Australian Energy Regulator v Australian Competition Tribunal (No 2)
[2017] FCAFC 79
•24 May 2017
FEDERAL COURT OF AUSTRALIA
Australian Energy Regulator v Australian Competition Tribunal (No 2) [2017] FCAFC 79
Australian Energy Regulator v Australian Competition Tribunal (No 3) [2017] FCAFC 80SUMMARY
In accordance with the practice of the Court in some cases that have attracted publicity, particularly in the case of lengthy reasons for judgment, the Court has prepared a summary of the judgments. The only authoritative statement of the Court’s reasons is that contained in the published reasons for judgment. The summary has no legal status as part of, or an explanation of, the reasons for judgment themselves. What follows is such a summary.
Before the Court were five applications by the Australian Energy Regulator (AER) for judicial review of determinations of the Australian Competition Tribunal (Tribunal).
The Tribunal had set aside the AER’s Final Decisions and remitted the matter to the AER to make the decisions again in accordance with certain directions.
The AER’s judicial review challenge to the Tribunal’s determinations was directed principally to the following core concerns:
(a)The Tribunal had failed to undertake its review function lawfully by failing to properly construe and apply the grounds of review under s 71C of the National Electricity Law and s 246 of the National Gas Law. The AER contended that errors of this kind led the Tribunal to carry out reviews of a kind that were not authorised by the legislation.
(b)In one instance, the AER contended, the Tribunal purported to review a decision of a type that did not and could not fall within its jurisdiction. This related only to the fifth matter involving Jemena Gas Networks and the National Gas Law and the National Gas Rules and is the subject of the second the judgment published today.
(c)The Tribunal allowed the distribution network service providers and the covered pipeline service provider to raise, in relation to whether a ground of review existed, matters that were not raised and maintained by the service providers in submissions to the AER before the reviewable regulatory decisions were made, thus contravening the constraints imposed by s 71O(2) of the National Electricity Law and s 258(3) of the National Gas Law.
(d)The Tribunal erred in its construction of new provisions in the National Electricity Rules and the National Gas Rules relating to the determination of the rate of return on capital, the value of imputation credits (gamma) and the operating expenditure criteria.
(e)The Tribunal made other reviewable errors in making its decision, including adopting reasoning that was irrational, unreasonable and/or uncertain.
The Court has upheld the applications for judicial review in respect of the Tribunal’s construction of the Rules in relation to the value of imputation credits (gamma). The Court has otherwise dismissed the AER’s applications.
The Court has directed the parties to consult and, within 21 days, file orders in an agreed form to give effect to the reasons of the Court. Failing agreement, the parties are to file, within the same period, the orders for which they contend. The proposed orders are to include orders as to costs.
The published reasons for judgment and the summary will be available on the Internet at Besanko
Justice Yates
Justice Robertson
24 May 2017
FEDERAL COURT OF AUSTRALIA
Australian Energy Regulator v Australian Competition Tribunal (No 2) [2017] FCAFC 79
Application from: Applications by Public Interest Advocacy Service Ltd and Ausgrid Distribution [2016] ACompT 1
Applications by Public Interest Advocacy Service Ltd and Endeavour Energy [2016] ACompT 2
Applications by Public Interest Advocacy Service Ltd and Essential Energy [2016] ACompT 3
Application by ActewAGL Distribution [2016] ACompT 4
File numbers: NSD 415 of 2016
NSD 416 of 2016
NSD 418 of 2016
NSD 419 of 2016Judges: BESANKO, YATES AND ROBERTSON JJ Date of judgment: 24 May 2017 Catchwords: ADMINISTRATIVE LAW – application for judicial review of decision of the Australian Competition Tribunal (Tribunal) reviewing decisions of the Australian Energy Regulator (AER) – nature and scope of review by the Tribunal – whether the Tribunal erred in its construction of provisions in the National Electricity Rules relating to the determination of the rate of return on debt, the value of imputation credits and the operating expenditure criteria – whether the Tribunal allowed the distribution network service providers to raise matters that were not raised and maintained by them in submissions to the AER, contrary to s 71O(2) of the National Electricity Law Legislation: Administrative Decisions (Judicial Review) Act 1977 (Cth) s 3, Sch 3
Competition and Consumer Act 2010 (Cth) s 103
Fair Work Act 2009 (Cth)
National Electricity Law ss 71A, 71B, 71C, 71O, 71P, 71R
Competition and Consumer Regulations 2010 (Cth)
National Electricity Rules
Cases cited: Applicant WAEE v Minister for Immigration and Indigenous Affairs [2003] FCAFC 184; 236 FCR 593
Application by ActewAGL Distribution [2010] ACompT 4
Application by ActewAGL Distribution [2015] ACompT 3 Application by APT Allgas Energy Limited (No 2) [2012] ACompT 5
Application by ATCO Gas Australia Pty Ltd [2016] ACompT 10
Application by DBNGP (WA) Transmission Pty Ltd (No 3) [2012] ACompT 14
Application by ElectraNet Pty Limited (No 3) [2008] ACompT 3
Application by Energex Limited (No 2) [2010] ACompT 7
Application by Energex Limited (Gamma) (No 5) [2011] ACompT 9
Application by EnergyAustralia [2009] ACompT 8
Application by Envestra Pty Limited (No 2) [2012] ACompT 3
Application by United Energy Distribution Pty Limited [2012] ACompT 1
Application by WA Gas Networks (No 3) [2012] ACompT 12
Applications by Public Interest Advocacy Centre Ltd, Ausgrid, Endeavour Energy and Essential Energy [2015] ACompT 2
Australian Competition and Consumer Commission v Australian Competition Tribunal [2006] FCAFC 83; (2006) 152 FCR 33
Australian Energy Regulator v Australian Competition Tribunal [2016] FCAFC 144
Chan Yee Kin v Minister for Immigration and Ethnic Affairs [1989] HCA 62; 169 CLR 379
Collector of Customs v Pozzolanic Enterprises Pty Ltd [1993] FCA 456; 43 FCR 280
East Australian Pipeline Pty Ltd v Australian Competition and Consumer Commission [2007] HCA 44; 233 CLR 229
House v R [1936] HCA 40; 55 CLR 499
Industry Research and Development Board v Bridgestone Australia Ltd [2001] FCA 954; 109 FCR 564
Minister for Aboriginal Affairs v Peko-Wallsend Ltd [1986] HCA 40; 162 CLR 24
Minister for Immigration and Citizenship v Li [2013] HCA 18; 249 CLR 332
Minister for Immigration and Ethnic Affairs v Wu Shan Liang [1996] HCA 6; 185 CLR 259
Norbis v Norbis [1986] HCA 17; 161 CLR 513
Pfizer Pty Ltd v Birkett [1999] FCA 1778
Pilbara Infrastructure Pty Limited v Australian Competition Tribunal [2011] FCAFC 58; 193 FCR 57
Pilbara Infrastructure Pty Limited v Australian Competition Tribunal [2012] HCA 36; 246 CLR 379
SPI Electricity Pty Ltd v Australian Competition Tribunal [2012] FCAFC 186; 208 FCR 151
Dates of hearing: 17, 18, 19, 20, 21 and 24 October 2016 Registry: New South Wales Division: General Division National Practice Area: Commercial and Corporations Sub-area: Economic Regulator, Competition and Access Category: Catchwords Number of paragraphs: 785 Counsel for the Applicant: Mr S Lloyd SC with Mr MH O’Bryan QC, Mr S Balafoutis, Mr J Arnott and Ms T Phillips Solicitor for the Applicant: Corrs Chambers Westgarth Counsel for the First Respondent: The First Respondent submitted save as to costs Counsel for the Second Respondent in
NSD415/2016
NSD416/2016
NSD418/2016:Mr CA Moore SC with Ms K Richardson SC, Mr A Hochroth and Ms C Dermody Solicitor for the Second Respondent in
NSD415/2016
NSD416/2016
NSD418/2016:Herbert Smith Freehills Counsel for the Second Respondent in
NSD419/2016:Mr N Young QC with Mr AJ McClelland QC and Mr M Borsky Solicitor for the Second Respondent in
NSD419/2016:Gilbert + Tobin Lawyers Counsel for the First Intervener: Mr T Howe QC with Mr B Lim Solicitor for the First Intervener: Australian Government Solicitor Counsel for the Second Intervener in
NSD415/2016
NSD416/2016
NSD418/2016:Mr S Horgan QC with Mr T Clarke Solicitor for the Second Intervener in
NSD415/2016
NSD416/2016
NSD418/2016:Public Interest Advocacy Centre Ltd ORDERS
NSD 415 of 2016 BETWEEN: AUSTRALIAN ENERGY REGULATOR
Applicant
AND: AUSTRALIAN COMPETITION TRIBUNAL
First Respondent
AUSGRID
Second Respondent
NSD 416 of 2016 BETWEEN: AUSTRALIAN ENERGY REGULATOR
Applicant
AND: AUSTRALIAN COMPETITION TRIBUNAL
First Respondent
ESSENTIAL ENERGY
Second Respondent
NSD 418 of 2016 BETWEEN: AUSTRALIAN ENERGY REGULATOR
Applicant
AND: AUSTRALIAN COMPETITION TRIBUNAL
First Respondent
ENDEAVOUR ENERGY
Second Respondent
NSD 419 of 2016 BETWEEN: AUSTRALIAN ENERGY REGULATOR
Applicant
AND: AUSTRALIAN COMPETITION TRIBUNAL
First Respondent
ACTEWAGL DISTRIBUTION (ABN 76 670 568 688)
Second RespondentJUDGES:
BESANKO, YATES AND ROBERTSON JJ
DATE OF ORDER:
24 MAY 2017
THE COURT ORDERS THAT:
1.The parties consult and, within 21 days, file orders in an agreed form to give effect to these reasons. Failing agreement, the parties are to file, within the same period, the orders for which they contend. The proposed orders are to include orders as to costs.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
REASONS FOR JUDGMENT
INTRODUCTION
[1]
THE CENTRAL STATUTORY PROVISIONS
[10]
THE TRIBUNAL’S JURISDICTION AND POWERS
[17]
The submissions of the parties and of the interveners
[17]
Analysis
[133]
FORECAST OPERATING EXPENDITURE
[160]
Introduction
[160]
The National Electricity Rules
[164]
The Grounds for Review
[172]
The Tribunal’s Reasons
[182]
The Amendments to Rule 6.5.6 in 2012
[184]
The Econometric Models
[188]
The Principal Issue
[193]
An Overview of the Electricity Network Respondents’ Challenges to the AER’s Estimate of the Required Opex
[194]
The AER’s Approach
[198]
Criticisms of the data used in the EI Model
[216]
Criticisms of the AER’s decision to lower the EI Model’s Comparison Point
[229]
Criticisms of the OEF Adjustments made by the AER
[232]
Criticisms of the AER’s approach to Vegetation Management Costs
[235]
The Criticisms of the AER’s approach to the Labour Costs of the NSW Service Providers
[251]
The Electricity Network Respondents’ submission that the AER used the EI Model as the Sole Determinative of Opex
[257]
The Tribunal’s consideration of the “Principal Opex Issue”
[260]
Analysis of the AER’s Grounds of Review
[272]
The Tribunal’s approach to the AER’s use of the EI Model and the Tribunal’s underlying concerns (Grounds 6, 7, 9 and 21)
[279]
The Tribunal’s approach to the Labour Costs of the Electricity Network Respondents (Ground 8)
[356]
Whether the Tribunal’s reasons and orders are uncertain and unreasonable (Grounds 10 and 11)
[373]
Conclusion
[386]
RETURN ON DEBT
[387]
Introduction
[387]
The National Electricity Rules
[389]
The AER’s final decisions
[399]
The Tribunal’s decision
[415]
The operation of s 71O(2)(a)
[420]
A regulated and common entity for all service providers?
[430]
The correct transitioning arrangement?
[439]
The grounds of review
[451]
Whether the Tribunal erred by receiving and acting upon a matter that was not raised and maintained by the service providers in their submissions to the AER
[453]
The AER’s submissions
[453]
The electricity network respondents’ submissions
[465]
The AER’s reply submissions
[478]
Analysis and conclusion
[482]
Whether the Tribunal erred in concluding that the AER was bound to address the ROR Objective on the basis that the benchmark efficient entity must be an unregulated entity
[491]
Introduction
[491]
The AER’s submissions
[497]
PIAC’s submissions
[514]
The electricity network respondents’ submissions
[517]
The AER’s reply submissions
[526]
Analysis and conclusion
[529]
Whether the Tribunal erred in its construction of r 6.5.2(k)(4) of the NER
[546]
The AER’s submissions
[546]
The electricity network respondents’ submissions
[551]
The AER’s reply submissions
[556]
Analysis and conclusion
[557]
Whether the Tribunal’s conclusions as to what is required to be done to comply with rr 6.5.2(c) and (k) reveal error
[576]
The AER’s submissions
[576]
The electricity network respondents’ submissions
[587]
Analysis and conclusion
[590]
Whether the Tribunal failed properly to undertake a review of the AER’s decision on return on debt
[597]
The AER’s submissions
[597]
The electricity network respondents’ submissions
[607]
The AER’s reply submissions
[614]
Analysis and conclusion
[615]
Conclusion
[617]
THE VALUE OF IMPUTATION CREDITS (GAMMA)
[618]
The Tribunal’s Reasons
[618]
The grounds of review relevant to gamma
[648]
The AER’s submissions
[649]
Grounds 16 and 18
[655]
Ground 17
[674]
Ground 19
[681]
Ground 20
[691]
The electricity network respondents’ submissions
[696]
The AER’s reply submissions
[732]
Analysis
[738]
Orders
[785]
THE COURT:
INTRODUCTION
Before the Court are five applications for judicial review brought by the Australian Energy Regulator (the AER) in relation to five determinations of the Australian Competition Tribunal (the Tribunal).
Those determinations, and the Tribunal’s accompanying reasons, were as follows: Applications by Public Interest Advocacy Centre Ltd and Ausgrid [2016] ACompT 1 (ACT 1 of 2015, ACT 4 of 2015) (Ausgrid); Applications by Public Interest Advocacy Centre Ltd and Endeavour Energy [2016] ACompT 2 (ACT 2 of 2015, ACT 6 of 2015); Applications by Public Interest Advocacy Service Ltd and Essential Energy [2016] ACompT 3 (ACT 3 of 2015); Application by ActewAGL Distribution [2016] ACompT 4 (ACT 5 of 2015) (together NSD 415 of 2016, NSD 416 of 2016, NSD 418 of 2016 and NSD 419 of 2016); and Application by Jemena Gas Networks (NSW) Ltd [2016] ACompT 5 (ACT 8 of 2015) (NSD 420 of 2016).
These reasons concern the first four of these matters, which involve the National Electricity Law (NEL) and the National Electricity Rules (NER), and the common issues arising in the fifth matter in this list, NSD 420 of 2016, which involves the National Gas Law (NGL) and the National Gas Rules (NGR). Separate reasons, published today, deal with the return on debt issues specific to Jemena Gas Networks (NSW) Ltd (JGN), NSD 420 of 2016.
The determination of the Tribunal in the first of these matters (Ausgrid), which the parties treated as the lead determination by the Tribunal, was in the following terms:
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.
Each application to this Court for judicial review was made under the Administrative Decisions (Judicial Review) Act 1977 (Cth) (the ADJR Act): see paragraphs (ca) and (cb) of the definition of “enactment” in s 3(1) and items 2(d), (daa) and (da) of Sch 3 to the ADJR Act.
As will be seen, this Court is asked to find that the Tribunal made judicially reviewable errors in the course of reviewing, on (limited) merits review grounds, the AER’s Final Decisions.
These judicial review proceedings are in the original jurisdiction of the Court, although that jurisdiction has been directed by the Chief Justice to be exercised by a Full Court: s 20(1A) of the Federal Court of Australia Act 1976 (Cth).
As set out in the AER’s written submissions, the AER’s challenge to the Tribunal’s determinations was directed principally to the following core concerns:
(a)The Tribunal had failed to undertake its review function lawfully by failing to properly construe and apply the grounds of review under s 71C of the NEL and s 246 of the NGL. Errors of this kind led the Tribunal to carry out reviews of a kind that were not authorised by the legislation.
(b)In one instance, the Tribunal purported to review a decision of a type that did not and could not fall within its jurisdiction. This related only to the fifth matter, NSD 420 of 2016, which, as we have said, involves JGN and the NGL and the NGR and is the subject of separate reasons published today.
(c)The Tribunal allowed the distribution network service providers and the covered pipeline service provider to raise, in relation to whether a ground of review existed, matters that were not raised and maintained by the service providers in submissions to the AER before the reviewable regulatory decisions were made, thus contravening the constraints imposed by s 71O(2) of the NEL and s 258(3) of the NGL.
(d)The Tribunal erred in its construction of new provisions in the NER and the NGR relating to the determination of the rate of return on capital, the value of imputation credits and the operating expenditure criteria.
(e)The Tribunal made other reviewable errors in making its decision, including adopting reasoning that was irrational, unreasonable and/or uncertain.
It should also be noted that on 17 October 2016 the Court made the following orders on applications to intervene: see Australian Energy Regulator v Australian Competition Tribunal [2016] FCAFC 144:
1.On the application of the Minister for the Environment and Energy to intervene:
Until further order,
(a)Pursuant to r 9.12(2) of the Federal Court Rules 2011 (Cth), the Minister have leave to intervene in each of the applications, that leave being limited to the making of the written submissions on construction filed by him on 30 September 2016.
(b)There be no order for costs in respect of the Minister’s application to intervene or his intervention.
2.On the application of the Public Interest Advocacy Centre Ltd (PIAC) to intervene:
Until further order,
(a)Pursuant to r 9.12(2) of the Federal Court Rules 2011 (Cth), PIAC have leave to intervene in applications NSD 415/2016, NSD 416/2016 and NSD418/2016 that leave being limited to the making of the written submissions filed by it on 30 September 2016.
(b)There be no order for costs in respect of PIAC’s application to intervene or its intervention.
THE CENTRAL STATUTORY PROVISIONS
The relevant provisions of the NEL are as follows. We do not set out the equivalent provisions of the NGL, principally ss 245, 246, 258, 258A, 259 and 261.
Section 71B provides:
71B—Applications for review
(1)An affected or interested person or body, with the leave of the Tribunal, may apply to the Tribunal for a review of a reviewable regulatory decision.
(2) An application must—
(a) be made in the form and manner determined by the Tribunal; and
(b) specify the grounds for review being relied on.
Section 71C provides:
71C—Grounds for review
(1)An application under section 71B(1) may be made only on 1 or more of the following grounds:
(a)the AER made an error of fact in its findings of facts, and that error of fact was material to the making of the decision;
(b)the AER made more than 1 error of fact in its findings of facts, and that those errors of fact, in combination, were material to the making of the decision;
(c)the exercise of the AER’s discretion was incorrect, having regard to all the circumstances;
(d)the AER’s decision was unreasonable, having regard to all the circumstances.
(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.
(2)It is for the applicant to establish a ground listed in subsection (1) and the matter referred to in subsection (1a).
The term “materially preferable NEO decision” is defined in s 71A by reference to s 71P(2a)(c), which we set out below.
Section 71O provides:
71O—Matters that may and may not be raised in a review
(1)The AER, in a review under this Subdivision, may—
(a) respond to any matter raised by the applicant or an intervener; and
(b) raise any other matter that relates to—
(i) a ground for review; or
(ii) a matter raised in support of a ground for review; or
(iii)a matter relevant to the issues to be considered under section 71P(2a) and (2b).
(2)In a review under this Subdivision, the following provisions apply in relation to a person or body, other than the AER (and so apply at all stages of the proceedings before the Tribunal):
(a)a regulated network service provider to whom the reviewable regulatory decision being reviewed applies may not raise in relation to the issue of whether a ground for review exists or has been made out any matter that was not raised and maintained by the provider in submissions to the AER before the reviewable regulatory decision was made;
(b)a regulated network service provider whose commercial interests are materially affected by the reviewable regulatory decision being reviewed may not raise in relation to the issue of whether a ground for review exists or has been made out any matter that was not raised and maintained by the provider in submissions to the AER before the reviewable regulatory decision was made;
(c)an affected or interested person or body (other than a provider under paragraph (a) or (b)) may not raise in relation to the issue of whether a ground for review exists or has been made out any matter that was not raised by the person or body in a submission to the AER before the reviewable regulatory decision was made;
(d) subject to paragraphs (a), (b) and (c)—
(i)the applicant, or an intervener who has raised a new ground for review under section 71M, may raise any matter relevant to the issues to be considered under section 71P(2a) and (2b); and
(ii)any person or body, other than the applicant or an intervener who has raised a new ground for review under section 71M, may not raise any matter relevant to the issues to be considered under section 71P(2a) and (2b) unless it is in response to a matter raised by—
(A) the AER under subsection (1)(b)(iii); or
(B) the applicant under subparagraph (i); or
(C) an intervener under subparagraph (i).
(3) For the purposes of subsection (2)(d)—
(a)a reference to an applicant includes a reference to a person or body who has applied to the Tribunal for leave to apply for a review under this Subdivision; and
(b)a reference to an intervener includes a reference to a person or body who has applied to the Tribunal for leave to intervene in a review under this Subdivision.
Section 71P relevantly provides:
71P—Tribunal must make determination
(1)If, following an application, the Tribunal grants leave in accordance with section 71B(1), the Tribunal must make a determination in respect of the application.
Note—
See section 71Q for the time limit within which the Tribunal must make its determination.
(2) 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).
(2c)If the Tribunal makes a determination under subsection (2)(b) or (c), the Tribunal must specify in its determination—
(a)the manner in which it has taken into account the interrelationship between the constituent components of the reviewable regulatory decision and how they relate to the matters raised as a ground for review as contemplated by subsection (2b)(a); and
(b)in the case of a determination to vary the reviewable regulatory decision—the reasons why it is proceeding to make the variation in view of the requirements of subsection (2a)(d).
(3)For the purposes of making a determination of the kind in subsection (2)(a) or (b), the Tribunal may perform all the functions and exercise all the powers of the AER under this Law or the Rules.
(5)A determination by the Tribunal affirming, varying or setting aside the reviewable regulatory decision is, for the purposes of this Law (other than this Part), to be taken to be a decision of the AER.
Section 71R provides:
71R—Matters to be considered by Tribunal in making determination
(1)Subject to this section, the Tribunal, in acting under this Division with respect to a reviewable regulatory decision—
(a)must not consider any matter other than review related matter (and any matter arising as a result of consultation under paragraph (b)); and
(b)must, before making a determination, take reasonable steps to consult with (in such manner as the Tribunal thinks appropriate)—
(i)network service users and prospective network service users of the relevant services; and
(ii)any user or consumer associations or user or consumer interest groups,
that the Tribunal considers have an interest in the determination, other than a user or consumer association or a user or consumer interest group that is a party to the review.
(3)If in a review the Tribunal is of the view that a ground for review has been made out, the Tribunal may, on application by a party to the review, allow new information or material to be submitted if the party can establish to the satisfaction of the Tribunal that the information or material—
(a)was publicly available or known to be available to the AER when it was making the reviewable regulatory decision; or
(b)would assist the Tribunal on any aspect of the determination to be made and was not unreasonably withheld from the AER when it was making the reviewable regulatory decision,
and was (in the opinion of the Tribunal) information or material that the AER would reasonably have been expected to have considered when it was making the reviewable regulatory decision.
(4)Subject to this Law, for the purpose of subsection (3)(b), information or material not provided to the AER following a request for that information or material by it under this Law or the Rules is to be taken to have been unreasonably withheld.
(5)Subsection (4) does not limit what may constitute an unreasonable withholding of information or material.
(5a) In addition, if in a review the Tribunal is of the view—
(a) that a ground for review has been made out; and
(b)that it would assist the Tribunal to obtain information or material under this subsection in order to determine whether a materially preferable NEO decision exists,
the Tribunal may, on its own initiative, take steps to obtain that information or material (including by seeking evidence from such persons as it thinks fit).
(5b)The action taken by a person acting in response to steps taken by the Tribunal under subsection (5a) must be limited to considering decision related matter under section 28ZJ.
(6) In this section—
review related matter means—
(a) the application for review; and
(b) a notice raising new grounds for review filed by an intervener; and
(c) the submissions made to the Tribunal by the parties to the review; and
(d) decision related matter under section 28ZJ; and
(e)any other matter properly before the Tribunal in connection with the relevant proceedings.
THE TRIBUNAL’S JURISDICTION AND POWERS
The submissions of the parties and of the interveners
We shall set out the competing submissions at some length since this is the first occasion on which a Full Court has been required to construe the grounds for review in the NEL and the NGL in their present form. As will be seen, there is a limit to the usefulness of construing terms such as “findings of facts”, “error of fact”, “exercise of… discretion” and “unreasonable” in the abstract.
The AER submitted that the legislature had confined the extent to which the merits of the AER’s determinations may be reconsidered, by reference to the grounds enumerated in s 71C(1) of the NEL (and s 246(1) of the NGL): see Application by WA Gas Networks (No 3) [2012] ACompT 12 (WA Gas Networks) at [22] and the Tribunal cases there cited. So much was common ground.
The AER submitted that the first two grounds of review could only be established by an applicant satisfying the Tribunal of three elements: (a) identifying the AER’s findings of fact, in so doing it is “crucial to ascertain precisely what the conclusion of fact was” (Application by Envestra Pty Limited (No 2) [2012] ACompT 3 (Envestra) at [138]); (b) determining whether, within those findings, there are one or more facts that can properly be characterised as constituting an error or errors of fact; and (c) if so, determining whether the error was material to the making of the decision.
As to the first element, the AER submitted it was readily apparent that the NEL and NGL were not premised upon any simple fact/law dichotomy. The reference to “discretion” in the third ground excluded such an approach. The concept of a “fact” in this legislative context did not embrace everything that was not “law”. For example, a finding of fact did not extend to the making of choices between permitted methodologies or the attaching of weight to competing regulatory considerations: (Australian Competition and Consumer Commission v Australian Competition Tribunal [2006] FCAFC 83; (2006) 152 FCR 33 (ACCC v ACT) at [172]; Envestra at [30]).
It was uncontroversial that the expression “findings of fact” extended to findings as to the existence of historical or present facts comprised by events or circumstances: ACCC v ACT at [171].
In obiter dicta, ACCC v ACT (at [171]) suggested that the expression “should be interpreted broadly” so as to extend to “an opinion about the existence of a future fact or circumstance”. This conclusion was premised upon the observation that the regulator’s functions involved not only making assessments of historical and present facts but also assessing expert opinion on various matters pertaining to likely future circumstances. It was said by the service providers that the “error of fact” ground of review should cover opinions of future facts or circumstances in order to make the review “meaningful” in relation to the regulator’s function. The AER submitted that this analysis did not arise from the language of the legislation or the intention of having limited merits review. Further, the Full Court’s approach did not address case law that distinguished between “matters of fact” and “expressions of opinion”: Pfizer Pty Ltd v Birkett [1999] FCA 1778 at [11]. In any event, these obiter statements were made in the context of provisions that were not complete analogues to s 71C. The AER submitted that opinions about the existence of future facts (in other words, forecasts) were properly reviewed under the “unreasonableness” ground of review in s 71C.
In Application by ActewAGL Distribution [2010] ACompT 4 (ActewAGL) referring to the ACCC v ACT decision of the Full Court, the Tribunal at [32] described the Court’s characterisation of an opinion as comprising a finding of fact as involving “a radical meaning to be given to the word ‘fact’”, observing that “the generally accepted view is that an opinion is an inference which is drawn from facts”. Although there will be many instances where it is “difficult (if not impossible) to distinguish between ‘fact’ and ‘opinion’”, the Tribunal in ActewAGL considered, by reference to examples, that the difference was “between a more concrete and specific form of descriptive statement and a less specific and concrete form”.
The AER contended that the Tribunal in ActewAGL was rightly sceptical of the characterisation of opinions as findings of fact for the purposes of s 71C(1)(a) and (b) of the NEL. It was submitted that this Court should not apply the Full Court’s obiter on this issue to s 71C. (It was obiter because the ACCC sought judicial review in the Full Court of the Tribunal’s conclusion that the ACCC’s exercise of discretion had been incorrect or unreasonable. The Tribunal did not find an error of fact: see ACCC v ACT, [181]; on appeal to the High Court: East Australian Pipeline Pty Ltd v Australian Competition and Consumer Commission [2007] HCA 44; 233 CLR 229, 249 [78] (EAPL).)
As to the second element of the first two grounds of review, the AER submitted that when the Tribunal considered whether there was an “error of fact”, the concept of “error” set a threshold that was not passed simply because there was material that could support a different finding of fact or simply because the Tribunal might, if it considered the material afresh, prefer to make a different finding of fact: Application by DBNGP (WA) Transmission Pty Ltd (No 3) [2012] ACompT 14 (DBNGP) at [326] and WA Gas Networks at [22]. Before a fact could be characterised as erroneous, more had to be established by a review applicant: such as the absence of evidence supporting the finding made. Further, “where the finding is a complex one, that is one which involves the assessment of expert opinion material or conflicting material or (as here) conflicting expert opinion material, an error of fact was not shown simply because one expert opinion or set of opinions had been preferred over another expert opinion or set of opinions.
As to the third element of the first two grounds of review, the AER submitted that the applicant also had to establish that the error (or the errors in combination) was (or were) “material”. In Envestra, the Tribunal (at [32]) defined an error of fact as material “if the relevant decision of the AER depends, or is based, on the error”, citing the decision of Jagot J in Ibrahim v Minister for Immigration and Citizenship [2009] FCA 1328 at [8]. The reasoning of her Honour in that case was consistent with higher authority as to the meaning of “material”, to which her Honour referred at [10]-[13].
The AER submitted that the third ground of review – incorrect exercise of discretion – did not concern findings of fact made by the AER; rather, it related to matters in respect of which the AER had made a choice under the NEL and NER (or the NGL and NGR): ACCC v ACT at [173]. The Full Court implicitly (and correctly) invoked the applicable principles for review of discretionary decisions in House v R [1936] HCA 40; 55 CLR 499 at 504-5 (House). On appeal in EAPL, Gummow and Hayne JJ observed that the first part of the ground of review in s 39(2)(a), that the exercise of the ACCC’s discretion was incorrect, “should be understood as encompassing the words in House, ‘[i]f the judge acts upon a wrong principle, if he allows extraneous or irrelevant matters to guide or affect him … if he does not take into account some material consideration’” (at [79]).
The AER submitted that if the AER had exercised its discretion on correct principles and if the particular exercise of discretion was open to it, the Tribunal was not empowered to set aside that decision because it thought another decision would have been preferable: ACCC v ACT at [176]; Envestra at [34].
As to the ambit of the fourth ground of review, established when the AER’s decision was shown to be unreasonable, the AER submitted that in Envestra, citing Application by ElectraNet Pty Limited (No 3) [2008] ACompT 3 (ElectraNet (No 3)) at [74], the Tribunal (at [48]) considered the ambit of this ground and stated that the “unreasonableness must be of the AER’s decision itself”, in contrast to a step in the reasoning leading to that decision. In other words, “it is the AER’s decision which must be unreasonable having regard to all the circumstances before that ground is enlivened”. The Tribunal in ElectraNet (No 3) referred with approval in this context to the statements of the Full Court regarding unreasonableness in ACCC v ACT at [178], and the Tribunal’s endorsement of that statement in ElectraNet (No 3) at [65] and in Application by EnergyAustralia [2009] ACompT 8 (EnergyAustralia) at [66]–[67].
The AER submitted that it was necessary, and reasonable, for it to form opinions (for example, in making forecasts) and to rely upon expert opinions. Where there was conflicting expert opinion, the AER may be required to choose between the opinions. Such a decision would only be unreasonable if the choice lacked reason or the underlying opinion lacked reason. No error was established simply by reason that the Tribunal might have chosen differently: ACCC v ACT at [172]-[176].
The AER also made submissions on constraints on matters that may be raised in support of grounds of review. It submitted that at “all stages” of the proceedings before the Tribunal – including leave – a party (other than the AER) was restricted in the submissions it may make to the Tribunal by the operation of s 71O(2) NEL, and s 258A(3) NGL. In summary, a party was not permitted to raise any matter that was not raised and maintained in submissions to the AER when it made its decision the subject of the review. In SPI Electricity Pty Ltd v Australian Competition Tribunal [2012] FCAFC 186; 208 FCR 151 (SPI Electricity), the Court considered that, as long as a matter was raised, review was not precluded “merely because it may have been raised more forcefully or more compellingly” (at [65]). Since that decision, however, the addition of the words “and maintained” to s 71O(2) and s 258A(3) indicated a legislative intention to focus attention upon the degree to which a submission was pursued throughout the assessment process.
The AER submitted that an applicant must have “maintained” its position in substance, not form. Section 71O(2) of the NEL and s 258A(3) of the NGL required an applicant actively to involve itself with the regulator’s stated views throughout the decision making process. That process would not be meaningful if parties could pay lip service to a particular contention and then seek the Tribunal’s intervention. The requirement that all contentions be raised and maintained before the AER ensured that all stakeholders had a proper opportunity to make submissions and provide evidence to the AER with respect to them.
The AER also made submissions on the “materially preferable NEO decision” test in its legislative context. Prior to the 2013 Act, the AER submitted, the Tribunal was empowered to set aside or vary a reviewable regulatory decision or remit the matter to the AER to make the decision again in accordance with a direction or recommendation only if one or more grounds of review were established. Subsequent to the 2013 Act, after reaching a state of satisfaction in relation to the existence of grounds of review, and possibly after considering further “information or material” (see s 71R(5a) of the NEL, s 261(3b) of the NGL), the Tribunal must consider whether s 71P(2a)(c) of the NEL or s 261(4a)(c) of the NGL had been satisfied before it can set aside or vary the AER’s decision. The “only … if” formulation was unambiguous: it posited a precondition on an exercise of power.
The AER submitted that s 71P(2a)(c) required the Tribunal to consider the specific decision that it would be inclined to make as a result of the establishment of one or more grounds of review and to compare that proposed decision with the AER’s reviewable regulatory decision. If the correction of errors revealed by established grounds of review necessarily resulted in a materially preferable National Electricity Objective (NEO) decision, then s 71P(2a) would have no work to do.
The expression “materially preferable” used ordinary English words and was not a technical expression. Having regard to dictionary definitions, the combined concept referred to something being “considerably more suitable or desirable” or “more suitable or desirable to an important degree”. In its broader context, this language meant that the Tribunal was required to consider whether its proposed decision would be likely to be considerably better suited to contributing to the achievement of the NEO than the AER’s decision. The Tribunal was not to assume that correcting an error of fact or redressing a departure from the NER necessarily resulted in a better decision; it needed to be satisfied on evidence that as between the two or more decisions the proposed decision would be likely to advance the achievement of the NEO to an important degree; if not so satisfied, there could be no change to the AER’s decision (even if it contained reviewable error).
Section 71P(2b) of the NEL identified three mandatory relevant considerations when considering whether a proposed Tribunal decision was materially preferable (in the relevant sense) to the AER decision. First, the Tribunal was required to consider how the constituent components of the reviewable regulatory decision interrelated with each other and with the matters raised (presumably successfully) as a ground of review: s 71P(2b)(a). This consideration was facilitated by the AER’s reasons which had to address this inter-relationship: s 16(1)(c). Secondly, the Tribunal had to consider the revenue and pricing principles (RPPs) (s 7A) in the same manner in which the AER was to take them into account: s 71P(2b)(b). That was to say, they were matters that had to be taken into account in certain circumstances and that could be taken into account in other circumstances (s 16(2)). In no circumstances were the principles binding constraints in their own terms: see Rathborne v Abel (1964) 38 ALJR 293 at 295 (per Barwick CJ) and 301 (per Kitto J); Minister for Aboriginal Affairs v Peko-Wallsend Ltd [1986] HCA 40; 162 CLR 24 at 41 (per Mason J, Gibbs CJ and Dawson J agreeing); Foster v Minister for Customs and Justice [2000] HCA 38; 200 CLR 442 at [22]–[23] (per Gleeson CJ and McHugh J) and at [34], [35] and [38] (per Gaudron and Hayne JJ); A v Corruption and Crime Commissioner [2013] WASCA 288; 306 ALR 491 at [90]-[92], [245]- [246], [248] (per Martin CJ, McLure P and Murphy JA). They were considerations which were useful to the extent that they assisted in “balancing” and “informing” how the NEO may be better achieved “in the context of ensuring the service provider acts efficiently”: see DBNGP at [77]. Thirdly, the Tribunal was required to, in assessing the extent of contribution to the achievement of the NEO, consider the reviewable regulatory decision as a whole: s 71P(2b)(c).
The AER submitted that these provisions were designed to meet a concern about review applicants “cherry picking” parts of reviewable regulatory decisions. The Standing Council on Energy and Resources (SCER) noted that a continuation of the pre-existing merits review regime “has the potential to embed cherry picking of decisions and gaming of the regime for future determinations”. The SCER considered that “such an outcome is inconsistent with ensuring that overall regulatory determinations are in the long term interests of consumers”.
In addition to the (non-exhaustive) guidance provided in s 71P(2b)(a)-(c) as to the matters that could be taken into account in determining whether the Tribunal’s decision would lead to a materially preferable NEO decision, s 71P(2b)(d) provided guidance as to considerations that were not, in themselves, sufficient to justify a conclusion that a decision to be varied by the Tribunal would be materially preferable to the AER’s decision (in relation to contributing to the achievement of the NEO).
The AER submitted that something more than these three matters needed to be established for the Tribunal to reach the requisite state of satisfaction. This was hardly surprising. The first of them must exist in every case in which the Tribunal would be inclined to vary or set aside a decision by the AER: if no ground of review had been established, no relief would be forthcoming. Paragraph (iii) served to emphasise that the materially preferable test was not a re-statement of the financial threshold imposed on leave applications (see s 71F). Exceeding that threshold was not itself sufficient to justify varying or setting aside the AER’s decision. The materially preferable NEO decision test was doing different, separate and additional work to s 71F.
The AER submitted that it was also significant that the consequences for, or impacts on, the average annual regulated revenue of a service provider was a factor that was not in itself sufficient to determine the question of whether the Tribunal’s proposed decision was a materially preferable NEO decision. An applicant must go beyond observing the quantity of the revenue that was at stake. Relying only upon materials permitted under s 71R, an applicant must establish why the achievement of the NEO was more likely than not to be contributed to as a consequence of the adoption of a decision that would rectify any grounds of review that had been established.
The AER submitted that in the context of this legislation, the use of the language “will, or is likely to”, in connection with whether a varied or substituted decision would be a materially preferable NEO decision, required the Tribunal to reach a state of satisfaction on the balance of probabilities. It could not have been the intention of the legislature that the AER’s decision be replaced simply because there was a mere prospect of improvement that was not remote, fanciful or farfetched.
The respondents Ausgrid, Endeavour Energy (Endeavour), Essential Energy (Essential) (referred to by the Tribunal as Networks NSW but which we refer to in these reasons as NSW service providers) and ActewAGL, (sometimes referred to as Distribution Network Service Providers (DNSPs) but which we refer to in these reasons as the electricity network respondents), submitted that the AER’s written submissions raised a large number of contentions relating to the merits of the Tribunal’s decision. Many of the matters raised were not properly grounds of judicial review, but rather were argumentative assertions about the Tribunal’s analysis of factual matters and the contentions of the parties.
The electricity network respondents submitted that one theme running through the AER’s submissions was an allegation that the Tribunal had not identified the errors in the AER’s decision with sufficient specificity. This assertion resulted from significant mischaracterisations of the Tribunal’s reasoning and conclusions. Those mischaracterisations took various forms. They underlay each of the five alleged “core concerns” referred to in the AER’s submissions (see [8] above), such that none of those concerns was justified.
More generally, the electricity network respondents submitted that the AER’s submissions failed to do justice to the lengthy and detailed reasons of the Tribunal which carefully analysed the evidence and the extensive submissions of the parties on the issues it determined, in the context of a legislative requirement to deliver its reasons on an expedited basis: NEL s 71Q. The Tribunal was a specialist tribunal constituted by a judge and two experts, making it well suited to deal with complex questions of fact and economic regulation: Pilbara Infrastructure Pty Limited v Australian Competition Tribunal [2011] FCAFC 58; 193 FCR 57 at [15]. As noted in Pilbara Infrastructure, it was not the Court’s function to resolve the difficult and complex matters of judgment raised by the evidence and resolved by the Tribunal. The AER in the present case, like the applicants in Pilbara Infrastructure, invited the Court to engage in what the Full Court in that case referred to as the “slide into impermissible merit review” at [17].
In relation to the scope of merits review and the grounds of review, the electricity network respondents submitted the Tribunal’s decision formed part of the “review” that the Tribunal was required to undertake under Pt 6, Div 3A Subdiv 2 of the NEL (“Merits review for reviewable regulatory decisions”) (Subdivision 2). The powers of the Tribunal to review regulatory decisions made by the AER under the NER were derived from the NEL.
Of further relevance was s 103(1)(a)-(b) of the Competition and Consumer Act 2010 (Cth), which provided that the procedure of the Tribunal ‘shall be conducted with as little formality and technicality, and with as much expedition, as the requirements of this Act and a proper consideration of the matters before the Tribunal permit’. Section 44ZZR of the CCA applied s 103 of the Competition and Consumer Act to the Tribunal when it was performing functions under a State/Territory energy law or a designated Commonwealth energy law.
In the administrative law context, the term ‘review’ “has no settled pre-determined meaning. Rather, it takes its meaning from the context in which it appears”: EAPL at [62] per Gummow and Hayne JJ (Gleeson CJ, Heydon and Crennan JJ agreeing at [13]).
The nature of the review by the Tribunal was, as the Tribunal repeatedly (and correctly) described in its reasons, a “limited merits review regime”: see [31], [92], [101], [699]. Specifically, the review conducted by the Tribunal was limited by: (i) the grounds for review upon which an application can be made (s 71C(1)); (ii) the matters that can be raised by a party other than the AER as part of the review (s 71O); and (iii) the material that may be considered by the Tribunal when making its determination in respect of the application for review (s 71R). However, subject to these limitations, the proper role of the Tribunal was to engage in merits review of the AER’s determination in order to determine whether a ground for review listed in s 71C was established.
The AER’s submissions, in section B, raised many points about the construction and scope of the grounds of review. It was somewhat difficult to discern how the balance of the submissions translated those observations into grounds of judicial review. For example, the AER made submissions (at AER [16]-[20]) about whether the Full Court was correct in ACCC v ACT to observe that a “finding of fact” could include “an opinion about the existence of a future fact or circumstance”. However, the Tribunal did not rely upon any errors of fact in that extended sense, and the AER did not anywhere suggest that it did.
The electricity network respondents submitted there was thus no occasion in the present case for a general review of the scope of the s 71C grounds. For completeness, they responded to the AER’s contentions as follows.
As to error(s) of fact – s 71C(1)(a)-(b) – the electricity network respondents submitted the phrases “error of fact” and “findings of fact” in s 71C(1)(a) and (b) of the NEL were ordinary English words with a familiar meaning in law in the context of judicial and appellate review. Except to the extent the statutory scheme indicated otherwise, the words should be read consistently with that jurisprudence.
First, in relation to the concept of “findings of fact”, it was well accepted that this encompassed far more than ‘primary’ fact finding. Findings of fact may include the application of standards requiring normative judgments. Thus, for example, a finding that particular conduct was negligent is a finding of fact, Woods v Multi-Sport Holdings Pty Limited [2002] HCA 9; 208 CLR 460 at 502-503 [137]-[140] per Hayne J, as was a finding that conduct was misleading or deceptive, Domain Names Australia Pty Ltd v .au Domain Administration Limited [2004] FCAFC 247; 139 FCR 215 at [18] (Full Court), a finding that inadequate provision had been made for an eligible person within a family provision statute, Singer v Berghouse [1994] HCA 40; 181 CLR 201 at 210 and a finding that a contract was ‘unjust’ within the meaning of the Contracts Review Act 1980 (NSW), Perpetual Trustee Co Limited v Khoshaba [2006] NSWCA 41; 14 BPR 26,639; at [40].
At the level of general principle, what inferences should be drawn from the evidence as was accepted by the trier of fact, was generally a matter of fact, Brakell v Metropolitan Ice & Cold Storage Works (W Angliss & Co Aust Pty Ltd) (1946) 63 WN (NSW) 203 (Court of Appeal). The distinction was often expressed in terms of whether a question would be left for the jury in a jury trial, Australian Competition and Consumer Commission v Telstra Corp Limited [2004] FCA 987; 208 ALR 459 at [49] (Gyles J).
A “finding of fact” in s 71C was at least as broad as its ordinary meaning in conventional usage, such as in conventional court proceedings. Such findings of fact may be simple (‘I find that the car was travelling on the wrong side of the road at the time of the accident’) or more complicated (‘Having regard to the evidence discussed above, including the expert opinions of Professor X and Professor Y and my consideration of those opinions, I find that the prevailing required return on equity for investors in a conventional electricity business in 2015 is 7.1%’). The latter may involve the weighing of different strands of evidence, the consideration of methodologies, and the formation of ‘evaluative judgments’. It was nevertheless a finding of fact. Further, it was plain that an expert opinion may be material relevant to a fact — whether it be the speed of a motor car or the costs likely to be incurred by a regulated entity. The expert evidence was likely to be material which informed the answers to the factual issues before the Tribunal and so informed the decision as to the fact or facts, DBNGP at [325].
There was nothing in the statutory language or context which suggested that ‘findings of fact’ should be narrower than its conventional meaning. Indeed, the Full Court in ACCC v ACT concluded (at [171]) that the meaning of ‘fact’ in the equivalent of s 71C was broader than its conventional meaning (historical facts and present facts), and extended to an opinion about the existence of a future fact or circumstance, and an opinion formed by the AER based upon approaches to the assessment of facts or methodologies which it had chosen to apply: decision reversed on appeal in EAPL, but not on that issue; DBNGP at [323]; ElectraNet No 3 at [67]; Envestra at [27]-[29].
The AER’s suggestion at [18], that the Full Court’s analysis in ACCC v ACT could be distinguished on the basis that the Court was there considering a provision that was not a true analogue was misconceived (as the ground for review under consideration by the Full Court provided that there had been an “error in the relevant Regulator’s findings of facts”): EAPL at [77]. The AER placed emphasis on a suggestion by an earlier Tribunal in ActewAGL at [32]-[33] that the Full Court’s characterisation of an opinion as within the concept of a “finding of fact” was a “radical meaning” to be given to the word fact. However, later Tribunals had not adopted this observation in ActewAGL: Application by APT Allgas Energy Limited (No 2) [2012] ACompT 5 (Allgas) at [31] citing ACCC v ACT at [171], see [58] below.
Secondly, the phrase “error of fact” in s 71C(1)(a)-(b) also had a familiar meaning in law in the context of judicial and appellate review. Any error in the making of the “findings of fact” as described above was an error of fact. That is, where an applicant raised an error of fact ground, the language of s 71C(1)(a) required the Tribunal to assess the impugned factual findings made by the AER to determine if they could properly be described as “erroneous”, by reference to the evidence upon which they were based: Inghams Enterprises Pty Ltd v Sok [2014] NSWCA 217; 87 NSWLR 198 at [22]. Typical errors included errors in the weighing of evidence, in failing to have regard to probative evidence, in misunderstanding the significance of certain evidence, or in making a logical error in the evaluation process: Warren v Coombes [1979] HCA 9; 142 CLR 531 at 551-552. The Tribunal did not also need to be satisfied that the factual finding of the AER was illogical or irrational. Such a restriction was contrary to the structure of s 71C(1): ElectraNet No 3 at [73].
There was nothing in the statutory scheme of the NEL which indicated that an impugned finding which was based on ‘evaluative judgment’ could not constitute an ‘error of fact’: cf. AER [21]. As the Full Court said in ACCC v ACT at 74 [171], the words ‘error of fact’ should be interpreted “broadly enough to be meaningful” in relation to the function of the AER under review. To remove all findings based on ‘evaluative judgments’ from the Tribunal’s review of errors of fact would be to substantially curtail the availability of merits review. In this respect, the AER quoted ACCC v ACT out of context. That case involved a different Code relating to gas which specifically set out (in s 8.4) which methodologies were permitted to be adopted in calculating total revenue (see [60]).
Section 8.10 of the Code then set out a list of factors that should be considered in establishing a capital base for a pipeline (at [62]). Unsurprisingly, the Full Court stated in obiter at [172] that a finding of fact is not in error because it is based upon the use of one [permitted] methodology in s 8.4 rather than another [permitted methodology]. Likewise, the Court observed that the relative weight to be given to the list of expressly-permitted considerations in s 8.10 was a matter of discretion rather than a finding of fact which could be impugned. As such, the observation of the Full Court was in fact a narrow one which related only to choices among permitted choices. In any event, the Full Court’s observations were not purporting to be an exhaustive description of the ‘error of fact’ ground.
At AER [21], the AER relied on the unremarkable proposition made by an earlier Tribunal in DBNGP at [326] that an error of fact was not established merely by pointing to other evidence that would have supported an alternate fact, to contend that more must be established, “such as the absence of evidence supporting the finding made”. Under the ‘limited merits review’ available pursuant to Subdiv 2, a ground based on an error of fact was clearly broader than the ‘no evidence’ ground of judicial review. As already submitted, an error of fact for the purpose of s 71C(1)(a) and (b) was at least as broad as an error of fact in ordinary judicial proceedings.
The conclusion that the Tribunal’s review for ‘error of fact’ bore its conventional meaning in s 71C was buttressed by the extrinsic materials which supported the conclusion that the legislative intention in relation to the merits-review provisions in Subdiv 2 was to provide for a new type of review that was broader than judicial review.
The electricity network respondents also made submissions on s 71C(1)(c), that the exercise of the AER’s discretion was incorrect, having regard to all the circumstances.
The AER was mistaken to suggest that the Full Court’s decision in ACCC v ACT at [175] would support constraining the error in exercising a discretion to those available as judicial review grounds. To the contrary, the Full Court accepted that traditional grounds for judicial review, in relation to the exercise of a discretion, were clearly within s 71C(1)(c); but then continued at [175].
Thus the Full Court’s decision was not purporting to restrict the scope of s 71C(1)(c), as suggested by the AER, but in fact was acknowledging its breadth. It certainly was not purporting at [174]-[175] of its decision to make an exhaustive statement of the categories of error that might properly be described as an error of discretion.
There was no reason to construe the ground to exclude logical error or unexplained discretionary choice because of the availability of s 71C(1)(d). It may well follow that logical error or unexplained discretionary choice also resulted in an unreasonable decision (see ACCC v ACT at 75 [178]) but it was not necessarily so; hence the separate ground, and hence why logical error or unexplained discretionary choice fell within the s 71C(1)(c) ground, as recognised in a series of decisions of the Tribunal: APT Allgas at [49]; Energy Australia at [67]; Envestra at [47]; ATCO Gas at [40].
In MCE, Decision – Review of Decision-Making in the Gas and Electricity Regulatory Frameworks, May 2006 (MCE Decision), when commenting on a then proposed combined “exercise of the decision-maker’s discretion was incorrect or was unreasonable” ground (set out at the bottom of p21), the Ministerial Council of Energy (MCE) said:
This proposed merits review ground would instead allow the ACT to scrutinise the discretion exercised by the decision-maker, taking into account a wider range of circumstances than judicial review would allow. The ACT could decide whether, in all the circumstances, it agrees with the reasoning, judgments and choices made by the original decision-maker. If the ACT considers it made an error, or the decision was unreasonable in a less onerous sense than the judicial review Wednesbury sense, then the ACT would have the power to re-exercise the power to the extent necessary to address the error, and to this extent has all the power of the original decision-maker. But rather than being directed towards an examination at large, the merits review ground would allow the ACT to focus on those matters that it considers being of sufficient weight and importance to make out the specified ground of review.
This was far removed from judicial review. The MCE went on, at p24, to decide that the single “exercise of the discretion was incorrect or was unreasonable” ground should be separated out into the two grounds present in s 71C(1)(c) and (d), not so as to narrow the ground, but rather so as to avoid a difficulty if the aspect of a decision that was “unreasonable” was not strictly speaking an exercise of discretion in a legal sense. The MCE Decision was otherwise useful in explaining the policy reasons for adopting a process of merits review that was far broader than judicial review.
The electricity network respondents also made submissions on s 71C(1)(d) – that the decision was unreasonable. Those parties submitted that it was neither possible nor necessary to give an exhaustive definition of what is an ‘unreasonable’ decision: ActewAGL at [35]. However it was clear that the concept of unreasonableness in s 71C(1)(d) went beyond Wednesbury unreasonableness: Allgas at [51]; EnergyAustralia at [63]; ActewAGL at [35].
The following were given as examples of when a decision met the description of ‘unreasonable’ within s 71C(1)(d): a decision that contained logical error or irrationality: Allgas at [51], citing ACCC v ACT at [178]; a decision that contained an element of arbitrariness: Energy Australia at [67]; ActewAGL at [35]; a decision that was not determined by reference to the applicable criteria in the NEL or the NER: EnergyAustralia at [68], cited with approval in Application by United Energy Distribution Pty Limited [2012] ACompT 1 at [49]-[50], Envestra at [52], Allgas at [54] and ATCO Gas at [45]; or a decision where there had been a failure to take into account a matter which was required to be considered or consideration of a matter which was irrelevant: Allgas at [54]; ActewAGL at [35].
In relation to the observation at AER [26] that the unreasonableness must be in the “decision itself”, whilst in a very limited number of cases it might be possible to say that the overall decision was ‘unreasonable’ because the result was plainly unreasonable (without more), in the majority of cases it would be necessary to identify the error in logic or the irrational step which had caused the AER’s decision to miscarry, i.e. has caused the AER to make the decision. This was what the parties in the present case did before the Tribunal. They identified the error, and explained how that error led to the overall decision being a substantial departure from the correct decision. The AER’s point did not (and was not said to) go anywhere for the purposes of the present matter.
The AER also contended that certain errors could not be ‘unreasonable’ if the AER’s decision was merely open on the evidence. This was far from a complete statement in relation to the ground of ‘unreasonableness’ as that concept was understood, even within the limited constraints of judicial review: Minister for Immigration and Citizenship v Li [2013] HCA 18; 249 CLR 332 at [68]-[74]; see also APT Allgas at [51], [55]; ActewAGL at [35]. That the decision was open, on the evidence, may not be relevant when the Tribunal was examining an unreasonable decision that contained logical error or irrationality, or an element of arbitrariness or was not determined by reference to the applicable criteria in the NEL or the NER or if there had been a failure to take into account relevant considerations or consideration of a matter that is irrelevant.
Finally, the electricity network respondents noted that s 71C(1)(d) separately addressed the unreasonableness of the AER’s decision as a ground of review (as distinct from s 71C(1)(c) which referred to “incorrectness” in the AER’s exercise of its discretion). By contrast, the respective statutes at issue in ACCC v ACT, included a ground of review which linked unreasonableness to the exercise of discretion. The difference in the drafting of s 71(1)(c) and (d) of the NEL meant, as the Tribunal observed in EnergyAustralia, that the term ‘unreasonable’ did not just provide a basis for informing the presence of one or more of the established grounds which rendered a decision ‘incorrect’, in the sense of the incorrect exercise of discretion. Rather, it provided a distinct ground of review: Energy Australia at [59]. It also followed that the observations in ACCC v ACT in relation to unreasonableness in the context of an incorrect exercise of discretion were not applicable to s 71C.
The electricity network respondents also made submissions on s 71O(2) – the constraint on matters that may be raised.
Those parties submitted that this issue was only relevant to the debt topic. It was unnecessary to consider these matters in detail because on any view the relevant matter was raised and maintained by the respondents. This was readily apparent when the relevant issue was understood in its proper context, and not as mischaracterised by the AER.
However, the electricity network respondents submitted, the significance of the decision in SPI Electricity for the current wording of s 71O(2), and therefore to the proper construction of that wording, had been misstated by the AER. Prior to recent amendments, s 71O(2) prevented an applicant from raising any matter before the Tribunal “that was not raised in submissions to the AER”. It had been held that this did not require that the argument before the Tribunal be in precisely the same form as the submission to the AER, but rather “[i]t is only if a matter … cannot be identified as broadly arising out of a matter fairly raised before the determinations under review were made that it will not be permitted to be raised in the review”, and this would accommodate a reformulation of the argument provided the argument had been put to the AER: EnergyAustralia at [312(f)]; Application by Epic Energy South Australia Pty Limited [2002] ACompT 4; (2003) ATPR 41-932 at [24]. That authority was not affected by SPI Electricity or the subsequent amendment.
It was clear that the addition of “and maintained” was to deal with the specific mischief of an argument being resolved or abandoned during the process before the AER. It was not dealing with the existing authorities as to the specificity with which the issue had to be raised. Nor, contrary to the AER’s submission, was the addition of “and maintained” contrary to the Full Court’s conclusion in SPI Electricity that an issue could be “raised” (and maintained) even if it could have been pursued more forcefully or more compellingly.
The electricity network respondents also made submissions on the issue of the materially preferable NEO decision.
Those parties submitted that like the section on the s 71C grounds, the AER had advanced very general submissions about the requirements in the NEL pertaining to a “materially preferable NEO decision”. It was unnecessary to determine all of the matters raised by the AER, because the only alleged error by the Tribunal in its findings in respect of this requirement was a specific matter connected with imputation credits, and a general matter raised in connection with the AER’s overall approach to “grounds for review”. It was likewise unnecessary for the respondents to respond to all of the matters raised.
The AER referred to the issue of “cherry picking”, and provided an example to illustrate the point. There may be cases where the regulated business sought to correct one error, where there was a matching error or matching generosity elsewhere, such that correcting the error would not result in a materially preferable decision in terms of satisfying the NEO. However, the present case was not such a case. The errors identified by the Tribunal were errors in fundamental aspects of the revenue building blocks, which caused allowable revenue to be materially understated. As the Tribunal recorded at [1221], it was not suggested that any interrelationships or generosities were of such magnitude as to offset the potentially adverse consequences of the established grounds of review.
The Tribunal gave very careful consideration to the issue of a materially preferable NEO decision, at [31]-[49], [65]-[101], and [1176]-[1226] (and with other references throughout the decision). Nothing said by the Tribunal was inconsistent with any point made by the AER in its submissions and the AER did not appear to suggest otherwise. With the exception of ground 19 relating to a specific issue concerning the value of imputation credits, the AER’s application did not raise any ground concerning the Tribunal’s finding that its determination would likely result in a “materially preferable NEO decision”.
In reply, the AER submitted it did not ask this Court to “resolve the difficult and complex matters of judgment raised by the evidence and resolved by the Tribunal”. To the contrary, the AER challenged the Tribunal’s decision on the basis that, in purporting to resolve such matters, the Tribunal exceeded the scope of its powers under the NEL and NGL. In Pilbara Infrastructure Pty Limited v Australian Competition Tribunal [2012] HCA 36; 246 CLR 379, the High Court reversed the Full Court and set aside a decision of the Tribunal on the basis that it had formed its conclusions following a review which was not of the kind that was provided for under the relevant legislative scheme: at [120]. This Court should reach the same conclusion here. Indeed, there were even greater constraints on the Tribunal’s powers to conduct a limited merits review of regulatory decisions of the AER – which must be based on the particular grounds, the particular material and the particular subject matter specified in the NEL and NGL – than there were upon the Tribunal’s function at issue in Pilbara Infrastructure (at [35]-[37], [60]) to undertake a “re-consideration” of the relevant matter. Further, in addition to the limits imposed on the Tribunal’s powers to review the AER’s decisions by NEL ss 71C, 71O and 71R (and NGL equivalents), the Tribunal’s merits review jurisdiction was limited to one which led to a materially preferable NEO decision.
As to error of fact – NEL s 71C(1)(a)-(b); NGL s 246(1)(a)-(b), the AER submitted in reply that the review regime presently in issue conferred discrete powers for the Tribunal to review material errors of fact in findings of fact, unreasonable decisions, and incorrect exercises of discretion. In delineating what was required to establish a ground under each category, the articulation by courts of the meaning of a “fact” in quite different contexts – including ones concerning whether a finding warranted appellate intervention under specific provisions, was appropriately a subject of expert evidence, or was amenable to determination by a jury – could not provide any useful guidance.
The AER submitted that the electricity network respondents’ suggestion that an error of fact for the purpose of s 71C(1)(a) may arise from the formation of evaluative judgments to prefer the opinion of a particular expert, or the making of choices from permitted methodologies, found no basis in the extrinsic material, was inconsistent with authority and should be rejected: ACCC v ACT at [171]-[173]; Envestra at [30]. Such an expansive construction of the notion of an error of fact would give the “unreasonableness” and “incorrect discretion” grounds in s 71C little or no operation; and would enfeeble the objective legislative intent – evinced by the deliberate insertion of grounds of review in the merits review regime in the first place – to limit the class of errors that were susceptible to Tribunal review. Indeed, the untrammelled characterisation of an error of fact, for which the electricity network respondents contended, had been rejected even where extremely broad review powers were engaged.
As to s 71C(1)(c) – incorrect discretion – the AER submitted that the passage from ACCC v ACT did not detract from the Court’s identification that the respects in which a discretion may be said to be exercised incorrectly mirrors the categories identified in House. If a material error of fact had been established, it may follow that a discretion informed by such a fact had also been exercised incorrectly. However, where no factual error had been established, the discretion could only be said to have been exercised incorrectly if a legal error of the kind articulated in ACCC v ACT at [174] had been made.
The extrinsic material relied upon by the electricity network respondents (see [66] above) gave little guidance on how to ascertain whether “the exercise of the original decision maker’s discretion was incorrect, having regard to all the circumstances”, given that the MCE commentary which was there extracted was directed to a different form of language than that which was ultimately included in each of s 71(1)(c) and s 246(1)(c).
As to s 71C(1)(d) – that the decision was unreasonable – the AER submitted that it had not sought to confine a decision that was “unreasonable, having regard to all the circumstances” to one which was merely not open to the AER on the evidence. The AER squarely accepted that the concept of unreasonableness extended to a decision which was not justified by reference to its stated reasons, or which was arbitrary and capricious. That said, the AER submitted in reply, as the unreasonableness ground was supplemental to grounds that related to an error of fact or incorrect exercise of discretion, there was no basis in the legislation to construe it as covering the universe of logical errors or deficient reasoning, as the electricity network respondents appeared to contend.
As to s 71O(2) – the constraint on matters that may be raised – the AER submitted that the respondents invited this Court to construe the provisions, in their amended form, by applying the authorities which considered what needed to be done to “raise” a matter – within the meaning of the unamended provisions – and then construing the meaning of “and maintained” by reference to the particular facts of the case (SPI Electricity) which ostensibly prompted the relevant amendments. That approach to construction should be eschewed. The provision required that a matter not be agitated before the Tribunal where the AER and not been asked to consider and reach views on it throughout its complex regulatory decision-making process.
The intervenors made submissions on these issues and the parties responded to those submissions as follows.
The Minister submitted it may be necessary when construing an amended Act to approach with caution earlier interpretations of the Act (and even its unamended provisions) which could not have accounted for the effect of the subsequent amendments. It is the text as amended which is controlling, and not “[p]araphrases of the statutory language … in cases decided under the Act or under different legislation”: Baini v The Queen [2012] HCA 59; 246 CLR 469 at [14]. An earlier version of an Act is, for this purpose, “different legislation”. Such paraphrases are “apt to mislead” and “do not, and cannot, stand in place of the words used in the statute”.
The Minister submitted that the relevant context included the South Australian Minister’s Second Reading Speech for the Bill for the 2013 Amending Act (South Australia, Parliamentary Debates, House of Assembly, 26 September 2013, 7171 (The Hon J R Rau) which explained that the amendments implemented aspects of COAG’s Energy Market Reform Implementation Plan. Its “most significant amendments” related to “the role of the [Tribunal] in conducting a review of a reviewable regulatory decision”.
The AER was wrong to assert, the respondents submitted, that the Tribunal indicated that the AER would be required to consider the competing expert views on any remitter. Nothing in [1118]-[1119] of the Tribunal’s reasons suggested this. There was also nothing uncertain or unclear about the Tribunal’s direction on gamma. The Tribunal directed the AER to use 0.25 as the figure for gamma but, correctly, left the AER with a discretion as to its overall assessment of the total revenue allowance after it took into account any relevant interrelationships between the different parts of the determination.
The AER’s reply submissions
In reply, the AER submitted that the Tribunal exceeded the limits of its jurisdiction in making its determination that the AER should make its decisions again by reference to a gamma of 0.25 in the absence of any clear finding that a s 71C ground of review was made out. The Tribunal observed at [1062]-[1063] that it was not required to conclusively determine the dispute and consequently the subsequent rejection by the Tribunal of the AER’s weighting of various techniques for measuring gamma could not be said to have been founded on any finding by the Tribunal that the AER erred in law in construing the concept of gamma or that the AER incorrectly exercised its discretion. The Tribunal did not engage in the in-depth construction exercise now propounded by the respondents. The Tribunal’s reasoning disclosed that it was firmly focused not on what gamma is but with how gamma ought to be measured. Its disagreement with the weight given to measurement methods did not engage any ground of review. In reasoning as it did at [1072], the Tribunal assumed that the market value studies relied on by the providers to support their preferred gamma figure of 0.25 gave the authoritative “answer” for gamma. That approach involved legal error. The Tribunal simply assumed the correctness of the estimate drawn from one measurement technique (market value studies) and, proceeding on that assumption, rejected the others. It did not identify or connect its findings to a permissible ground of review.
To the extent that the Tribunal’s reasoning was predicated upon some legal construction of the notion of gamma, the AER submitted such construction was erroneous. The Tribunal’s approach to gamma was underpinned by a misunderstanding on its part about how return to investors was conceptualised in a WACC framework. The Tribunal appeared to have assumed that other parameters in the WACC calculations were market values that already incorporated investors’ tax positions and transaction costs however, the AER submitted, that misconstrued the “post-tax” framework. The rules required gamma to be determined consistently with return on equity. The return on equity proceeded on the basis that the “value” of a $1 dividend is $1. The whole objective of including gamma in the revenue calculation was to avoid overcompensation and this was undermined by assuming the value of $1 of imputation credits was less than $1. The Tribunal should have found that the AER’s approach to gamma was consistent with the approach taken to other building blocks. The AER’s approach to gamma was supported by Associate Professor Handley and his expertise should not be challenged in these judicial review proceedings.
The AER also submitted in reply that the Tribunal erred in the manner in which it assessed and ruled upon the techniques for measuring gamma which were in issue. Deciding such matters, which turned on competing expert evidence on matters of methodological preference, went beyond the Tribunal’s remit to determine the grounds of review in s 71C. The AER submitted the Tribunal was wrong to reject the equity ownership and tax statistics approaches as ones that “make no attempt to assess the value of imputation credits to shareholders”. Clearly the earlier decision of the Tribunal in Energex Ltd (No 2) was material to the Tribunal’s reasoning. The Tribunal did not address the AER’s expert evidence about why tax statistics could provide a point estimate. The Tribunal rejected the tax statistics methodology for a legally flawed reason. In addition, the Tribunal’s erroneous rejection of the tax statistics approach was what led to its rejection of the equity ownership approach and impugned its entire consideration of the issue of gamma, as apparent by its conclusion at [1096].
The AER criticised the respondents’ submissions as attempts to re-engage the merits of the Tribunal’s treatment of the various methodologies used for deriving gamma. That having been said, the AER submitted that as the flaws in the submissions made on such points were apt to mislead the Court, it was necessary for the AER to directly address them.
The AER submitted it was critical to bear in mind that there is no market for imputation credits which allows their value to be directly observed. As such, it is necessary for that value to be estimated from observable data. That data can never provide the value for gamma, but can only ever be a surrogate or proxy, from which inferences may be drawn. The robustness of the gamma estimate that is drawn from the data depends on many factors. The AER submitted that the respondents’ submission that there were five factors that affected how investors valued imputation credits, and which were accounted for by market value studies, could not resolve which valuation method was the most appropriate for producing a gamma figure. Such a submission assumed that the theoretical capacity of an estimation technique to account for more factors which might contribute to value meant that such a technique would actually produce the more robust figure. The market value studies, even assuming that they were directed to measuring the factors which impacted upon value, faced problems both with the data that was relied upon and the econometric manipulations made to such data to derive the ultimate inference as to value. The Tribunal accepted as much at [1045]-[1052].
The AER submitted a revised version of the table advanced in the submissions on behalf of the electricity network respondents which, the AER submitted, accorded with the manner in which the AER made its regulatory decisions and the Tribunal’s findings:
Equity ownership approach
Tax Statistics Approach
Market value studies
Reliability of underlying data set
✓
Based on foreign ownership statistics which are robust: (see [1038])
✕
Inaccuracies in data (see [1092])
✕
Considerable data problems (see [1050], [1052])
Fitness for
purpose of data set
✓
Extent to which credits may be utilised by domestic investors (who, in large part, can utilise credits) provides a proxy for value (see [1038], [1091])
✓
Extent to which credits are utilised as disclosed by information reported in tax returns provides a proxy for value (see [1046])
✕
Movements in share prices around dividend payments dates may be explicable for reasons other than distribution of credits and so may not provide a proxy for value. (see [1050], [1052])
Reliability of manipulation required to obtain gamma estimate from data set
✓
Limited transparent manipulation of data required.
([1039]-[1040])
✓
Little to no manipulation of data required.
([1046])
✕
Detailed econometric manipulation required
(see [1050]-[1052],
[1102])
This form of the table, the AER submitted, demonstrated that there was a myriad of factors which may contribute to an assessment of the methodologies which may be used to estimate gamma. The oversimplified characterisation of their respective strengths and weaknesses in the submissions on behalf of the respondents was to be rejected. So also to be rejected was the Tribunal’s finding that the AER’s approach to gamma measured the wrong thing. The Tribunal’s reasons gave no basis for finding that the AER’s approach sought to measure something other than the “value” referred to in the rules.
Analysis
We first repeat the observation of the Full Court in Pilbara Infrastructure at [16] that it is not this Court’s function on judicial review to resolve the difficult and complex matters of judgment raised by the evidence and resolved by the Tribunal. The submissions on each side from time to time sought to involve this Court in such matters. This Court’s role in reviewing the decision of the Tribunal is to ensure that the decision of the Tribunal accords with law.
It is also the case, in our opinion, that much of the disputation between the parties in relation to gamma turned on different understandings of the Tribunal’s reasons.
Ground 16 was to the effect that the Tribunal misconstrued and misapplied s 71C of the NEL insofar as it set aside the AER’s decision on the basis of the AER’s conclusions with respect to the valuation of imputation credits (gamma). This was said to involve judicially reviewable error in the Tribunal not having jurisdiction to make its decision, that its decision was not authorised by the NEL, that the decision involved an error of law and that the Tribunal’s decision was otherwise contrary to law under paragraphs (c), (d), (f) and (j) of s 5(1) of the ADJR Act.
We do not accept the contention on behalf of the AER that the process of reasoning engaged in by the Tribunal was to assess the merits of the underlying decision or the merits of the component parts of the decision and reach its conclusion that the AER’s decision was wrong if the Tribunal’s conclusion on the merits did not align with the AER’s approach or if the AER did not satisfy the Tribunal that its approach was to be preferred to the approach contended for by the respondents. In our opinion this contention misses the point of substance in the Tribunal’s reasons in this respect which is that the Tribunal considered that the AER had misconstrued the expression “the value of imputation credits” in r 6.5.3 of the NER.
The substantial point of difference between the Tribunal and the AER was as to the meaning of “value” in that statutory context: the NER. It was not merely as to the weighing of evidence, or preference on the part of the Tribunal for one type of evidence over another. The measures which were used flowed from the interpretation of the statutory expression “the value of imputation credits”. For example, the respondents contended, and the Tribunal accepted, that the equity ownership and tax statistics measures were not appropriate because those measures were not measuring the correct thing but a subset of it, and therefore were not in accordance with the correct interpretation of the NER. It would follow that there was error, reviewable by the Tribunal, in the AER giving primary weight to such measures. Put differently, the appropriate method, sources of information and/or weight to be attributed to each data source when determining “the value of imputation credits” was a derivative of the interpretation of that term.
By way of illustration given in oral submissions, the model the AER used proceeded on the assumption that $1 of dividends was worth $1 to the investor. The respondents contended that because the AER was taking a market-based approach, $1 of dividends was not worth $1 to investors as the investors had to meet their costs out of the dividend being paid.
There can, in our opinion, be no doubt that such a ground, material misconstruction of the NER, may lead to error within s 71C of the NEL. The dispute is not about the meaning of an individual word but about the meaning of a statutory expression in its statutory context: see Industry Research and Development Board v Bridgestone Australia Ltd [2001] FCA 954; 109 FCR 564 at [51] and [62] per Lindgren J. The misconstruction may be put as having the consequence that the exercise of the AER’s discretion was incorrect within House principles or it may be put as the AER’s decision being unreasonable as a result of that construction: see Chan Yee Kin v Minister for Immigration and Ethnic Affairs.
In our opinion, ground 16 is not made out. It is a different question whether the Tribunal was correct in the construction it gave to the statutory expression. That question is the subject of the next ground.
Ground 17 was to the effect that the Tribunal misconstrued and misunderstood the meaning of the expression “value of imputation credits” in r 6.5.3 of the NER and the requirements of the NER, including the revenue and pricing principles set out in s 7A of the NEL.
These matters were said to involve the Tribunal not having jurisdiction to make its decision, that its decision was not authorised by the NEL, that the making of the decision was an improper exercise of the power because it was so unreasonable that no reasonable person could have so exercised the power, that the decision involved an error of law and that the Tribunal’s decision was otherwise contrary to law: see s 5(1)(c), (d), (e) (in conjunction with s 5(2)(g)), (f) and (j) of the ADJR Act.
As it seems to us, this is the key dispute for the Court to resolve. It is to be recalled that this issue was considered by the Tribunal at [1059] and following. It first considered the role of gamma in the NER and the context provided by the NER and s 7A of the NEL. The Tribunal said that it was necessary to consider both the eligibility of investors to redeem imputation credits and the extent to which investors determined the worth of imputation credits to them.
At [1062], the Tribunal referred to the debate between the parties before it as to the nature of the issues it had to decide. The Tribunal said, at [1063], that it was not required conclusively to determine the character of that dispute “except to the extent necessary to consider whether a ground is made out under s 71C(1) of the NEL …”. We reject the submission on the part of the applicant AER that this paragraph of the Tribunal’s reasons meant that it failed to carry out a review prescribed by s 71C.
The Tribunal expressed its conclusion on the question of construction at [1081], stating, in effect, that in light of its discussion of the competing views and the implications of those views, it did not accept the AER’s approach that imputation credits were valued at their claimable amount or face value. The Tribunal said the value was not what can be claimed or utilised, but what is claimed or utilised as demonstrated by the behaviour of the shareholder recipients of the imputation credits.
In our opinion, the Tribunal erred in law in construing r 6.5.3 of the NER and r 87A of the NGR as invalidating the AER’s approach to estimating the estimated cost of corporate income tax of the respondents where gamma is the value of imputation credits. In our opinion, the expression “the value of imputation credits” is to be construed as a whole, in its context and having regard to the subject matter of the exercise. It would be an error to limit attention to the word “value” and give it a meaning in isolation. In essence, we think this is what the Tribunal did. The Tribunal thereby misunderstood the function of imputation credits under the Rules in relation to the return on capital and the tax building block.
We accept the AER’s submission that the context is the determination of a regulated return using a post-tax revenue model based on a nominal vanilla WACC. We accept the AER’s submission that the Rules require consistency in the way the relevant building blocks interact, that is, a post-company tax and pre-personal tax and personal costs basis. We also note that the nature of gamma is an estimate to be used in a model.
The present context relates to a statutory model rather than the value of something which exists. In our opinion the Tribunal was distracted by the apparent simplicity of the concept of market studies and data into mistaking what was to be estimated as real in a market rather than as estimates within a model.
This is what led the Tribunal into error at [1081]-[1082] in concluding that the value of gamma is (only) what is claimed or utilised as demonstrated by the behaviour of the shareholder recipients of the imputation credits.
While we reject the AER’s submission that the Tribunal exceeded the limits of its jurisdiction by failing to make a clear finding that a s 71C ground of review was made out, since we think it is clear that the Tribunal proceeded on the basis that the relevant ground was error of construction leading to errors of discretion, we accept the AER’s submission the Tribunal’s approach to gamma was underpinned by a misunderstanding on its part about how return to investors was conceptualised in a WACC framework. In our opinion the Tribunal assumed that other parameters in the WACC calculations were market values that already incorporated investors’ tax positions and transaction costs but that misconstrued the “post-tax” framework. The rules required gamma to be determined consistently with return on equity.
In our opinion, it was not therefore a reviewable error for the AER to prefer one theoretical approach to considering the determination of gamma over another. This means that it is not an error of construction for the AER to focus on utilisation rather than on implied market value. This is not to say that the AER’s approach to gamma is immune from (limited) merits review. For example, if it erred in principle and thereby omitted to take into account a mandatory relevant consideration or arrived at a conclusion which meant that its decision was unreasonable within the meaning of s 71C(1)(d) of the NEL, the Tribunal may intervene. It may also be that the AER would err within s 71C(1)(c) or (d) in acting on economic learning outside the mainstream of that discipline, at least if it did so without explaining the basis for so doing.
Ground 17 is made out.
It is therefore unnecessary for us to determine the balance of the grounds on which the AER contended that the Tribunal had made judicially reviewable errors in relation to gamma. What follows is for completeness.
Ground 18 was, in summary, that the Tribunal failed to consider or address significant aspects of the reasons for the AER’s decision in relation to the valuation of imputation credits. The ground referred to the detailed consideration which the AER had given to why the tax statistics published by the ATO could be used to give a point estimate for gamma, rather than merely providing an upper bound or check. The ground also referred to the AER considering in detail the appropriate use of market value studies generally and the SFG study in particular and providing reasons for its conclusions as to the appropriate use to make of such studies.
These matters were said to involve the Tribunal not having jurisdiction to make its decision, that its decision was not authorised by the NEL, that the Tribunal’s decision involved an error of law and that the Tribunal’s decision was otherwise contrary to law: see paragraphs (c), (d), (f) and (j) of s 5(1) of the ADJR Act.
In substance, as we understood it, the complaint here was that the Tribunal had exceeded the jurisdiction available to it on the limited merits review established by s 71C of the NEL. In our opinion it would not be a legal error on the part of the Tribunal to fail to deal with the entirety of the reasons given by the AER for its use of tax statistics where, for example, the Tribunal found, on limited merits review, that an error on the part of the AER displaced those reasons. Similarly, in our opinion, it would not be a legal error on the part of the Tribunal to fail to deal with the entirety of the reasons given by the AER on the appropriate use of market value studies where the Tribunal found, on limited merits review, that an error on the part of the AER displaced those reasons.
In our opinion, this is what the Tribunal did. We again refer to Applicant WAEE: see [278] above.
In relation to tax statistics, the Tribunal concluded that as a matter of principle tax statistics can only provide an upper bound on the estimate of theta. It stated at [1095] that the AER’s tax statistics approach made no attempt to assess the value of imputation credits to shareholders and ignored the likely existence of factors which reduced the value of imputation credits across all eligible shareholders below the “face” value assumed by the AER. The Tribunal considered that approach to be inconsistent with a proper interpretation of the Officer Framework underlying r 6.5.3 of the NEL. The Tribunal said, in the same paragraph, it was the reason that the theta estimates produced by the tax statistics could be no better than upper bounds on the market value of imputation credits.
We see no separate legal error on the part of the Tribunal in so concluding. In our opinion, it stands or falls with the construction issue raised by ground 17. The Tribunal was not required, in light of that approach, to give further consideration to the AER’s reasons for using the tax statistics as it did. The Tribunal anchored its conclusion in an available ground of limited merits review within s 71C.
In relation to market value studies, the Tribunal explained at [1049] that market studies of the value of imputation credits was the third source of estimates of the utilisation rate. It referred, at [1092], to the value of theta produced not only by taxation statistics, but also by market value studies to some extent, was evidence that Australian investors did not value imputation credits at their face value, including because they may be unable to use them. Then, at [1095], the Tribunal said that the AER’s approach was inconsistent with a proper interpretation of the Officer Framework underlying r 6.5.3 of the NER. It followed, the Tribunal said at [1096], that the assessment of theta must rely on market studies. It said that of the various methodologies for estimating gamma employed by the AER, market value studies were best placed to capture the considerations that investors made in determining the worth of imputation credits to them. At [1097], the Tribunal said that it considered the use of market studies to estimate the value of imputation credits was consistent with the method used to calculate other parameters of the costs of debt and equity from market data.
We see no separate legal error on the part of the Tribunal in so concluding. The Tribunal was not required, in light of that approach, to give further consideration to the AER’s reasons for its conclusions as to the appropriate use to make of market value studies. The Tribunal anchored its conclusion in an available ground of limited merits review within s 71C.
In our opinion ground 18 is not made out as a separate source of legal error on the part of the Tribunal.
We turn next to ground 19. It will be recalled that this ground concerned, essentially, the claim that the Tribunal erred in that it did not quantify the materiality of any effect on the return on equity through a change to gamma.
At [1169] and following, the Tribunal addressed the requirement that it may only vary the Final Decisions or set them aside if it was satisfied that to do so will, or is likely to, result in a materially preferable NEO decision. It therefore stated the correct test: see Minister for Immigration and Ethnic Affairs v Wu Shan Liang [1996] HCA 6; 185 CLR 259 at 271. The Tribunal recognised, at [1179], that the fact that the proper application of the NER on the building block methodology will promote the NEO did not mean that, where a step taken by the AER was or was not in full accordance with the building block methodology, the NEO was not being achieved. It said there may be other matters which the AER considered and which may balance out any adverse consequences of such non-compliance. The amounts involved may not impair in a material way the NEO.
The Tribunal noted, at [1188]-[1189], that the AER recognised the key drivers of cost facing a network service provider included its taxation costs (taxable income at the corporate rate adjusted for the value of imputation credits) and that that topic, amongst others, reflected one of the building blocks in the NER.
At [1202], the Tribunal stated that s 16(1)(c) of the NEL required the AER to consider how the constituent components of its relevant Final Decisions related to each other, and how that inter-relationship had been taken into account. It stated that s 71P imposed a corresponding requirement on the Tribunal. It set out five, non-exhaustive, forms of interrelationship recognised by the AER and stated, at [1203], that that approach by the AER was a proper one and it was the approach the Tribunal took. The Tribunal restated the correct test.
The Tribunal then turned to apply the test at [1216] and following. It referred back to the appropriate considerations it had enumerated, in a non-exhaustive manner, required to address the making of a materially preferable NEO decision or, put alternatively, the parameters within which the materially preferable NEO decision lay.
The Tribunal stated, at [1218], that the AER’s decisions had 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, were not appropriate to support the ultimate decision of the AER. The Tribunal stated, at [1221], there were obviously significant inter-relationships between elements of the building blocks.
The context of the Tribunal’s reasoning was that the AER did not present the case that the matters referred to in [1221] were of such magnitude that they would offset the potentially adverse consequences of the established grounds of review for the purposes of the Tribunal’s task under s 71P.
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. It was accepted by senior counsel for the AER that 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, at [1225], said that it had had careful regard to that Table. The Tribunal said, at [1226], that it did not consider that the data in the Table minimised or offset the very substantial (putative) consequences to the network service providers of the grounds of review which had been made out. They were quantified in documents concerning data source revenue impacts presented in the course of closing submissions to the Tribunal. They were “putative” simply because they represented the contentions of the network service providers but not necessarily the final outcomes which the AER might reach when it reconsiders its relevant Final Decisions. They were treated by the Tribunal as indicative only. The precise figures were not critical to the decisions.
In our opinion, no separate legal error is disclosed in the Tribunal’s conclusion that a change to gamma would or would be likely to lead to a materially preferable NEO decision. The Tribunal recognised, at [1115], that any change in gamma would also have to be included in a revised rate of return on equity. It stated, at [1116], that the interaction with the rate of return on equity should only increase the materiality of the direct effects of a change in gamma on the revenue allowance for income tax.
In our opinion, it is not a requirement that before reaching such a conclusion the Tribunal must quantify the materiality of any effect or do so by quantifying the final outcomes which the AER might reach when it reconsiders its Final Decisions. So to require would, as it seems to us, overlay the exercise with an air of unreality. We note that it appears that no party suggested to the Tribunal or to the Court that the effect on the corporate tax building block would be substantially or entirely offset by some adjustment in the return on equity.
We reject any submission that, in this context, gamma should be treated as a separate matter which itself must satisfy the “materially preferable NEO decision” requirement.
For completeness we note that the Tribunal also referred to the power to vary the Final Decisions and the constraint on that power, being that the Tribunal may so act if satisfied that a variation order will not require it to undertake an assessment of such complexity that it is preferable to set aside the Final Decisions and remit them to the AER. The Tribunal said it was almost self-evident that the task of undertaking the appropriate review and determining the appropriate orders was a complex one. This supported the decision to have the AER reconsider its decision.
Ground 20 centres on the use by the Tribunal of the word “provisionally” in [1103] of its reasons. Reference was also made in this respect to order 1(c), that the AER was 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”. It will be recalled that the AER submitted on its judicial review application that paragraph (c) was not supported or supportable by the reasons for the Tribunal’s determination.
The use of the word “provisionally” in this context does not disclose separate legal error. The Tribunal’s conclusion in [1103] was as to the best estimate of theta being 0.35 and that conclusion was provisional because, as the Tribunal indicated, it needed to consider s 71P of the NEL, which it did at [1168] and following.
The Tribunal was not, in these paragraphs, giving further consideration to the estimate for either theta or gamma. Instead the Tribunal was there dealing with the issue of remedy which in turn depended on whether its “provisional” conclusions would or might have the requisite character, that is to say a materially preferable NEO decision.
We do not understand the AER to make any separate complaint about the calculation whereby the Tribunal’s opinion as to theta resulted in a gamma of 0.25 in paragraph 1(c) of its orders. As we have said, it was not contentious that gamma, the value of imputation credits, was the product of the distribution rate and the utilisation rate. The gamma figure of 0.25 in paragraph 1(c) was arrived at by multiplying the distribution rate of 0.7 by the best estimate of theta of 0.35.
For these reasons we reject the submission that paragraph 1(c) of the Tribunal’s orders was not supported or supportable by the reasons for the determination. In particular we reject the submission that the reasons for determination do not express a final view with respect to the value for theta and do not make any finding as to the value for gamma or that the AER should be directed to use a particular value for gamma.
Orders
We direct that the parties consult and, within 21 days, file orders in an agreed form to give effect to these reasons. Failing agreement, the parties are to file, within the same period, the orders for which they contend. The proposed orders are to include orders as to costs.
I certify that the preceding seven hundred and eighty-five (785) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justices Besanko, Robertson and Yates. Associate:
Dated: 24 May 2017
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