Applications by Public Interest Advocacy Centre Ltd and Ausgrid
[2016] ACompT 1
•26 february 2016
AUSTRALIAN COMPETITION TRIBUNAL
IN THE MATTER OF APPLICATIONS BY PIAC, AUSGRID AND OTHERS
SUMMARY
Applications by Public Interest Advocacy Service Ltd and Ausgrid Distribution
[2016] ACompT 1Applications by Public Interest Advocacy Service Ltd and Endeavour Energy [2016]
ACompT 2Applications by Public Interest Advocacy Service Ltd and Essential Energy
[2016] ACompT 3Application by ActewAGL Distribution [2016] ACompT 4
This background to, and summary of, the reasons of the Tribunal (Mansfield J, Mr R C Davey and Dr D R Abraham) in determining these matters is not a complete statement of those reasons or its conclusions, nor does it comprise part of the reasons for the Tribunal’s determination. The only authoritative statement of the Tribunal’s reasons is that contained in the published Reasons for Determination available at
In brief
The Tribunal’s PIAC-Ausgrid determination is the ‘lead’ case in its consideration of the five matters listed below under the heading “Parties”.
While the Tribunal determined that it is in the long term interests of consumers of electricity and gas to set aside the AER’s decisions and have the AER make them again, the impact on the suppliers’ revenues, and hence the prices they may charge, will not be known until the AER remakes its decisions.
The Tribunal found in favour of the regulated suppliers on some issues and in favour of the AER on others. The most significant finding for the suppliers is that when the AER decides the suppliers’ operating expenses (opex) allowances again, it is to use a broader range of modelling and benchmarking against Australian businesses and include a “bottom up” review of their forecast opex. The suppliers’ challenges to the AER’s allowances for their returns on debt, the value it set for gamma and ActewAGL’s Service Target Performance Incentive Schemes allowance were also upheld.
The suppliers’ challenges to the AER’s decision on their returns on equity, Efficiency Benefit Sharing Schemes and metering issues raised by Ausgrid and Jemena were not upheld.
The Tribunal’s opex finding meant that it did not need to decide the suppliers’ challenges to the AER’s decisions on some interrelated matters (the X factor and some metering issues) but it has provided some guidance to the AER on how it may approach those matters when it comes to remake its decisions.
The parties
The hearing of PIAC and Ausgrid’s challenges also involved the Tribunal’s consideration applications by:
· the three NSW government owned regulated electricity suppliers: Ausgrid, Endeavour Energy and Essential Energy (Networks NSW) and by PIAC to review the AER’s April 2015 determination of Networks NSW’s revenues for 2014-19 (ACT Nos 1, 2 and 3);
· the regulated electricity supplier, ActewAGL Distribution, to review the AER’s April 2015 determination of its revenues for 2014-19 (ACT No 4); and
· the regulated gas supplier, Jemena Gas Networks (NSW) Limited (JGN), to review the AER’s June 2015 determination of its revenues for 2015-20 (ACT No 5).
The following companies, which opposed the AER’s methodology because it might be applied to them, intervened in the proceeding in support of the regulated suppliers: AusNet Services (Distribution) Pty Ltd, AusNet Services (Transmission) Ltd, Australian Gas Networks Ltd, Citipower Pty Ltd, Powercor Australia Ltd, SA Power Networks and United Energy Distribution Pty Ltd (Vic/SA Network Interveners) and the Queensland government owned Ergon Energy Corporation Ltd (Ergon).
The Commonwealth Minister for Energy and Science / Minister for Resources, Energy and Northern Australia also intervened. The Minister’s submissions were confined to the proper construction and application of the relevant legislation: the National Electricity Law (NEL), the National Gas Law (NGL) and associated Rules (the National Electricity Rules and the National Gas Rules). As these matters involved the first application by the AER (and, on review, by the Tribunal) of significant 2012 changes to the Rules and 2013 changes to the Laws, the Tribunal was most appreciative of the Minister’s submissions.
The Tribunal’s task
The challenges to the AER’s decisions raised complex legal and economic issues. The decisions, being made under new, untested legislation, meant that the AER’s task (and the Tribunal’s on review) of resolving those issues was more demanding than it might have otherwise been.
Consumer consultations and prices
Prior to hearing the applications the Tribunal engaged in two days of consultation with individual consumers and representatives of consumer and user groups. This consultation process was a ‘first’ for the Tribunal under the new legislation.
As PIAC was a party to the proceedings, it did not participate in the consumer consultations. However, by participating in the hearing, PIAC played a particularly helpful role by advancing the consumers’ and users’ perspective.
The consumer consultation process enabled the Tribunal to better understand and appreciate consumers’ and users’ concerns – price being the most significant. There was material showing the number of disconnections over time and consumers raised the issue of the less well-off in the community being either unable to afford access to the services at all, or at least to do so only at considerable personal cost.
It is, however, to be noted in that context that the national electricity / gas objectives (NEO / NGO) that speaks of efficiency in the long term interests of consumers, do not extend to broader social and environmental objectives better dealt with in other legislative instruments and policies which sit outside the NEL / NGL (see Legislative Council, South Australia, 16 October 2007, Hansard at p 886).
The issue of price was not only raised by consumers in a lower socio-economic context, but also by some smaller commercial enterprises, primary producers and others – all noted, and generally supported, the price reductions that the AER predicted should follow from its decisions. Those predictions will, however, have to be revisited once the AER has made its decisions again in accordance with the Tribunal’s determination.
The hearing
The available grounds for review are, briefly, that the AER made material error of facts, its exercise of discretion was incorrect or its decisions were unreasonable in all the circumstances.
The hearing involved what is known as a limited merits review – ‘limited’ because it is a review ‘on the papers’ in which the Tribunal is restricted in the material it may consider. The material that the Tribunal may consider is material which was before the AER when it made its decision (eg the suppliers’ proposals and their experts’ reports in support of those proposals), submissions made in the course of the Tribunal’s consumer consultations, the applications for review and written and oral submissions by the parties appearing before the Tribunal. Neither the AER nor the Tribunal has the benefit of the experts’ reports being tested by oral examination before them.
The hearing of oral submissions by those opposing the AER’s decisions and from the AER occupied three weeks. The review-related material which the parties drew on in making their submissions was said to extend to more than one million pages. Lengthy written submissions were presented to the Tribunal – on but one issue (the AER’s opex allowances) the parties’ written submissions were over 460 pages and their oral submissions occupied three and a half days filling over 250 pages of transcript.
The length of the Tribunal’s reasons (over 300 pages), and the time taken to release them, reflects the size of its task and that of the AER in reaching its decisions – just one of the AER’s five decisions under challenge (the Ausgrid decision) comprised an overview of 66 pages and 20 attachments totalling 1,470 pages, with the other four decisions being of similar size.
The legislationThe AER’s obligations
The Laws and Rules empower the AER to decide the revenue a regulated electricity or gas supplier may earn over a regulatory period of 5 years.
In making a decision the Laws require the AER to, amongst other things:
·have regard to, as appropriate, the NEO / NGO and to the Laws’ revenue and pricing principles (the RPP);
·give users or consumers a reasonable opportunity to make a submission before the decision is made; and
·if there are two or more possible decisions that will or are likely to contribute to the achievement of the NEO / NGO make the decision that the AER is satisfied will or is likely to contribute to the achievement of those objectives to the greatest degree (the preferable reviewable regulatory decision).
While the requirement to have regard to the NEO / NGO and to the RPP have existed for some time, this was the first time that the AER has been obliged to give consumers the opportunity to be heard and to make a preferable reviewable regulatory decision.
The Tribunal’s obligations
When reviewing an AER decision, the Tribunal may only determine to vary it, or set it aside and remit it to the AER to make the decision again, if the Tribunal is satisfied that to do so will, or is likely to, result in a materially preferable NEO / NGO decision (ie a decision that is materially preferable to the AER’s decision in making a contribution to the achievement of the NEO / NGO).
In a context where for every competing argument there is a supporting expert or experts, the use of the phrase “materially preferable” requires the Tribunal to look through the inevitable conflict and difference of views between experts, all advocating positions which they regard as being preferable, and to determine whether an advocated materially preferable NEO / NGO decision is, indeed, materially preferable: ie a decision which, notwithstanding that divergence of views, is sufficiently compelling to be seen by the Tribunal as being “materially preferable” to the AER’s (cf: Wellington International Airport Limited & Ors v Commerce Commission [2013] NZHC 3289 at [164]).
Also, if the Tribunal’s determination is to vary the AER’s decision – the Tribunal must be satisfied that to do so will not require it to undertake an assessment of such complexity that the preferable course of action would be to set aside the decision and remit it to the AER to make the decision again. It is self-evident from each issue outlined below where the Tribunal’s set aside the AER’s decision, the task of undertaking the appropriate review and making the decision again is a complex one.
The issues and the Tribunal’s decisions
That the Tribunal found for the applicants on some issues is not to cast an adverse reflection on the AER. Nor is it to suggest that the AER did not conscientiously examine the submissions it received. It recognises that the AER had a large and most difficult task to perform within a limited timeframe.
The applicants, variously supported by the interveners, took issue with aspects of certain ‘building blocks’ that the AER is obliged to use in deciding the revenue to allow each regulated supplier for the relevant regulatory period. The building blocks, the applicants which challenged them and the Tribunal’s decision on each topic follow:
The operating expenses (opex) allowance: PIAC; Networks NSW; ActewAGL.
Networks NSW and ActewAGL argued the AER’s opex allowances for them were too low. PIAC’s challenge, which it limited to the AER’s opex allowances for Networks NSW, asserted they were too high.
Networks NSW and ActewAGL’s raised a number of issues in relation to a benchmarking model on which the AER relied to arrive at their respective opex allowances. PIAC’s concerns focused on the AER’s lowering of the model’s efficiency target comparison point and adjustments it made to the model to account for operational environment factors peculiar to a particular supplier.
The Tribunal’s decision
The AER is to make the opex decision again in accordance with Tribunal’s reasons including using a broader range of modelling and benchmarking against Australian businesses and a “bottom up” review of the regulated suppliers’ forecast opex.
The X-factor: Networks NSW.
The X factor for a particular year represents the real rate of change in revenues for that year that have been approved by the AER (before any annual adjustments). In effect, it operates as a “smoothing factor” for revenue over consecutive years.
Networks NSW and the AER agreed on the desirability of avoiding price volatility and the strong message from the consumer consultations was that price shocks should be avoided where possible. The immediate effect of the AER’s X factor decisions would, however, be significant price decreases in 2015-16 potentially followed by nominal price increases during 2016-19.
The Tribunal’s decision
The Tribunal’s decision on the opex issue requires the AER to revisit and re-determine Networks NSW’s opex allowances and then re-apply the X factor. In those circumstances while the Tribunal did not need to determine whether Networks NSW’s contention was correct it did observe that the NEO and RPP are complementary and that the NEO may not give rise to a decision by the AER which in fact is inconsistent with the RPP.
The Efficiency Benefit Sharing Scheme (EBSS): Networks NSW.
As part of the incentive regulation underpinning the Laws, the EBSS rewards a regulated supplier by allowing it to keep any yearly gain derived from the difference between its actual opex and its forecast.
The difference between Networks NSW and the AER turned on whether the rewards were related to real efficiency gains. The AER took the view that certain reductions in Ausgrid and Endeavour’s respective opex resulted from substantial changes in the assumptions underlying estimates for provisioning of future payments of employee entitlements, such as long service leave, not real business outcomes.
The Tribunal’s decision
The Tribunal was not satisfied that any ground of review exists in relation to the AER’s decisions concerning the EBSS – the view taken by the AER was open to it. A consequence of the Tribunal’s opex decision does, however, mean that the AER will be required to make its EBSS decisions again.
The Service Target Performance Incentive Scheme (STPIS): ActewAGL
The STPIS is designed to balance incentives to reduce expenditure, with the need to maintain or improve service quality. It achieves that by providing financial incentives to a supplier to maintain and improve performance and reliability – penalties if the supplier fails to maintain historical levels of reliability over the last five years, benefits if the levels are exceeded.
ActewAGL contended that the AER’s decision to apply its then existing STPIS to ActewAGL for the subsequent regulatory period without modification of the targets to account for reductions in its opex was erroneous because the reductions meant it could not maintain its historical levels of reliability by reference to which the targets had been set.
The Tribunal’s decision
The Tribunal’s decision on the opex issues means that one of the foundations on which the AER based its STPIS decision is flawed. In those circumstances, the Tribunal considers that the AER’s STPIS decision is also flawed.
The return on equity: PIAC; Networks NSW; ActewAGL, JGN
An allowed rate of return objective introduced by 2012 changes to the Rules informs both the rate of return on equity and the rate of return on debt. The objective is that the rate of return for a regulated entity is to be commensurate with the efficient financing costs of a benchmark efficient entity with a similar degree of risk as that which applies to the regulated supplier in respect of the provision of its regulated services.
Applying its foundation financial model, the AER allowed an annual return on equity of 7.1 percent in lieu of Networks NSW’s proposed 10.11 percent, ActewAGL’s 10.71 percent and JGN’s 9.83 percent. PIAC focused on one of the components of the AER’s foundation financial model, the equity beta, contending that the correct equity beta should have been 0.5 and that the AER erred in selecting a value at the top of the range, 0.7, which its guidelines contemplated.
The Tribunal’s decision
The AER’s use of its foundation financial model did not involve an error of discretion. Nor was the Tribunal persuaded that that the AER’s selection of an equity beta of 0.7 was wrong – the Tribunal observed that it is one matter to show that the AER’s analysis might have been undertaken in another way, but it is another matter to show that the other way would produce an outcome which is the correct outcome rather than just an alternative and rational outcome.
The return on debt: PIAC; Networks NSW; ActewAGL, JGN
While the AER replacement of its ‘on-the-day’ method of estimating a supplier’s return on debt used in the previous regulatory with a ‘trailing average’ method was uncontentious, there was contention about it adopting a 10 year transitional period for a supplier to move to the new method.
Networks NSW proposed immediate application of the new method. Although there were some differences between them, ActewAGL joined in Networks NSW’s submissions on this issue. They also asserted other errors in the AER’s transitioning approach. JGN contended that the AER was wrong to apply its transition methodology to both the base rate and the DRP components of the return on debt. PIAC argued that the transition to the new method should have commenced from 2015-16 rather than 2014-15 to comply, or to better comply, with the relevant rule, especially where the on-the-day interest rates at the time of, and leading up to, the date of its decision were declining. Ergon contended that the AER made an error of fact in finding that a simple trailing average should be used to estimate the return on debt when the use of a Post-Tax Revenue Model (PTRM) weighted average would better meet the requirements of the Rules.
The Tribunal’s decision
The Tribunal found that a ground of review was made out and ordered the AER to make its decision on a return on debt in relation to the introduction of the trailing average approach in accordance with the Tribunal’s reasons.
The Tribunal noted PIAC’s contention to the effect that Network NSW’s existing debt financing structures are not necessarily efficient for the purposes of any transition and that, when the AER comes to make its decision again, the requirement upon it to make the preferable regulatory decision may entitle the AER to make some adjustment if, as PIAC says, consumers may be paying “a second time” for the consequences of the spike in DRP rates following the GFC.
As the AER acknowledged that Ergon’s PTRM-weighted average approach had potential advantages in some circumstances and observed it was open to future consideration by the AER, the Tribunal did not consider it desirable to address that issue.
Imputation credits/gamma: Networks NSW; ActewAGL; JGN
The value of imputation credits is recognised by the Rules in estimating a regulated supplier’s allowed revenue. The Rules reduce the revenue that a regulated supplier requires to pay the estimated cost of its corporate tax by way of a formula in which the value of imputation credits is represented by the Greek letter ‘gamma’.
Under the formula, the higher the value for gamma, the lower the estimated cost of corporate income tax for a regulated supplier. The AER adopted a gamma of 0.4 (from a possible range of 0.3 to 0.5). The Networks NSW; ActewAGL and JGN argued for a gamma of 0.25. PIAC argued that the AER should retain the value of 0.5 it adopted in its Draft Decisions.
The Tribunal’s decision
The Tribunal decided that the AER set a value for gamma which was too high. It ordered the AER to make its decision on gamma in accordance with the Tribunal’s reasons including by reference to an estimated cost of corporate income tax based on a gamma of 0.25.
Metering services – opex: ActewAGL
ActewAGL contended that the AER misconstrued data provided to it and made an error in the course of its calculation of its price cap for ActewAGL’s Type 5 and 6 metering services.
The AER argued that it proceeded on a reasonable understanding of the complex data presented by ActewAGL and submitted, amongst other things, that the amount in issue ($4.9m ($2013-2014)) – assuming that its assessment of ActewAGL’s data was incorrect – means that the contended error is not a material one and its correction would not lead to a materially preferable NEO decision.
The Tribunal’s decision
It was not necessary to decide whether, in the circumstances, a ground of review had been made out. That is because, the Tribunal’s opex decision means that the AER must revisit ActewAGL’s opex and in doing so it is unlikely that the contended misconstruction of ActewAGL’s data will recur.
Metering classification: ActewAGL
The AER’s decision on the classification of ActewAGL’s metering services was made in error.
The AER conceded the error and that it should be corrected. It proposed to do so after the Tribunal proceedings were concluded. Notwithstanding the AER's concession, ActewAGL maintained that the most appropriate course is for the error to be corrected by the Tribunal.
The Tribunal’s decision
The Tribunal did not need to further address this issue because its opex decision means that the ActewAGL decision is being set aside and the AER will make the decision again. In those circumstances the error, which is conceded, should be corrected by the AER.
Metering services - opex: Ausgrid
Ausgrid challenged the AER’s decision to reject its forecast metering opex and substitute its own forecast alleging errors on the part of the AER in:
· deciding that a Type 5 meter is not more expensive to operate and maintain than a Type 6 meter (it was Ausgrid’s contention that a Type 5 meter is more complex than the more common Type 6 meters); and
· using an average of 2008-13 when calculating Ausgrid’s metering opex allowance, rather than a single base year of 2012-13.
Tribunal’s decision
The AER’s decision that Type 5 and 6 meters do not have materially different costs was not an error of fact and did not lead to it making an unreasonable decision. Nor did the AER’s use of a 5 year average to calculate Ausgrid’s metering opex demonstrate a reviewable error.
Market Expansion Capital Expenditure (ME Capex): JGN
ME capex is expenditure for new assets that JGN requires to connect new customers to its network. JGN challenged the AER’s decision not to approve JGN’s ME capex forecast based on its unit rate derivation model (the JGN model) and to adopt an ME capex forecast based on its own, alternative model (the AER’s ME capex decision). The AER was not satisfied that the unit rate composition JGN used in determining the cost per connection was arrived at on a reasonable basis or was the best estimate because JGN relied on only one year of data and did not adequately justify increases in its estimates of metres of certain connections
The Tribunal’s decision
While the Tribunal formed the view that properly understood, the JGN model contained adequate detail to assess its validity, the Tribunal has had the benefit of detailed written and oral submissions not available to the AER when it made its ME Capex Decision. In the absence of appropriate explanatory material, the AER’s concerns with the JGN model were legitimate. In reaching that view the Tribunal observed that the Rules do not require the AER to engage with a service provider indefinitely – there is a point at which the consultation process must cease and a decision made. The fact that the JGN model did not ultimately satisfy the AER that JGN’s ME capex forecast represented the best forecast or estimate in the circumstances did not demonstrate error on the part of the AER.
The Tribunal did, however, find that the AER’s rejection of JGN’s one year of data and conclusion based upon historical average unit rates involved an error.
Rather than substituting or varying the AER’s ME capex decision, the Tribunal concluded that when comes to re-make its JGN Final Decision on other grounds, it will have the opportunity to reconsider its ME capex decision and its interrelationships when deciding what is the preferable designated reviewable regulatory decision.
26 February 2016
AUSTRALIAN COMPETITION TRIBUNAL
Applications by Public Interest Advocacy Centre Ltd and Ausgrid
[2016] ACompT 1
Citation: Applications by Public Interest Advocacy Centre Ltd and Ausgrid [2016] ACompT 1 Review from: Australian Energy Regulator Applicant: PUBLIC INTEREST ADVOCACY CENTRE LTD
AUSGRIDFile number: ACT 1 of 2015
ACT 4 of 2015Tribunal: MANSFIELD J, PRESIDENT
MR R DAVEY, MEMBER
DR D ABRAHAM, MEMBERInterveners in
ACT 1 of 2015
ACT 4 of 2015:AusNet Services (Distribution) Pty Ltd
AusNet Services (Transmission) Ltd
Australian Gas Networks Ltd
Citipower Pty Ltd
Powercor Australia Ltd
SA Power Networks
United Energy Distribution Pty Ltd
Ergon Energy Corporation Ltd
Minister for Resources, Energy and Northern AustraliaInterveners in
ACT 1 of 2015:Ausgrid Interveners in
ACT 4 of 2015:Public Interest Advocacy Centre Ltd Date of Determination: 26 February 2016 Catchwords: ENERGY AND RESOURCES – applications under s 71B of the National Electricity Law (NEL) for review of a distribution determination by the AER – consideration of the legislative background to the NEL and the National Electricity Rules (NER) – amendments to the NER made in 2012 by the Australian Energy Market Commission (AEMC) – amendments to the NEL made in 2013 – role of the AER - national electricity objective (NEO) - consultation and notification obligations under s 16(1)(b) – interrelationship of constituent components and preferable reviewable regulatory decision by the AER under s 16(1)(c), and (d) – role of the Tribunal on review - interrelationship of constituent components and materially preferable NEO decision under s 71P(2a), and (2b) – conduct of consultation process under s 71R(1) – topics for review – operating expenditure (opex) – X-factor – efficiency benefit sharing scheme (EBSS) – return on equity – return on debt – gamma – metering services
ENERGY AND RESOURCES – operating expenditure (opex) – use of econometric benchmarking – comparability of RIN data – comparability of overseas data – adjustments the AER made to the outcomes of the econometric benchmarking – operating environment factors - lowering of the efficiency target comparison points – efficiency of vegetation management costs – efficiency of labour costs – transition path
ENERGY AND RESOURCES – efficiency benefit sharing scheme (EBSS) – whether the AER was correct in adjusting the provisions expense reported - exclusion of allowances for efficiency gains as a result of movements in provisioning – whether there was retrospective exclusion of particular cost categories
ENERGY AND RESOURCES – return on equity – achievement of the rate of return objective - efficient financing costs of a benchmark efficient entity with a similar degree of risk as that which applies to a service provider - requirement that regard be had to relevant estimation methods, financial models, market data and other evidence - foundation model approach - adjustment of parameters to reflect other models
ENERGY AND RESOURCES – return on debt - transition between methods of deciding the return on debt– transition to trailing average approach - efficient financing costs of a benchmark efficient entity with a similar degree of risk as that which applies to a service provider - features of a benchmark efficient entity – whether the NER provide for more than one benchmark efficient entity – actual historical debt financing practices of network service providers – features of the individual regulated service provider
ENERGY AND RESOURCES – gamma – significance of the substitution of “the value of imputation credits” for “the assumed utilisation of imputation credits” in the definition of gamma – interpretation of “the value of imputation credits”– interpretation consistent with the NER – relevance of “market value” - proper use of equity ownership data, tax statistics and market studies - calculation of distribution rate
ENERGY AND RESOURCES – metering services - use of multi-year averaging to calculate metering opex
Legislation: National Electricity Law
National Gas Law
National Electricity Rules
National Gas Rules
Energy Services Corporations Act 1995 (NSW)
National Electricity (South Australia) Act 1996 (SA)
National Electricity (South Australia) (New National Electricity Law) Amendment Act 2005 (SA)
Australian Energy Market Commission Establishment Act 2004 (Cth)
Trade Practices Act 1974 (Cth)
Competition and Consumer Act 2010 (Cth
National Electricity (South Australia) National Electricity Law (Miscellaneous Amendments) Amendment Act 2007 (SA)
National Electricity (South Australia) (National Electricity Law – Australian Energy Market Operator) Amendment Act 2009 (SA)
Statutes Amendment (National Electricity and Gas Laws – Limited Merits Review) Act 2013 (SA)
National Electricity (South Australia) National Electricity Law (Miscellaneous Amendments) Act 2007 (SA)
Fair Work Act 2009 (Cth)
Cases cited: Applications by Public Interest Advocacy Centre Ltd, Ausgrid, Endeavour Energy and Essential Energy [2015] ACompT 2
Application by ActewAGL Distribution [2015] ACompT 3
Application by Jemena Gas Networks (NSW) Limited [2015] ACompT 4
Application by ElectraNet Pty Limited (No 3) [2008] ACompT 3
Application by Envestra Limited (No 2) [2012] ACompT 3
East Australian Pipeline Pty Ltd v Australian Competition and Consumer Commission (2007) 233 CLR 229
Tillmans Butcheries Pty Ltd v Australian Meat Industry Employees Union (1979) 27 ALR 367
Monroe Topple & Associates Pty Ltd v Institute of Chartered Accountants (2002) 122 FCR 110
Seven Network Limited v News Limited (2009) 182 FCR 160
Australian Gas Light Co v ACCC (2003) 137 FCR 317
Application by DBNGP (WA) Transmission Pty Ltd (No 3) [2012] ACompT 14
Application by EnergyAustralia [2009] ACompT 8
Application by WA Gas Networks (No 3) [2012] ACompT 12
Commissioner of Stamps (SA) v Telegraph Investment Co Pty Ltd (1995) 184 CLR 453
Applications by Public Interest Advocacy Centre Ltd and Endeavour Energy [2016] ACompT 2
Applications by Public Interest Advocacy Centre Ltd and Essential Energy [2016] ACompT 3
Application by ActewAGL Distribution [2016] ACompT 4
Application by Jemena Gas Networks (NSW) Ltd [2016] ACompT 5
Toyota Motor Corporation Australia Limited v Marmara [2014] 222 FCR 152
Teys Australia Beenleigh Pty Ltd v Australasian Meat Industry Employees Union [2015] 317 ALR 636
Re East Australian Pipeline Limited [2004] ACompT 8
Wellington International Airport Limited & Ors v Commerce Commission [2013] NZHC 3289
Paciocco v Australia and New Zealand Banking Group Limited [2015] FCAFC 50
SPI Electricity Pty Ltd v Australian Competition Tribunal (2012) 208 FCR 151
Rathbone v Abel (1964) 38 ALJR 293
R v Hunt; Ex parte Sean Investment Pty Ltd (1979) 180 CLR 322
Turner v Minister for Immigration and Ethnic Affairs (1981) 35 ALR 388\
Australian Broadcasting Tribunal; Ex p 2HD Pty Ltd (1979) 144 CLR 45 AER
Application by Jemena Gas Networks (NSW) Ltd (No 3) [2011] ACompT 6 Application by AAPT Allgas Energy Ltd (No 2) [2012] ACompT 5
Application by Energex Limited (Gamma) (No 5) [2011] ACompT 9
Dates of hearing: 21-25 September 2015; 28-30 September 2015
1-2 October 2015; 6-9 October 2015Place: Darwin (via video link to Sydney, Melbourne, Brisbane and Adelaide) Number of paragraphs: 1230 Counsel for the Public Interest Advocacy Centre Ltd: S Horgan QC with T Clarke Solicitor for the Public Interest Advocacy Centre Ltd: Public Interest Advocacy Centre Ltd Counsel for Endeavour Energy: C Moore SC with K Morgan, A Hochroth and C Dermody Solicitor for Endeavour Energy: Herbert Smith Freehills Counsel for the Australian Energy Regulator: S Lloyd SC and M O’Bryan QC with S Balafoutis, A Mitchelmore, J Arnott, T Phillips, D Tucker and F St John Solicitor for the Australian Energy Regulator: Corrs Chambers Westgarth Counsel for the Commonwealth Minister for Resources, Energy and Northern Australia: T Howe QC and B Lim Solicitor for the Commonwealth Minister for Resources, Energy and Northern Australia: Australian Government Solicitor Counsel for AusNet Services (Distribution) Pty Ltd, AusNet Services (Transmission) Ltd, Australian Gas Networks Ltd, Citipower Pty Ltd, Powercor Australia Ltd, SA Power Networks and United Energy Distribution Pty Ltd: P Brereton SC with R Higgins Solicitor for AusNet Services (Distribution) Pty Ltd, AusNet Services (Transmission) Ltd, Australian Gas Networks Ltd, Citipower Pty Ltd, Powercor Australia Ltd, SA Power Networks and United Energy Distribution Pty Ltd: Jones Day Counsel for Ergon Energy Corporation Ltd T Bradley QC with A Coulthard and E Hoiberg Solicitor for Ergon Energy Corporation Ltd Minter Ellison
IN THE AUSTRALIAN COMPETITION TRIBUNAL
ACT 4 of 2015
RE: APPLICATIONS UNDER S 71B OF THE NATIONAL ELECTRICITY LAW FOR A REVIEW OF DISTRIBUTION DETERMINATION MADE BY THE AUSTRALIAN ENERGY REGULATOR IN RELATION TO AUSGRID PURSUANT TO RULE 6.11.1 OF THE NATIONAL ELECTRICITY RULES
BY: AUSGRID
TRIBUNAL:
MANSFIELD J, PRESIDENT
MR R DAVEY, MEMBER
DR D ABRAHAM, MEMBER
DATE OF DETERMINATION:
26 February 2016
WHERE MADE:
DARWIN (VIA VIDEO LINK TO SYDNEY, MELBOURNE, BRISBANE AND ADELAIDE)
THE TRIBUNAL DETERMINES THAT:
1.Pursuant to s 71P(2)(c) of the National Electricity Law, the Final Decision Ausgrid distribution determination 2015-16 to 2018-19, April 2015, including attachments, (the Final Decision) is set aside and remitted to the Australian Energy Regulator (AER) to make the decision again in accordance with the following directions:
(a)the AER is to make the constituent decision on opex under r 6.12.1(4) of the National Electricity Rules in accordance with these reasons for decision including assessing whether the forecast opex proposed by the applicant reasonably reflects each of the operating expenditure criteria in r 6.5.6(c) of the National Electricity Rules including using a broader range of modelling, and benchmarking against Australian businesses, and including a “bottom up” review of Ausgrid’s forecast operating expenditure;
(b)the AER is to make the constituent decision on return on debt in relation to the introduction of the trailing average approach in accordance with these reasons for decision;
(c)the AER is to make the constituent decision on estimated cost of corporate income tax (gamma) in accordance with these reasons for decision, including by reference to an estimated cost of corporate income tax based on a gamma of 0.25; and
(d)the AER is to consider, and to the extent to which it considers appropriate to vary the Final Decision in such other respects as the Australian Energy Regulator considers appropriate having regard to s 16(1)(d) of the National Electricity Law in the light of such variations as are made to the Final Decision by reason of (a)-(c) hereof.
IN THE AUSTRALIAN COMPETITION TRIBUNAL
ACT 1 of 2015 RE: APPLICATIONS UNDER S 71B OF THE NATIONAL ELECTRICITY LAW FOR A REVIEW OF DISTRIBUTION DETERMINATION MADE BY THE AUSTRALIAN ENERGY REGULATOR IN RELATION TO PUBLIC INTEREST ADVOCACY CENTRE LTD PURSUANT TO RULE 6.11.1 OF THE NATIONAL ELECTRICITY RULES
BY: PUBLIC INTEREST ADVOCACY CENTRE LTD
ACT 4 of 2015 Re: APPLICATION UNDER S 71B OF THE NATIONAL ELECTRICITY LAW FOR A REVIEW OF DISTRIBUTION DETERMINATION MADE BY THE AUSTRALIAN ENERGY REGULATOR IN RELATION TO AUSGRID PURSUANT TO RULE 6.11.1 OF THE NATIONAL ELECTRICITY RULES
BY: AUSGRID
TRIBUNAL:
MANSFIELD J, PRESIDENT
MR R DAVEY, MEMBER
DR D ABRAHAM, MEMBERDATE:
26 february 2016
PLACE
DARWIN (via video link to sydney, MELBOURNE, BRISBANE AND ADELAIDE)
REASONS FOR DETERMINATION
INTRODUCTION
[1]
The Distribution Determinations
[5]
The Access Arrangement Decision
[9]
The Review Applications
[12]
The Legislative Background
[18]
The 2012 Rule Amendments
[29]
The 2013 Legislative Amendments
[31]
The Consultation Process
[50]
The Materially Preferable NEO/NGO Decision
[65]
The Tribunal’s Role on Review
[87]
The Grounds of Review
[102]
The Structure of the Decision
[109]
OPERATING EXPENDITURE (OPEX)
[115]
The Opex Issues
[123]
The principal issue
[123]
Overview of the parties’ challenges
[125]
Background
[138]
Opex in the context of the NEL and the NER
[138]
Rule 6.5.6 and the 2012 Rule Amendments
[142]
The EI model
[145]
The First EI Report
[146]
The use of overseas data in the EI model
[156]
Country dummy variables
[160]
EI’s outputs specification criteria
[163]
The EI model’s specifications
[167]
The Second EI Report
[170]
The AER’s lowering of the EI model’s comparison point
[175]
The AER’s operating environment factors (OEFs) adjustments
[178]
The AER’s application of the benchmarking opex factor (rule 6.5.6(d)(4))
[198]
The AER’s application of the other rule 6.5.6(d) opex factors
[225]
The Parties’ Submissions on the Principal Issue
[227]
Inadequacies in the EI model’s data set and comparability issues
[230]
The AER’s lowering of the EI model’s comparison point
[309]
Other OEF issues
[354]
The efficiency of the DNSPs’ vegetation management costs
[355]
Labour costs – Networks NSW’s challenge
[409]
The AER’s use of the EI model as the sole determinative of opex
[443]
Consideration of the Principal Opex Issue
[463]
Transition Path
[486]
Conclusion on Opex (subject to s 71P(2a) and (2b))
[495]
X FACTOR
[498]
Background
[498]
The X Factor Decision
[507]
The Grounds of Review
[520]
Consideration
[522]
EFFICIENCY BENEFIT SHARING SCHEME (EBSS)
[539]
Background
[553]
The AER Decision
[567]
EBSS Issues
[578]
The Grounds of Review
[586]
Consideration
[593]
Conclusion
[628]
RETURN ON EQUITY
[632]
The Regulatory Background
[640]
The AER’s Final Decisions
[655]
PIAC’s Contention
[681]
The Grounds of Review: Network Applicants
[701]
Consideration
[709]
The relevant Rules
[709]
The application of the Rules
[712]
The use of the SL CAPM model
[719]
The challenged findings of fact
[736]
The Unreasonableness of the Final Decisions
[805]
RETURN ON DEBT
[815]
The AER’s Final Decisions
[834]
The Transition: The AER Approach
[858]
Consideration
[870]
The Benchmark Efficient Entity
[877]
Was this issue raised and maintained by Networks NSW and ActewAGL?
[877]
Is the Benchmark Efficienty Entity a Regulated Entity?
[891]
Is the Benchmark Efficient Entity a common entity for all DNSPs?
[891]
The Transition
[923]
PIAC’s contentions
[944]
Separate issues of Networks NSW
[964]
Other General Issues
[996]
Ergon’s issue
[998]
JGN’s separate issues
[1004]
GAMMA
[1006]
Historical and Legislative Content
[1019]
The AER’s approach to setting Gamma
[1030]
Interpretation of “The Value of Imputation Credits”
[1059]
Consideration
[1083]
AER’s CAPM framework
[1083]
AER’s conceptual approach to and estimation of theta
[1090]
Adjustment of SFG theta estimate for personal costs
[1101]
Estimation of the distribution rate
[1104]
Conclusion
[1110]
METERING SERVICES OPEX
[1121]
The Decision
[1129]
Grounds of Review
[1139]
Costs of Type 5 and Type 6 meters
[1143]
Averaging from 2008-09 to 2012-13
[1150]
Consideration
[1153]
Conclusion
[1163]
FINAL CONCLUSIONS
[1166]
General
[1166]
A Materially Preferable NEO Decision?
[1176]
The AER’s Approach
[1184]
Consideration
[1205]
PIAC’s contentions
[1207]
Application of the prescribed test
[1216]
Determination
[1227]
A final observation
[1228]
INTRODUCTION
These reasons relate to two of seven applications made to review decisions of the Australian Energy Regulator (AER) made on 30 April 2015 under the National Electricity Law (NEL). The issues relating to those decisions, and to a further decision of the AER made on 3 June 2015 under the National Gas Law (NGL) have been heard together.
That is because a number of the issues arising in relation to these two applications are common to issues in relation to the six other review applications referred to below, although there are a few issues particular to one or more of the applications, and in some respects the matters raised on certain issues differed slightly. It was common ground that the substantial commonality of issues raised in the eight applications made it preferable for them to be heard together.
These reasons deal only with the applications to review the AER decision concerning Ausgrid. They will serve as the “lead” reasons insofar as the Tribunal’s general considerations, on the significant matters of common concern, and its consideration of aspects of particular topics may not need to be repeated in full by the Tribunal in its consideration of the other applications.
All the applications were made in respect of a regulatory decision-making process by the AER and a regulatory review process by the Tribunal which were each significantly different from the regulatory decision-making process and the review process previously existing. The parties understandably spent considerable time addressing those differences and their significance. These reasons contain the Tribunal’s consideration of those submissions. Where appropriate that consideration will be incorporated by reference into its determinations in relation to the other applications, rather than be repeated.
The Distribution Determinations
On 30 April 2015, the AER published a distribution determination final decision under r 6.11.1 of Chapter 6 of the National Electricity Rules (NER) in relation to each of Ausgrid, Endeavour Energy (Endeavour) and Essential Energy (Essential). Each of the final decisions include an overview and attachments, the overviews being entitled: Final Decision Ausgrid distribution determination 2015-16 to 2018-19, Overview, April 2015; Final Decision Endeavour Energy distribution determination 2015-16 to 2018-19, Overview, April 2015; and Final Decision Essential Energy distribution determination 2015-16 to 2018-19, Overview, April 2015. Ausgrid, Endeavour and Essential are State owned corporations incorporated under the Energy Services Corporations Act 1995 (NSW) and are referred to collectively as Networks NSW. Each is the owner and operator of a monopoly electricity distribution network in New South Wales.
On the same day, the AER published a distribution determination final decision including an overview and attachments under the same provision in relation to ActewAGL Distribution (ActewAGL): Final Decision ActewAGL distribution determination 2015-16 to 2018-19 Overview, April 2015. ActewAGL is the owner of the electricity distribution network in the Australian Capital Territory.
The AER determined as follows:
(1)Ausgrid can recover $6576.4m ($ nominal) from its customers over the 2015-2019 regulatory control period.
(2)Endeavour can recover $3182.8m ($ nominal) from its customers over the 2015-2019 regulatory control period.
(3)Essential can recover $3826.1m ($ nominal) from its customers over the 2015-2019 regulatory control period.
(4)ActewAGL can recover $590.9m ($ nominal) from its customers over the 2015-2019 regulatory control period.
Each of those entities may be referred to as a Distribution Network Service Provider (DNSP).
Distribution charges represent a significant component of the annual bill for customers of the DNSPs and so for consumers of electricity in their respective distribution areas. The AER estimated that its decisions would (noting that it was providing estimates only and that there are other factors that will affect a consumer’s electricity bill, such as the wholesale price of electricity) have the following estimated impact:
( )Ausgrid: For residential customers, a reduction in their average annual electricity bills by $165 (or 8 percent) in 2015-16 and remaining relatively stable over the rest of the regulatory control period. For small business customers, a reduction in their average annual electricity bills by $264 (or 8 percent) in 2015-16 and remaining relatively stable over the rest of the regulatory control period.
(a)Endeavour: For residential customers, a reduction in their average annual electricity bills by $106 (or 5.3 percent) in 2015-16 and remaining relatively stable over the rest of the regulatory control period. For small business customers, a reduction in their average annual electricity bills by $152 (5.3 percent) in 2015-16 and remaining relatively stable over the rest of the regulatory control period.
(b)Essential: For residential customers, a reduction in their average annual electricity bills by $313 (or 11.9 percent) in 2015-16 and remaining relatively stable over the rest of the regulatory control period. For small business customers, a reduction in their average annual electricity bills by $528 (or 11.9 percent) in 2015-16 and remaining relatively stable over the rest of the regulatory control period.
(c)ActewAGL: For residential customers, a reduction in their average annual electricity bills by $112 (or 5.8 percent) in 2015-16 and remaining relatively stable over the rest of the regulatory control period. For small business customers, a reduction in their average annual electricity bills by $168 (or 5.8 percent) in 2015-16 and remaining relatively stable over the rest of the regulatory control period.
The Access Arrangement Decision
On 3 June 2015, the AER published a full access arrangement final decision in relation to Jemena Gas Networks (NSW) Ltd (JGN), pursuant to rr 62 and 64 of the National Gas Rules (NGR): Final Decision – Jemena Gas Networks (NSW) Ltd Access Arrangement 2015-20 Overview, June 2015, which, like the final distribution decisions mentioned above, includes a number of attachments.
By that decision, the AER determined that JGN could recover $2,229.0m ($ nominal) from its customers over five years commencing 1 July 2015.
As with the DNSPs, the revenue that the AER determined affects the distribution component of a consumer’s final gas bill. For residential and small business customers, the AER estimated that:
(a)average annual gas bills would fall by around 9.2 percent in 2015-16, translating into a $96 reduction in bills for residential customers and a $462 reduction for small business customers;
(b)bills will continue to fall over the following three years; and
(c)there would be a small increase of 1 percent in 2019-20.
The Review Applications
Each of the distribution determinations that the AER made on 30 April 2015 is a “reviewable regulatory decision” within the meaning of subcl (a) of the definition of that term in s 71A of the NEL. The AER’s access arrangement decision in relation to JGN is also a “reviewable regulatory decision” within the meaning of subcl (d) of the definition in s 244 of the NGL. It is convenient to refer to each of those five decisions as a Final Decision.
The term “Final Decision” is used to distinguish between the separate decision-making stages specified in the Rules. Under the NEL and NER a network service provider is required to submit to the AER a regulatory proposal that the AER must consider. The AER must then publish a draft decision, allowing the network service provider the opportunity to submit a revised regulatory proposal that the AER must consider. The AER must then publish a draft decision, allowing the network service provider the opportunity to submit a revised regulatory proposal prior to a Final Decision being made. A like process must be followed under the NGL and NGR by a service provider submitting, and the AER considering, an access arrangement revision proposal prior to a Final Decision being made. In respect of each of Networks NSW, ActewAGL and JGN, it is convenient to refer to each of those proposals and draft decisions as a “Regulatory Proposal”, “Draft Decision” or “Revised Regulatory Proposal” respectively.
By applications made on 21 May 2015 pursuant to s 71B of NEL, ActewAGL and Networks NSW applied to the Tribunal for leave to review the AER’s respective Final Decisions concerning them. The Public Interest Advocacy Centre Ltd (PIAC) also applied for leave to review each of the AER’s three Final Decisions relating to Networks NSW. On 24 June 2015, JGN filed an application for leave to review the AER’s Final Decision concerning it.
It is convenient hereafter to refer collectively to Networks NSW, ActewAGL and JGN as the Network Applicants from time to time.
On 17 July 2015, the Tribunal granted leave in respect of each of the applications relating to the four Final Decisions made on 30 April 2015: Applications by Public Interest Advocacy Centre Ltd, Ausgrid, Endeavour Energy and Essential Energy [2015] ACompT 2 and Application by ActewAGL Distribution [2015] ACompT 3. On 4 August 2015, the Tribunal granted leave in relation to the Final Decision relating to JGN: Application by Jemena Gas Networks (NSW) Limited [2015] ACompT 4.
In addition to their applications for review, PIAC and Networks NSW sought and were each granted leave to intervene in the other respective review applications concerning the AER’s Final Decisions relating to Networks NSW. There were other interveners granted leave to appear before the Tribunal in the review applications generally, clearly in the case of other DNSPs because regulatory review determinations were in the process of being made by the AER. A list of the interveners is:
·PIAC (in relation to the Networks NSW applications);
·Networks NSW (in relation to the PIAC applications);
·AusNet Services (Distribution) Pty Ltd, AusNet Services (Transmission) Ltd, Australian Gas Networks Ltd, Citipower Pty Ltd, Powercor Australia Ltd, SA Power Networks and United Energy Distribution Pty Ltd (Vic/SA Network Interveners);
·Ergon Energy Corporation Ltd (Ergon); and
·the Commonwealth Minister for Industry and Science. On 21 September 2015, the title of the Commonwealth Minister with responsibility for energy matters changed from the Minister for Industry and Science to the Minister for Resources, Energy and Northern Australia. For consistency, hereafter he is referred to as the Minister.
The Minister’s intervention was confined to making submissions on the proper construction and application of the relevant provisions of the NEL, the NER, the NGL and the NGR. Although the Ministers of participating jurisdictions are entitled to intervene, and were notified by the Tribunal of the several applications for review of the Final Decisions (once leave to apply for review had been given), none of the relevant Ministers did intervene.
The Legislative Background
The national electricity market was established following the enactment of the National Electricity (South Australia) Act 1996 (SA), in broad terms providing for the competitive trading and regulation of the generation, transmission, distribution and supply of electricity (then) in south-eastern Australia. The national electricity market was to be a competitive wholesale market comprising a comprehensive set of trading arrangements. The initial version of the NEL was a schedule to that Act.
It is clear enough, from that legislation, its context, and the events preceding it, that it was a consequence of the competition policy reforms and the pro-competitive policy mindset following the Hilmer reforms in the early 1990s. It was designed, wherever possible, to introduce competition into the provision of electricity to consumers through structural reform, by ensuring that government enterprises competed in an appropriate form, and in the case of monopoly infrastructure to provide for regulated access to monopoly infrastructure with independent authorities to oversee prices. That Act was amended by the National Electricity (South Australia) (New National Electricity Law) Amendment Act 2005 (SA), substituting the current version (since amended) of the NEL, and providing for the conferral of functions and powers in respect of the national electricity governance on the Australian Energy Market Commission (AEMC) (established under the Australian Energy Market Commission Establishment Act 2004 (Cth)) and upon the AER (established under the Trade Practices Act 1974 (Cth) (now the Competition and Consumer Act 2010 (Cth)). It was at the time contemplated, and it has now been effected, that the AER would operate as the economic regulator of both electricity and gas transmission and distribution networks for all jurisdictions other than Western Australia. The previous State based regulatory structure was removed.
The National Electricity (South Australia) National Electricity Law (Miscellaneous Amendments) Amendment Act 2007 (SA) really introduced the present structure under which, subject to amendments to the NER and to the NGR by the AEMC in 2012 and to legislative amendments to the NEL and the NGL in 2013, the AER and the Tribunal are conducting their present functions.
The Act referred to in the preceding paragraph set out to establish a single national regulatory framework for electricity networks, and introduced important changes to the AER’s powers, including the prescription of the national electricity objective (the NEO), and the revenue and pricing principles (RPP), to guide the AER in making regulatory decisions, and in other respects. It also introduced new merits review provisions under which the Tribunal (also a creation of the then Trade Practices Act 1974) was given the responsibility of reviewing certain decisions of the AER.
It was said in the Second Reading Speech by the Minister for Mineral Resources and Development (South Australia) that the proposed Act would lower the barriers to competition: Legislative Council, South Australia, 16 October 2007 Hansard p 883. It was specifically noted (Hansard p 886) that the NEO did not extend to “broader social and environmental objectives”. The Minister’s Second Reading Speech said:
The purpose of the National Electricity Law is to establish a framework to ensure the efficient operation of the national electricity market, efficient investment in, and the effective regulation of electricity networks. As previously noted, the national electricity objective also guides the Australian Energy Market Commission and the Australian Energy Regulator in performing their functions. This should be guided by an objective of efficiency that is in the long term interests of consumers. Environmental and social objectives are better dealt with in other legislative instruments and policies which sit outside the National Electricity Law.
It was the same legislation which introduced the RPP, which, it was said (p 887) are fundamental to ensuring achievement of the intention of enhancing efficiency in the national electricity market. The principles were said to maintain a framework for an efficient network investment irrespective of the evolution of the regulatory regime (by changes to the NER). The same was proposed for the new NGL and the national gas objective (NGO).
The AEMC from July 2005 was responsible for developing the NER. Similarly, it later became responsible for developing the NGR.
As noted, that legislation introduced also the limited merits review by the Tribunal of certain regulatory decisions under the NEL (and contemplated under the NGL). It was intended that network service providers, users and consumer associations could seek review of primary transmission and distribution determinations made by the AER. The review was confined to specified grounds of review, but more importantly there were two elements limiting the scope of review: the review could only address issues which were raised and addressed previously to the AER, and secondly the review could only address those issues on the material presented to the AER. There was to be no review of an AER decision on arguments not made to, or on material not presented to, the AER.
At about the same time, extensive amendments to Chapter 6 of the NER were introduced by the AEMC to guide the AER.
The National Electricity (South Australia) (National Electricity Law – Australian Energy Market Operator) Amendment Act 2009 (SA) then effected further amendments by which the Australian Energy Market Operator (AEMO) came to be the national energy market operator for both the electricity and gas markets, so as to reinforce the national character of energy market governance. It is not necessary to discuss in detail the effect of those amendments.
It is within that structure that, for present purposes, it can fairly be said that the first regulatory cycle (2008-13) of decision making by the AER became the subject of determinations for transmission and distribution networks under the NEL, and under the NGL, by the AER. Given the complexity of the task, it is hardly surprising that the Standing Committee on Energy and Resources (SCER) and the AEMC determined that significant reforms to the provisions of the NEL and the NER (and in turn the NGL and the NGR) should be introduced in the light of that initial experience.
The 2012 Rule Amendments
On 15 November 2012, the AEMC published its Final Position Paper National Electricity Amendment (Economic Regulation of Network Service Providers) Rule 2012 National Gas Amendment (Price and Regulation of Gas Services) Rule 2012 (the Final Postiion Paper). On 29 November 2012, the AEMC published its Rule Determination National Electricity Amendment (Economic Regulation of Network Service Providers) Rule 2012 National Gas Amendment (Price and Revenue Regulation of Gas Services) Rule (the 2012 Rule Amendments). It will be necessary to refer to those particular amendments in the course of considering particular matters raised on this and the related applications. It should be noted, however, that the 2012 Rule Amendments required the AER to publish guidelines specifying the approach that the AER proposed to use to assess forecasts of operating expenditure (opex) and capital expenditure (capex), and to set out the methodologies that it proposed to use in estimating the allowed rate of return, and the methods, financial models, market data and other evidence that it proposed to take into account in estimating the return on equity and the return on debt. This requirement resulted in the AER’s Better Regulation Rate of Return Guideline, December 2013, (the RoR Guideline) and its Better Regulation Rate of Return Guideline Explanatory Statement, December 2013 (the RoR Explanatory Statement). Significant amendments were made to r 6.5.2 of the NER which are discussed in relation to the topics of return on debt and return on equity which were each the subject of matters of debate in the course of this application and the related applications. Similarly significant amendments were made to r 6.5.6 in relation to how the AER should address the opex factors and capex factors.
To allow for a transition to the new rules, the Savings and Transitional Rules in Division 2 of Part ZW of Chapter 11 of the NER provided for a two stage process for the regulation of ACT and NSW DNSPs over the five year period commencing on 1 July 2014 (the 2014-19 period), comprising:
(a)the transitional regulatory control period from 1 July 2014 and ending on 30 June 2015 (transitional regulatory control period); and
(b)the subsequent regulatory control period from 1 July 2015 and ending on 30June 2019 (subsequent regulatory control period).
The 2013 Legislative Amendments
In addition, the Statutes Amendment (National Electricity and Gas Laws – Limited Merits Review) Act 2013 (SA) (the 2013 Legislative Amendments) refined the responsibility of the AER under s 16(1)(b) of the NEL and amended the Limited Merits Review Regime in Pt 6, Div 3A, of the NEL by facilitating the participation of “reviewable regulatory decision process participants”. It also, in a complementary way, added s 16(1)(c) and 16(1)(d) to the NEL to ensure the AER had a focus on the NEO and the NGO and s 71P (and related provisions) modifying the Tribunal’s power to vary or set aside a determination to circumstances where a substituted decision would, or would be likely to, better serve the NEO or the NGO. The detailed nature of those amendments is set out below so far as they are relevant.
As observed above, during 2013, the AER in response to those changes adopted its RoR Guideline which it described in some detail in its Final Decision in relation to Ausgrid (see the Overview at pp 55-56) and in its other Final Decisions. It consulted widely with stakeholders to develop a number of guidelines as required. The guidelines included the Expenditure Forecast Assessment Guideline (EFA Guideline), concerning a networks forecast opex proposal, and the RoR Guideline referred to above. The process of producing the Better Regulation guidelines involved active consultation with interested entities, including with PIAC which (as noted above) has itself sought to review the three Networks NSW decisions of the AER.
The NEL was substantially amended by the 2013 Legislative Amendments. Relevant to the role of the AER, apart from having a definition of “constituent components” in s 2(1) of the NEL, for present purposes the significant alteration was made by the substitution of s 16(1)(b) and the addition of s 16(1)(c) and, perhaps more importantly, the addition of s 16(1)(d).
Section 16(1)(b) requires extensive consultation and notification obligations to be fulfilled by the AER for the purposes of interested persons (including network service users or prospective users of the relevant services, and user or consumer associations that have an interest in the determination) being given an opportunity to address the issues being considered by the AER, and s 16(1)(c) requires the AER to specify in its decision the manner in which the constituent components of the decision relate to each other and how that inter-relationship has been taken into account.
Section 16(1)(d) provides that the AER must:
if the AER is making a reviewable regulatory decision and there are 2 or more possible reviewable regulatory decisions that will or are likely to contribute to the achievement of the national electricity objective –
(i)make the decision that the AER is satisfied will or is likely to contribute to the achievement of the national electricity objective to the greatest degree (the preferable reviewable regulatory decision); and
(ii)specify reasons as to the basis on which the AER is satisfied that the decision is the preferable reviewable regulatory decision.
That obligation on the AER in exercising its economic regulatory power was of particular relevance to the three applications by PIAC.
Effectively, like obligations were prescribed under the NGL by the deletion and substitution of s 28(1) of the NGL.
In relation to the Tribunal, and merits review under Div 3A of the NEL, there were also extensive and presently relevant amendments. Section 71A was amended by inserting some additional definitions (to which it will be appropriate to refer as necessary having regard to the substantive amendments).
Section 71C, specifying the grounds for review, did not change.
However, the additional recognition of the need for the regulatory decision, whether by the AER or on review by the Tribunal, to reflect the “materially preferable NEO decision” (as defined in s 71P(2a)), and the desirability of ensuring that the long term of interests of consumers are properly identified and addressed through the consumer groups was reinforced. It is worth repeating s 71C(1) setting out the (unchanged) grounds of review, and reciting s 71C(1a). They provide:
(1)An application under s 71B(1) may be made only on 1 or more of the following grounds:
(a)the AER made an error of fact in its finding 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.
(1a)An application under section 71B(1) must also specify the manner in which a determination made by the Tribunal varying the reviewable regulatory decision, or setting aside the reviewable regulatory decision and a fresh decision being made by the AER following remission of the matter to the AER by the Tribunal, on the basis of 1 or more grounds raised in the application, either separately or collectively, would, or would be likely to, result in a materially preferable NEO decision.
Section 71E prescribes the circumstances in which the Tribunal must not grant leave to apply for review. Those circumstances were extended by adding the additional criterion that it must appear to the Tribunal that the applicant for review has established a prima facie case that any decision or determination by the Tribunal varying the reviewable regulatory decision or setting it aside and remitting the matter back to the AER to make the decision again, on the basis of one or more grounds of review raised in the application:
... either separately or collectively, would, or would be likely to, result in a materially preferable NEO decision.
Section 71M was amended by adding s 71M(1a) requiring an intervener who raises a new ground of review to provide appropriate particulars of that ground, including how, if accepted or made out, it would, or would be likely to, result in a materially preferable NEO decision.
Section 71O was deleted and substituted in its entirety. It deals with the matters that may or not be raised in a review. It firstly ensures that the AER is not confined in a review application so as to prevent it from raising issues which might be considered under s 71P(2a) and (2b). It provides that the applicant, if it is a regulated network service provider, may only raise for review matters that have been raised and maintained in submissions to the AER. The same restriction applies to a regulated network service provider whose commercial interests might be materially affected by that decision. Any other affected or interested person or body may not raise in relation to an issue a matter that was not raised by that body in submissions to the AER (the requirement of having been raised and maintained is not precisely adopted).
Section 71O(2)(d) provides that, subject to those restrictions, the applicant or an intervener who has raised a new ground of review under s 71M is also entitled to raise any matter relevant to the issues to be considered under s 71P(2a) and (2b) (set out below) and otherwise any person or body may not raise any matter relevant to those issues unless it is in response to a matter raised by the AER, the applicant or an intervener.
The obligation of the Tribunal to make a determination under s 71P has also been substantially refined. It is necessary to set out ss 71P(2a) and (2b) in full to understand their significance. Those provisions in broad terms mirror the obligations imposed upon the AER by s 16(1)(d), and there are parallel obligations upon the Tribunal as upon the AER imposed by s 71P(2c) requiring the Tribunal to explain how it has taken into account the inter-relationship between constituent components of the reviewable regulatory decision and why it has proceeded to make the order which it has determined to make in that light.
Section 71P(1)-(2b) provides:
(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 which the Tribunal must make its determination.
(2)Subject to subsection (2a), a determination under this section may –
(a) affirm the reviewable regulatory decision; or
(b) vary the reviewable regulatory decision; or
(c)set aside the reviewable regulatory decision and remit the matter back to the AER to make the decision again in accordance with any direction or recommendation of the Tribunal.
(2a) Despite subsection (2), the Tribunal may only make a determination –
(a) to vary the reviewable regulatory decision under subsection (2)(b); or
(b)to set aside the reviewable regulatory decision and remit the matter back to the AER under subsection (2)(c).
if –
(c)the Tribunal is satisfied that to do so will, or is likely to, result in a decision that is materially preferable to the reviewable regulatory decision in making a contribution to the achievement of the national electricity objective (a materially preferable NEO decision) (and if the Tribunal is not so satisfied the Tribunal must affirm the decision); and
(d)in the case of a determination to vary the reviewable regulatory decision – the Tribunal is satisfied that to do so will not require the Tribunal to undertake an assessment of such complexity that the preferable course of action would be to set aside the reviewable regulatory decision and remit the matter to the AER to make the decision again.
(2b)In connection with the operation of subsection (2a) (and without limiting any other matter that may be relevant under this Law) –
(a)the Tribunal must consider how the constituent components of the reviewable regulatory decision interrelate with each other and with the matters raised as a ground for review; and
(b)without limiting paragraph (a), the Tribunal must take into account the revenue and pricing principles (in the same manner in which the AER is to take into account these principles under section 16); and
(c)the Tribunal must, in assessing the extent of contribution to the achievement of the national electricity objective, consider the reviewable regulatory decision as a whole; and
(d)the following matters must not, in themselves, determine the question about whether a materially preferable NEO decision exists:
(i)the establishment of a ground for review under section 71C(1);
(ii)consequences for, or impacts on, the average annual regulated revenue of a regulated network service provider;
(iii)that the amount that is specified in or derived from the reviewable regulatory decision exceeds the amount specified in section 71F(2).
As noted above, the review by the Tribunal of any decision of the AER was, and in broad terms still is, confined in the following ways:
·the requirement of the Tribunal to be satisfied of certain pre-conditions before leave to apply for review is given by it;
·the limitation upon the material which the Tribunal may have regard to in making its determination as to whether a ground of review has been made out on the material that was before the AER; and
·the requirement that the issue before the Tribunal upon which a ground of review is sought to be established was properly advanced before the AER.
Those pre-conditions have been maintained, and to a degree refined.
In relation to the second of those matters, s 71R defined and still defines review related matter in the same way. In one significant respect, the material relevant to a review has been extended to include matters arising as a result of the consultation required by s 71R(1)(b). That obliges the Tribunal, before making a determination, to take reasonable steps to consult with network service users of the relevant services, and any user or consumer associations or user or consumer interest groups that the Tribunal considers to have an interest in the determination (excluding a user or consumer association or interest group that is a party to the review). In addition, the opportunity for the Tribunal to seek additional information relevant to the relief which it might otherwise contemplate granting has been extended by amendments to s 71R(3) and by the addition of ss 71R(5a) and (5b).
In substance, parallel amendments were made to the merits review of AER determinations under the NGL under Part 5 of the NGL, including the extension of the required circumstances in which leave to review may be given under s 248, and by the insertion of s 259(4a) and (4b) equating to s 71P(2a) and (2b) of the NEL, and the deletion and substitution of s 261(1) and insertion of s 261(3a) and (3b) equating to s 71R(1) and s 71R(5a) and (5b) of the NEL.
The Consultation Process
The consultation process referred to in s 71R(1)(b) of the NEL and s 261(1)(b) of the NGL is an additional procedural step which the Tribunal must take and, ideally, be accommodated within the target time prescribed by s 71Q of the NEL and s 260 of the NGL. The Tribunal, having given leave to apply for review in these and the related matters on 17 July 2015 (other than the JGN application where leave to apply for review was given on 30 July 2015) sought information from the AER as to all of the interest groups or persons who might have an interest in the review by the Tribunal under s 71R(1)(b) of the NEL and s 261(1)(b) of the NGL.
The Tribunal then conducted an extensive communication process directly with each of those entities or persons to invite them to indicate whether they wished to consult with the Tribunal in relation to any of the Final Decisions, as to the nature of their proposed participation, and as to how the consultation might best be carried out. In the light of that material, the Tribunal consulted with all of those persons on 6 and 7 August 2015. To ensure a satisfactory process, the Tribunal issued a Consultation Agenda under which it provided for those who wished to speak to the Tribunal on that occasion either personally or on behalf of an organisation, to do so. It arranged for the speakers to be listed randomly, so that there was no bias in the sequence of presenting particular perspectives, other than (of course) endeavouring to accommodate the personal circumstances and convenience of each of the proposed participants. During those consultations, members of the Tribunal sought clarification, and sometimes supplementation of comments or submissions or further development in the views expressed so that they were better understood or appreciated by the Tribunal. The transcript of that consultation process has been included by the Tribunal on its website relating to each of these applications. A list of those persons or entities who chose to make submissions, during the consultation process or in writing as a complement or supplement to oral submissions, or only by making written submissions or comments is also listed on the Tribunal’s website.
In the course of the consultation process, a number of significant issues of concern to consumers and consumer interests were identified. It is fair to say that price was a significant concern. It is also fair to say that there were a number of persons who participated, and whose concern was to ensure the quality, safety, reliability and security of the supply of electricity either because of their particular circumstances or their particular geographical location, or for other reasons. The balance, as the submissions exposed, is a very difficult one.
The applicants to the several applications (including PIAC), the AER and the interveners did not participate in the consultation process. That was appropriate, of course, because they each participated in the hearing before the Tribunal. The matters which emerged in the course of the consultation process, apart from informing the Tribunal about the concerns or views expressed, also provided the foundation for matters the Tribunal raised with the applicants, the AER and the interveners during the hearing. They also served as the focus for questions of the Minister, during the hearing, as to how the various concerns or matters raised were to be taken into account by the Tribunal in reaching its decisions on the several applications. Those matters are addressed later in these reasons for decision.
It is a mark of the sophistication of the participants in the consultation process that the range of matters discussed was not extensive. Of course, many focused on the price of electricity and the impact of the present and potential price and the ability of the less well-off in the community either to afford access to the electricity network at all, or at least to do so only at considerable personal cost. There was material showing the number of disconnections over time. The issue of price was not simply raised by consumers or representatives of consumers in a lower socio-economic setting, but by some smaller commercial enterprises, primary producers and others.
The Tribunal does not intend to do injustice to the process by listing, without setting out in detail, the views presented.
It is, in the view of the Tribunal, helpful to note the broad themes presented during the consultation process as they were identified by the Tribunal. That list was then circulated to the participants for comment. As it was not then suggested that it was inaccurate or incomplete, it is set out below:
•Consumer engagement and understanding
o The Tribunal’s approach to engagement
o Consumer education and access to information
o Participation in the AER processes
•Impact of electricity prices on consumers
o General consumer impact
o Vulnerable customers
o Rural and regional customers
o Price stability (including pace of any change)
o Long-term interests of consumers relating to price
•The regulatory framework
o Success of previous regimes
o Policy observations regarding the framework
•Balancing the NEO and NGO for the long-term interests of consumers
o The meaning of “long term interests of consumers”
o The price and reliability trade off
o The disconnection 'death spiral'
•Operating expenditure
o AER benchmarking approach
o Adherence to operating expenditure guidelines
o Impact of industrial agreements
o Vegetation management and bushfire risks
•Rate of return
o Adherence to the Guideline
o Estimation of return on debt
o Estimation of return on equity
o Ultimate pricing impact of the rate of return
•Demand and energy forecasts
o Inflation of demand and energy forecasts
•Demand management and innovation
o Expenditure on innovation
•Materially preferable NEO/NGO decision
As noted, the price of electricity was the most significant issue raised during the consultation, but there were also significant numbers of consumers whose emphasis was more on the reliability of the supply of electricity in their particular circumstances.
In the matters concerning the Final Decisions of the AER regarding the Networks NSW businesses, in large measure (and as set out later in these reasons) the role of PIAC was a particularly helpful one. Its three applications sought to have the relevant AER Final Decisions set aside, and to have substituted determinations through the Tribunal which would substantially lessen the amounts recoverable by the Networks NSW businesses over the regulatory period 2015-19, as well as presenting the viewpoint that the matters raised by Networks NSW to have the recoverable amounts increased were erroneous. Many of the views put forward by those on the consultation process were therefore reflected or represented by the contentions of PIAC during the hearing.
It recognised the key drivers of cost facing a network service provider are:
·its accumulated network investment (reflected in the regulatory asset base);
·its expected growth in network expenditure (reflected in the capex program “net of capital returned to shareholders through depreciation”);
·its financing costs (interest on borrowing and a return on equity to shareholders);
·its opex program (the cost of operating and maintaining the network); and
·its taxation costs (taxable income at the corporate rate adjusted for the value of imputation credits).
Each of those topics reflects one of the building blocks in the NER.
At p 11, the AER referred to the most important factors impacting on Ausgrid’s costs in the 2015-19 regulatory control period. It identified an improved investment environment, translating to lower financing costs necessary to “attract efficient investment”; as evidence that Ausgrid’s past expenditure has been higher than necessary to maintain its network safety and reliability (confirmed, it stated, by inter alia its benchmarking analysis; lower than expected demand growth and therefore falling levels of utilisation; expected reasonably flat forecast demand; and inefficiency in Ausgrid’s labour and workforce practices).
It concluded at p 11:
These factors are reflected throughout our final decision and impact the different constituent components of our decision to varying degrees. At the total revenue level, they provide a consistent picture: Ausgrid, operating prudently and efficiently, could provide distribution services with materially less revenue than it has proposed for the 2015-19 regulatory control period. Further, the average annual revenue Ausgrid requires in the 2015-19 regulatory control period is materially less than the revenue it recovered from customers in 2013-14.
In our final decision we consider that Ausgrid’s proposal does not reflect the factors impacting on its cost drivers to a satisfactory extent. As a consequence, we conclude that Ausgrid has proposed to recover more revenue from its customers than is necessary for the safe and reliable operation of its network. It follows that we consider that Ausgrid’s revised proposal does not contribute to the achievement of the NEO to a satisfactory degree.
As the AER then said, the major constituent components of the AER Final Decision related to the rate of return and opex. Those matters are, of course, addressed above.
One matter which the AER addressed at this point, prompted by Ausgrid’s Revised Regulatory Proposal, was the “safety implications” of the opex proposed in the Draft Decision. The AER said, in part by reference to its benchmarking analysis and the OEFs, that it considered the revenue allowance it allowed would fund efficient costs for Ausgrid, as a prudent operator, to run its network safely and reliably. Thus, the AER said, its costs above that level should be borne by its shareholders and not its consumers.
Another matter addressed at this point, prompted also by Ausgrid’s Revised Regulatory Proposal, was financeability. The AER noted that Ausgrid indicated that its financial viability would be threatened as a result of its Draft Decision if carried through. In support of this, Ausgrid had submitted a range of material including an expert’s report submitting that sizeable opex reductions in a short period of time would negatively impact the ongoing financeability of the DNSPs and their viability as economic entities: Ausgrid, Revised Regulatory Proposal, January 2015 at p 45; a confidential credit profile report by Standard and Poors (S&P): S&P, Confidential credit assessment: Ausgrid – Stand-alone credit profile, January 2015; and a report by USB including confidential content relevant to financeability: USB, Financeability – Debt issue and capital structure (Confidential version), January 2015.
The AER said as to that at pp 18-19:
Neither the NEL nor the NER include an explicit obligation requiring us to consider the impact of our determination on the viability of the service provider in its actual circumstances. Our task is to determine the revenue that a service provider can recover from its customers with reference to an efficient and prudent level of expenditure. The service provider’s actual ownership circumstances and the financial structure of its shareholder are not factors that we are required to consider in fulfilling our task under the NEL or the NER.
The AER added that Ausgrid had not been clear about what it meant by the term “financial viability”, so it had considered whether it would be at material risk of insolvency. By modelling cash flows, and on the basis of an expert report of RSM Bird Cameron: Independent review of the AER’s internal cash flow analysis of insolvency risk for NSW electricity service providers for the regulatory period 2014-19, April 2015, the AER concluded that Ausgrid would not be at material risk of insolvency. It was not prepared to act on the S&P Report, as it “was not persuaded” that the assumptions underlying that report were reasonable; its cash flow modelling and its expert report did not support the claim; and it noted that Ausgrid was subject to a stable regulatory environment favourable for capital raising (of course, the latter observation is dependent upon informed investors considering that an investment of capital is worthwhile, and upon informed lenders considering that the advance of funds would be able to be funded as to interest at an appropriate rate and the funds duly repaid).
The AER Final Decision in Attachment 20 – Analysis of financial viability further explains why it reached that view.
More generally, and in principle more significantly, by reference to s 16(1)(d), the AER under the heading “Assessment of options under the NEO”, addressed matters relevant to the issue the Tribunal is now addressing. That is that there may be several possible decisions that will, or are likely to, contribute to the achievement of the NEO. It said at pp 19-20:
For at least two reasons, we consider that there will almost always be several decisions that contribute to the achievement of the NEO. First, the NER requires us to make forecasts, which are predictions about unknown future circumstances. As a result, there will likely always be more than one plausible forecast. Second, there is substantial debate amongst stakeholders about the costs we must forecast, with both sides often supported by expert opinion. As a result, for several components of our decision there may be several plausible answers or several point estimates within a range. This has the potential to create a multitude of potential overall decisions. In this decision we have approached this from a practical perspective, accepting that it is not possible to consider every possible permutation specifically. Where there are several plausible answers, we have selected what we are satisfied is the best outcome, under the NEL and NER.
In many cases, our approach results in an outcome towards the end of the range of options materially favourable to Ausgrid (for example, our choice of equity beta). While it can be difficult to quantify the exact revenue impact of these individual decisions, we have identified where we have done so in our attachments. Some of these decisions include:
•selecting at the top of the range for the equity beta
•setting the return on debt by reference to data for a BBB broad band credit rating, when the benchmark is BBB+
•the cash flow timing assumptions in the post-tax revenue model
•the the point at which we have set the benchmark for opex
•the allowances we have made for operating environment factors in our benchmarking analysis.
We set out our detailed reasons in the attachments. They demonstrate that the constituent components of our decision comply with the NER’s requirements. At an overall level our decision reflects the key reasons set out above, which indicate that Ausgrid should recover less revenue than it has proposed or recovered in recent years. Our decision reflects these at both the constituent component and overall revenue levels.
Given our approach, we are satisfied that our decision will or is likely to contribute to the achievement of the NEO to the greatest degree.
It is important to note that the AER recognises that the regulatory decision-making under the NEL may involve balancing of factors going to the long term interests of consumers. It returned to that theme in the later section of its Ausgrid Final Decision-Overview, under the heading “Understanding the NEO” at pp 52-53. There it referred to the importance of “correct” pricing. It said that overpricing leads to consumers not using or not efficiently using the network (and the longer term pricing for those consumers continuing to do so) on the one hand, and that underpricing by too low a revenue stream leads to investors being unwilling to invest in adequately maintaining the network so as not to adversely affect its safety, security and reliability to the detriment to consumers on the other. Either of those positions would not advance the NEO.
The Tribunal agrees with those observations
There was an additional matter for the AER to address.
In tandem with s 71P(2b)(a) and (2c)(a) for the Tribunal, s 16(1)(c) of the NEL requires the AER to consider how the constituent components of its relevant Final Decisions relate to each other, and how that inter-relationship has been taken into account. It recognised that inter-relationships can take various forms, including:
(1)underlying drivers and context which are likely to affect many constituent components of its decision – an example is that forecast demand affects the efficient levels of capex and opex in the regulatory control period;
(2)direct mathematical links between different components of a decision – examples are that the level of gamma has an impact on the appropriate tax allowance; the BEE’s debt to equity ratio has a direct effect on the cost of equity, the cost of debt, and the overall vanilla rate of return;
(3)trade-offs between different components of revenue – an example is that undertaking a particular capex project may affect the need for opex or vice versa;
(4)trade-offs between forecast and actual regulatory measures, that is the reasons for one part of a proposal may have impacts on other parts of a proposal – an example is that an increase in augmentation to the network means the distributor has more assets to maintain leading to higher opex requirements; and
(5)the distributor’s approach to managing its network, as the distributor’s governance arrangements and its approach to risk management will influence most aspects of the proposal, including capex/opex trade-offs.
That approach by the AER is a proper one. It is the approach the Tribunal takes. That is, the Tribunal considers whether, in the light of its conclusions on the merits of the grounds of review, the remittal of the matter to the AER is, or is likely to, result in a materially preferable NEO decision.
The AER has drawn attention to the nature of the relevant inter-relationships in broad terms. As the AER did, the Tribunal has sought to identify in addressing the grounds of review those similar inter-relationships.
Consideration
The real question, in the view of the Tribunal, is whether, by reason of the matters where it has found grounds of review made out, the balancing exercise which the AER carried out is, or may well be, erroneous. If it is, or is likely to be, then there is a very real risk that allowing the AER Final Decision concerning Ausgrid to stand will, or is likely to, have the adverse consequences to the long term interests of consumers to which the AER referred.
Obviously, from the price perspective, the present issues raised by Networks NSW are not intended to reduce the price for the provision of electricity. PIAC’s applications concerning Networks NSW are intended to have that effect. Obviously, pricing for the provision of electricity services is a sensitive topic.
PIAC’s contentions
For the reasons already given, the Tribunal has concluded that the AER’s approach to determining opex was erroneous. The nature of those errors is such as to have made it unnecessary to fully explore PIAC’s contentions regarding opex, namely whether the benchmark comparison point for Networks NSW should not have been lowered (as the AER did) but held to the weighted average of the upper quartile of the comparators, and whether there should be re-setting of the OEF adjustments adversely to Networks NSW.
Those contentions, if accepted, would have reduced significantly the opex allowances by the following amounts (claimed by Networks NSW without specifying whether the figures were real or nominal): Ausgrid by $365m; Endeavour by $196m; and Essential by $291m.
Clearly, that in turn would materially contribute to lowering the price to consumers for the provision of electricity services during the current regulatory period, and in the longer term.
PIAC’s contentions, however, were premised on the AER’s primary approach being correct. The Tribunal has not accepted with respect to opex that to be the case.
As to the return on equity, the Tribunal has not concluded that the contentions of PIAC should lead it to setting the equity beta at 0.5. That contention, if correct, would have set the return on equity at 5.8 percent. It would also have reduced the Networks NSW return on equity over the regulatory control period by the following amounts (claimed by Networks NSW without specifying whether the figures were real or nominal): Ausgrid by $485m, Endeavour by $196m, and Essential by $241m.
Again, all else being equal, and putting aside any inter-relationships between elements of the revenue, those adjustments would substantially reduce the price to consumers for electricity.
The Tribunal has also not concluded that, with respect to the return on equity, the AER’s relevant Final Decisions have exposed any ground of review as raised by Networks NSW, or by ActewAGL.
As to the return on debt, again the grounds of review made out by Networks NSW have meant that PIAC’s particular point concerning the commencing year for the QTC methodology for the introduction of the trailing average approach has not needed to be determined. There were very significant potential consequences – on the assumption that the AER’s adoption of that transitional methodology was broadly correct but should have commenced at the earlier year – as the Networks NSW allowances for return on debt would have been reduced by the following amounts (claimed by Networks NSW without specifying whether the figures were real or nominal): Ausgrid by $706m, Endeavour by $288m, and Essential by $341m.
If the other elements of the AER Final Decisions with respect to Networks NSW were not disturbed as no ground of review had been made out by Networks NSW, then it would be quite clear to the Tribunal that any one or more of PIAC’s contentions with respect to those topics – if established – would have satisfied the Tribunal that the error should be corrected because its correction would have, or would be likely to have, resulted in a materially preferable NEO decision. The price to consumers would have been substantially reduced, and (on the assumption of no other grounds of review being made) there would probably be no offsetting detriment to the long term interests of consumers with respect to the quality, safety, reliability or security of the supply of electricity or of the national electricity system. However, whether either the AER or Networks NSW would have asserted and established before the AER (if the matter were remitted) or before the Tribunal (if it decided simply to vary the Final Decisions) either some significant detriment or detriments to the long term interests of consumers which needed to be taken into account is not a matter which needs to be addressed.
Application of the prescribed test
The AER has, as discussed above, identified the appropriate considerations required to address the making of a materially preferable NEO (or NGO) decision. Or put alternatively, the parameters within which the materially preferable NEO (or NGO) decision lies.
As directed by s 71P(2b)(d), the Tribunal does not regard any of the three particular matters there referred to as determinative.
However, in the Networks NSW matters, the Tribunal’s conclusions on the grounds of review indicate that in significant respects the AER has formed its decision on foundations that are not properly established. Put another way, its decisions have been reached on complex factual bases and/or the exercise of discretions giving rise to very significant outcomes which, by reason of the Tribunal’s conclusions on the grounds of review, are not appropriate to support the ultimate decision of the AER.
The Tribunal, in that light, is satisfied that it is appropriate to set aside the AER Networks NSW Final Decisions and to remit them to the AER under s 71P(2)(c) of the NEL.
In that way, the AER will better identify the appropriate revenue during the current regulatory control period for those entities to achieve the level of quality, safety, reliability and security of supply of electricity and of the national electricity system in the long term interests of consumers, and be in a better position then to also address the desirability of consumers not paying more than is necessary over the long term for those services. Those two elements are identified and addressed by the AER as noted above. The AER’s analysis is also reflected in the comments of the Tribunal in Electranet (No 3) [2008] ACompT 3 at [15], [201] and [251].
There are obviously significant inter-relationships between elements of the building blocks. Again, the AER has identified them or some of them. To avoid a piecemeal approach, the Tribunal does not propose to restrict the AER by confining the remittal to a particular building block or building blocks. Moreover, because such significant building blocks are to be revisited, when re-assessing the options under the NEO, the Tribunal does not intend to prevent the AER (subject to giving effect to the matters determined by, or directed by, the Tribunal) from revisiting those other matters where (as noted above) its approach involved, in its view, an outcome on particular matters towards the end of the range of options materially favourable to Networks NSW. Those matters were not quantified, and the AER does not present the case that they are of such magnitude that, taken as they are, they would offset the potentially adverse consequences of the established grounds of review for the purposes of the Tribunal’s task under s 71P(2a)(and (2b).
Apart from those matters, which address s 71P(2b) and (2c)(b), it is desirable to add a little more about inter-relationships having regard to s 71P(2b)(a) and (2c)(a).
Obviously, as noted in the body of these reasons for decision, there is a relationship between the allowance for opex and the decisions of the AER to suspend the operation of the EBSS for Ausgrid and Essential, and not to impose the penalty carry over amount for Endeavour in relation to the EBSS in respect of the previous regulatory period.
The Tribunal notes that, in relation to Networks NSW, there are no other direct inter-relationships where a change in the method for quantifying one building block necessarily requires a change in another building block analysis.
At the request of the Tribunal, the AER provided a “Table of Inter-relationships in its Draft and Final Decisions” for each of the network service providers. Inevitably, as senior counsel for the AER said, it was extensive and non-specific in its application because, at that time, the parties did not know whether the Tribunal would determine whether any, and which, grounds of review would be made out. The Tribunal has had careful regard to that Table.
It does not consider that the data in that Table goes to minimise or offset the very substantial (putative) consequences to Networks NSW of the grounds of review which have been made out. They are quantified in the “Networks NSW – Summary of revenue impacts”, and a related document concerning data source revenue impacts presented in the course of closing submissions. They are described by the Tribunal as “putative” simply because they represent the contentions of Networks NSW, but not necessarily the final outcomes which the AER might reach when it reconsiders its relevant Final Decisions. In any event, they have been treated by the Tribunal as indicative only. The precise figures are not critical to these decisions. The AER, in turn, present a different version of “Estimated revenue outcomes by topic (without inter-relationships)” concerning each of the five network service providers. It incorporates changes which would flow from PIAC’s contentions being accepted. The Tribunal does not express any view about the “correct” outcome, or the range of correct outcomes, following the AER’s reconsideration.
Determination
The Tribunal therefore makes the following determination:
(1)Pursuant to s 71P(2)(c) of the NEL, the Final Determination is set aside and remitted to the AER to make the decision again in accordance with the following directions:
(a)the AER is to make the constituent decision on opex under r 6.12.1(4) of the NER in accordance with these reasons for decision including assessing whether the forecast opex proposed by the applicant reasonably reflects each of the operating expenditure criteria in r 6.5.6(c) of the NER including using a broader range of modelling, and benchmarking against Australian businesses, and including a “bottom up” review of Ausgrid’s forecast operating expenditure;
(b)the AER is to make the constituent decision on return on debt in relation to the introduction of the trailing average approach in accordance with these reasons for decision; and
(c)the AER is to make the constituent decision on estimated cost of corporate income tax (gamma) in accordance with these reasons for decision, including by reference to an estimated cost of corporate income tax based on a gamma of 0.25;
(d)the AER is to consider, and to the extent to which it considers appropriate to vary the Final Decision in such other respects as the AER considers appropriate having regard to s 16(1)(d) of the NEL in the light of such variations as are made to the Final Decision by reason of (a)-(c) hereof.
A final observation
The Tribunal wishes to record its appreciation to each of the applicants in these eight applications heard together, and the AER, and each of the interveners, and their respective counsel and solicitors, for the very extensive assistance provided to the Tribunal prior to and during the hearing.
As is readily apparent, each of the parties, the AER and the interveners worked cooperatively to properly identify issues, to draw to the Tribunal’s attention the material relevant to those issues, and to present their respective submissions. That meant that, in some instances, joint submissions were made by more than one party; in many instances submissions made on behalf of one party were adopted and refined to a particular entity rather than repeated. The volume of the review related material was very extensive, and it appeared to the Tribunal that reference to it was appropriately selective and focused.
Moreover, as all readily acknowledged, the task confronting the AER, and then the Tribunal was a very large one having regard to the extensive 2012 Rule Amendments, and the 2013 Legislative Amendments. The AER was required to adopt consultation procedures in relation to its Guidelines and its relevant Final Decisions in what was in real terms a fairly confined period. The Tribunal was constrained by a tight timetable to complete the hearing, allowing for its consultation and the work of the parties and the AER to prepare and participate in the hearing. The fact that the eight applications were able to be heard and determined in the time which has elapsed is in no small measure a consequence of the efforts of the parties, the AER and the interveners, and without exception the very considerable assistance they provided to the Tribunal.
I certify that the preceding one thousand two hundred and thirty (1230) numbered paragraphs are a true copy of the Reasons for Decision herein of the Honourable Justice Mansfield, Mr R Davey and Dr D Abraham. Associate:
Date: 26 February 2016
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