case of some complaints, the DNSPs do not have a common position. No one DNSP was a party to every issue raised before the Tribunal.
In light of the above circumstances, the Tribunal resolved to deal with the matters before it on an issue by issue basis. In this way, the submissions and arguments of all interested parties directed to particular issues were heard at the one time. Having approached the hearing in this way, we think that these Reasons should follow the same format.
We will, therefore, address the matters before us on an issue by issue basis, broadly in the order in which those issues were addressed at the hearing. Subject to the need to preserve confidentiality in respect of one issue, there will be one set of Reasons for all five review applications. In due course, it will be necessary to make appropriate orders to give effect to these Reasons.
Before embarking upon that task, we propose to describe the legislative scheme which now governs the regulation of the DNSPs and the present review applications.
THE LEGISLATIVE SCHEME
The legislative scheme governing the National Electricity Market (NEM) was established under co-operative arrangements involving the Commonwealth and the States of New South Wales, Victoria, Queensland, South Australia and Tasmania. South Australia is the lead legislature. The relevant South Australian legislation is the National Electricity (South Australia) Act 1996 (NESA). The NEL is set out in the Schedule to the NESA. The NEL provides for the making of National Electricity Regulations (NERegs) and NER.
Section 11 of the NESA provides as follows:
11—General regulation-making power for National Electricity Law
(1)The Governor may make such regulations as are contemplated by, or necessary or expedient for the purposes of, the National Electricity Law.
(2)Regulations under this Part may—
(a)be of general or limited application;
(b)vary according to the persons, times, places or circumstances to which they are expressed to apply.
(3)Regulations under this Part may be made only on the unanimous recommendation of the Ministers of the participating jurisdictions.
(5)Section 10 of the Subordinate Legislation Act 1978 does not apply to a regulation under this Part.
Section 12 of the NESA describes a number of specific matters that may be covered by the NERegs. One such matter is the transition from the old National Electricity Law to the NEL. Another is the time at which amendments are to take effect.
Section 15 of the NESA provides:
15—Conferral of functions and powers on Commonwealth bodies
(1)Clause 2 of Schedule 2 of the National Electricity Law will have effect in relation to the operation of any provision of this Act, or any regulation made under this Act, as if the provision or regulation formed part of the National Electricity Law.
(2)Subsection (1) does not limit the effect that a provision or regulation would validly have apart from the subsection.
Clause 2 of Sch 2 to the NEL is a provision which relates to the interpretation of the NEL.
Victoria acceded to the co-operative scheme in respect of electricity on 1 January 2009.
Prior to 1 January 2009, the regulation of electricity distribution and pricing in Victoria had been undertaken by the Office of the Regulator-General (Vic) (ORG) (for the period 2001–2005) and the ESCV (for the period 2006–2010).
The ORG issued an Electricity Distribution Price Determination in respect of the regulatory period 2001–2005. That Determination was published in final form in December 2000. The ESCV issued the Electricity Distribution Price Review (2006–2010) in respect of the regulatory period 2006–2010. That Determination was published in final form in December 2008. It had been originally published in October 2005.
In late 2007, a Bill was introduced into the Victorian Parliament for the purpose of implementing the Australian Energy Market Agreement (AEMA), which is an agreement reached at the Council of Australian Governments (COAG). That Agreement had been made in anticipation of amendments to the NEL and the NER which would provide that the AER would regulate all distribution networks in the NEM. The Bill contained transitional provisions in respect of the transfer of responsibility for the economic regulation of electricity distribution from the ESCV to the AER. The Bill provided that the AER would become responsible for the next review in Victoria which was scheduled to commence in January 2009. The Bill also provided that, when the transfer of responsibility from the ESCV to the AER took place, the AER would assume responsibility for the existing price determination (ie that determination which was in force as at 1 January 2009). That determination was to continue in force until the end of 2010 in accordance with its terms.
Effective 1 January 2008, the National Electricity (Economic Regulation of Distribution Services) Amendment Rules 2007 inserted a new Chapter 6 into the NER. That Chapter of the NER is of critical importance in the matters with which the Tribunal is currently concerned. It is headed: Economic Regulation of Distribution Services. We will refer to Ch 6 of the NER in detail, as required, later in these Reasons. The relevant version of the NER for present purposes is Version 39.
Section 5 of the National Electricity (Victoria) Amendment Act 2007 (Act No 66 of 2007), which commenced on 1 January 2009, provided for the transition of economic regulatory functions from the ESCV to the AER.
The upshot of these legislative changes was that the responsibility for administering the last price determination put in place by the ESCV (viz that which was in force for the period 2006–2010) was transferred to the AER on 1 January 2009. In addition, the responsibility for the future regulation of the distribution networks of electricity in Victoria passed to the AER (see esp s 23 of the National Electricity (Victoria) Act 2005 (NEVA), which was inserted into that Act by s 5 of Act No 66 of 2007).
It will also be necessary to refer to NEVA in more detail later in these Reasons.
Section 2 (Definitions) of the NEL contains a number of definitions which are pertinent to the present matters. These definitions, which apply in the NEL, are:
AEMC means the Australian Energy Market Commission established by section 5 of the Australian Energy Market Commission Establishment Act 2004 of South Australia;
AER means the Australian Energy Regulator established by section 44AE of the Trade Practices Act 1974 of the Commonwealth;
AER economic regulatory decision means a decision (however described) of the AER under this Law or the Rules performing or exercising an AER economic regulatory function or power;
AER economic regulatory function or power means a function or power performed or exercised by the AER under this Law or the Rules that relates to—
(a) the economic regulation of services provided by—
(i)a regulated distribution system operator by means of, or in connection with, a distribution system; or
(ii)a regulated transmission system operator or AEMO by means of, or in connection with, a transmission system; or
(b)the preparation of a network service provider performance report; or
(c)the making of a transmission determination or distribution determination; or
(d)an access determination;
application Act means an Act of a participating jurisdiction that applies, as a law of that jurisdiction, this Law or any part of this Law;
associate in relation to a person has the same meaning it would have under Division 2 of Part 1.2 of the Corporations Act 2001 of the Commonwealth if sections 13, 16(2) and 17 did not form part of that Act;
changeover date means 1 July 2009 or some other date fixed as the changeover date by Ministerial Gazette notice;
Court means—
(a)where this Law applies as a law of the Commonwealth, the Federal Court;
(b)where this Law applies as a law of a participating jurisdiction that is a State or a Territory, the Supreme Court of that jurisdiction;
distribution determination means a determination of the AER under the Rules that regulates any 1 or more of the following:
(a)the terms and conditions for the provision of electricity network services that are the subject of economic regulation under the Rules including the prices an owner, controller or operator of a distribution system charges or may charge for those services;
(b)the revenue an owner, controller or operator of a distribution system earns or may earn from the provision by that owner, controller or operator of electricity network services that are the subject of economic regulation under the Rules;
distribution reliability standard means a standard imposed by or under the Rules or jurisdictional electricity legislation relating to the reliability or performance of a distribution system;
distribution service standard means a standard relating to the standard of services provided by a regulated distribution system operator by means of, or in connection with, a distribution system imposed—
(a) by or under jurisdictional electricity legislation; or
(b) by the AER in accordance with the Rules;
distribution system means the apparatus, electric lines, equipment, plant and buildings used to convey or control the conveyance of electricity that the Rules specify as, or as forming part of, a distribution system;
distribution system safety duty means a duty or requirement under an Act of a participating jurisdiction, or any instrument made or issued under or for the purposes of that Act, relating to—
(a) the safe distribution of electricity in that jurisdiction; or
(b) the safe operation of a distribution system in that jurisdiction;
draft Rule determination means a determination of the AEMC under section 99;
electricity network service means a service provided by means of, or in connection with, a transmission system or distribution system;
electricity services means services that are necessary or incidental to the supply of electricity to consumers of electricity, including—
(a)the generation of electricity;
(b)electricity network services;
(c)the sale of electricity;
final Rule determination means a determination of the AEMC under section 102;
jurisdictional electricity legislation means an Act of a participating jurisdiction (other than national electricity legislation), or any instrument made or issued under or for the purposes of that Act, that regulates the generation, transmission, distribution, supply or sale of electricity in that jurisdiction;
jurisdictional regulator means—
…(b)if this Law is applied as a law of the State of Victoria—
(i)the Essential Services Commission established by section 7(1) of the Essential Services Commission Act 2001 of Victoria; or
(ii)if the functions or powers of that Essential Services Commission under this Law are transferred to the AER by or under a law of Victoria, the AER;
…
MCE means the Ministerial Council on Energy established on 8 June 2001, being the Council of Ministers with primary carriage of energy matters at national level comprising the Ministers representing the Commonwealth, the States, the Australian Capital Territory and the Northern Territory, acting in accordance with its own procedures;
national electricity legislation means—
(a)the National Electricity (South Australia) Act 1996 of South Australia and Regulations in force under that Act; and
(b)the National Electricity (South Australia) Law; and
(c)an Act of a participating jurisdiction (other than South Australia) that applies, as a law of that jurisdiction, any part of—
(i)the Regulations referred to in paragraph (a); or
(ii)the National Electricity Law set out in the Schedule to the Act referred to in paragraph (a); and
(d)the National Electricity Law set out in the Schedule to the Act referred to in paragraph (a) as applied as a law of a participating jurisdiction (other than South Australia); and
(e)the Regulations referred to in paragraph (a) as applied as a law of a participating jurisdiction (other than South Australia);
national electricity market means—
(a)the wholesale exchange operated and administered by AEMO under this Law and the Rules; and
(b)the national electricity system;
national electricity objective means the objective set out in section 7;
National Electricity Rules or Rules means—
(a)the initial National Electricity Rules; and
(ab)additional Minister initiated Rules; and
(b)Rules made by the AEMC under this Law, including Rules that amend or revoke—
(i)the initial National Electricity Rules or additional Minister initiated Rules; or
(ii)Rules made by it;
network revenue or pricing determination means a distribution determination or a transmission determination;
network service provider means a Registered participant registered for the purposes of section 11(2) that owns, controls or operates a transmission system or distribution system that forms part of the interconnected national electricity system;
participating jurisdiction means a jurisdiction that is a participating jurisdiction within the meaning of section 5;
regulated distribution system operator means an owner, controller or operator of a distribution system—
(a)who is a Registered participant; and
(b)whose revenue from, or prices that are charged for, the provision of electricity network services are regulated under a distribution determination;
regulated network service provider means—
(a)a regulated distribution system operator; or
(b)a regulated transmission system operator;
Regulations means the regulations made under Part 4 of the National Electricity (South Australia) Act 1996 of South Australia that apply as a law of this jurisdiction;
regulatory obligation or requirement has the meaning given by section 2D;
revenue and pricing principles means the principles set out in section 7A;
Tribunal means the Australian Competition Tribunal referred to in the Trade Practices Act 1974 of the Commonwealth and includes a member of the Tribunal or a Division of the Tribunal performing functions of the Tribunal;
Sections 2B, 2C and 2D of the NEL provide:
2B—Meaning of direct control network service
A direct control network service is an electricity network service—
(a)the Rules specify as a service the price for which, or the revenue to be earned from which, must be regulated under a distribution determination or transmission determination; or
(b)if the Rules do not do so, the AER specifies, in a distribution determination or transmission determination, as a service the price for which, or the revenue to be earned from which, must be regulated under the distribution determination or transmission determination.
2C—Meaning of negotiated network service
A negotiated network service is an electricity network service—
(a)that is not a direct control network service; and
(b)that—
(i)the Rules specify as a negotiated network service; or
(ii)if the Rules do not do so, the AER specifies as a negotiated network service in a distribution determination or transmission determination.
2D—Meaning of regulatory obligation or requirement
(1)A regulatory obligation or requirement is—
(a)in relation to the provision of an electricity network service by a regulated network service provider—
(i)a distribution system safety duty or transmission system safety duty; or
(ii)a distribution reliability standard or transmission reliability standard; or
(iii)a distribution service standard or transmission service standard; or
(b)an obligation or requirement under—
(i)this Law or Rules; or
(ii)an Act of a participating jurisdiction, or any instrument made or issued under or for the purposes of that Act, that levies or imposes a tax or other levy that is payable by a regulated network service provider; or
(iii)an Act of a participating jurisdiction, or any instrument made or issued under or for the purposes of that Act, that regulates the use of land in a participating jurisdiction by a regulated network service provider; or
(iv)an Act of a participating jurisdiction or any instrument made or issued under or for the purposes of that Act that relates to the protection of the environment; or
(v)an Act of a participating jurisdiction, or any instrument made or issued under or for the purposes of that Act (other than national electricity legislation or an Act of a participating jurisdiction or an Act or instrument referred to in subparagraphs (ii) to (iv)), that materially affects the provision, by a regulated network service provider, of electricity network services that are the subject of a distribution determination or transmission determination.
(2)A regulatory obligation or requirement does not include an obligation or requirement to pay a fine, penalty or compensation—
(a) for a breach of—
(i)a distribution system safety duty or transmission system safety duty; or
(ii)a distribution reliability standard or transmission reliability standard; or
(iii)a distribution service standard or transmission service standard; or
(b)under this Law or the Rules or an Act or an instrument referred to in subsection (1)(b)(ii) to (v).
Note—
See also section 7A(2)(b).Section 3 of the NEL provides:
3—Interpretation generally
Schedule 2 to this Law applies to this Law, the Regulations and the Rules and any other statutory instrument made under this Law.
Section 5 of the NEL specifies the means by which a jurisdiction may become a participating jurisdiction. It is common ground amongst all parties to the present review that Victoria is a participating jurisdiction.
Sections 7, 7A and 8, which are important provisions for present purposes, are in the following terms:
7—National electricity objective
The objective of this Law is to promote efficient investment in, and efficient operation and use of, electricity services for the long term interests of consumers of electricity with respect to—
(a)price, quality, safety, reliability and security of supply of electricity; and
(b)the reliability, safety and security of the national electricity system.
7A—Revenue and pricing principles
(1)The revenue and pricing principles are the principles set out in subsections (2) to (7).
(2)A regulated network service provider should be provided with a reasonable opportunity to recover at least the efficient costs the operator incurs in—
(a)providing direct control network services; and
(b)complying with a regulatory obligation or requirement or making a regulatory payment.
(3)A regulated network service provider should be provided with effective incentives in order to promote economic efficiency with respect to direct control network services the operator provides. The economic efficiency that should be promoted includes—
(a)efficient investment in a distribution system or transmission system with which the operator provides direct control network services; and
(b)the efficient provision of electricity network services; and
(c)the efficient use of the distribution system or transmission system with which the operator provides direct control network services.
(4)Regard should be had to the regulatory asset base with respect to a distribution system or transmission system adopted—
(a)in any previous—
(i)as the case requires, distribution determination or transmission determination; or
(ii)determination or decision under the National Electricity Code or jurisdictional electricity legislation regulating the revenue earned, or prices charged, by a person providing services by means of that distribution system or transmission system; or
(b)in the Rules.
(5)A price or charge for the provision of a direct control network service should allow for a return commensurate with the regulatory and commercial risks involved in providing the direct control network service to which that price or charge relates.
(6)Regard should be had to the economic costs and risks of the potential for under and over investment by a regulated network service provider in, as the case requires, a distribution system or transmission system with which the operator provides direct control network services.
(7)Regard should be had to the economic costs and risks of the potential for under and over utilisation of a distribution system or transmission system with which a regulated network service provider provides direct control network services.
8—MCE statements of policy principles
(1)Subject to this section, the MCE may issue a statement of policy principles in relation to any matters that are relevant to the exercise and performance by the AEMC of its functions and powers in—
(a)making a Rule; or
(b)conducting a review under section 45.
(2)Before issuing a statement of policy principles, the MCE must be satisfied that the statement is consistent with the national electricity objective.
(3)As soon as practicable after issuing a statement of policy principles, the MCE must give a copy of the statement to the AEMC.
(4)The AEMC must publish the statement in the South Australian Government Gazette and on its website as soon as practicable after it is given a copy of the statement.
The national electricity objective (NEO) and the revenue and pricing principles (RPP) are matters of significance in the interpretation and application of the NEL and the NER. A number of the definitions extracted at [28] above feed into the descriptions of these two concepts found in s 7 and s 7A.
The NER have the force of law in Victoria (s 9 of the NEL).
Section 11(2) of the NEL relevantly provides that a person must not engage in the activity of owning, controlling or operating, in Victoria, a distribution system that forms part of the interconnected national electricity system unless the person is a registered participant in relation to that activity or is exempt from the requirement of being so registered. Each of the DNSPs is a registered participant in relation to the distribution of electricity services in Victoria.
Section 14B of the NEL provides that a regulated distribution system operator (as defined in s 2) must comply with a distribution determination (as defined in s 2) that applies to the electricity network services (as defined in s 2) provided by that operator.
Under the NEL, the AER has the functions and powers set out in s 15 of the NEL. That section provides:
15—Functions and powers of AER
(1)The AER has the following functions and powers—
(a)to monitor compliance by—
(i)Registered participants and other persons with this Law, the Regulations and the Rules; and
(ii)regulated network service providers with network revenue or pricing determinations; and
(iii)AEMO with this Law, the Rules, the Regulations or a transmission determination; and
(b)to investigate breaches or possible breaches of provisions of this Law, the Regulations or the Rules, including offences against this Law; and
(c)to institute and conduct proceedings—
(i)against relevant participants under section 61 of this Law or section 44AAG of the Trade Practices Act 1974 of the Commonwealth; or
(ii)in respect of Registered participants under section 63 of this Law; or
(iii)against persons under section 68 of this Law; or
(iv)in relation to offences against this Law; and
(d)to institute and conduct appeals from decisions in proceedings referred to in paragraph (c); and
(e)to exempt persons proposing to engage, or engaged, in the activity of owning, controlling or operating a transmission system or distribution system forming part of the interconnected transmission and distribution system from being registered as Registered participants; and
(ea)to prepare and publish reports on the financial and operational performance of network service providers in providing electricity network services; and
(eb)to approve compliance programs of service providers relating to compliance by service providers with this Law or the Rules; and
(f)AER economic regulatory functions or powers; and
(g)any other functions and powers conferred on it under this Law and the Rules.
(2)The AER has the power to do all things necessary or convenient to be done for or in connection with the performance of its functions.
(3)However, the AER—
(a)cannot make a transmission determination—
(i)regulating the revenue AEMO earns or may earn; or
(ii)regulating the price of electricity network services provided by AEMO unless the services are shared transmission services provided by means of, or in connection with, a declared shared network; and
(b)cannot regulate by transmission determination or in any other way the price of any other service provided by AEMO, or the amount of any other charge made by AEMO.
The final decision was an AER economic regulatory decision (as defined in s 2) arrived at as the result of the AER exercising AER economic regulatory functions or powers (as defined in s 2).
Section 16 of the NEL prescribes the manner in which the AER is to perform the AER economic regulatory functions or powers. That section is in the following terms:
16—Manner in which AER performs AER economic regulatory functions or powers
(1)The AER must, in performing or exercising an AER economic regulatory function or power—
(a)perform or exercise that function or power in a manner that will or is likely to contribute to the achievement of the national electricity objective; and
(b)if the function or power performed or exercised by the AER relates to the making of a distribution determination or transmission determination, ensure that the regulated network service provider to whom the determination will apply, any affected Registered participant and, if AEMO is affected by the determination, AEMO, are, in accordance with the Rules—
(i)informed of material issues under consideration by the AER; and
(ii)given a reasonable opportunity to make submissions in respect of that determination before it is made.
(2)In addition, the AER—
(a)must take into account the revenue and pricing principles—
(i)when exercising a discretion in making those parts of a distribution determination or transmission determination relating to direct control network services; or
(ii)when making an access determination relating to a rate or charge for an electricity network service; and
(b)may take into account the revenue and pricing principles when performing or exercising any other AER economic function or power, if the AER considers it appropriate to do so.
(3)For the purposes of subsection (2)(a)(ii), a reference to a “direct control network service” in the revenue and pricing principles must be read as a reference to an “electricity network service”.
(4)In this section—
affected Registered participant means a Registered participant (other than the regulated network service provider to whom the distribution determination or transmission determination will apply) whose interests are affected by the distribution determination or transmission determination.
The confidentiality provisions embodied in s 44AAF of the Competition and Consumer Act 2010 (Cth) (the Competition Act) are applied specifically for the purposes of the NEL, the NERegs and the NER “… as if it formed part of [the NEL]” (see s 18 of the NEL).
Section 28D of the NEL provides:
28D—Meaning of regulatory information notice
A regulatory information notice is a notice prepared and served by the AER in accordance with this Division that requires the regulated network service provider, or a related provider, named in the notice to do either or both of the following:
(a)provide to the AER the information specified in the notice;
(b)prepare, maintain or keep information specified in the notice in a manner and form specified in the notice.
Section 28ZC of the NEL provides as follows:
28ZC—Consideration by the AER of submissions made to it under this Law
If, under this Law or the Rules, the AER publishes a notice inviting submissions in relation to the making of an AER economic regulatory decision, the AER, in making the decision—
(a)must consider every submission it receives within the period specified in the notice; and
(b)may, but need not, consider a submission it receives after the period specified in the notice expires.
Part 4, Div 1 of the NEL contains various provisions governing the functions, powers and operations of the Australian Energy Market Commission (AEMC).
Part 6 deals with proceedings under the NEL.
Part 6, Div 3A contains provisions dealing with merits review of relevant decisions. The Tribunal has power to do all things necessary or convenient to be done for or in connection with the performance of its functions under Pt 6, Div 3A (s 57B of the NEL).
Sections 71B, 71C, 71M, 71N, 71O, 71P and 71R are in the following terms:
71B—Applications for review
(1)An affected or interested person or body, with the leave of the Tribunal, may apply to the Tribunal for a review of a reviewable regulatory decision.
(2)An application must—
(a)be made in the form and manner determined by the Tribunal; and
(b)specify the grounds for review being relied on.
71C—Grounds for review
(1)An application under section 71B(1) may be made only on 1 or more of the following grounds:
(a)the AER made an error of fact in its findings of facts, and that error of fact was material to the making of the decision;
(b)the AER made more than 1 error of fact in its findings of facts, and that those errors of fact, in combination, were material to the making of the decision;
(c)the exercise of the AER’s discretion was incorrect, having regard to all the circumstances;
(d)the AER’s decision was unreasonable, having regard to all the circumstances.
(2)It is for the applicant to establish a ground listed in subsection (1).
…
71M—Interveners may raise new grounds for review
(1)An intervener may raise in a review under this Subdivision any of the grounds specified in section 71C even if the ground that is raised by the intervener is not raised by the applicant.
(2)To avoid doubt, it is for the intervener to establish the ground referred to in subsection (1).
71N—Parties to a review under this Subdivision
The parties to a review under this Subdivision are—
(a)the applicant; and
(b)AER; and
(c)an intervener.
71O—Matters that parties to a review may and may not raise in a review
(1) The AER, in a review under this Subdivision, may raise—
(a)a matter not raised by the applicant or an intervener that relates to a ground for review, or a matter raised in support of a ground for review, raised by the applicant or an intervener;
(b)a possible outcome or effect on the reviewable regulatory decision being reviewed that the AER considers may occur as a consequence of the Tribunal making a determination setting aside or varying the reviewable regulatory decision.
(2)A party (other than the AER) to a review under this Subdivision may not raise any matter that was not raised in submissions to the AER before the reviewable regulatory decision was made.
71P—Tribunal must make determination
(1)If, following an application, the Tribunal grants leave in accordance with section 71B(1), the Tribunal must make a determination in respect of the application.
Note—
See section 71Q for the time limit within which the Tribunal must make its determination.
(2)A determination under this section may—
(a)affirm, set aside or vary the reviewable regulatory decision;
(b)remit the matter back to the AER to make the decision again, in accordance with any direction or recommendation of the Tribunal.
(3)For the purposes of making a determination of the kind in subsection (2)(a), the Tribunal may perform all the functions and exercise all the powers of the AER under this Law or the Rules.
(4)In deciding whether to remit a matter back to the AER to make the decision again, the Tribunal must have regard to the nature and relative complexities of—
(a)the reviewable regulatory decision; and
(b)the matter the subject of the review.
(5)A determination by the Tribunal affirming, setting aside or varying the reviewable regulatory decision is, for the purposes of this Law (other than this Part), to be taken to be a decision of the AER.
…
71R—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 have regard to any document—
(a)prepared, and used, by the AER for the purpose of making the reviewable regulatory decision; and
(b)that the AER has made publicly available.
(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 the AER when it was making the reviewable regulatory decision.
(4)Subject to this Law, for the purpose of subsection (3)(b), information or material not provided to the AER following a request for that information or material by it under this Law or the Rules is to be taken to have been unreasonably withheld.
(5)Subsection (5) does not limit what may constitute an unreasonable withholding of information or material.
(6)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 a network revenue or pricing determination—any document, proposal or information required or allowed under the Rules to be submitted as part of the process for the making of the determination; and
(d)any written submissions made to the AER before the reviewable regulatory decision was made; and
(e)any reports and materials relied on by the AER in making the reviewable regulatory decision; and
(f)any draft of the reviewable regulatory decision; and
(g)any submissions on the draft of the reviewable regulatory decision or the reviewable regulatory decision itself considered by the AER; and
(h)the transcript (if any) of any hearing conducted by the AER for the purpose of making the reviewable regulatory decision.
For the purposes of those provisions, a reviewable regulatory decision is defined to mean:
(a)a network revenue or pricing determination that sets a regulatory period; or
(b)any other determination (including a distribution determination or transmission determination) or decision of the AER under the Rules that is prescribed by the Regulations to be a reviewable regulatory decision,
but does not include a decision of the AER made under Pt 3, Div 6.
Part 3, Div 6 deals with the disclosure of confidential information provided to the AER.
The meaning of the phrase “unreasonable having regard to all the circumstances”, as it appears in s 71C(1)(d) was considered by the Tribunal (Middleton J, Deputy President, Mr R Davey and Mr RF Shogren) in Application by EnergyAustralia and Ors (2009) ATPR 42-299. After referring to and citing passages from the Full Court decision in Australian Competition and Consumer Commission v Australian Competition Tribunal (2006) 152 FCR 33, at [63]–[67], the Tribunal said:
63The Tribunal considers it clear that the scope of the separate ground of review of ‘unreasonableness’ set out in the NEL goes somewhat beyond the so called Wednesbury unreasonableness ground. To a certain extent, there is an overlap between the exercise of a discretion which is ‘incorrect’, and a decision which is unreasonable having regard to all the circumstances. If the reasons for a decision contain an element arbitrariness, in the sense of an unexplained discretionary choice made in reaching a conclusion, then it may readily be concluded that the decision itself is unreasonable, and that the exercise of discretion miscarried or was in error.
64If a decision is not determined by reference to the applicable criteria in the NEL and the Rules, then it will readily lead to a conclusion that the exercise of any discretion in reaching the decision was incorrect, and the decision was unreasonable in all the circumstances.
65In considering whether the Applicants have established any ground of review, s 71R limits the matters which the Tribunal may consider on its review to ‘review related matter’ as defined in s 71R(6). It is only if a ground of review is made out that the Tribunal may allow new information or material to be submitted, and then only if it would assist on any aspect of the determination to be made and was not earlier unreasonably withheld from the AER: see s 71R(3). Also, s 71O(2) prevents a party to a review, other than the AER, from raising any matter that was not raised in submissions to the AER before the reviewable regulatory decision was made.
66Therefore, the Tribunal’s review is not at large, but is a review of the AER’s decision on the factual and legal grounds available, but only on the material provided to or before the AER. Nevertheless, the Tribunal must consider the merits of whether the material provided to or before the AER leads to a finding or findings of material fact different from those made by the AER, or that it exercised its discretion incorrectly, or that its decision in all the circumstances was unreasonable.
67Once the Tribunal is satisfied that a ground of review is established, the Tribunal must consider the various options available under the NEL. One option is to remit the matter to the AER. The Tribunal has already indicated its approach to the appropriateness or otherwise of remitting the matter to the AER: see Application by EnergyAustralia (2009) ACompT 7 at [30-38].
We agree with the observations extracted at [49] above. We would wish to add that, in our view, the ground of review provided for in s 71C(1)(d) captures the notion of want of reason. That ground is not a mandate for the substitution of the Tribunal’s preferred view. The review applicant must establish more than that.
In the same case, the Tribunal observed that the grounds of review specified in s 71C(1)(c) and s 71C(1)(d) were separate grounds of review. We also agree with that observation.
In a later decision (Application by ActewAGL Distribution (2010) ATPR 42-324), the Tribunal (Finkelstein J, President, Mr RF Shogren and Dr JS Marsden), considered a statutory provision (s 245 of the National Gas Law) which is in the same terms as s 71C of the NEL. At [30]–[35], the Tribunal explained all of the relevant concepts in the following way:
30During the hearing, there was some discussion about the nature of the review. The grounds seem simple enough: error of fact, incorrect exercise of discretion and unreasonableness. In reality, however, these concepts are not straightforward.
31Take the meaning of “fact”. A glance at a dictionary shows its meaning to be something which is capable of being experienced or perceived and hence known to be true. On this basis a “fact” is something that actually exists independently of its acknowledgement in the mind of the perceiver.
32In Australian Competition & Consumer Commission v Australian Competition Tribunal (2006) 152 FCR 33, 73-74 the Full Court gave the word “fact” a much wider meaning. It decided that, in a provision such as s 39 of the Gas Pipelines Access (South Australia) Act 1997 (SA), which is in the same terms as s 246 of the Law, “facts” include: (1) historical facts; (2) present facts; and (3) an opinion about the existence of a future fact or circumstance (if necessary, we would add a fourth category, namely negative facts). As regards meaning (3), the Tribunal relied upon the decision of McInerney J in Morley v National Insurance Co [1967] VR 566, 567 where the question was what constitutes a “fact” for the purpose of s 55 of the Evidence Act 1958 (Vic), which made admissible certain documents containing statements by deceased persons intending to establish facts about which they had personal knowledge. McInerney J said that “fact” should be given an expanded meaning. He said the word “fact” should include a statement of opinion by an expert.
33This is a radical meaning to be given to the word “fact”. The generally accepted view is that an opinion is an inference which is drawn from facts. Yet, as Wigmore famously pointed out, there are many instances where it is difficult (if not impossible) to distinguish between “fact” and “opinion”. Take the statement: “He was driving on the left hand side of the road”. Ordinarily this would be regarded as a statement of “fact”. On the other hand a statement that: “He was driving carelessly” would usually be regarded as an expression of an opinion. The difference between the two statements, however, is between a more concrete and specific form of descriptive statement and a less specific and concrete form.
34Describing the meaning of a discretionary decision is also a difficult matter. The description “discretionary” is often applied to several types of decision making processes. It is most commonly applied to decision making which involves essentially a weighing up of relevant facts. First the decision maker finds the facts. Then the decision maker undertakes a weighing up process which involves taking into account considerations that are found to be relevant, assessing the weight to be given to those considerations so assessed and determining what, as a result of that process, is the right result. Another approach is found in Norbis v Norbis (1985-1986) 161 CLR 513, 518. There Mason and Deane JJ described a discretionary decision as one which involves an assessment that calls for “value judgments in respect of which there is room for reasonable differences of opinion, no particular opinion being uniquely right.”
35A test for what is an unreasonable decision in the context of limited merits review has been considered, albeit briefly, by the High Court. In East Australian Pipeline Pty Ltd v Australian Competition and Consumer Commission (2007) 233 CLR 229, [80], Gummow and Hayne JJ said that unreasonableness in legislation such as s 246 of the Law is not intended to include the concept of unreasonableness as applied in judicial review proceedings: ie what is often referred to as “Wednesbury unreasonableness”. It is, we think, neither possible nor necessary to give an exhaustive definition of what is an unreasonable decision. At one extreme a decision that is arbitrary or capricious will plainly be unreasonable. At the other extreme, it will not be sufficient merely to reach a different decision to the first instance decision maker; in many areas reasonable persons can perfectly reasonably come to opposite conclusions. But, as the High Court indicated in East Australian Pipeline (at [80]) the term unreasonable “provides the basis for inferring the presence of one or more of the well established grounds which render a decision ‘incorrect’”. In other words, if the decision maker fails to call to attention matters he/she is bound to consider or considers matters which are irrelevant, he/she will be acting unreasonably. Reference might also be made in this connection to the Tribunal’s comments on unreasonableness in Application by EnergyAustralia [2009] ACompT 8 at [63]-[64].
In the present review applications, we are content to adopt the approach to the statutory grounds of review recorded at [30]–[35] in Application by ActewAGL Distribution.
In respect of a number of matters, the AER submitted that those matters may not be raised before the Tribunal because they were not raised in submissions to the AER before the final decision was made (s 71O(2) of the NEL). The AER also submitted that the review applicants have generally failed to meet the requirements of s 71C. Finally, the AER submitted that some of the material now sought to be relied upon by the DNSPs and the interveners is not review related matter within the definition of that expression in s 71R(6) and should not be permitted to be relied upon. For these reasons, the Tribunal will need to consider the impact of ss 71B, 71C, 71M, 71N, 71O, 71P and 71R in respect of a number of the issues to be determined in the present review applications.
We note that in addition to the above costs of complying with the 2010 Regulations, the following costs above 2009 actual costs will apply during the period January 2011 to end December 2015 in respect of PAL/CP’s program of achieving compliance with the clearance space requirements in low bushfire risk areas.
# Nature of Activity Cost for Powercor Network Cost for CitiPower Network 1 Costs of achieving compliance with clearance space requirements in low bushfire risk areas (LBRA). $3,250k $450k
CitiPower and Powercor carried forward the estimates given to them by VEMCO into their revised regulatory proposals.
To facilitate a review by ESV (at the request of the AER) of the volume and number of spans to be actioned in 2011–2015 regulatory control period as a result of the changes effected by the 2010 clearance regulations, the AER and ESV requested further and more detailed information from the DNSPs regarding the volume or number of spans to be actioned by them under the 2010 clearance regulations. In response to that request, CitiPower and Powercor obtained and provided to the AER a statement dated 30 August 2010 made by Mr Joyce, the Managing Director of VEMCO.
CitiPower and Powercor placed great reliance before the Tribunal on this statement. The statement is slightly more than 40 pages in length and comprises 226 paragraphs. Mr Joyce is familiar with the networks of both CitiPower and Powercor and described those networks in some detail. He also made clear in his statement that much of the work of clearing would be done by subcontractors retained by VEMCO. The essence of the material conveyed by Mr Joyce is contained in pars 32–39 of his statement which are in the following terms:
Vegetation management costs
32 Vegetation management costs for any given work program are generally a product of the number of spans to be actioned in that work program and the unit rate (per span), or average cost per span, for actioning those spans.
33In costing the changes as between the 2005 Regulations and Code and the 2010 Regulations and Code, I assumed that the various work programs required to address compliance with those changes would be implemented as part of the cyclic inspection and clearance programs that will be carried out by Powercor and CitiPower under the 2010 Code.
34The nature of the work required to be carried out on a span and therefore the volume of work activity per span may differ between work programs, with the result that different unit rates are used in costing different work programs. In this case, the nature of the change between the 2005 Regulations and Code and the 2010 Regulations and Code will affect the nature and volume of the work per span required to address that change. As a result, the unit rates per span vary across the different changes between the 2005 Regulations and Code and the 2010 Regulations and Code.
35VEMCO determines the unit rates per span for any given work program based on a number of factors, including:
(a)the cutting workload per span associated with the work program including in particular:
(i)the number of trees to be actioned per span in the work program; and
(ii)the targeted clearance distances and the resultant aggressiveness of the cutting required in the work program;
(b)the inspection of spans required as part of the work program (as it is common to recover the costs of these inspections through the unit rate per span applied to the number of spans to be actioned in the work program);
(c)the historical costs of that cutting workload per span and those inspections;
(d)the expected future number of spans to be actioned in the work program to which the unit rate applies and in other work programs or activities (as this will determine the demand over which common costs, such as the costs of travel to and from the site and management costs, may be spread/recovered and, thus, the amount of these costs reflected in the unit rate for the work program);
(e)the costs of travel to and from the site;
(f)site access costs;
(g)traffic control costs;
(h)clean up requirements for the work program and the resultant clean up costs;
(i)weather impacts (for example, rain and total fire bans);
(j)the notification and consultation costs expected to be associated with the work program;
(k)customer requirements expected to be associated with the work program and the resultant costs of complying with those requirements;
(l)the composition of the crew(s) required for the work program – including the type of crew expertise required to undertake the work and the cost of that crew make up per hour;
(m)enterprise bargaining agreements;
(n)machinery capital and running costs;
(o)the productivity of crews;
(p)the management costs associated with the work program; and
(q)the costs of any auditing required as part of the work program.
36These factors differ for the different changes between the 2005 Code and the 2010 Code and as between LBRA and HBRA and the CitiPower and Powercor networks. This is because the work per span required to be undertaken differs depending on the relevant change, whether the cutting or removal of the trees required by that change is in LBRA or HBRA and whether the cutting or removal required by that change is in the CitiPower or Powercor network. As a result, in costing the impact of the changes between the 2005 Code and the 2010 Code for CitiPower and Powercor I used different unit rates for different changes.
37With the exception only of the estimation of the incremental costs due to the removal of the exemption from compliance with the requirements of the 2005 Code in HBRA granted to Powercor by ESV on 21 December 2005 (HBRA Exemption), in estimating the incremental cost of any given change as between the 2005 Regulations and Code and the 2010 Regulations and Code I estimated the number of spans that will require vegetation management activities in order to comply with that change. In some cases, the spans would have still required action in the absence of the change (i.e., in order to comply with the 2005 Regulations and Code), but the change under the 2010 Regulations and Code necessitates that additional work be carried out in actioning the spans. The unit rate I applied to the estimated number of spans requiring vegetation management activities as a result of the change reflects only the cost per span of those additional work activities necessitated by the change. This ensured that only the cost of the additional work activities necessitated by the change between the 2005 Regulations and Code and the 2010 Regulations and Code are costed.
38In estimating the incremental costs due to the removal of the HBRA Exemption, the method I adopted differs from that described in the preceding paragraph but it nonetheless ensures that I isolated the incremental cost due to the removal of the HBRA Exemption. This method is described in detail below.
39I describe in detail below the impact of the key changes for Powercor and CitiPower identified in paragraphs 10 and 14 above and my methodology for calculating the incremental costs of those key changes.
At par 77 of his statement, Mr Joyce set out various unit costs which he had used in formulating his cost estimate conveyed to CitiPower and Powercor by his letter dated 13 July 2010. He did not, however, explain in par 77 (or anywhere else in his statement) precisely how he had derived those unit rates. At par 79 of his statement, he provided a summary of the total cost position in which he compared the costs of clearing in accordance with the 2010 clearance regulations and the costs of doing so without the impact of those regulations. He also made some general remarks concerning the frequency with which inspections will be required in the future.
In oral submissions made to the Tribunal, Senior Counsel for CitiPower and Powercor spent some considerable time going through the statement made by Mr Joyce in an endeavour to persuade the Tribunal that the statement was very detailed and provided all the reasonable information that the AER could have required in order to accept the step change amounts included in the revised regulatory proposal of CitiPower and Powercor.
In the final decision, the AER did not accept the step change amounts proposed by CitiPower and Powercor. It concluded that:
(a)The unit rates estimated by Mr Joyce of VEMCO and proposed by CitiPower and Powercor did not reasonably reflect the efficient and prudent unit rates of complying with the relevant changes effected by the 2010 clearance regulations; and
(b)The efficient and prudent step change amounts for CitiPower and Powercor were those estimated by applying unit rates based on those proposed by other DNSPs to the volumes estimated by VEMCO and proposed by CityPower and Powercor.
The AER had asked the ESV to carry out an assessment of the volume of work proposed by VEMCO. The ESV reported to the AER that the volume of work proposed by VEMCO as a result of the changes effected by the 2010 clearance regulations was reasonable.
The AER, therefore, ultimately reached its conclusion on the basis that it was not satisfied with the unit rates which VEMCO had proposed to CitiPower and Powercor. Its dissatisfaction on this point was based upon the findings of Nuttall Consulting. Nuttall Consulting had been retained by the AER to evaluate those rates.
CitiPower and Powercor contend that the evaluation conducted by Nuttall Consulting was defective because it placed too much emphasis on common features across all networks and, in particular, on unit costs on an average basis undertaken by other networks without paying due regard to the idiosyncrasies of the CitiPower (and, in particular) the Powercor networks.
Nuttall Consulting took the approach which it did because it came to the view that:
(a)CitiPower and Powercor had not provided sufficient information to support their cost estimates;
(b)The supporting information provided by, and unit rates of, the other DNSPs were highly consistent (although inconsistent with those supplied by CitiPower and Powercor);
(c)The VEMCO unit rates underpinning CitiPower’s and Powercor’s step change amounts were considerably higher than the unit rates proposed by the other DNSPs; and
(d)Nuttall Consulting could not deduce any legitimate reasons for these differences.
For these reasons, the AER substituted its own estimates for the step change amounts propounded by CitiPower and Powercor.
The errors to which CitiPower and Powercor point are the following:
(a)The AER failed to afford to each of CitiPower and Powercor procedural fairness in the regulatory process;
(b)The AER erred in concluding that CitiPower and Powercor had not provided sufficient detail and sufficient information to support their proposed step change amounts;
(c)The AER placed undue weight on the findings of Nuttall Consulting and insufficient weight on the material provided by Mr Joyce;
(d)The AER failed to take due account of the fact that the other DNSPs were all serviced by one clearance contractor whereas CitiPower and Powercor were serviced by the only other available clearance contractor; and
(e)The AER placed far too much weight on the unit rates propounded by the other DNSPs.
CitiPower and Powercor devoted a great deal of time and effort, both in their written and oral submissions, in attempting to make good the errors which we have summarised at [651] above. Accompanying those submissions were various schedules which Senior Counsel deployed in aid of his oral submissions.
In very broad terms, those schedules were designed to demonstrate the following:
(a)In relation to HBRA, compared with all of the other DNSPs, Powercor’s less frequent cutting involves more aggressive cutting, which is more costly per span cut than more frequent light cutting. This illustrates the need for the AER, when comparing unit rates of one DNSP with one or more of the other DNSPs, to be careful to ensure that appropriate consideration is given to the differences between the networks and the work programs in place for achieving the clearance requirements according to the relevant regulations.
(b)Insofar as the insulated service line changes were concerned, it is apparent that there were vast differences in the frequency of cutting in SP AusNet’s network compared with Powercor’s network. Nuttall Consulting had placed considerable weight on SP AusNet’s rates. In addition, there were substantial differences between the inclusions in the rate as between CitiPower and UED/JEN. The costliest lines, for example, were not in the unit rate because aspects of the costs were dealt with as capital (rather than opex). Furthermore, the AER did not make allowance for inspection costs in applying the unit rates of other DNSPs.
(c)In respect of the low bushfire risk area (LBRA) spans exceeding 100 metres, Powercor submitted that the vegetation characteristics of those spans as between the networks were vastly different. The use of other DNSPs’ unit rates in respect of those items did not provide a proper comparison.
The procedural fairness complaint is a simple one: CitiPower and Powercor complain that the AER should have told them that it was contemplating evaluating the efficiency and prudence of unit rates calculated by VEMCO by comparing them with unit rates put forward by other DNSPs. It did not do this. Second, it should have provided to CitiPower and Powercor the unit rates which it had in mind benchmarking so that CitiPower and Powercor could comment on those rates. It did not do that. Third, the denial to CitiPower and Powercor of the opportunity to comment on the rates propounded by the other DNSPs produced a serious injustice because Nuttall Consulting and the AER placed far too much store in the utility of using the other DNSPs’ rates as a comparator.
The AER’s Submissions
In its draft decision, the AER expressed dissatisfaction with the forecast opex provided by each of the DNSPs. It also made reference to step changes. Appendix 1 to the AER’s draft decision described the AER’s approach to benchmarking. In that Appendix, the AER said that, with assistance from its consultants, it had undertaken trend analysis, bottom up benchmarking, ratio analysis and reviews of policies and procedures to compare the efficiency of the opex and capex forecasts proposed by the DNSPs.
In Appendix L to its draft decision, the AER set out its analysis of the DNSPs proposed step changes. The AER foreshadowed an expectation on its part that more precise forecasts in respect of the step changes likely to be required as a response to the 2010 clearance regulations would be known by the time the revised regulatory proposals were submitted to it.
After publishing its draft decision, the AER looked carefully at Annexure MJ-7 to Mr Joyce’s statement and the calculations contained in the spreadsheet forming part of that Annexure. The spreadsheet only contained calculations in relation to the removal of the HBRA exemption. It did not contain calculations in respect of any other proposed step changes as a result of the 2010 clearance regulations coming into force. The unit rates shown in the spreadsheet were final numbers without any breakdown or detailed information about how they had been derived. That shortcoming was not ameliorated by the text of the statement.
Nuttall Consulting benchmarked CitiPower’s and Powercor’s step change amounts and formed the view that they were excessive. The AER said in the final decision that it had assessed the step changes solely against the opex criteria and the opex factors according to cl 6.5.6 of the NER in a manner which was consistent with the NEO and which took into account the RPP. It explained its reasoning processes in Appendix H and Appendix L to the final decision.
The AER submitted that its decision was perfectly justifiable given the shortcomings in the information provided by CitiPower and Powercor.
Decision
Despite the volume of words and the many pages devoted to the exercise, the information provided by CitiPower and Powercor via Mr Joyce’s cost estimates and statement was at a general and “high level”. A close examination of that information reveals that very little information about the build up of the unit rates relied upon by Mr Joyce was provided by CitiPower or Powercor or Mr Joyce. Virtually no information about the rates to be charged to VEMCO by its subcontractors was provided to the AER. Furthermore, no comparison between the rates proposed in the revised regulatory proposals and those incurred by the CitiPower and Powercor businesses in the 2009 calendar year was undertaken. As the AER pointed out, answers to the following questions would, at a minimum, have assisted the AER to accept the step change amounts proposed. These questions are:
·How many workers are in each crew (both cutting and clean up)?
·What are their hourly contract rates?
·What amount of time has been allocated for those crews per span?
·How many workers are involved in inspections?
·What are their hourly contract rates?
·What amount of time has been allocated for those inspections per span?
·What resources are required for notification and consultation, data capture, subcontractor resource management, auditing and quality control?
·How is the unit rate of $182.00 per crew broken down into the components generally listed in Mr Joyce’s statement?
At par 35 of his statement, Mr Joyce lists a number of matters but does not relate those matters to the particular exigencies of the circumstances and network programs of each of CitiPower and Powercor. He made no effort at all to connect up the various matters listed in par 35 to the unit rates contained in his spreadsheet by, for example, breaking out those unit rates by reference to the various matters listed.
Furthermore, Mr Joyce was working on estimates. There was no evidence either before the AER or before the Tribunal, one way or the other, as to whether VEMCO had entered into a contract with either CitiPower or Powercor to do the work contemplated. There was, therefore, no firmness about the estimate beyond Mr Joyce’s assertion that the estimates were reasonable.
The AER was entitled to be suspicious of the quantum of the step change amounts claimed by each of CitiPower and Powercor given the shortcomings in the information provided and the significant increase over the 2009 base year. Furthermore, it was entitled to benchmark those rates against information provided by the other DNSPs.
In our view, CitiPower and Powercor had ample opportunity to provide greater assurance to the AER concerning the step change amounts which they had claimed. They must be taken to have understood that the AER would wish to look at the rates which underpinned those amounts carefully, would wish to benchmark them against the other DNSPs’ rates and would wish to cross-check them as against expenditure in prior periods.
For the reasons which we have explained at [660]–[664] above, we think that the AER was justified in not being satisfied with the information which had been provided to it by CitiPower and Powercor. The build-up of the unit rates relied upon by Mr Joyce in formulating his cost estimates should have been revealed to the AER so that a careful assessment of those estimates could have been undertaken by the AER and its consultants.
On the other hand, the assessment made by Nuttall Consulting failed to pay proper regard to the differences between Powercor’s network and those of the other DNSPs and failed to take proper account of the differences between the work programs which had been put in place by Powercor, in particular, and those which the other DNSPs proposed to undertake. After all, the work programs which Powercor had put in place had been assessed as reasonable by ESV, at the behest of the AER. ESV had concluded that the Powercor work programs constituted a reasonable response to the new regulatory environment created by the Victorian Government as a result of the Black Saturday bushfires.
The AER was justified in not being satisfied with the VEMCO costings. However, its assessment of the costs of Powercor’s work programs was unreasonable.
In those circumstances, we propose to remit this issue to the AER. We think that CitiPower and Powercor should be given a further opportunity to justify the VEMCO estimates and that the AER should then reconsider its decision on this issue in light of the information then available to it.
Given that there is to be a remitter of the final determinations of both CitiPower and Powercor, it is not necessary to consider the procedural fairness grounds raised by those corporations in relation to this issue.
There will be orders accordingly.
SUMMARY OF CONCLUSIONS
The conclusions to which we have come in these Reasons for Decision may be summarised as follows:
Issue 1—Public Lighting Issues
SGC failed to make out any of the grounds of review that were the subject of leave granted by the Tribunal to SGC pursuant to s 71B of the NEL.
The decisions made by the AER in respect of the public lighting issues are affirmed.
Issue 2—UED Opex and Internal and Related Party Costs
UED has failed to make out its ground of review concerning the AER’s assessment of a component of its forecase opex (viz its internal and related party costs) for the base year of the regulatory control period.
The decisions made by the AER in respect of that matter are confirmed.
Issue 3—Closeout of the ESCV’s “S” Factor Scheme
The AER erred by applying in the distribution determination for UED the methodology which it developed for closing out the ESCV “S” Factor Scheme because it did not have power to apply that methodology. The distribution determination in respect of UED must be remitted to the AER so that it can remake the distribution determination in respect of UED upon a basis which does not involve the application of its methodology for closing out the ESCV “S” Factor Scheme.
There will be liberty to apply to the AER and to each of the other DNSPs in respect of the consequences of this decision.
Issue 4—Establishment of the Regulatory Asset Base (Capitalised Related Party Margins)
The Minister failed to make out any of the grounds of review that were the subject of leave granted by the Tribunal to him pursuant to s 71B of the NER in respect of this issue.
The decisions made by the AER in respect of the Regulatory Asset Base (Capitalised Related Party Margins) issue are affirmed.
Issue 5—Establishing the Regulatory Asset Base as at 1 January 2016 (Depreciation)
The Minister failed to make out any of the grounds of review that were the subject of leave granted by the Tribunal to him pursuant to s 71B of the NER in respect of this issue.
The decisions made by the AER in respect of the Regulatory Asset Base (Depreciation) issue are affirmed.
Issue 6—Indexation of the Regulatory Asset Base for Inflation
The AER erred in its methodology for indexing the regulatory asset base for inflation by using as a starting point for the period in respect of which indexation is to occur the date “September 2003”. It should have used as a starting point for that exercise the date “1 July 2004” and also used, on that basis, the values of the regulatory asset base of each of the DNSPs specified in the table forming part of cl S6.2.1(c)(1) of the NER.
The distribution determination in respect of JEN must be remitted to the AER so that it can remake the distribution determination in respect of JEN upon a basis which conforms to the requirements of the NER (including the particular matters addressed in the immediately preceding paragraph).
There will be liberty to apply to the AER and to each of the other DNSPs in respect of the consequences of this decision.
Issue 7—Debt Risk Premium (Annualisation and Methodology)
The AER erred by having regard to the APT bond when determining JEN’s debt risk premium.
The distribution determination in respect of JEN will be varied by deleting the figure “3.70%” for the DRP in Table 14 of that distribution determination and substituting therefor the figure “4.34%”.
The AER also erred in annualising the DRP in all of the distribution determinations in the respects specified in par 11 and par 12 of Attachment “C” to these Reasons.
The remaining distribution determinations will be varied by:
(a) replacing the figure “3.74%” for the DRP in Table 13 of the distribution determination in respect of UED with the figure “3.89%”.
(b) replacing the figure “4.05%” for the DRP in Table 14 of the distribution determination in respect of SP AusNet with the figure of “4.22%”.
(c) replacing the figure of “3.74%” for the DRP in Table 14 of the distribution determination for each of CitiPower and Powercor with the figure of “3.89%”.
Each distribution determination is also otherwise to be varied as may be required in order to give effect to the variations in DRP values specified above, including, in particular, the resultant recalculation of the rate of return (or WACC), return on capital, annual revenue requirements and “X” factors for standard control services and the affected control mechanisms for alternative control services specified in each of those distribution determinations.
Issue 8—JEN Capital Expenditure (Broadmeadows Relocation Project)
The AER erred in its decision to substitute zero capital expenditure for 2011 for the Broadmeadows project in place of the direct costs amount proposed by JEN.
The distribution determination in respect of JEN is to be varied by including in the forecast capital allowance for JEN for the 2011–2015 regulatory control period an allowance in the amount confidentially agreed between the AER and JEN in respect of the Broadmeadows project.
Issue 9—Disallowance of Certain Enterprise Support Function Cost Centres (JEN)
The AER erred when it disallowed certain Enterprise Support Function Costs in the forecast opex for JEN for the 2011–2015 regulatory control period.
This distribution determination in respect of JEN will be varied so that the amounts claimed by JEN in its revised regulatory proposal in the enterprise support function costs centres described as:
(a) Energy Investment;
(b) Financial Strategy; and
(c) Investment Analysis
be allowed in accordance with these Reasons
Issue 10—Gamma
The AER erred when, in respect of the value of gamma, it determined a distribution rate of between 0.7 and 1 and a value of theta of 0.65.
The AER should have used the figure of 0.7 for the distribution rate and a value for theta of 0.35.
Each of the distribution determinations will be varied by replacing the figure “0.50” as the value for gamma with the figure “0.25” as the value for gamma when used as input in the calculation of the cost of corporate income tax.
Issue 11—Materiality Threshold for Nominated Pass Through Events (SP AusNet)
SP AusNet failed to make out any of the grounds of review that were the subject of leave granted by the Tribunal pursuant to s 71B of the NEL.
The decision made by the AER to fix a materiality threshold of 1% of the smoothed forecast of the revenue of the regulatory year in which the costs are incurred in respect of insurance pass through events is affirmed.
Issue 12—The Insurance Event Issue (SP AusNet)
See separate confidential Reasons for Decision (Application by SPI Electricity Pty Limited [2012] ACompT 2).
Issue 13—Efficiency CarryOver Mechanism (Vegetation Management Opex) (Powercor)
The AER erred by declining to make the ECM adjustments for 2008–2009 proposed by Powercor incurred in achieving compliance with the 2005 clearance regulations.
The distribution determination in respect of Powercor will be varied by:
(a) replacing the annual revenue requirements for 2011–2015 set out in Table 6 of that distribution determination with annual revenue requirements for 2011–2015 that have been recalculated by excluding therefrom (in addition to the 2001–2005 negative carryover arising under the ORG’s 2001–2005 ECM) the 2006–2010 efficiency carryover amounts under the ESCV’s 2006–2010 ECM.
That determination will also otherwise be varied as required to give effect to this variation, including, in particular, the resultant recalculation of the “X” factors for standard control services specified in that determination.
Issue 14—Victorian Bushfire Royal Commission Nominated Pass Through Event (CitiPower and Powercor)
CitiPower and Powercor have failed to make out any ground of review in respect of the decision made by the AER not to nominate an additional pass through event in respect of the consequences of recommendations made by the Victorian Bushfire Royal Commission.
The decision by the AER in this respect is affirmed.
Issue 15—2001–2005 Accrued Negative Carryover (Powercor)
The AER erred when it applied to Powercor’s annual revenue requirements for the 2011–2015 regulatory control period an accrued negative carryover from the 2001–2005 regulatory period. It did not have power to apply that carryover to the current regulatory control period.
The distribution determination in respect of Powercor will be varied by excluding from Powercor’s annual revenue requirements for the 2011–2015 regulatory control period the accrued negative efficiency carryover from the 2001–2005 regulatory period.
That determination will also otherwise be varied as required to give effect to this variation, including, in particular, the resultant recalculation of the “X” factors for standard control services specified in that determination.
Issue 16—Vegetation Management Opex Step Change (CitiPower and Powercor)
CitiPower and Powercor have established that, notwithstanding that the AER was justified in not being satisfied that the VEMCO cost estimates met the requirements of the NER in respect of this step change, the substitution of the costings prepared by Nuttall Consulting for those of VEMCO was an incorrect exercise of discretion and unreasonable in the circumstances.
The decision of the AER in respect of this matter will be remitted to the AER to be remade in accordance with the NEL, the NER and these Reasons for Decision.
I certify that the preceding six hundred and seventy-one (671) numbered paragraphs are a true copy of the Reasons for Decision herein of the Honourable Justice Foster (Deputy President), Mr G Latta AM and Professor D Round. Associate:
Dated: 6 January 2012
ATTACHMENT “A”
Victorian DNSPs’ Distribution Areas
ATTACHMENT “B”
ATTACHMENT “C”
ATTACHMENT “D”
ATTACHMENT “E”
ATTACHMENT “F”
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