Goldfields Gas Transmission Pty Ltd v Economic Regulation Authority
[2018] WASC 104
•11 APRIL 2018
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CIVIL
CITATION: GOLDFIELDS GAS TRANSMISSION PTY LTD -v- ECONOMIC REGULATION AUTHORITY [2018] WASC 104
CORAM: LE MIERE J
HEARD: 10 & 11 OCTOBER 2017
DELIVERED : 11 APRIL 2018
FILE NO/S: CIV 2967 of 2016
BETWEEN: GOLDFIELDS GAS TRANSMISSION PTY LTD
Plaintiff
AND
ECONOMIC REGULATION AUTHORITY
First Defendant
BHP BILLITON LTD
Second Defendant
Catchwords:
Judicial review - Jurisdictional error - Statutory interpretation - Impermissible consideration - Whether decision maker took into account matters it was required to ignore by statute - Whether error of law on the face of the record - Whether decision is invalid
Legislation:
National Gas Access (WA) Act 2009 (WA)
National Gas Law s 23, s 24, s 28
National Gas Rules 2008 pt 8, pt 9, r 92(3)
Result:
No jurisdictional error or error of law on the face of the record
Application for certiorari and mandamus dismissed
Category: B
Representation:
Counsel:
| Plaintiff | : | Mr B Dharmananda SC & Mr D J Jackson SC |
| First Defendant | : | Mr N J O'Bryan SC & Mr E M Heenan |
| Second Defendant | : | Mr P Brereton SC & Ms E Hoiberg |
Solicitors:
| Plaintiff | : | Gilbert + Tobin |
| First Defendant | : | Holman Fenwick Willan |
| Second Defendant | : | Herbert Smith Freehills |
Case(s) referred to in decision(s):
A v Corruption and Crime Commissioner (2013) 306 ALR 491
Alcan (NT) Alumina Pty Ltd v Commissioner of Territory Revenue (2009) 239 CLR 27
Certain Lloyd's Underwriters Subscribing to Contract No IH00AAQS v Cross; Certain Lloyd's Underwriters Subscribing to Contract No IH00AAQS v Thelander (2012) 248 CLR 378
Commissioner of Taxation v Consolidated Media Holdings Ltd (2012) 250 CLR 503
Craig v State of South Australia (1995) 184 CLR 163
Minister for Aboriginal Affairs v Peko‑Wallsend Ltd (1986) 162 CLR 24
R v Australian Broadcasting Tribunal, Ex parte 2HD Pty Ltd (1979) 144 CLR 45
Re Application by ATCO Gas Australia Pty Ltd [2016] ACompT 10
Re Application by Energy Australia [2009] ACompT 8
Re State Administrative Tribunal; Ex parte McCourt (2007) 34 WAR 342
Seiffert v Prisoners Review Board [2011] WASCA 148
Thiess v Collector of Customs (2014) 250 CLR 664
LE MIERE J:
Summary
The National Gas Access (WA) Act 2009 (WA) (NGA Act) and the National Gas Rules 2008 (WA) (NGR) establish a legal regime to facilitate third party access to natural gas pipelines in Western Australia. This case is about the proper construction of NGR r 92(3).
The first respondent, the Economic Regulation Authority, (ERA), is responsible for regulating third party access to gas pipelines in Western Australia. The applicant, Goldfields Gas Transmission Pty Ltd, (GGT), is the operator of one of those pipelines ‑ the Goldfields Gas Pipeline (the Pipeline). The second respondent, BHP Billiton, is a user of the services provided by GGT for the transportation of gas along the Pipeline.
Third party access to a covered pipeline, that is a pipeline subject to regulation under the NGR, is governed by an access arrangement approved by the ERA. An access arrangement sets out the terms and conditions, including reference tariffs (price), which the service provider must offer to users of the pipeline, although the service provider and a user are at liberty to enter into an agreement for the provision of services at a different price. An access arrangement has a commencement date and a revision commencement date, which is the date fixed in the access arrangement as the date on which the next (revised) access arrangement is intended to take effect. However, there may be a delay between the revision commencement date and the date on which the revised access arrangement commences. This is referred to in the NGR as the interval of delay.
An access arrangement known as AA2 was in force in respect of the Pipeline. GGT submitted a revised access arrangement proposal. On 30 June 2016 the ERA published its final decision (Final Decision). In its Final Decision the ERA refused to approve GGT's access arrangement proposal and itself proposed a revised access arrangement. The access arrangement known as AA3 took effect on 1 July 2016.
The revision commencement date, that is the date on which AA2 was intended to end, is 1 January 2015. However, the revised access arrangement (AA3) did not come into effect until 1 July 2016. NGR r 92(3) says that if there is an interval of delay, reference tariffs, as in force at the end of the previous access arrangement period, continue without variation for the interval of delay but the operation of the sub‑rule may be taken into account in fixing reference tariffs for the new access arrangement period. During the interval of delay (1 January 2015 to 1 July 2016), the reference tariffs, as in force at the end of the previous access arrangement period (AA2), continued without variation. Reference tariffs in the AA3 period are declining compared to the AA2 period. In its Final Decision the ERA, in effect, decided to reduce the reference tariffs over the AA3 period (1 July 2016 to 31 December 2020) to adjust for the 'over recovery' by GGT during the interval of delay.
GGT has applied for judicial review of the Final Decision by the ERA. GGT's essential complaint is that the ERA erroneously construed NGR r 92(3). In short, GGT says that in fixing reference tariffs for the new access arrangement period that commenced on 1 July 2016, the ERA fixed those tariffs by impermissibly taking into account the impact of, and adjusting for, reference tariffs that had already been charged in the earlier interval of delay. The ERA, in effect, reduced the reference tariffs that it would otherwise have determined for the period 1 July 2016 to 31 December 2020 to adjust for the 'over recovery' by GGT during the interval of delay. GGT says that the ERA thereby made a jurisdictional error. Further, GGT says that the Final Decision discloses the erroneous construction of NGR r 92(3); the Final Decision is part of the record and therefore the ERA made an error of law on the face of the record.
GGT seeks a writ of certiorari quashing what it describes as the 'Determination', which is that part of the Final Decision in which the ERA sets out its decision to refuse to approve the access arrangement revision proposed by GGT and to make the revised access arrangement described in an appendix to the Final Decision which became AA3 and which was to take effect on 1 July 2016. GGT further seeks a declaration to the effect that because the ERA failed to take into account the matters it should have and took into account a matter it was required to ignore, the Determination was invalid and of no lawful force or effect. GGT also seeks a writ of mandamus to compel the ERA to propose and make revisions to AA2 in accordance with the proper construction of NGR r 92.
For the reasons which follow I find that the ERA did not make an error of law in construing NGR r 92(3) and the application should be dismissed.
The evidence
There is no dispute about the facts. The principal evidence consists of three documents: Economic Regulation Authority, Public Version Final Decision on Proposed Revisions to the Access Arrangement for the Goldfields Gas Pipeline, 30 June 2016, As amended on 21 July 2016 (The Final Decision); the Goldfields Gas Pipeline Revised Access Arrangement (revised by the Economic Regulation Authority) (the AA3); and the ERA GGT Tariff Model June 2016 (Public Reference Tariff Model). The reference tariffs in AA3 were based on the Public Reference Tariff Model which is described in the Final Decision as Appendix 7 but was published as a separate publication on the ERA's website.
GGT and BHP Billiton each adduced evidence from an expert economist, Dr Hird and Mr Balchin respectively. The evidence of the experts was helpful in explaining economic concepts in the NGA Act and the NGR and I have adopted some of their evidence in these reasons. I did not receive into evidence parts of Dr Hird's report on the ground that in those parts of his report Dr Hird impermissibly offers an opinion on the correct interpretation of NGR r 92(3). BHP Billiton did not read into evidence those parts of Mr Balchin's report in which he commented on those parts of Mr Hird's report which I held to be inadmissible.
The national gas legislative scheme
The National Gas Law (NGL) is set out in the schedule to the National Gas (South Australia) Act 2008 (SA). It is applied as a law of other jurisdictions by their application Acts, eg National Gas (Victoria) Act 2008 (Vic). The NGA Act implements the NGL and gives the NGR (initially made under the NGL) the force of law in Western Australia. The NGL as applied in Western Australia and modified by provisions of the NGA Act may be cited as the National Gas Access Law (NGA Law).
The national gas regime regulates third party access to 'covered' transmission and distribution pipelines. Covered pipelines operate in an inherently non‑competitive natural monopoly environment. The national gas regime regulates prices (revenue tariffs) charged by service providers to users with the object of achieving economic efficiency and promoting the long term interests of consumers. Economic efficiency means producing services that provide the most value to users, production is at least cost, and production choices adapt over time to changing consumer tastes and technology. Economic efficiency and the long term interest of consumers are maximised when the price is set as low as possible whilst not adversely affecting the incentive and capacity for continued provision of the service, including ensuring that an incentive exists for efficient new investment. The point at which prices are minimised whilst not adversely affecting provision of the service is reached where regulated prices are set to allow recovery of the cost of providing the service, where cost includes a commercial return on investment.
The concepts of 'economic efficiency' and the 'long‑term interests of consumers' are both contained within the National Gas Objective (NGO) which is stated in s 23 of the NGA Law:
The object of this Law is to promote efficient investment in, and efficient operation and use of, natural gas services for the long term interests of consumers of natural gas with respect to price, quality, safety, reliability and security of supply of natural gas.
Section 28(1) of the NGA Law says that the ERA must, in performing or exercising an economic regulatory function or power (which relevantly includes fixing reference tariffs) perform or exercise that function or power in a manner that will or is likely to contribute to the achievement of the NGO.
Section 28(2) of the NGA Law says that, in addition, the ERA must take into account the revenue and pricing principles (RPPs). The RPPs are set out in s 24(2) to (7) of the NGA Law to the following effect:
RPP2A service provider should be provided with a reasonable opportunity to recover at least the efficient costs the service provider incurs in providing reference services in complying with the regulatory regime.
RPP3A service provider should be provided with effective incentives in order to promote economic efficiency with respect to reference services the service provider provides.
RPP4Regard should be had to the capital base with respect to a pipeline adopted in any previous access arrangement decision.
RPP5A reference tariff should allow for a return commensurate with the regulatory and commercial risks involved in providing the reference service to which the tariff relates.
RPP6Regard should be had to the economic costs and risks of the potential for under and over investment by a service provider in a pipeline with which the service provider provides pipeline services.
RPP7Regard should be had to the economic costs and risks of the potential for under and over utilisation of a pipeline with which a service provider provides pipeline services.
Dr Hird explains that the RPPs can be understood as providing a direction to the ERA as to the mechanism by which the NGO is to be promoted. Specifically, RPP3 is that the ERA should provide incentives for efficient investment in the operation of the pipeline. The ERA must allow compensation that is expected to compensate a service provider for the costs it incurs in providing efficient investment in and efficient operation and use of natural gas services. RPP2 makes this explicit in requiring that the service provider is provided with a reasonable opportunity to recover at least efficient costs.
NGR pt 8 access arrangements
Part 8 of the NGR sets out the process for a pipeline operator to submit a proposed access arrangement and for the ERA to approve or itself make an access arrangement. The service provider submits an access arrangement proposal. After considering the access arrangement proposal the ERA makes an access arrangement draft decision which indicates whether the ERA is prepared to approve the access arrangement proposal and, if not, the amendments that are required. The service provider may submit amendments to the access arrangement proposal. The ERA must then make an access arrangement final decision to approve, or refuse to approve, an access arrangement proposal. If an access arrangement final decision approves an access arrangement proposal, the access arrangement to which the decision relates takes effect on a date fixed in the final decision. NGR r 64 provides that if, in an access arrangement final decision, the ERA refuses to approve the access arrangement proposal, the ERA must itself propose an access arrangement. The access arrangement, or the revisions to which the decision relates, takes effect on the date fixed in the determination.
NGR pt 9 price and revenue regulation
NGR pt 9 sets out how the price to be paid by users in an access arrangement for transport of gas along the pipeline, is to be calculated. The core elements of this regulation are 'total revenue' and 'reference tariffs'. Total revenue is determined for each year of an access arrangement period as the sum of five 'building blocks' in accordance with NGR r 76. Reference tariffs and a reference tariff variation mechanism are derived from total revenue.
The building block approach to calculating total revenue is set out in r 76. The approach is described by Mr Balchin as a four step process. Step 1 is making a projection of the cost of providing the relevant services over the forthcoming access arrangement period which is determined as the sum of the building block items. This basic calculation can be described as a standard profit and loss statement turned upside down. In financial accounting, a profit and loss statement commences with the revenue and deducts expenses (including depreciation) and so derives profit, which can then be divided by the value of assets to yield the rate of return. The calculation performed by the building block approach commences with an asset value, multiplies this by a reasonable rate of profit to yield the reasonable profit, and then adds expenses to yield the reasonable overall level of total revenue. Step 2 determines a formal control over prices that is expected to deliver revenue over the period that is equal to the cost of service derived in the first step, in present value terms, given the forecasts of demand over the period. The formal control over prices is referred to as the 'reference tariff variation mechanism' in the NGR. Thirdly, the regulated price remains in place for the access arrangement period, irrespective of whether costs change from those forecast, except for specific variations set out in the access arrangement. Fourthly, prior to the end of the access arrangement period, the ERA conducts a periodic review. The regulated price will be revised according to the first and second steps referred to. Any change in the value of the capital assets during the current access arrangement period is taken into account in estimating costs for the new access arrangement period.
NGR r 95 sets out the requirements for the determination of reference tariffs. Rule 95 also determines how total revenue is apportioned to reference services and to particular users or classes of users. A tariff or a reference service must be designed to generate from the provision of each reference service a portion of total revenue referable to the reference service and as far as is practicable consistently with that, to generate from the users, or class of users, to which the reference service is provided, the portion of total revenue referable to providing the reference service to the particular users or class of users. Thus, reference tariffs are a function of total revenue.
Efficiency and incentive
During the access arrangement period, the service provider gains the benefit, and bears the risk, if actual costs are different to those estimated. If the service provider can provide the service at a lower cost than that forecast by the ERA, the service provider will keep those profits for the rest of the access arrangement period. When prices are reset at the end of the access arrangement period, those efficiency gains are passed on to consumers in the form of lower prices. Conversely, if costs increase, the service provider will have to bear those costs until the prices are reset at the start of the new access arrangement period. One of the purposes of the regulatory regime, therefore, is to incentivise the service provider to achieve greater efficiency in the provision of services than is provided for by the access arrangement.
The NGO provides the overarching economic objective for regulation under the national gas regime: the promotion of efficient investment and efficient operation and use of natural gas services for the long term interests of consumers. Consumers will benefit in the long run if resources are used efficiently, that is if resources are allocated to the delivery of goods and services in accordance with consumer preferences at least cost. As reflected in the revenue and pricing principles, this in turn requires prices to reflect the long run cost of supply and to support efficient investment, providing investors with a return which covers the opportunity costs of capital required to deliver the services. See Re Application by Energy Australia [2009] ACompT 8 at [14] referring to the National Electricity Law.
Rule 92 - revenue equalisation
An access arrangement must include a reference tariff variation mechanism for variation of a reference tariff over the course of an access arrangement period. The reference tariff variation mechanism that is included in the access arrangement is designed to equalise forecast revenue from reference services over the access arrangement period (having regard to forecast demand for those services) and the portion of total revenue that is allocated to reference services for the access period.
Rule 92(3) is:
However, if there is an interval (the interval of delay) between a revision commencement date stated in a full access arrangement and the date on which revisions to the access arrangement actually commence:
(a)reference tariffs, as in force at the end of the previous access arrangement period, continue without variation for the interval of delay; but
(b)the operation of this subrule may be taken into account in fixing reference tariffs for the new access arrangement period.
Rule 92(3) effectively provides that where there is an interval of delay, the reference tariffs in force at the end of the previous access arrangement period apply during the interval of delay. The reference tariff variation mechanism will not apply during the interval of delay. Where reference tariffs are falling (rising) compared to the previous access arrangement period, by continuing to charge the previous higher (lower) tariffs the service provider will 'over recover' ('under recover') revenue during the interval of delay in the sense that the revenue recovered by a service provider will be higher (lower) than if the reference tariffs fixed in the revised access arrangement had applied during the interval of delay.
ERA's Final Decision
The ERA did not approve GGT's revised access arrangement proposal and determined total revenue and reference tariffs itself. In the section of its Final Decision dealing with reference tariffs, the ERA noted that it had regard to NGR r 92(3). The ERA noted that, as a result of the interval of delay between 1 January 2015 and 1 July 2016, the reference tariffs at the end of the second access arrangement period (AA2) should continue to apply without variation for the interval of delay. At [2016] the ERA said that in calculating the reference tariffs, it 'factored in the delay and calculated the tariffs based on revised prices commencing on 1 July 2016 to ensure that GGT would be no better or worse off as a result of the delay'. At [2080] the ERA noted that r 92(3)(b) of the NGR 'allows it to deal with any possible revenue shortfall or windfall as a result of an interval of delay, depending on whether the tariff is rising or falling'. The ERA said that it:
[C]onsiders that this construction of r 92(3)(b) of the NGR is likely to achieve the greatest degree of consistency with the efficiency objectives of the NGO and the long term interests of consumers by applying a true up mechanism if the reference tariffs prevailing in the period of delay were lower (higher) than what they would otherwise have been.
The ERA calculated total revenues (and hence reference tariffs) based upon the period between 1 January 2015 and 31 December 2019, having regard to the interval of delay between the revisions commencement date of 1 January 2015 and the date on which the tariffs for the revised access arrangement would commence, 1 July 2016.
Dr Williams is an economist and the regulatory manager of APA Group, one of the owners of GGT. Dr Williams examined the Final Decision and a document known as 'ERA, GGT Tariff Model, June 2016 (Amended Final Decision)' which is a PDF version of the Public Reference Tariff Model that was used by the ERA to calculate reference tariffs to apply to GGT for AA3. Mr Williams explained that the effect of the ERA's method for calculating reference tariffs is that forecast revenue from reference services is significantly below the portion of total revenue allocated to reference services over the period from 1 July 2016 to 31 December 2019. Dr Williams shows that using the ERA's Public Reference Tariff Model, over this access arrangement period the portion of total revenue allocated to reference services in present value terms is approximately $139 million and the forecast revenue from reference services in present value terms is approximately $100 million. The difference of approximately $39 million over the current access arrangement period is a result of the ERA's adjustment of reference tariffs to account for the 'over recovery' in the period between 1 January 2015 and 1 July 2016.
GGT's construction of r 92(3)
GGT sets out what it says is the proper construction of NGR r 92(3) in its application for judicial review. GGT says that on the proper construction of r 92(3), when there has been an interval of delay between:
(a)the date stated in an access arrangement as a revision commencement date; and
(b)the date on which the revisions to that access arrangement actually commence,
the ERA, in deciding whether to approve an access arrangement proposal or to propose or make revisions to the access arrangement and, in particular, in fixing reference tariffs for the new access arrangement period as contemplated by r 92(3)(b):
(c)is authorised and required by the NGL and the NGR to take into account only the fact that there has been no variation to reference tariffs under the access arrangement between the revision commencement date that is stated in the access arrangement prior to the revisions taking effect, and the date on which the revisions will actually commence;
(d)is not permitted to fix reference tariffs by taking into account any difference between:
(i)forecast revenue from reference services over the entire period (including the period of the interval of delay) between the revision commencement date that is stated in the access arrangement prior to the revisions taking effect, and the new revision commencement date stated in the revised access arrangement; and
(ii)the portion of total revenue allocated to reference services for that entire period (including the period of the interval of delay); and
(e)is, instead, only permitted to fix reference tariffs by taking into account what variations would or could have been permitted to be made during the period of the interval of delay, but for rule 92(3)(a).
GGT says that the key question of construction is what is meant by NGR r 92(3)(b) when it says that the operation of the sub‑rule 'may be taken into account'. GGT submits that it cannot permit an inter‑period true up or correction for a perceived 'windfall' in a prior period. GGT says that NGR r 92(3)(b) does not permit the ERA to adjust reference tariffs as if there should be a true up to account for unvaried reference tariffs during interval of delay on the basis that the new reference tariffs should have applied during the interval. GGT says that what may be taken into account is the fact that, even though AA2 was still on foot during the interval of delay, the reference tariff variation mechanism contained in that access arrangement was effectively switched off by operation of NGR r 92(3)(a). This was the relevant 'operation of the sub‑rule' during the interval of delay, which may be taken into account. In this case, GGT says that if AA2's reference tariff variation mechanism had continued to apply during the interval of delay, there would have been variations to the reference tariffs based on Consumer Price Index (CPI) changes. GGT says it is the fact of those variations not being applied during the interval that may be taken into account and nothing more.
GGT says that interpreting NGR r 92(3)(b) as permitting an inter‑period true up would be discordant with its statutory context for the following reasons. First, such an interpretation would create conflict with the requirement in NGR r 92(2) that forecast or projected revenue over the access arrangement period be equal to the portion of total revenue or total building block costs permitted to be allocated to reference services. Secondly, such an interpretation would conflict with the object of the legislative scheme, namely the promotion of economic efficiency for the long term interests of consumers and the RPPs.
As to the first point, under the ERA's interpretation of NGR r 92(3)(b) GGT says there would not be revenue equalisation over the period from 1 July 2016 to 31 December 2019 but some sort of attempted revenue equalisation over a period covering both parts of AA2 (from 1 January 2015 until 30 June 2016) and AA3. The ERA's adjustment leads to a shortfall of permitted total revenue or 'total permitted building block costs' of $39 million over the AA3 access arrangement period.
As to the second point, the salient features of the statutory context of NGR r 92(3)(b) are the NGO, the RPPs and the framework for revenue and price regulation set out in NGR pt 9. The NGO is an economic concept directed at the promotion of economic efficiency. The RPPs are directed at providing effective incentives in order to promote economic efficiency. The framework for establishing reference tariffs under the NGR is forward looking. The NGR does not permit or contemplate any ex post (by which I understand senior counsel to mean 'after the fact' or based on actual costs during the period rather than the costs continued from the previous access arrangement period) true up to account apparently for situations in which 'out‑turn revenue' (by which I understand senior counsel to mean the actual amount of revenue during the period rather than the amount that was forecast) is above or below 'out‑turn cost' (by which I understand senior counsel to mean the actual costs in accordance with the building block approach during the period). To do so would not provide any incentive for efficiency and is likely to damage efficiency incentives if a service provider knows that it cannot retain the benefit of any efficiency gains.
I do not find these arguments persuasive. I will return to these arguments later in these reasons after first considering, as I must, the natural and ordinary meaning of r 92(3).
Principles of interpretation
The High Court has stated on many occasions that the task of statutory construction must begin and end with a consideration of the statutory text without adoption of a preconceived view of its meaning. The context and purpose of a provision are important to its proper construction. The language which has actually been employed in the statute is the surest guide to legislative intention. See Alcan (NT) Alumina Pty Ltd v Commissioner of Territory Revenue (2009) 239 CLR 27 [47]; Thiess v Collector of Customs (2014) 250 CLR 664 [22]; Commissioner of Taxation v Consolidated Media Holdings Ltd (2012) 250 CLR 503 [39]; Certain Lloyd's Underwriters Subscribing to Contract No IH00AAQS v Cross; Certain Lloyd's Underwriters Subscribing to Contract No IH00AAQS v Thelander (2012) 248 CLR 378.
The natural and ordinary meaning of r 92(3)
The language of r 92(3) must be considered having regard to the context and purpose of the subrule. Rule 92(3) is in the nature of a qualification or exception which is to apply to the calculation of reference tariffs if there is an interval of delay. Rule 92(3)(a) says that reference tariffs, as in force at the end of the previous access arrangement period, continue without variation for the interval of delay. Rule 92(3)(b) commences with the words 'the operation of this subrule'. That is a reference to r 92(3)(a) which has the effect that reference tariffs, as in force at the end of the previous access arrangement period, continue without variation for the interval of delay without any increase or decrease in accordance with the reference tariff variation mechanism applying during the previous access arrangement period and notwithstanding that the efficient costs incurred in providing the reference services during the interval of delay were not factored into the calculation of reference tariffs during the previous access arrangement period and therefore the reference tariffs during the interval of delay do not reflect the efficient costs incurred in providing the reference services during the interval of delay.
Rule 92(3)(b) permits the ERA to 'take into account' the operation of the subrule in fixing reference tariffs for the new access arrangement period. When r 92(3)(b) gives a discretion to the ERA to take into account the operation of the subrule it permits the ERA to give weight to the operation of the subrule as an element in determining revenue and reference tariffs. The 'operation' of the subrule refers to the way in which r 92(3)(a) works, the effect or result produced by it. The way in which the subrule works is that reference tariffs during the interval of delay are as they were at the end of the previous access arrangement period. The relevant effect or result produced is that there is no increase or decrease in the reference tariffs notwithstanding that they derive from and reflect the efficient costs for a previous period and not the efficient costs during the interval of delay or a period including the interval of delay. Rule 92(3)(b) permits the ERA to take this into account in fixing reference tariffs for the next access arrangement period.
The subrule gives the ERA a broad discretion to adjust reference tariffs in the new access arrangement period to take into account that the reference tariffs in force at the end of the previous access arrangement period applied during the period of delay. Where reference tariffs are falling compared to the previous access arrangement period, the service provider will 'over recover' revenue during the period of the delay by continuing to charge the previous higher tariffs, unless an adjustment is made to the reference tariffs in the new access arrangement period. The ERA may reduce reference tariffs over the new access arrangement period to adjust for the over recovery by the service provider during the period of delay. That may be done by comparing the reference tariffs directed by r 92(3)(a) with the tariffs that would have been determined, or are substantially the same as those that would have been determined, for the interval of delay if the access arrangement review had been completed as intended.
The natural and ordinary meaning of to 'take into account' the operation of the subrule is wide enough to encompass taking into account the operation of the subrule by reducing reference tariffs over the new access arrangement period to adjust for the over recovery by the service provider during the period of delay. In Re Application by ATCO Gas Australia Pty Ltd [2016] ACompT 10 the Australian Competition Tribunal construed NGR r 92(3) in that way.
Construction not inconsistent with r 92 equalisation
As I have said GGT says that adjusting reference tariffs in the new access arrangement period to take into account an 'over recovery' during the interval of delay is inconsistent with r 92(2) because it would cause forecast revenues over the access arrangement period to not equal the portion of total revenue allocated to reference services for the access arrangement period; the true up would be inconsistent with r 92 because it would mean that the present values referred to in r 92(2)(a) and (b) would not equate.
The calculation to determine the level of the reference tariff variation mechanism is set out in r 92(2) and the decision of the choice of mechanism is addressed in r 97. The purpose of the building block approach is to determine a reference tariff variation mechanism for the access arrangement period that permits the projected cost of service to be recovered. The choice of the particular reference tariff variation mechanism is governed by r 97. Once the form of reference tariff variation mechanism is selected, this must be calibrated so that it is expected to generate the intended level of revenue, that is the cost of service. This is the direction provided by r 92(2). The reference to 'present values' in the rule means that allowance is to be made for the time value of money when undertaking this calculation. That process is not subverted by the construction of r 92(3) adopted by the ERA.
GGT's argument that the ERA's interpretation of r 92(3) is wrong because it is inconsistent with the 'revenue equalisation' provision of r 92(2) is not persuasive. If any adjustment is made to the reference tariffs for the new access period to take into account r 92(3), the forecast revenue from reference services over the new access arrangement period will not equal (in terms of present values) the portion of total revenue allocated to reference services for the new access arrangement period. For example, senior counsel for GGT conceded that if the ERA fixed reference tariffs for the new access arrangement period by taking into account what variations would or could have been permitted to be made during the period of the interval of delay in accordance with the reference tariff variation mechanism such as CPI increases, then forecast revenue from reference services over the new access arrangement period will not equal (in terms of present values) the portion of total revenue allocated to reference services for the new access arrangement period. Rule 92(3) is a qualification or exception. That is consistent with it commencing with the word 'however'.
Construction not inconsistent with NGO and RPPs
GGT further says that adjusting reference tariffs in the new access arrangement period to deal with 'over recovery' during the interval of delay would not promote the NGO and would not achieve the RPPs for two reasons. First, it would be inconsistent with the forward looking nature of the tariff framework and therefore the promotion of incentives for efficiency and the long term interests of consumers. Secondly, there is no clear conceptual basis on which a true up to recover the over recovery can be calculated. I am not persuaded by those arguments for the following reasons.
Part of the regime for price control under the NGR is the conduct of periodic reviews which take into account, amongst other things, capital expenditure and operating expenditure during the preceding period. The choice of the length of the access arrangement period involves the consideration of the optimal sharing of the benefits from efficiency gains, which requires a balancing of two contributors to economic efficiency and the long term interests of consumers that are in tension: the desirability of providing an incentive for the service provider to pursue efficiency gains and the desirability of having prices not materially higher than cost. The choice of the length of the access arrangement period also involves a consideration of creating an environment that is conducive to investment in long lived, irreversible assets (that is assets which cannot be deployed to any other use). Where an access arrangement period runs longer than intended, the sharing of efficiency benefits between the service provider and consumers is distorted from what was intended and the allocation of risk is also changed. Restoring these outcomes to what was intended by means of a true up would be expected to promote economic efficiency and the long term interests of consumers.
I accept the opinion of Mr Balchin that characterising the setting of reference tariffs as a function of forward looking estimates of cost is an incomplete characterisation. The projected cost of service for an access arrangement period reflects capital costs incurred prior to the start of the period in question. Forecasting operating expenditure is based at least in part on actual past expenditure. Realigning prices to actual cost at periodical intervals is integral to the creation of medium to long term incentives.
Open to the ERA to calculate true up
Senior counsel for GGT, Mr B Dharmananda SC, submitted, in effect, that there is no clear and obvious method for calculating a true up and the method chosen by the ERA is open to criticism. That does not mean that the construction of r 92(3) adopted by the ERA is wrong. The process by which the ERA determines whether to approve an access arrangement proposal or to make its own access arrangement involves the ERA exercising its judgment; it is not a mechanical mathematical process. The method for calculating an appropriate adjustment to reference tariffs for the revised access arrangement period to take into account the operation of r 92(3)(a) similarly involves judgment not mere mechanical application.
Extrinsic material may be considered
Whilst each party maintained that r 92(3)(b) has a clear (albeit different) meaning they submitted that to the extent that the rule is ambiguous, extrinsic material may be relied on to confirm its meaning. NGA Law sch 2 cl 8(3) provides that subject to sub-cl (4), in the interpretation of a provision of the rules, consideration may be given to law extrinsic material or rule extrinsic material capable of assisting in the interpretation if the provision is ambiguous or obscure, to provide an interpretation of it or if the ordinary meaning of the provisions leads to a result that is manifestly absurd or unreasonable, to provide an interpretation that avoids such a result or in any other case to confirm the interpretation conveyed by the ordinary meaning of the provision.
Law extrinsic material and rule extrinsic material are each defined terms. Subrule (4) provides that in determining whether consideration should be given to law extrinsic material or rule extrinsic material and in determining the weight to be given to law extrinsic material and Rule extrinsic material, regard is to be had to the desirability of the provision being interpreted as having its ordinary meaning and the undesirability of prolonging proceedings without compensating advantage and other relevant matters.
Rule 92(3) is relevantly ambiguous or obscure. The interpretations advanced by the applicant and the respondents are both reasonably open.
Ministerial Council SCO does not assist interpretation of r 92(3)
The extrinsic material advanced by GGT is the Ministerial Council on Energy's Standing Committee of Officials (SCO) document entitled 'SCO Responses to Stakeholder Consultations on the National Gas Rules'. GGT says that the SCO document can be seen as either rule extrinsic material or law extrinsic material.
Law extrinsic material is defined in NGA Law sch 2 pt 2 cl 8 to mean 'relevant material not forming part of this law'. The definition goes on to give six examples of such material. The SCO document does not fall within any of the six examples given. I will assume that the SCO document is 'relevant material' and hence law extrinsic material. However, I do not find the SCO document assists in the interpretation of r 92(3).
The SCO document states that it contains the SCO policy responses to issues raised in response to the second exposure draft of the NGR released for consultation in July 2007 and the final exposure draft of the NGR released to key stakeholders for targeted consultation in March 2008. The document is in tabular form. The relevant issue addressed is:
There is no provision for what regulators are to do with respect to adjusting reference tariffs if the completion of the new access arrangement is delayed.
The SCO response is:
New Policy Position ‑ The rule will be varied to allow existing reference tariffs to be continued without adjustment. Pipelines will be compensated for any CPI adjustments in the next access arrangement. Officials agreed that this is necessary to balance need [to] provide regulatory certainty in the event of a delay, with appropriate incentives for businesses and the AER to complete access arrangement negotiations on time.
The new policy position that 'Pipelines' will be compensated for any CPI adjustments in the next access arrangement appears to address a particular access arrangement where the reference tariff adjustment mechanism during the access arrangement period would have adjusted reference tariffs in accordance with CPI increases and that if existing tariffs continue without adjustment during the period of delay, 'Pipelines' would not have the benefit of reference tariffs adjusted for CPI increases during the period of delay that it otherwise would have benefitted from. A reference tariff adjustment mechanism does not necessarily adjust reference tariffs in accordance with CPI increases. The new policy position explains what the regulator may (not must) do where an access arrangement contains a reference tariff adjustment mechanism that adjusts reference tariffs in accordance with CPI increases. The new policy position does not say that that is the only way in which the regulator may take into account existing reference tariffs continuing without adjustment during an interval of delay. The new policy position says nothing about what the regulator may do, in relation to access arrangements that do not contain a reference tariff adjustment mechanism that adjusts reference tariffs in accordance with CPI increases. Nor does the new policy position say what the regulator may do in situations such as where reference tariffs are falling compared with the previous period.
AEMC Rule Determination 2012
The extrinsic material advanced by the respondents is a rule determination of the Australian Energy Market Commission (AEMC) entitled 'National Electricity Amendment (Economic Regulation of Network Service Providers) Rule 2012, National Gas Amendment (Price and Revenue Regulation of Gas Services) Rule 2012' (the Rule Determination). The Rule Determination comes within the definition of rule extrinsic material. The weight to be given to the Rule Determination is diminished by the fact that the Rule Determination was made after r 92(3) was made. Nevertheless the Rule Determination provides some assistance. The Rule Determination confirms the natural and ordinary meaning of r 92(3) in its context is consistent with the construction adopted by the ERA.
The Rule Determination sets out a series of amendments to the National Electricity Rules and the NGR, the AEMC's reasons for those amendments and the transitional arrangements to implement the new rules. In ch 12 the AEMC deals with electricity transitional arrangements. Section 12.10.7 recites that Actew AGL had indicated that a 12 month delay to its electricity regulatory process would result in a direct overlap between its gas and electricity regulatory processes and, in doing so, give rise to serious resourcing issues. The AEMC decided to allow Actew AGL's gas access arrangement review submission date to be delayed by 12 months and to enable the effect of any delays to be dealt with in accordance with NGR r 92(3). The AEMC said that Actew AGL had raised some concerns about the strength of r 92(3)(b) and whether the regulator would actually be compelled to undertake a true up. The AEMC recognised that the word 'may' provides the regulator with some discretion as to whether to make a true up but that when exercising the discretion the regulator is required to have regard to both the NGO and the RPP. The AEMC then expressed the opinion:
These sections of the NGL would support the application of a true up mechanism if the reference tariffs prevailing in the period of delay were lower (higher) than what they would otherwise have been.
The AEMC noted that its view was consistent with the view of the Australian Energy Regulator (the regulator in states and territories other than Western Australia) in its recent draft 2013 - 17 access arrangement decision of Envestra Ltd, where it said:
There will be a delay in the making of the final decision. The AER has therefore taken into account the operation of rule 92(3) of the NGR in fixing reference tariffs of the 2013‑17 access arrangement period. The AER considers that the 2013 reference tariffs under the 2013‑2017 access arrangements should take effect from 1 July 2013 until 31 December 2013.
The AER considers that the interval of delay should not result in service providers incurring a windfall gain or loss, compared with what would have occurred if the 2013‑17 access arrangements had taken effect from 1 January 2013. This approach is consistent with the efficiency objectives under the NGO and long term interest of gas consumers. This approach will also provide service providers with a reasonable opportunity to recover at least the efficient costs of providing reference services as approved in the access arrangements, consistent with the RPP.
The AEMC noted:
[A]ny true up the AER carries out will result in the new NGR being effectively applied to the transitional year.
Chapter 13 of the Rule Determination deals with gas transitional arrangements. The AEMC says that only the GGT pipeline and one other pipeline were affected by the timing of the implementation of the new framework and stated that to ensure that the new rate of return framework can be applied to these two pipelines in the next round of access arrangement reviews, the transitional arrangements will permit the next access arrangement revisions to be submitted by each of the pipeline operators up to six months after the ERA publishes the final rate of return guidelines. The AEMC states:
To the extent that the postponement of the proposed access arrangement revisions gives rise to a delay in the commencement of the revisions, the following will occur:
-the reference tariffs in force at the end of the existing access arrangement will continue without variation; and
-the ERA will be allowed to take into account the effect of any delay when setting reference tariffs in the new access arrangement period.
At [13.4.4] the AEMC considered how to account for the effect of delays to the revision commencement date for the Goldfields Gas Pipeline and the other pipeline. The AEMC said that postponing the review submission date is expected to result in a delay in the commencement of the new access arrangement. The AEMC stated it is satisfied that r 92(3) can be relied upon to deal with the effect of any delay and no transitional provisions were therefore required to deal with this type of delay.
No jurisdictional error
Jurisdictional error will occur when a decision‑maker disregards or takes account of some matter in circumstances where the statute establishing the decision‑maker and conferring its jurisdiction requires that the particular matter be taken into account or ignored as a precondition of the exercise of any authority to make a decision in the circumstances of the case: Craig v State of South Australia (1995) 184 CLR 163, 177 ‑ 178.
Where a statute confers a discretion which in its terms is unconfined, the factors that may be taken into account in the exercise of the discretion are similarly unconfined, except in so far as there may be found in the subject matter, scope and purpose of the statute some implied limitation on the factors to which the decision‑maker may legitimately have regard: R v Australian Broadcasting Tribunal, Ex parte 2HD Pty Ltd (1979) 144 CLR 45, 49 ‑ 50; Minister for Aboriginal Affairs v Peko‑Wallsend Ltd (1986) 162 CLR 24, 40 (Mason J); A v Corruption and Crime Commissioner (2013) 306 ALR 491 [90] ‑ [92] (Martin CJ & Murphy JA).
Rule 92(3)(b) says that the ERA may take into account the operation of the subrule in fixing reference tariffs for the new access arrangement period. There is no relevant implied limitation found in the subject matter, scope or purpose of the NGR as to the manner in which the ERA may exercise its discretion beyond that it must exercise that discretion in a manner that will or is likely to contribute to the achievement of the NGO and must take into account the revenue and pricing principles. Rule 92(3)(b) does not require the ERA 'to ignore any perceived need for a true up over the period of the new access arrangement period anticipated in the old access arrangement period' as submitted by GGT. The ERA may adjust the reference tariffs in the new access arrangement period to take into account an 'over recovery' during the interval of delay in the sense that the reference tariffs in that period were greater than if the revised access arrangement period had commenced on the revision commencement date under the previous access arrangement period.
NGR r 92(3) allows the ERA to take into account the operation of the subrule in fixing tariffs for the new access arrangement period by adjusting the new reference tariffs so that the service provider gives up any 'over recovery' during an interval of delay in the sense that I have discussed. The ERA made no error in interpreting the rule. That finding is sufficient to dismiss GGT's application for relief. However, I will set out in a summary way my findings on other matters raised in this application.
Erroneous interpretation would be jurisdictional error
If, contrary to my finding, r 92(3)(b) required the ERA 'to ignore any perceived need for a true up over the entire period of the anticipated new access arrangement period' in fixing reference tariffs for the actual access arrangement period then by taking that matter into account the ERA would have misconceived, misapprehended or disregarded the nature of its function and the limits and extent of its powers and its Final Decision would not have been a decision of the kind for which the NGA Act and the NGR conferred jurisdiction on it to make. That would have been a jurisdictional error.
No error of law on the face of the record
In the absence of any contrary intention appearing in the legislation, if the reasons are not expressly incorporated by the decision‑maker into its decision they do not form part of the record for the purposes of judicial review: Re State Administrative Tribunal; Ex parte McCourt (2007) 34 WAR 342 [22]; Seiffert v Prisoners Review Board [2011] WASCA 148 [182] ‑ [183] (Martin CJ). The reasons for the ERA's revisions to the access arrangement do not form part of the record for the purposes of certiorari. There was no error of law on the face of the record even if the ERA misconstrued r 92(3) in the manner alleged by GGT.
Discretionary considerations concerning relief
Certiorari is a discretionary remedy and the court may refuse relief even if, contrary to my findings, GGT made out a ground of review. The respondents say that there are discretionary reasons why the court should exercise its discretion to refuse a grant of certiorari. First, GGT did not avail itself of the limited merits review procedure available to it in the Australian Competition Tribunal, which the legislature intended to be the primary means of review. Secondly, if AA3 were now to be quashed there would be difficulties in relation to how the tariffs that have applied since 1 July 2016 should be treated.
If I was otherwise satisfied that certiorari should be granted I would not refuse relief for those reasons. If, contrary to my findings the ERA misconstrued NGR r 92(3) as alleged by GGT, the ERA had no lawful authority to make AA3 including the reference tariffs there specified. In any event, if the ERA made the alleged error, a declaration concerning the error by ERA in construing NGR r 92(3) in the course of making AA3 should be made.
Conclusion
The application for judicial review should be dismissed.
I certify that the preceding paragraph(s) comprise the reasons for decision of the Supreme Court of Western Australia.
RK
ASSOCIATE TO LE MIERE J11 APRIL 2018
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