United Energy Distribution Pty Ltd v Alinta Asset Management Pty Ltd

IN THE SUPREME COURT OF VICTORIA

Not Restricted

AT MELBOURNE

COMMERCIAL & EQUITY DIVISION No. 2025 of 2008

UNITED ENERGY DISTRIBUTION PTY LTD (ACN 064 651 029)	Plaintiff
v
ALINTA ASSET MANAGEMENT PTY LTD (ACN 104 352 650)	First Defendant
and
ESSENTIAL SERVICES COMMISSION (ABN 71 165 498 668)	Second Defendant

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JUDGE:	Kyrou J
WHERE HELD:	Melbourne
DATE OF HEARING:	25-26, 28 November, 1-5, 12 December 2008, further written submissions on 19 December 2008 and 16 and 20 January 2009
DATE OF JUDGMENT:	10 February 2009
CASE MAY BE CITED AS:	United Energy Distribution Pty Ltd v Alinta Asset Management Pty Ltd
MEDIUM NEUTRAL CITATION:	[2009] VSC 19

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Electricity Industry Act 2000 (Vic) – Essential Services Commission Act 2001 (Vic) – power of Essential Services Commission to issue guidelines requiring a licensed distribution company to provide actual costs incurred by a related party in providing services to the distribution business – definition of “related party” in Electricity Industry Guideline No 3 Regulatory Information Requirements Issue No 6 dated December 2006 and meaning of “significant influence” for purposes of that definition – validity of that Guideline – whether licensed distribution company and operator of distribution network under operating services agreement were related parties – whether operating services agreement confers entitlement to information about actual costs – common basis of dealing.

Application for declaration – whether proceeding is hypothetical or futile.

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APPEARANCES:	Counsel	Solicitors
For the Plaintiff	Mr P Bick QC with Mr D Farrands	Norton Gledhill
For the First Defendant	Mr J Delany SC with Mr A Weinstock	Blake Dawson
For the Second Defendant	Mr P Gray	Brand Partners as agents for Gilbert & Tobin

TABLE OF CONTENTS

Introduction and summary.................................................................................................................. 2

Overview of factual and regulatory background............................................................................. 3

Overview of parties’ roles............................................................................................................... 3

ESC............................................................................................................................................. 3
UED and its licence..................................................................................................................... 4
AAM........................................................................................................................................... 5

Overview of ownership structures and relationships between UED and AAM......................... 5

Ownership structure................................................................................................................... 5
UEDH Shareholders Agreement................................................................................................. 7
Operating services agreement.................................................................................................... 10
UED’s senior management team and role of PIES..................................................................... 16

The Guideline................................................................................................................................ 17
Non-provision of AAM’s costs information to UED................................................................... 18

Commencement of proceeding and issues to be determined....................................................... 18

Witnesses and reliability of their evidence.................................................................................... 20

Scope and validity of Guideline...................................................................................................... 24

Relevant provisions of Guideline.................................................................................................. 24
Statutory basis for Guideline........................................................................................................ 27
Validity of Guideline..................................................................................................................... 31

Nature and permissible scope of Guideline................................................................................. 32
AAM’s submission that Guideline is not “necessary or convenient”.......................................... 37
AAM’s submission that Guideline circumvents legislative scheme............................................. 40
AAM’s submission that Guideline is inconsistent with Part 4 of ESC Act.................................. 42
Decision that Guideline is valid................................................................................................. 45

Does the Guideline apply to the 2006 and 2007 calendar years?............................................... 45
Severance....................................................................................................................................... 48

Was AAM a related party of UED in 2006 and 2007?................................................................... 48

Meaning of “significant influence”.............................................................................................. 49
Capacity to significantly influence or actual significant influence?........................................... 52
Board representation and participation in management and policymaking............................. 54

Alinta’s and AAM’s influence through decision-making organs................................................. 54
AAM’s influence through the OSA............................................................................................ 57
Alinta’s and AAM’s influence through operating and financial policies..................................... 59
Alinta’s and AAM’s influence where there are conflicts of interest............................................. 60
AAM’s influence through the power of attorney........................................................................ 62
Conclusion on board representation, management and policy-making........................................ 63

Material transactions and economic dependence....................................................................... 63
Alinta’s and AAM’s influence through interchange of managerial personnel......................... 64
Alinta’s and AAM’s influence through provision of essential technical information............... 64
Parties’ acknowledgments that they are related......................................................................... 65
Decision that AAM was a related party of UED in 2006 and 2007........................................... 65

Does the OSA require AAM to provide its actual costs information to UED?.......................... 66

Was there a common basis of dealing that AAM’s costs remain confidential?......................... 68

Is the proceeding hypothetical or futile?........................................................................................ 71

Relief sought...................................................................................................................................... 78

Proposed orders.................................................................................................................................. 80

HIS HONOUR:

Introduction and summary

This is an application by the plaintiff, United Energy Distribution Pty Ltd (“UED”) for declaratory and other relief relating to whether Alinta Asset Management Pty Ltd (“AAM”) was a related party of UED in 2006 and 2007 within the meaning of Electricity Industry Guideline No 3 Regulatory Information Requirements Issue No 6 (“Guideline”) published by the Essential Services Commission (“ESC”) on 15 December 2006.

The Guideline requires a holder of an electricity distribution licence, such as UED, to include in its regulatory accounting statements for the 2006 and subsequent calendar years information about actual costs incurred by related parties in connection with the licensee’s distribution business. AAM has denied that it was a related party of UED in 2006 and 2007 and has refused to provide information about its actual costs to UED which, in turn, has resulted in UED failing to include this information in the regulatory accounting statements it has filed with the ESC for 2006 and 2007.

UED is concerned that, if the Guideline is valid and AAM is a related party of UED, UED’s failure to include information about AAM’s costs in its regulatory accounting statements may constitute a breach of the conditions of its licence which may enable the ESC to revoke the licence. If UED’s licence is revoked, it would cease to be able to carry on its distribution business.

For the reasons set out in this judgment, I have concluded that the related party information provisions of the Guideline that apply to the 2006 and 2007 regulatory accounting statements are valid, that AAM was a related party of UED in those years, that AAM is contractually obliged to include information about its actual costs in those statements and that UED is entitled to appropriate relief.

This proceeding was heard concurrently with another proceeding, Multinet (DB No 1) Pty Ltd v Alinta Asset Management Pty Ltd,[1] which raised similar issues in relation to the gas industry. At the commencement of the hearing, I made an order that the evidence in one proceeding shall also be evidence in the other proceeding to the extent relevant.
[1][2009] VSC 18.

For convenience, I have included a glossary of terms and abbreviations at the end of this judgment.

Overview of factual and regulatory background

In this part of the judgment, I set out a brief overview of the factual and regulatory background in order to introduce the issues in the proceeding. Relevant facts and statutory and contractual provisions are discussed in more detail in subsequent parts of the judgment.

Overview of parties’ roles
ESC

The ESC is a body corporate established pursuant to s 7 of the Essential Services Commission Act 2001 (Vic) (“ESC Act”) and is the regulator of the electricity industry in Victoria pursuant to s 7A of the Electricity Industry Act 2000 (Vic) (“EI Act”). It is the successor to the Office of the Regulator General pursuant to s 68 of the ESC Act.

An important function of the ESC is to issue licences to electricity generators, distributors and retailers. Section 16 of the EI Act requires electricity generators, distributors and retailers in Victoria to be licensed by the ESC. The ESC may impose conditions on licences. If a licensee is in breach of a licence condition, the ESC may serve an enforcement order under s 53(2) of the ESC Act. If the licensee fails to comply with an enforcement order, the ESC may give the licensee notice of its intention to revoke the licence. The ESC may revoke the licence if the licensee does not comply with an enforcement order prior to the expiration of the period set out in the notice.[2]
[2]See s 29(3) of the EI Act and cl 3.4 of UED’s licence which is referred to in paragraph 11 of this judgment.

Another important function of the ESC is to make Electricity Price Determinations which fix prices that distributors can charge their customers. The last Electricity Price Determination was made in or shortly after December 2005 and fixed prices for the five years ending 31 December 2010. In performing this function, s 33 of the ESC Act requires the ESC to have regard to matters such as “the costs of making, producing or supplying [electricity]”, “the return on assets in the [electricity industry]” and “any relevant interstate and international benchmarks for prices, costs and return on assets in comparable industries”. The Victorian Electricity Supply Industry Tariff Order 2005 (Vic) (“Tariff Order”), which was made by the Governor in Council under s 15A of the EI Act, included as one of the principles to be applied by the ESC in making a price determination under s 33 of the ESC Act, a requirement that the ESC “have regard to the need to … ensure a fair sharing of the benefits achieved through efficiency gains between customers and the Distributors”.[3] Clearly, the costs incurred by a distributor in operating the distribution business, and changes in those costs, are important components in the fixing of prices charged by distributors.
[3]Tariff Order, cl 2.1(c)(2).

UED and its licence

UED is the holder of an electricity distribution licence regulated under Part 2 of the EI Act. The licence took effect on 3 October 1994 and was last varied on 14 January 2005 (“Licence”). Since approximately October 1994, UED has carried on an electricity distribution business known as “United Energy Distribution”. The business transports electricity from generators to various supply points along assets (such as poles, electric lines and associated equipment) owned by UED. It services south-east Melbourne and the Mornington Peninsula with a 12,600 kilometre electricity network covering approximately 1,450 square kilometres. It supplies electricity to around 600,000 customers through the retailers AGL, TRUenergy and Pulse Energy. The retailers sign contracts known as use of system agreements with UED to gain access to UED’s assets and thereby supply electricity to their customers.

Clause 22.1(d) of the Licence states that UED as licensee must, among other things, comply with all applicable provisions of any guideline, if the guideline itself requires UED as licensee to comply or the ESC has informed UED as licensee that compliance is required. Schedule 1 to the Licence defines “guideline” to mean “a guideline published by the [ESC]”

Under cl 26 of the Licence, UED as licensee must ensure that separate accounts are prepared for its distribution business. Under cl 27 of the Licence, UED as licensee must provide to the ESC, in the manner and form decided by the ESC, such information as the ESC may from time to time require.

AAM

AAM was incorporated on 28 April 2003. It was originally known as Alinta Network Services Pty Ltd and adopted its current name on 31 March 2006. Since 2003, it has carried on the business, among others, of managing and operating electricity and gas distribution networks pursuant to operating services agreements with the owners of those networks.

Overview of ownership structures and relationships between UED and AAM
Ownership structure

UED was incorporated on 11 May 1994. From 13 September 1994 to 9 October 2003, it was known as United Energy Ltd. It has carried on the business of electricity distribution since 1994. Immediately prior to July 2003, UED was owned by Aquila Inc as to 48.23 percent and companies associated with AMP as to 51.77 percent and UED itself operated the distribution business. In July 2003, Aquila Inc sold its interest in UED to Alinta Ltd and companies associated with AMP (see below) with the former ending up with a 34 percent interest and the latter with a 66 percent interest, and the day to day operation of the distribution business was outsourced to AAM. UED’s personnel, information and systems relating to the operation of the business were transferred to AAM. The outsourcing was effected by the operating services agreement discussed in paragraph 22 of this judgment.

During 2006 and 2007, UED was (and remains) a wholly owned subsidiary of Power Partnership Pty Ltd which in turn was (and remains) a wholly owned subsidiary of United Energy Distribution Holdings Pty Ltd (“UEDH”). UEDH was incorporated on 10 April 2003. In this judgment, I refer to the three abovementioned companies as “the UED Group”.

Between July 2003 and 31 August 2007, Alinta Ltd owned 34 percent of the issued shares of UEDH and 66 percent of the issued shares were owned (and continue to be owned) by two listed trusts collectively referred to as “DUET”. The first trust is the Diversified Utility and Energy Trust No 1 (“DUET No 1”), the trustee of which is AMP Henderson Global Investors Ltd, now known as AMP Capital Investors Ltd (“AMPCI”). The second trust is the Diversified Utility and Energy Trust No 2 (“DUET No 2”), the trustee of which is AMP Investment Services Pty Ltd (“AMPIS”).

On 25 October 2006, Alinta Ltd changed its name to Alinta 2000 Ltd and a new company with the name Alinta Ltd became its holding company. Between April 2003 and 31 August 2007,[4] the ultimate holding company of AAM was either the old Alinta Ltd (which changed its name to Alinta 2000 Ltd on 25 October 2006) or the new Alinta Ltd, and, accordingly, this period is sometimes referred to as the “Alinta period”. The key events relevant to this proceeding took place during the Alinta period. In this judgment, all references to “Alinta” are to the company which was known as Alinta Ltd until 25 October 2006 and as Alinta 2000 Ltd from 25 October 2006 to 22 September 2008.
[4]On 31 August 2007, the Alinta Group was purchased by a consortium comprising the Babcock & Brown Group and the Singapore Power International Group. The Babcock & Brown Group acquired the new Alinta Ltd (which is now known as Westnet WA Infrastructure Holdings Ltd) and Alinta 2000 Ltd (which is now known as Westnet Infrastructure Group Ltd). However, 49 percent of the issued shares in AAM were acquired by the Singapore Power International Group. From 31 August 2007, the Babcock & Brown Group has owned 51 percent of the issued shares in AAM through the new Alinta Ltd, and the Singapore Power International Group has owned 49 percent of the issued shares through Jemena Asset Management Holdings Pty Ltd. The Singapore Power International Group will fully own AAM after certain consents are obtained. Since 31 August 2007, the Babcock & Brown Group has owned 34 percent of UEDH and thus 34 percent of UED. DUET continues to own 66 percent of UEDH and UED.

In 2006 and 2007, UED and AAM also had (and continue to have) links through a company called Pacific Indian Energy Services Pty Ltd (“PIES”), which is owned in equal one-third shares by Alinta Network Holdings Pty Ltd (“ANH”), Multinet Group Holdings Pty Ltd (“MGH”) and UEDH. I refer to PIES further below.

UEDH Shareholders Agreement

On 14 July 2003, UEDH, Alinta, AMPCI (in its capacity as trustee of DUET No 1) and AMPIS (in its capacity as trustee of DUET No 2) executed a shareholders agreement (“UEDH Shareholders Agreement”) for the “purpose of [recording] the parties’ agreement for the control and management of the [UED Group]”. It contains the following relevant provisions:

(a)Clause 2.1, which provides that the following matters listed in schedule 1 require a Special Majority Shareholders Resolution:
[i]the issue of further shares or any change in the share capital of [UEDH] or its Subsidiaries;
[ii]the grant of any loan or advance or giving of any financial accommodation other than in the ordinary course of business;
[iii]the giving of any guarantee or indemnity or granting any security interest to secure the liabilities or obligations of any person or entity other than [UEDH] in the ordinary course of business;
[iv]the sale, Transfer, lease, assignment, disposal or any other dealing with a material part of the undertaking, property or assets of [UEDH] or its Subsidiaries having a value in excess of $10 million or contracting to do so other than in the ordinary course of the Business;
[v]the sale, Transfer, disposal or any other dealing with a material part of the Business;
[vi]a change in the nature of the Business or the undertaking of new activities;
[vii]the undertaking of borrowings or capital expenditure in excess of 20% of the Budget and Business Plan for that financial year;

[viii]the initiation or settlement of disputes in excess of 20% of the Budget and Business Plan for that financial year;
[ix]a change in [UEDH’s] dividend policy or the adoption of a new dividend policy for [UEDH];
[x]the undertaking of any material investments outside the Business which are not supplemental or incidental to the Business;
[xi]the making of any amendments to the Constitution or the replacement of the Constitution with a new constitution; and
[xii]the appointment of an administrator, a receiver, a receiver and manager or a liquidator.

Clause 24.1 defines “Special Majority Shareholders Resolution” as a resolution of the shareholders which is approved by shareholders (who are not disqualified from voting on the resolution) who between them hold not less than 81 percent of the total number of shares held by all shareholders who are present and vote, and Alinta for so long as Alinta holds 10 percent or more of the shares and is not disqualified from voting on the resolution.
(b)Clause 2.4, which states that a shareholder may not vote at a meeting of shareholders on any matter (including those requiring a Special Majority Shareholders Resolution) relating to any agreement between UEDH (or a subsidiary) and the shareholder (or any affiliate) other than an agreement between UEDH (or a subsidiary) and an entity in which all shareholders have a direct or indirect interest.
(c)Clause 3.1, which provides that the board of UEDH is responsible for the overall direction and management of UEDH and its subsidiaries and the formulation of the policies to be applied in conducting the business including:
(i)any matter relating to any agreement between UEDH (or a subsidiary) and a shareholder (or an affiliate) other than an agreement between UEDH (or a subsidiary) and an entity in which all shareholders have a similar type of direct or indirect interest; and
(ii)any material decision in respect of the services arrangements between UEDH and an operator of regulated energy assets (other than Alinta).

(d)Clause 3.2, which provides that the Budget and the Business Plan must be approved by a Special Majority Directors Resolution. The definitions of “Budget” and “Business Plan” in cl 24.1 include the budget and business plan of UED. A Special Majority Directors Resolution is defined in cl 24.1 to mean a resolution of directors which is approved by directors (who are not disqualified from voting on that resolution) who between them hold not less than 81 percent of the total number of votes that may be exercised by all of the directors of UEDH who are present and vote. Clause 6.4 provides that if the board does not approve the Budget or Business Plan for a particular year, then, until it does so, the Budget or Business Plan will be the same as the previous year’s Budget or Business Plan.
(e)Clause 4, which deals with directors of UEDH. Clause 4.1 provides that the board consists of four directors nominated by shareholders and an independent chairman. Clause 4.2 provides that each shareholder other than Alinta is entitled to appoint one director for each 25 percent of the shares it holds. Clause 4.4 provides that Alinta is entitled to appoint one director for so long as it holds 10 percent or more of the shares. Clause 4.5 provides that DUET is entitled to appoint the independent chairman provided that, for so long as Alinta holds 10 percent or more of the shares, Alinta’s prior approval is required for the person nominated by DUET. Clause 4.10 provides that subject to the duty to act in good faith and in the best interests of UEDH as a whole, a director appointed by a shareholder may have regard to and act in the interests of their appointor.
(f)Clause 4.14, which provides that the composition of the board of UED must be the same as the composition of the board of UEDH and the provisions of the UEDH Shareholders Agreement regarding the conduct of UEDH’s affairs apply equally to the conduct of the affairs of UED.
(g)Clause 5.2, which provides that the quorum for board meetings is three directors and that where the draft Budget or Business Plan is being considered, the three directors must include a director appointed by Alinta and two directors appointed by DUET.
(h)Clause 5.6, which provides that a director may not vote on a resolution on any matter relating to any agreement between UEDH (or a subsidiary) and the shareholder (or an affiliate) who appointed the director, other than an agreement between UEDH (or a subsidiary) and an entity in which all shareholders have a similar type of direct or indirect interest. Clause 5.6 also provides that if the board is considering a material decision in respect of services arrangements between UEDH and an operator of regulated energy assets (other than Alinta), the directors appointed by Alinta may not participate in the consideration of or vote on the resolution of the subject matter of the services agreement. The chairman is exempted from the restrictions in cl 5.6.

Pursuant to cl 4 of the UEDH Shareholders Agreement, between 2003 and 2 March 2006, Alinta appointed its chief executive officer, Robert Browning, as a director of UEDH and UED, and between 2 March 2006 and 31 August 2007, Alinta appointed one of its then senior executives, Ian Devenish, as a director of UEDH and UED.[5] Mr Devenish was Mr Browning’s alternate on the boards of UEDH and UED between 10 May 2004[6] and 2 March 2006. Mr Shaun Reardon, a senior manager of Alinta, was Mr Devenish’s alternate on the boards of UEDH and UED between 6 October 2006 and 31 August 2007. Mr Browning was also a director of AAM between 28 April 2003 and 21 January 2007. He was one of a total of three directors of AAM while he held office.
[5]Mr Devenish resigned on 31 August 2007 but ASIC’s records show him as holding office until 11 September 2007.
[6]The appointment took effect on 10 June 2004 in the case of UED.

Operating services agreement

On 23 July 2003, AAM, UED and UEDH entered into an operating services agreement for an initial period ending on 30 June 2006. The agreement specified a first renewal period of five years commencing on 1 July 2006. The agreement was renewed on 1 July 2006 and was subsequently amended on 10 October 2006. The amendment is discussed in paragraph 39 of this judgment. In this judgment, I refer to the operating services agreement, as amended, as “the OSA”.

Pursuant to cl 3(b) of the OSA, UED delivered up operating control of its distribution network to AAM. Existing services contracts with third parties were largely assigned or novated to AAM. Under the OSA, AAM operates and manages UED’s distribution business on behalf of UED. UED pays AAM a fixed annual fee for operating expenses (“Opex”), which is referred to in the OSA as the “Opex Fee”. Under cl 12 of the OSA, the Opex Fee is payable monthly in arrears and is adjusted annually in accordance with the consumer price index and other factors. As the prices UED can charge are fixed by the ESC and its Opex are fixed under the OSA, UED has a degree of certainty about its profitability and is able to make stable distributions to its investors. Any savings in actual costs incurred by AAM in a particular year are retained by AAM for its own benefit.

Unlike Opex, which are borne by AAM in return for a fixed Opex Fee without disclosure of AAM’s actual costs, the capital expenses (“Capex”) are divided into fixed capital expenses and variable capital expenses (as defined in schedule 7 to the OSA) and are subject to budgets which are prepared by AAM and submitted to UED for UED’s approval under cl 11 of the OSA. UED therefore knows the amounts AAM incurs in respect of Capex. Under cl 12 of the OSA, UED pays AAM an annual “Fixed Capex Fee” monthly in advance and an annual “Variable Capex Fee” monthly in arrears. The Fixed Capex Fee is adjusted annually in a similar manner to the Opex Fee. The Variable Capex Fee is calculated in accordance with a schedule of rates agreed between the parties annually. In broad terms, in 2006 and 2007 UED’s annual expenditure on Opex approximated its annual expenditure on Capex.

Clause 5.1(a) of the OSA provides that UED appoints AAM to provide the “Services”. Clause 5.2(a) provides that not less than nine months before the expiry of the “Initial Period” on 30 June 2006, UED and AAM will commence negotiation of the fees to apply during the “First Renewal Period”, namely 1 July 2006 to 30 June 2011, having regard to a number of matters including “any reasonable changes to costs which will necessarily be incurred by [AAM] during the First Renewal Period in providing the Services including increases in costs to [AAM] and efficiencies to be achieved by [AAM] during the First Renewal Period”.

The negotiations over the fees for the First Renewal Period have not yet been concluded. One of UED’s motives in seeking information about AAM’s costs (in addition to protecting the Licence) is to use that information in the negotiations over the fees. One of AAM’s motives in refusing to provide the information about its costs (apart from its belief that it is not a related party of UED for the purposes of the Guideline) is that it does not want UED to be able to use that information in the negotiations over the fees. Pending completion of the negotiations, UED continues to pay the fees payable during the Initial Period.

Clause 6.1 of the OSA requires AAM to provide the “Services” to UED at AAM’s own cost. Clause 1.1 defines “Services” to mean the services described in schedule 1 other than the “Excluded Services”. Clause 1.1 defines “Excluded Services” to mean the services described in part 2 of schedule 1 and certain treasury services provided by AMPCI. Clause 6.5 states that AAM is the exclusive provider of the “Services” to UED.

Schedule 1 to the OSA lists a large number of services under the headings “1. General”, “3. Regulatory Services”, “4. Network Management”, “5. Construction Management”, “6. Network Customer Services”, “7. Network Planning & Engineering Services” and “8. Network Operation, Incident Management and Supervisory Control Services”.

Under the heading “1. General”, schedule 1 states:

… [AAM] will operate and manage, or procure the operation and management of, the Distribution Network and the Business in accordance with Good Industry Practice and the Service Standards excluding those services described in paragraph 2 of this schedule and including the Services described in paragraphs 3, 4, 5, 6, 7 and 8 of this schedule. …

Under the heading “2. Excluded Services”, schedule 1 states:

The following services are not provided by [AAM]:
(a)approval of and final submissions to the ESC in relation to Distribution Price Reviews;
(b)regulatory strategy including strategy for network pricing and tariff reassignment;
(c)determining those matters referred to in paragraphs 3(a) and 3(b) of this schedule;
…
(e)general management and operation of UED including the board of UED; and
(f)press releases/publications of UED.

Under the heading “3. Regulatory Services”, schedule 1 states:

Subject to [paragraph] 2 of this schedule and consultation with UED:
(a)Proposing Distribution Tariffs and Network Tariffs to UED pursuant to the Electricity Price Determination.
(b)Drafting submissions to the ESC in relation to Distribution Price Reviews and other assistance reasonably required by UED in relation to the Distribution Price Reviews.
(c)The recommendation to UED for the setting of additional charges for excluded services as defined in the Electricity Price Determination.
(d)Providing all reports to the ESC required by an Electricity Law or the Electricity Price Determination.

The services specified under the heading “4. Network Management” and the sub‑heading “4.1. Manage the Business, the Network and associated assets” include:

(a)Provide commercial and technical expertise in support of the management of the Business.
…
(h)Establish and maintain commercial, design, operational and maintenance policies and standards for the asset. …

Other services specified in schedule 1 include: “Develop contracts and tendering processes that allow the selection of the appropriate contracting resources to meet the capital forecast requirements”, “Negotiate [use of system agreements] with market participants”, “Operate and maintain a Distribution Network billing system to recover all revenue recoverable under contracts and other arrangements”, “Develop policy and procedures to control access and connection to the Distribution Network“ and “The maintenance of asset records and record systems to satisfy business needs and regulatory requirements … and … [t]he maintenance of technical drawings and records”.

Clause 1.1 of the OSA defines “Electricity Law” to include “Codes” and defines “Codes” to include “the Guidelines issued or approved by the ESC pursuant to the [EI Act]”. The term “Guidelines”, as used in the definition of “Codes”, is not defined by the OSA. Clause 1.1 defines “Electricity Price Determination” as “the price determination made by ESC in December 2000 in relation to distribution networks in Victoria for the 5 years ending 31 December 2005 and … any replacement of it”.

Clause 7.1 of the OSA requires AAM to provide operational, financial and other reports specified in cl 7 and schedule 4. Clause 7 refers to incident reports and annual reports. Clause 7.4(a) requires AAM to deliver to UED within 80 days after the end of each calendar year in respect of that year an annual report on its activities and performance under the OSA, including “Reports” described in schedule 4 for that year and the information required to be included by UED in its annual report, which information will be notified to AAM from time to time. Schedule 4 requires AAM to provide to UED “Regulatory Reports” (being reports UED is required to submit to the ESC and other regulators) in the format required by regulators at least five business days before providing the report to a regulator, monthly “Revenue Reports”, monthly “Operating Reports” which discuss all major operational aspects of the business not covered in the “KPI report”, monthly “KPI Reporting” showing performance against the Key Performance Indicators (“KPIs”) listed in schedule 5,[7] and six monthly “IP Reporting”.
[7]The KPIs are summarised in fn 35 of this judgment.

Clause 10 of the OSA requires AAM to develop an asset management plan for the repair, management and maintenance of the distribution network and associated assets for the period 1 January 2004 to 30 June 2006 and to update it annually to, among other things, be consistent with UED’s long-term objectives. The revised asset management plan must be submitted to UED for approval no later than 31 October each year. If UED does not approve the plan, it must give reasons and AAM must resubmit a new asset management plan which complies with UED’s requirements. AAM must carry out the approved asset management plan at its own cost.

Clause 25.1 of the OSA imposes mutual confidentiality obligations on the parties. Clause 25.3 provides an exception in respect of confidential information a party is required to disclose “by any Government Agency”. Clause 1.1 defines “Government Agency” as including a “Regulator” and a “Regulator” as including the ESC.

Clause 32.1 of the OSA prior to its amendment in 2006 contained an irrevocable power of attorney in favour of AAM which authorised AAM to “perform the Services”, enter into any use of system agreement and “do anything which is necessary or desirable to deliver the Services” on behalf of UED. AAM was required to obtain UED’s prior approval before incurring any liability on behalf of UED, other than liability in the ordinary course. Pursuant to the power of attorney, AAM executed a number of agreements on behalf of UED.

The OSA Amendment Agreement, which took effect on 10 October 2006, deleted cl 32 of the OSA and revoked the power of attorney. A new cl 32 was inserted which conferred authority on AAM to enter into such agreements for and on behalf of UED as the board of UED nominated from time to time either by standing resolution or specific resolution, other than any use of system agreement or any connection agreement. The new cl 32 also includes an acknowledgment that, in the performance of the Services, AAM is an independent contractor and not an agent or partner of UED. On 22 November 2006, the board of UED authorised AAM to enter into certain agreements so long as they are in the normal course of business and do not commit UED to expenditure of more than $100,000.

As part of its role of operating and managing UED’s distribution business and in accordance with the services set out in schedule 1 to the OSA (see paragraph 32 of this judgment), AAM prepared operating policies for that business (either by creating new policies or revising existing policies) and submitted them to UED for approval. The policies (which are sometimes referred to as “strategies”) included the Vegetation Management Strategy Policy, the Distribution Transformer Strategy Policy, the Two Pole Substations Strategy Policy, the Maintaining Vegetation Clearance Between Private Overhead Electric Lines and Servicelines on Private Property Policy, the Maintaining Clearance Between Existing Powerlines and Vegetation in Declared Areas Policy, the Maintaining Clearance Between Existing Powerlines and Vegetation Policy, the Vegetation Management Policy, the Vegetation Management Procedure – Organisation Structure – Roles and Responsibilities Policy, the Vegetation Management Strategy Policy, and the Pole Top Structures Strategy Policy.

UED’s senior management team and role of PIES

UED did not have any employees in 2006 and 2007. Its corporate functions have been performed by a combination of AAM personnel under the OSA and senior executives and experts sourced from a number of shareholder and other related entities rather than UED itself. These functions are sourced through UEDH. UEDH principally carries on these functions through:

(a)PIES, which provides executive management services to UEDH and co‑ordinates the provision of services by shareholders under the United Energy Management Services Agreement dated 14 July 2003 between UEDH and PIES (“UEMSA”); and
(b)AMPCI, which provides treasury/financial services to UEDH under the Financial Services Agreement dated 14 July 2003 between UEDH and AMPCI (“FSA”).

Under the UEMSA, UEDH appointed PIES as manager to provide the services set out in schedule 1 to the UEMSA. Those services include the management of the contractual relationship between UEDH, UED and AAM under the OSA, management of the contractual relationship between UEDH and AMPCI under the FSA, development of the regulatory strategy for the UED Group, performance of company secretarial duties, preparation of statutory accounts and tax returns, preparation of the UED Group’s business plan, review of drafts of business plans submitted under the OSA and the FSA, and management of the UED Group’s cashflow requirements.

Under the FSA, UEDH appointed AMPCI as adviser to provide the services set out in schedule 1 to the FSA. Those services are treasury services, transaction services in respect of capital raisings and other services as agreed from time to time.

PIES, Alinta, ANH, AMPCI, MGH and UEDH entered into a Shareholders Agreement dated 14 July 2003 (“PIES Shareholders Agreement”). Clause 3 provides that PIES cannot employ more than three personnel to provide management services to ANH, MGH and UEDH without approval in writing by Alinta and AMPCI unless the increase is fully provided for in the business plan of each of ANH, MGH and UEDH. The board of PIES comprises three directors, with ANH, MGH and UEDH each having the right to appoint a director. Decisions of directors have to be unanimous. Alinta’s nominee on the board of PIES for the period July 2003 to 23 March 2006 was Mr Browning and in the period 23 March 2006 to 31 August 2007, it was Mr Devenish.[8]
[8]Mr Devenish resigned on 31 August 2007 but ASIC’s records show him as holding office until 14 September 2007.

During 2006 and 2007, UED’s senior management team comprised Hugh Gleeson, CEO, David Strang, CFO, Shaun Glasson, engineer and Wilson Foo, financial analyst (commenced 29 January 2007). They were not employees of UED and were provided by PIES.

The Guideline

As mentioned in paragraph 1 of this judgment, the ESC published the Guideline on 15 December 2006. The Guideline requires licensees such as UED to include within their regulatory accounting statements information as to the actual costs incurred by their “Related Parties” in relation to the licensee’s distribution business. The Guideline provides a definition of “Related Party”, which is set out in paragraph 69 of this judgment. The definition and other relevant provisions of the Guideline are discussed below under the heading “Scope and validity of Guideline”.

Non-provision of AAM’s costs information to UED

In April 2007, UED filed with the ESC its regulatory accounting statements for the year ended 31 December 2006. AAM’s actual costs information was not included on the basis that it was not available to UED.

By letter dated 19 December 2007, UED requested AAM to provide information about AAM’s actual costs to UED to enable UED to comply with the Guideline for the year ending 31 December 2007. By letter dated 15 January 2008, AAM refused to provide the information on the basis that AAM was not a related party of UED within the meaning of the Guideline.

On 7 March 2008, UED informed AAM that unless within 14 days AAM agreed to the provision of AAM’s actual costs information within a suitable timeframe for the orderly preparation of the regulatory accounting statements, UED would have no alternative other than to institute legal proceedings. By letter dated 12 March 2008, AAM reiterated that it is not obliged to provide the actual costs information.

In April 2008, UED filed with the ESC its regulatory accounting statements for the year ended 31 December 2007, again without AAM’s actual costs information.

Commencement of proceeding and issues to be determined

On 30 May 2008, UED commenced this proceeding against AAM and the ESC seeking the following relief:

(a)A declaration that AAM is required under the OSA to provide to UED AAM’s actual costs information for the year ended 31 December 2006 and/or the year ended 31 December 2007.
(b)Specific performance of the obligation that AAM provide to UED certain reports and/or AAM’s actual costs information in respect of the year ended 31 December 2006 and/or the year ended 31 December 2007 within 30 days.
(c)A declaration as to whether AAM is a related party of UED for the years ended 31 December 2006 and 31 December 2007 for the purpose of the Guideline.
(d)All necessary orders including interim and interlocutory orders to give effect to the relief sought by UED including orders restraining the ESC and its agents or delegates from taking any steps or proceedings on the basis of UED’s failure to comply with the Guideline or, alternatively, the related party costs information provisions of the Guideline.

UED included the ESC as a defendant to the proceeding so that it would be bound by the Court’s decision as to whether or not UED and AAM were related parties, within the meaning and application of the Guideline, in 2006 and 2007.

In its defence and counterclaim, AAM denies that it was a related party of UED in 2006 and 2007 and that it has breached the OSA. It also alleges that the Guideline is invalid. It seeks a declaration that, to the extent the Guideline requires the provision of AAM’s actual costs information, it is invalid and of no effect.

In its defence, the ESC asserts that the Guideline is valid, that AAM was a related party of UED in 2006 and 2007 and that UED is obliged to include in its regulatory accounting statements the actual costs information of AAM.

The issues requiring determination by this Court are:

(a)Is the Guideline valid?
(b)If the Guideline is valid, does it apply to 2006 and 2007?
(c)Was AAM a related party of UED in 2006 and 2007?
(d)Does the OSA oblige AAM to provide its actual costs information to UED?
(e)Is the proceeding hypothetical or futile?
(f)What relief, if any, is appropriate?

Witnesses and reliability of their evidence

Evidence in chief was given by way of affidavit or witness statement. Each witness was cross-examined.

UED called only one witness, David Strang, who has been the company secretary and CFO of UED and UEDH since 26 November 2003. The ESC did not call any witnesses. AAM called:

(a) Mr Devenish, a former senior executive of Alinta who served as Alinta’s nominee alternate director and later nominee director on the boards of UED and UEDH from mid 2004 to 31 August 2007.[9] He also served as Alinta’s representative on UEDH’s audit and risk committee.
[9]See paragraph 21 of this judgment.

(b) Mr Reardon, a senior manager employed by Jemena Asset Management Holdings Pty Ltd (“Jemena”) which, since 31 August 2007, has owned 49 percent of AAM.[10] Between October 2006 and 30 September 2007, he was responsible for the management of all commercial aspects of the services AAM provided to UED under the OSA. He was Mr Devenish’s alternate on the boards of UED and UEDH and on UEDH’s audit and risk committee between 6 October 2006 and 31 August 2007.
[10]See fn 4 of this judgment.

(c) Bill Fletcher, a financial controller employed by Jemena. Since April 2006, he has been responsible for all financial and management accounting services provided by AAM to UED and has filled the role of UED’s financial controller.

(d) Sumit Garg, a business analyst employed by Jemena. Between April 2005 and October 2005, he was employed in Alinta’s management accounting group and between November 2005 and October 2007, he was employed in Alinta’s financial accounting group which, until Mr Fletcher’s team took over responsibility, prepared monthly accounting reports for UED.

(e) Craig Savage, an asset manager employed by AAM. In 2006 and 2007, he headed an “asset services” team which produced annual five year asset management plans for UED’s distribution business for UED’s approval.

(f) Mark Beech, who performed a similar role to Mr Savage in relation to the gas distribution business of the Multinet Gas Distribution Partnership (“Multinet”).

(g) Jock O’Callaghan, a partner of PricewaterhouseCoopers (“PwC”), who prepared reports to AAM on AAM’s costs of operating UED’s distribution business.

As many of the underlying facts, as distinct from matters of detail and interpretation, were not in dispute, the credit of witnesses is not a central consideration. It is therefore not necessary for me to discuss the evidence of each witness at length. My findings in respect of the witnesses may be summarised as follows:

(a)Mr Strang gave his oral evidence calmly and answered questions directly and honestly. He had a good recollection of relevant details and made concessions where appropriate. His evidence was very reliable and I have placed great weight on it.
(b)Mr Devenish gave truthful answers and made concessions where appropriate. However, there were gaps in his memory and he was hazy on some details. This is understandable, as he ceased employment with Alinta around the end of August 2007.
(c)Mr Reardon was an unimpressive witness whose evidence, on his own admission, was incomplete and capable of being misleading on issues such as when PwC commenced work on preparing reports on AAM’s 2006 and 2007 costs of operating UED’s distribution network, whether the reports were in draft or final form and when they were received by AAM. He also said that he did not recall particular facts notwithstanding that they occurred recently and were within the scope of his duties. The selective and guarded manner in which Mr Reardon gave evidence made it unreliable. I have given his evidence little weight when it was favourable to AAM except where it was supported by contemporaneous records or the evidence of another witness.
(d)Mr Fletcher answered questions truthfully. However, he was not very knowledgeable on a number of issues and hence his evidence was less precise than I would have expected. For example, although he fills the role of financial controller of UED, he has limited knowledge of the systems used by AAM in preparing UED’s accounts and he is not sure whether Mr Strang has access to those systems. Also, some of Mr Fletcher’s oral evidence differed from his affidavit evidence. For example, although in his affidavit he stated that he reports to Jemena’s CFO and liaises regularly and closely with Mr Strang, in his oral evidence he said he reports to Mr Strang. Further, although in his affidavit he stated he attended a meeting of UEDH’s audit and risk committee on 31 July 2006 “on behalf of Alinta”, in his oral evidence he said he represented UED’s interests at the meeting.
(e)Mr Garg answered questions truthfully and to the best of his ability.
(f)Mr Savage gave his evidence in a direct and straightforward manner. He made concessions where appropriate. His evidence was reliable.
(g)Mr Beech gave evidence in a guarded manner. He appeared to tailor some of his answers according to his perception of whether they would assist AAM’s case. He also appeared reluctant to make concessions, even on straightforward issues. These matters have adversely affected the weight I have given to Mr Beech’s evidence.

(h) Mr O’Callaghan gave truthful evidence.

Insofar as the evidence of Mr Strang conflicted with the evidence of any AAM witness, I have tended to prefer Mr Strang’s evidence.

Both Mr Bick QC, who appeared with Mr Farrands on behalf of UED, and Mr Delany SC, who appeared with Mr Weinstock on behalf of AAM, relied heavily on Jones v Dunkel[11] in submitting that I should infer that the evidence of certain individuals who were available to be called but were not called as witnesses by AAM and UED respectively would not have assisted that party’s case. Mr Bick made such a submission principally in relation to Ariel Leano (AAM’s financial controller from July 2004 to November 2006), Alistair Lehman (AAM’s current financial controller) and Peter Megarry (at relevant times, AAM’s general manager or CEO). Mr Delany made such a submission in relation to Mr Gleeson (UED’s CEO), Peter Lowe (the chairman of UED), Ross Israel, Peter Barry, Bruce Berry, Nicholas Langley and David Bartholomew (at various stages, executives of DUET and directors or alternate directors of UED) and Mr Glasson (a member of UED’s senior management team). Mr Delany also submitted that as the ESC called no evidence, the inference is that any witness called by the ESC would not have advanced the ESC’s case.
[11](1959) 101 CLR 298.

I have not found it necessary to rely on Jones v Dunkel in relation to any person who was available to be called but was in fact not called as a witness except as set out in paragraph 196 of this judgment. The key reason for this is that most of the substantive underlying facts in this proceeding were not in dispute. A key exception is the extent to which AAM is capable of providing information about its actual costs of operating UED’s distribution business in 2006 and 2007 in compliance with the Guideline over and above the information in the reports of PwC discussed in paragraph 186 of this judgment. Save as set out in paragraph 196 of this judgment, the parties made sensible choices about who to call as witnesses in light of the nature of the case and the need to ensure that it was heard and determined expeditiously.

Scope and validity of Guideline

In this part of the judgment, I discuss whether the provisions of the Guideline that require inclusion of related party costs information in a licensee’s regulatory accounting statements are valid. I also consider how those provisions, if valid, apply to the 2006 and 2007 years.

Relevant provisions of Guideline

Clause 1.1.1 of the Guideline describes the purpose of the Guideline as follows:

This Guideline sets out a mechanism for the collection of information and certain recurring substantive information requirements, to assist the Commission to fulfil its objectives and functions. The information provided to the Commission pursuant to this Guideline enable the Commission to undertake the following:
·to ensure the correct allocation of revenue and costs between the Distribution Business and non-distribution businesses;
·to inform Electricity Distribution Price Determinations and to perform other functions under relevant Acts;
·to measure actual financial performance of Distribution Businesses against forecast;
·to publish information on financial performance of Distribution Businesses;
·improve the level(s) of transparency in the regulatory processes;
·to generally give effect to the objectives of the Commission as stated in the Essential Services Commission Act 2001 and the Electricity Industry Act 2000.

Clause 2.8.2 of the Guideline states that the Guideline has “effect for Regulatory Accounting Periods ending on or after 31 December 2006”. Clause 5.4.1 provides that a “Regulatory Accounting Period shall be a calendar year unless the Commission should specify otherwise”.

Clause 2.2 of the Guideline states:

2.2.1Regulatory Accounts and Regulatory Accounting Statements must be prepared for a Distribution Business by the Licensee. The Distribution Business is not defined by legal entity structures but by the activities undertaken to fulfil the obligations set out in the Distribution Licence by the Licensee and/or a Related Party of the Licensee.
2.2.2Any revenue earned, asset utilised and liability or cost incurred in fulfilling a Distribution Licence obligation by the Licensee and/or a Related Party of the Licensee must be reported in the Regulatory Accounts and the Regulatory Accounting Statements. Whilst the Distribution Business is not defined as a legal entity, each revenue, cost element, asset and liability that when combined constitute the whole of the Distribution Business must have its origin in an audited Statutory Accounts although not necessarily all from the same set of Statutory Accounts.

Clauses 5.23.1 and 5.23.2 of the Guideline state:

5.23.1Where transactions between a Related Party and the Licensee occur for amounts greater than $500,000 in aggregate in the Regulatory Accounting Period, these shall be reported in the Regulatory Accounting Statements.
Explanation

The Distribution Business is defined by its activities and not by incorporation. Therefore, entities that are a Related Party of the Distribution Business and provide electricity distribution services or assets acquired for use in the provision of those services are considered part of the Distribution Business for the purpose of the Regulatory Accounting Statements. The Commission requires the value of goods and services originating in those Related Parties to be recorded in the Regulatory Accounting Statements.
5.23.2For the transactions reported under paragraph 5.23.1, the information that must be reported includes:
·The name of the Related Party which incurred the cost in providing the individual services to the Distribution Business;
·the actual incurred cost of the individual services provided by the Related Party to the Distribution Business;
·the individual services provided;
·a description of how the actual incurred cost was determined;
·a description of how the actual incurred cost is reflected in the Regulatory Accounting Statements identifying the Asset Category, Maintenance Cost category or Operating Cost category;
·a description of the way actual incurred cost amount is reflected in the Regulatory Accounting Statements including where the amount is allocated (by Asset Category and/or Maintenance Cost category and/or Operating Cost category); and
·a description of the allocation basis and the quantum of the allocator.

The actual incurred cost of the Related Party providing the service will be net of any profit margin or management fee.

The monetary limit in cl 5.23.1 of the Guideline was satisfied in the case of AAM and UED in both 2006 and 2007.

Clause 5.23.5 of the Guideline states:

A Licensee must:
·report the information required under this section 5.23 which is available to it and able to be included in its Regulatory Accounting Statements; and
·as soon as practicable and, in any case by 31 December 2007, enter into such arrangements with any of its Related Parties as are necessary to ensure that the information required under this section 5.23 is available to it and able to be included in its Regulatory Accounting Statements.

Part 6 of the Guideline contains the following relevant definitions:

Distribution Business means the entirety of the activities undertaken by the Licensee and/or a Related Party of the Licensee in order to fulfil the obligations incurred under the Distribution Licence.
Entity means a business unit, whether or not a legal entity.
Regulatory Accounts are financial records derived from the Statutory Accounts of the Licensee and the Statutory Accounts of Related Parties of the Licensee that are involved in the activities of a Distribution Business.
Regulatory Accounting Statements are financial reports revealing the performance and financial situation of the Distribution Business. They show the originating Statutory Account amount, its translation into a Regulatory Account amount and its disaggregation between Distribution Business Segments. The pro-forma templates for the Regulatory Accounting Statements are attached to this Guideline in APPENDIX 1.
Related Party means, in relation to a Licensee,
(a)any other Entity that, at any time during the reporting period, has control or significant influence over the Licensee;
(b)any other Entity that, at any time during the reporting period, is subject to control or significant influence by the Licensee;
(c)any other Entity that, at any time during the reporting period, is controlled by the same Entity that controls the Licensee — referred to as a situation in which entities are subject to common control;
(d)any other Entity that, at any time during the reporting period, is controlled by the same Entity that significantly influences the Licensee;
(e)any other Entity that, at any time during the reporting period, is significantly influenced by the same Entity that controls the Licensee; …

Statutory Accounts means the audited set of accounts prepared in accordance with Australian Securities and Investments Commission (ASIC) requirements submitted to the ASIC by statutory entities.

Clause 5.2.1 requires regulatory accounting statements to be prepared in accordance with the Guideline, that is, in accordance with the templates in Appendix 1.

Statutory basis for Guideline

The source of power relied upon to make the Guideline is set out in the Guideline itself. Clause 2.1.1 of the Guideline refers to s 13 of the ESC Act, which has provided at all relevant times: “The Commission may publish statements and guidelines relating to the performance of its functions and the exercise of its powers”.

Clause 2.1.1 of the Guideline states that the Guideline supports the Commission’s objectives as stated in s 8 of the ESC Act and s 10 of the EI Act.

When the Guideline was published on 15 December 2006, ss 8, 10 and 11 of the ESC Act relevantly provided:

8Objectives of the Commission
(1)In performing its functions and exercising its powers, the primary objective of the Commission is to protect the long term interests of Victorian consumers with regard to the price, quality and reliability of essential services.

(2)In seeking to achieve its primary objective, the Commission must have regard to the following facilitating objectives —
(a)to facilitate efficiency in regulated industries and the incentive for efficient long-term investment;
(b)to facilitate the financial viability of regulated industries;
(c)to ensure that the misuse of monopoly or non-transitory market power is prevented;
(d)to facilitate effective competition and promote competitive market conduct;
(e)to ensure that regulatory decision making has regard to the relevant health, safety, environmental and social legislation applying to the regulated industry;
(f)to ensure that users and consumers (including low-income or vulnerable customers) benefit from the gains from competition and efficiency;
(g)to promote consistency in regulation between States and on a national basis.

(3)Without derogating from sub-sections (1) and (2), the Commission must also perform its functions and exercise its powers in such a manner as the Commission considers best achieves any objectives specified in the relevant legislation under which a regulated industry operates.

10Functions of the Commission
The functions of the Commission are —
(a)to perform such functions as are conferred by [the ESC Act] and the relevant legislation under which a regulated industry operates;
…
(h)to administer [the ESC Act]; …

11Powers of the Commission
(1)Subject to [the ESC Act], the Commission has power to do all things necessary or convenient to be done for or in connection with the performance of its functions and to enable it to achieve its objectives under [the ESC Act] and under relevant legislation.
(2)Without derogating from sub-section (1), the Commission also has such powers as may be conferred on the Commission by the relevant legislation under which a regulated industry operates.

Sections 10, 12, 20, 21 and 26A of the EI Act relevantly provided in December 2006:

10Objectives of the Commission
The objectives of the Commission under [the EI Act] are —
(a)to the extent that it is efficient and practicable to do so, to promote a consistent regulatory approach between the electricity industry and the gas industry; and
(b)to promote the development of full retail competition.

12Powers in relation to price regulation
(1)For the purposes of Part 3 of the [ESC Act] —

** * * *
(b)the power to regulate prescribed prices in respect of [electricity] is conferred on the Commission in respect of the following —
(i)charges for connection to, and the use of, any distribution system;

** * * *
(iii)tariffs for the sale of electricity regulated by Order under section 13, to the extent specified in such an Order.

** * * *

20 Provisions relating to licences
…
(2)A licence is subject to such conditions as are decided by the Commission. …

21Specific licence conditions
Without limiting the generality of section 20, the conditions on a licence may include provisions —
…
(b)requiring the licensee to enter into agreements on specified terms or on terms of a specified type;
(c)requiring a retailer to have such agreements with one or more distribution companies as are necessary to ensure that, subject [to the EI Act], electricity is distributed or supplied to the extent necessary to enable the retailer to sell electricity to its customers;
(d)requiring a distribution company to have such agreements with retailers as are necessary to ensure that, subject to [the EI Act], electricity is distributed or supplied to the extent necessary to enable the retailers to sell electricity to their customers;
(e)requiring a distribution company —
(i)to prepare standard agreements for the purposes of paragraphs (c) and (d); and
(ii)to submit those standard agreements to the Commission for approval; and
(iii)to offer a standard agreement approved by the Commission to a retailer for the purposes of paragraphs (c) and (d);

…
(g)requiring a distribution company to comply with requirements relating to the provision of public lighting;
…
(i)requiring the licensee to supply information to VENCorp, when requested by VENCorp, to assist VENCorp to fulfil its functions in relation to the securing of supply of electricity;
(j)requiring the licensee to inform customers from time to time of the arrangements in place or proposed to be in place to allow them to elect to become a customer of another licensee;
…
(l) requiring the licensee to observe specified Orders in Council, industry codes, standards, rules and guidelines, with such modifications or exemptions as may be specified by the Commission;
(m)requiring the licensee to maintain specified accounting records and to prepare accounts according to specified principles;
(n)specifying requirements about the ownership of real or personal property used in or in connection with the carrying on of the activities authorised by the licence;
(o)preventing the licensee from engaging in or undertaking specified business activities;
(p)specifying methods or principles to be applied by the licensee in determining prices or charges;
(q)specifying methods or principles to be applied in the conduct of activities authorised by the licence;
(r)specifying procedures for variation or revocation of the licence;
…
(t)requiring the licensee to provide, in the manner and form specified by the Commission, such information as the Commission may from time to time require;
(u)requiring the licensee to develop, issue and comply with customer-related standards, procedures, policies and practices (including with respect to the payment of compensation to customers);
(v)requiring a transmission company to provide, in accordance with the guidelines under section 26A, access to a specified person or class of person to its land for the purpose of constructing, operating and maintaining augmentations to the electricity transmission system.

26AGuidelines about access to land
(1)The Commission —
(a)must prepare guidelines for the purpose of [section] 21(v) …; and
(b)may amend those guidelines from time to time. …

The Guideline also refers to cll 26 and 27 of the “Distribution Licences”, which is defined to include the Licence. Clauses 26 and 27 of the Licence are described in paragraph 13 of this judgment.

Validity of Guideline

Mr Delany submitted that the provisions of the Guideline requiring a related party’s actual costs to be included in a licensee’s regulatory accounting statements are not authorised by the ESC Act or the EI Act and are therefore invalid. Both Mr Gray, who appeared for the ESC, and Mr Bick submitted that the Guideline is valid. The grounds of invalidity relied upon by Mr Delany are discussed below under appropriate headings. In the course of argument, I raised some issues about the validity of the Guideline which Mr Gray addressed in argument and in detailed supplementary written submissions. I will refer to some of those issues under the heading “Nature and permissible scope of Guideline” below. I will only refer to the others insofar as Mr Delany relied on them. Where Mr Delany did not rely on an issue which is not discussed under the abovementioned heading, I will not discuss it specifically; it suffices for me to say that ultimately the issue has not had a bearing on the outcome of the proceeding.

Nature and permissible scope of Guideline

A guideline does not normally have binding force and can be distinguished from binding principles or rules. As the ordinary meaning of the word suggests, a guideline generally provides a guide to its subject matter but is not mandatory in relation to that subject matter. However, an instrument that is described as a “guideline” can be binding if there is a discernible legislative intent that it have such an effect.[12]
[12]Smoker v Pharmacy Restructuring Authority (1994) 53 FCR 287, 289, 290, 298-301; Ford v Legal Aid Commission of Queensland [1999] 1 Qd R 267, 272. See also Norbis v Norbis (1986) 161 CLR 513, 519-20.

In this case, the Guideline was published pursuant to s 13 of the ESC Act. There is nothing in s 13 itself which discloses an intention that a guideline published pursuant to that section be binding. However, it is necessary to consider the legislative regime as a whole, including the ESC Act and the EI Act. As set out in paragraph 74 of this judgment, the ESC may impose conditions on a licence under ss 20(2) and 21 of the EI Act. Compliance with conditions of a licence is mandatory in the sense that a failure to comply can result in revocation of the licence.[13] As appears from paragraph 74 of this judgment, s 20(2) confers a general power on the ESC to impose conditions. Section 21 lists a large number of conditions that the ESC may impose. However, s 21 expressly provides that it does not limit the generality of s 20. This means that any gaps or restrictions that appear in s 21 do not limit the ESC’s general power to impose conditions under s 20(2). That said, s 21 forms an important part of the legislative regime within which the ESC’s general power under s 20(2) exists, and while neither s 21 at large nor any particular condition listed in s 21 can limit or control that general power, the scope of particular conditions listed in s 21 can inform the interpretation of the ESC’s general power where that power is purportedly exercised to impose a condition which is similar to a condition listed in s 21.
[13]See s 53 of the ESC Act, s 29(3) of the EI Act and cl 3.4 of the Licence.

Section 21(l) of the EI Act is an important provision for present purposes. It states that the ESC may impose a condition requiring a licensee to observe specified “industry codes, standards, rules and guidelines”. It is arguable that s 21(l), read together with s 25 (which states that if a licence is subject to a condition under s 21(l), the ESC may amend the relevant industry codes, standards, rules or guidelines for the purposes of their application under that licence), refers to industry guidelines rather than guidelines published by the ESC. It is not necessary for me to decide this issue because, whatever its scope, it is clear that s 21(l) evinces an intention that the conditions of a licence can be used as a mechanism to make at least some guidelines binding on a licensee. As the ESC can publish guidelines and can impose conditions on a licence, it can impose a condition requiring a licensee to comply with guidelines published by the ESC under s 13 of the ESC Act unless, reading the provisions in the context of the legislative regime as a whole, it appears that there is a contrary legislative intent. There is no such contrary legislative intent. Rather, taken as a whole, the abovementioned provisions disclose a legislative intention that guidelines published pursuant to s 13 can be binding if they are required to be complied with as a condition of a licence.

I also note that, given that s 21(l) cannot limit the ESC’s general power to impose a condition under s 20(2) (see paragraph 78 of this judgment), if it is assumed that s 21(l) refers only to industry guidelines, that does not limit the ESC’s power to impose a condition under s 20(2) requiring a licensee to comply with guidelines published by the ESC under s 13. Likewise, if it is assumed that s 21(l) requires the condition itself to specify the industry guidelines that must be complied with, that does not mean that a condition imposed under s 20(2) may not require a licensee to comply with guidelines published by the ESC generally, whether or not they are specifically identified in the condition itself.

The width of the scope to be given to the general power to impose conditions in s 20(2) also needs to be considered in light of the broader statutory context. The ESC, through the licence regime, confers on the licensee the privilege to participate in a regulated industry delivering essential services, and to charge for those services. The electricity industry is regulated because of its monopoly characteristics. If the powers of regulation were read restrictively, the regime’s objectives (including the prevention of the misuse of monopoly or non-transitory market power, and ensuring that users benefit from efficiency gains, in order to protect the long-term interests of Victorian consumers as to the price of those services) would not be served. Accordingly, the ESC’s powers to impose conditions are to be read in a manner that enables the ESC to discharge its functions effectively and in furtherance of the objectives of the legislation.

For present purposes, the two provisions of the Licence that are relevant are cll 22.1(d) and 27, which are referred to in paragraphs 12 and 13 of this judgment. In essence, cl 22.1(d) requires UED, as licensee, to comply with all applicable provisions of any guideline published by the ESC, and cl 27 requires UED, as licensee, to provide to the ESC, in the manner and form decided by the ESC, such information as the ESC may from time to time require. Although cll 22.1(d) and 27 are not described as “conditions”, they have the character of conditions and have effect as such under cl 2.1 of the Licence, which states that the grant of the Licence is subject to the conditions set out in the Licence.

Under s 13 of the ESC Act, the ESC may publish guidelines “relating to” the performance of its functions and the exercise of its powers. In some contexts, this type of provision is confined to the publication of guidelines which set out the manner and form in which existing obligations are to be complied with and does not empower the relevant authority to publish guidelines imposing substantive obligations. However, such an interpretation is not supported by the legislative context defining the ESC’s powers. Although there is no indication in the ESC Act itself as to whether s 13 is intended to authorise guidelines which impose obligations, as distinct from providing the details of how obligations arising independently of the guidelines themselves, are to be complied with, assistance can be obtained by reading the EI Act as a whole. The broad range of matters that can be included in conditions (including statutory deemed conditions) and in guidelines supporting those conditions under provisions such as ss 20, 21, 23A, 26A, 36A and 44 indicates that guidelines are not confined to setting out the manner and form in which existing obligations are to be complied with. These provisions impose substantive obligations in relation to particular subject matters (sometimes in the form of deemed conditions to a licence) and then empower the ESC to publish guidelines defining the scope of those obligations as well as how they are to be complied with. There is no indication that in order to be valid and binding, a guideline must set out provisions as to the manner and form for compliance with existing obligations rather than impose substantive obligations.

Section 21(t) of the EI Act is particularly relevant. As noted in paragraph 78 of this judgment, the conditions listed in s 21 cannot control the ESC’s general power to impose conditions under s 20(2), but they can inform the interpretation of the scope of that general power. Section 21(t) requires UED, as licensee, “to provide, in the manner and form specified by the [ESC], such information as the [ESC] may from time to time require”. The reference to “manner and form” is subordinate to the reference to “provide … such information as the [ESC] may … require” and this makes it clear that the section is not confined to conditions specifying the manner and form in which existing obligations to provide information are to be complied with. An issue arises as to whether the condition itself must specify the type of information to be provided rather than simply stipulating that the licensee must provide such information as the ESC specifies from time to time. In my opinion, the section is not so limited. The section describes the type of condition that can be imposed and this is the condition that has in fact been imposed. A condition can, but is not required to, set out specific classes of information.

Another issue that arises in relation to s 21(t) is the meaning of the expression “information”. Clearly, the section does not authorise a condition requiring the licensee to provide to the ESC information of a third party which has no connection with the licensee, as the licensee would not be able to comply with such a condition. In my opinion, as the licence imposes obligations on the licensee, the reference to “information” in s 21(t) refers to information of the licensee, that is, information the licensee is legally capable of providing. This means information in the possession, custody or power of the licensee. In this context, “power” means an enforceable right to obtain possession or control of information without the need to obtain consent from another person.[14] It is not within the scope of s 21(t) to impose a condition requiring the licensee to provide information which the licensee is not legally capable of providing. Accordingly, a guideline which sets out the information to be provided to the ESC pursuant to a condition made under s 21(t) must be confined to information the licensee is legally capable of providing, that is, information in the licensee’s possession, custody or power. I discuss this matter further below in paragraph 114 of this judgment.
[14]Lonrho Ltd v Shell Petroleum Co Ltd [1980] 1 WLR 627, 635.

Although the ESC is given broad powers to impose binding obligations by way of guidelines, those powers are subject to important common law limitations that apply to all delegated legislation.

An important common law limitation is that a guideline cannot be inconsistent with or derogate from the operation of its empowering Act (which, in this case, includes both the ESC Act and the EI Act).[15] Such inconsistency can take a number of forms, which cannot always be, and for present purposes do not need to be, clearly differentiated from each other. An instrument such as a guideline may be directly inconsistent with its empowering Act, either by directly contradicting the Act (such as imposing an obligation which is mutually exclusive to an obligation imposed by the Act) or by dealing with a completely different subject matter. Such an instrument may also be inconsistent by dealing with an area where the intent of the Act is that the provisions of the Act are to form an exclusive code, or by purporting to deal with matters in a way which goes beyond the limits prescribed by the Act. Mr Delany drew on these principles in his submissions about the validity of the Guideline, as discussed below.
[15]See, eg, Morton v Union Steamship Company of New Zealand Ltd (1951) 83 CLR 402.

AAM’s submission that Guideline is not “necessary or convenient”

Mr Delany submitted that the power to publish guidelines under s 13 of the ESC Act is limited by s 11 of that Act, which empowers the ESC to do all things “necessary or convenient” to be done for or in connection with the performance of its functions and to enable it to achieve its objectives under the legislative regime. He relied on a statement in Shanahan v Scott that a power to make regulations “necessary or expedient” for the administration of an Act or for carrying out its objects:[16]

does not enable the authority by regulations to extend the scope or general operation of the enactment but is strictly ancillary. It will authorise the provision of subsidiary means of carrying into effect what is enacted in the statute itself and will cover what is incidental to the execution of its specific provisions. But such a power will not support attempts to widen the purposes of the Act, to add new and different means of carrying them out or to depart from or vary the plan which the legislature has adopted to attain its ends.

Parties’ acknowledgments that they are related

The financial reports of UEDH for the year to 30 June 2005 were prepared by Alinta on behalf of the UED Group. These financial statements were prepared on the basis that AAM was a related party of UED. Since that time, UEDH has prepared special purpose financial reports and has not reported related party transactions. In its 2006 regulatory accounting statements, UED listed AAM as a related party. The directors’ accounting responsibility statement stated that “no Related Party Transactions arose during the Regulatory Accounting Period that require disclosure under section 5.23 of the Guideline”. Mr Strang gave evidence that this statement reflected UED’s view that, on the proper interpretation of cl 5.23.5 of the Guideline, the Guideline did not apply to the 2006 year.

The notes to the financial statements of Alinta for the financial years ending 31 December 2003, 2004 and 2005 listed its equity investment in UED under the heading “Investments in associates” and accounted for that investment using the equity method of accounting.

These matters do not assist me in determining whether AAM and UED were related parties in 2006 and 2007.

Decision that AAM was a related party of UED in 2006 and 2007

In light of the matters discussed in paragraphs 135 to 164 of this judgment and applying the definition of “significant influence” in paragraph 121 of this judgment, I find that Alinta and AAM were in a position to significantly influence UED in 2006 and 2007 and did so. Accordingly, paragraphs (a) and (d) of the definition of “Related Party” in Part 6 of the Guideline were satisfied for those years. There is insufficient evidence to enable me to find that paragraph (b) of the definition was satisfied.

It follows that AAM was a related party of UED in 2006 and 2007 for the purposes of the Guideline.

Does the OSA require AAM to provide its actual costs information to UED?

Mr Delany submitted that there is no express obligation in the OSA requiring AAM to provide information about its actual costs to UED. Both Mr Bick and Mr Gray submitted that the OSA required AAM to prepare regulatory accounting statements that complied with the Guideline, including the related party costs information provisions of the Guideline.

As set out in paragraph 35 of this judgment, cl 7.1 of the OSA requires AAM to provide operational, financial and other reports specified in cl 7 and schedule 4. Amongst the reports that AAM is obliged to provide under schedule 4 are “the reports required to be submitted to … the ESC … in the form required by [the ESC]”. In addition, as set out in paragraph 31 of this judgment, the services that AAM must provide in accordance with schedule 1 include “[p]roviding all reports to the ESC required by an Electricity Law”. The expression “Electricity Law” is defined in cl 1.1 to include “Codes”, which in turn is defined to include “the Guidelines issued or approved by the ESC pursuant to the [EI Act]”. Furthermore, as set out in paragraph 37 of this judgment, cl 25.3 of the OSA provides an exception to the confidentiality of AAM’s information where the ESC requires disclosure of the information.

The above provisions have the effect of imposing an obligation on AAM to include in UED’s regulatory accounting statements such information as is required to be included by a guideline published by the ESC. I have found that the Guideline validly requires a licensee to include in its regulatory accounting statements information about actual costs incurred by a related party that is in the possession, custody or power of the licensee. By virtue of the provisions of the OSA referred to in paragraph 171 of this judgment, UED is entitled to require AAM to include the actual costs information in UED’s regulatory accounting statements without first obtaining AAM’s consent. It follows that the relevant information is within UED’s power in the sense that UED has a legally enforceable right to compel AAM to include the information in UED’s regulatory accounting statements. In turn, this means that the information is available to UED within the meaning of cl 5.23.5 of the Guideline and, in accordance with the Guideline, the information must be included in UED’s regulatory accounting statements.

The reasoning in paragraph 172 of this judgment involves reading the Guideline and the OSA as interdependent documents. This is necessary in order to give effect to the provisions of both documents and to give efficacy to the regulatory regime. I reject Mr Delany’s submission that such reasoning is circular.

A contract must be construed objectively by examining the surrounding circumstances which existed at the time that the contract was entered into and which were known by the parties, by looking to the language of the contract and deciding what a reasonable person in the position of the parties would consider that the parties had actually agreed upon.[37] A review of the surrounding circumstances at the time the OSA was executed on 23 July 2003 supports my conclusion that the OSA obliges AAM to include in UED’s regulatory accounting statements such information as is required by a guideline published by the ESC.
[37]Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451, 461-2 [22].

As at 23 July 2003, the ESC’s predecessor, the Office of the Regulator-General, had published Electricity Industry Guideline No 3 Regulatory Accounting Information Requirements Issue No 3 on 18 April 2000. Clause 5.19.1 provided that all costs incurred by the distribution business (which was said to be defined by its activities rather than incorporation) must be reported at cost and that entities that are a “Related Party of the Distribution Business” are considered part of the distribution business. The glossary defined “Related Party” in similar terms to the current definition in the Guideline. I will assume for the purposes of this judgment that Mr Delany’s submission that issue 3 of the Guideline required provision of the costs paid by UED to AAM rather than AAM’s actual costs is correct.

Furthermore, when UED, UEDH and AAM executed the OSA on 23 July 2003, they were aware that the distribution business was operating in a highly regulated industry dealing with essential services and that provision of information to the regulator is a key feature of the regulatory regime. They knew that the nature of the information that the regulator may require from the licensee may change from time to time, as this was a condition of UED’s Licence. They were also aware that the regulator had the capacity to publish guidelines from time to time that required the inclusion of costs information in regulatory accounting statements, that the then regulator had already published such a guideline, and that the regulator could publish a further issue of that guideline to require a greater level of detail in relation to those costs. Rather than provide for fixed information provision obligations in the OSA, the parties included flexible provisions requiring AAM to provide such information as the regulator may require and created an exception to the confidentiality obligations for this purpose.

In light of these surrounding circumstances, the provisions of the OSA referred to in paragraph 171 of this judgment indicate that the parties intended that AAM be under an obligation to include in the regulatory accounting statements of UED that it prepared in accordance with the OSA, such information about the costs of operating the distribution business as was required by any guideline published by the ESC.

Was there a common basis of dealing that AAM’s costs remain confidential?

Mr Delany submitted that there had been a common basis of dealing between UED and AAM that information about AAM’s costs and profits remains confidential to AAM. He referred to a series of documents that were developed by UED and AAM from August 2003 which stated that AAM’s costs would remain confidential. These documents contained statements that were variously described as “Principles”, “Commandments” and “Protocols”. The documents comprised:

(a)A document prepared by AAM on 25 August 2003 headed “[AAM and UED] Services Agreement Principles” which stated “[UED] acknowledges that the services contract is output-based and therefore [AAM] costs, profits and strategies remain confidential”.
(b)A revised version of the “principles” document prepared by UED and Multinet on 28 August 2003 which stated “[UED] acknowledges that the [AAM] costs and profits remain confidential” and added the following preamble:
Recognising that the services contract between [AAM] and [UED] will always represent the legal line-in-the-sand for future variations and re-negotiations, the parties have developed the following principles to help facilitate a smooth and co-operative way forward in managing the relationship in a practical sense …

(c)A document prepared by UED and Multinet in February 2005 headed “Operating Services Agreement: Management Manual” which stated “[UED] acknowledges that the [AAM] costs and profits remain confidential”. However, in addition to the preamble referred to above, this document contained a preface which included the following statements:
The document includes principles developed by [UED] and [AAM] since the [execution of the OSA] to assist with the day to day management of the contract and are not intended to contradict the intent of the OSA. …
This document is designed to be consistent with [the] OSA. All the obligations and requirements set out in this document are to [be] taken to be subordinate to the OSA unless specifically highlighted and agreed in this document.

The “manual” document did not specifically highlight the statement about the confidentiality of AAM’s costs and profits as not being subordinate to the OSA.
(d)A revised version of the “manual” document prepared by UED and Multinet in July 2005 contained the statements quoted above and did not specifically highlight the statement about the confidentiality of AAM’s costs and profits as not being subordinate to the OSA.

UED’s reply and defence to AAM’s counterclaim refers to cl 36.1 of the OSA, which provides that the OSA “can only be amended, supplemented, replaced or novated by another document signed by the parties”, as part of its case that, as no amendment had been agreed in relation to the confidentiality of AAM’s costs, the OSA continues to apply according to its terms. Mr Bick submitted that the “commandments” are irrelevant to the proper interpretation of the OSA and that there was no evidence that AAM relied on them. He also relied on concessions made by Mr Devenish that the commandments did not have the effect of amending the OSA and that the OSA prevailed over the commandments, on concessions by Mr Reardon and Mr Devenish that AAM has always regarded its costs as confidential and has not changed its position since the OSA, and on a statement by Mr Fletcher that he was not aware of any common basis of dealing that costs would not be made available to UED. He submitted that a common basis of dealing had not been established.

The communications between the parties that referred to costs information remaining confidential did not have the effect of amending or overriding the OSA. The preamble and preface referred to in paragraph 178 of this judgment make this clear. None of the communications referred to the provisions of the OSA which are discussed in paragraph 171 of this judgment and none stated that AAM could refuse to provide costs information where this was required by the ESC. Furthermore, as cl 25.3 of the OSA overrides confidentiality obligations in respect of information a party is required by the ESC to disclose, any common basis of dealing that AAM’s costs information remain confidential would not affect AAM’s obligations under the OSA to provide that information pursuant to a requirement of the ESC. Accordingly, if, on its true construction, the OSA requires AAM to include costs information in UED’s regulatory accounting statements in accordance with the Guideline, the communications referred to in paragraph 178 of this judgment do not alter that position. There was no acknowledgment or agreement by UED which affected its rights against AAM under the OSA.

For completeness, had it been necessary for me to decide the question of estoppel, I would have concluded that UED did not represent to AAM that it would not require AAM to provide its costs information in response to a regulatory requirement. AAM had its own internal policy of treating information about its costs as confidential. Even if UED had represented that it would not require AAM to provide its costs information in response to a regulatory requirement, AAM did not detrimentally rely on such a representation. AAM relied on its own policy regarding confidentiality and did not alter its position on this issue in response to the alleged representation by UED.

Is the proceeding hypothetical or futile?

Mr Delany submitted that declaratory relief should not be granted where, as here, the person seeking relief does not have a real interest, and the question is purely hypothetical, relief is claimed in relation to circumstances that have not occurred and might not ever happen or a declaration would not produce any foreseeable consequences for the parties.[38]
[38]AMP Fire and General Insurance Company Ltd v Dixon [1982] VR 833, 837; Ainsworth v Criminal Justice Commission (1992) 175 CLR 564, 582.

He submitted that this proceeding is hypothetical, as there is no evidence that, because UED has not reported AAM’s costs, the ESC has served or will serve UED with an enforcement order under s 53(2) of the ESC Act (which is referred to in paragraph 9 of this judgment) or will revoke UED’s licence, and indeed there is evidence that the ESC will do neither. He noted that neither the ESC nor UED called evidence on this question. He also submitted that there is no evidence of the ESC pressing for AAM’s actual costs of 2007. In relation to 2006, he referred to the ESC’s letter of 19 April 2007 to UED which I discuss in paragraph 193 of this judgment. He submitted that the ESC does not need the 2007 costs for the next price review and that it is a mere weak hypothesis that because UED has not reported AAM’s costs, the ESC will revoke its licence.

Mr Delany also submitted that this proceeding is futile in that a declaration would not produce any foreseeable consequences for the parties. He submitted that AAM has repeatedly offered to give the ESC as much as AAM practicably can give of the information ostensibly required of it by the Guideline and that the offer is to provide the best available information for 2006 and 2007, being the relevant PwC reports (which are discussed below) to be audited by KPMG. He further submitted that, if the Court were to make declarations, all that would follow is that UED would obtain access to AAM’s actual costs information, as best as it can be ascertained, and could use that confidential and commercially sensitive information in fee renegotiations. He submitted that that outcome should not be condoned by the Court because it would confer upon UED a commercial advantage which is irrelevant to its ostensible case.

Mr Delany referred to a letter dated 15 October 2008 from AAM’s solicitors to the solicitors for UED and the ESC setting out the following settlement offer:

We are instructed to communicate the following offer to settle the statement of claim and the counterclaim in the above proceeding.
1.Our client will, at its cost, prepare income statements detailing its costs and profits in relation to the services it provides to United Energy Distribution Pty Ltd (UED) under the Operating Services Agreement dated 23 July 2003. Those statements will be prepared by PricewaterhouseCoopers based upon information available to our client with the intent, so far as practicable, to comply with Guideline No. 3 for the years ending 31 December 2006 and 31 December 2007 (2006 and 2007 Income Statements).
2.Our client will, at its cost, obtain an audit opinion in relation to the 2006 and 2007 Income Statements again, so far as practicable, to comply with Guideline No. 3 (Audit Opinion).
3.Our client will provide the 2006 and 2007 Income Statements and the Audit Opinion directly to the Essential Services Commission (Commission) by 30 November 2008.
4.The 2006 and 2007 Income Statements and the Audit Opinion will be provided by our client to the Commission on the basis that the information contained therein is confidential and/or of a commercially sensitive nature in accordance with section 38(1) of the Essential Services Commission Act 2001 (Vic).
5.The Commission agrees to accept the 2006 and 2007 Income Statements and the Audit Opinion on that basis, and in full discharge of the requirements set out in Guideline No. 3 for the 2006 and 2007 calendar years. Such acceptance is to be on the express basis that it is without prejudice to the Commission’s right to contend that strict compliance with Guideline No. 3 is required for calendar years later than 2007 and is based on the premise that the 2006 and 2007 Income Statements contain the best information available and able to be provided by our client.
6.UED acknowledges that the 2006 and 2007 Income Statements and the Audit Opinion are confidential to our client and agrees that it will not seek disclosure by any person to it of the 2006 and 2007 Income Statements and the Audit Opinion.
7.The proceedings be discontinued on the basis that each party bear its own costs of the proceedings.

This offer of settlement is open for acceptance until 4.00pm on 23 October 2008. Settlement of this matter on the above basis is subject to both parties accepting this offer within the period in which it is open for acceptance.

For the purposes of the offer, AAM obtained from PwC a report dated 8 October 2008 setting out calculations of AAM’s costs in operating UED’s distribution network in 2006 and a draft report dated 10 November 2008 setting out calculations of AAM’s costs in operating the network in 2007.

Mr Delany also referred to the fact that during the course of the hearing on 28 November 2008, an open offer of settlement containing the first four paragraphs of the above quoted letter was made by AAM, with the date in paragraph 3 being extended to 31 March 2009. The letter itself was put in evidence on 4 December 2008, following a waiver by the parties of the joint without prejudice privilege attaching to the letter. The offer, with the revised date of 31 March 2009, remains open.

Mr Delany relied upon both the letter and the open offer in support of his submissions about futility and also as matters going to the Court’s discretion to refuse relief.

Although Mr Delany did not allege that this proceeding constituted an abuse of process, in relation to the Court’s discretion to refuse relief, he relied on Williams v Spautz[39] and Rediffusion (Hong Kong) Ltd v Attorney General of Hong Kong[40] for the proposition that a court will not condone, particularly where it is called upon to exercise a discretion, the achievement of a purpose which is ulterior to the ostensible purpose of the litigation. He submitted that, in this case, the Court should exercise its discretion to refuse relief.
[39](1992) 174 CLR 509, 523.
[40][1970] AC 1136, 1155.

In relation to whether this proceeding is hypothetical, Mr Bick submitted that AAM’s submissions about the risk of an enforcement order or revocation of UED’s Licence, and about whether the ESC has any reason to seek AAM’s costs in the context of the next price review, were based on mere speculation and supposition. In relation to whether this proceeding is futile, Mr Bick submitted that the Court has no means of assessing whether information provided by way of PwC reports, to be audited by KPMG, would be satisfactory, and that as the reports were not put into evidence by AAM, the Court should infer that the reports would suffer from defects that he identified in reports previously prepared by PwC in relation to AAM’s costs of operating Multinet’s gas distribution network and would not comply with the Guideline. He also submitted that it is clear from the ESC’s statements that submission of such reports would not necessarily be accepted as compliance with the Guideline, and that Mr Reardon conceded in cross-examination that the offer made by AAM contained a number of features likely to be unacceptable to UED.

Mr Gray submitted that the relief sought by UED would not be futile. He submitted that, provided that the Court is satisfied that there will be a clarifying and educative effect as to future compliance with the Guideline, that is sufficient utility to support the exercise of discretion to grant declaratory relief, and that such an effect would result here.

I reject Mr Delany’s submissions that the proceeding is hypothetical or futile. I have found that under the OSA, AAM is obliged to include in UED’s regulatory accounting statements for 2006 and 2007 information of AAM’s actual costs in operating the distribution network for 2006 and 2007. The facts that the regulatory accounting statements for 2006 and 2007 have already been filed without AAM’s actual costs information and that UED does not propose to replace its audited accounts for those years do not mean that no useful purpose would be achieved by a declaration. Mr Strang said in evidence that if AAM’s actual costs information is provided to UED, this would be provided to the ESC under seal of an audit certificate by way of supplement to the regulatory accounting statements UED has already lodged.

It is true that the ESC did not communicate to UED any intention to take any steps that would place the Licence in jeopardy. This may have been due to a view by the ESC that if UED did not have physical possession of AAM’s actual costs information, that information was not “available” to UED within the meaning of cl 3.25.3 of the Guideline and therefore UED was not in breach of the Guideline by not including such information in its regulatory accounting statements for 2006 and possibly 2007. This is supported by the ESC’s letter of 19 April 2007 to UED which stated “for the year ended 31 December 2006 [UED] is required to comply with the information reporting requirements of section 5.23 [of the Guideline] where the information is available to it”.

The ESC has not unequivocally stated either prior to or during the hearing that UED did not breach the Guideline in relation to its regulatory accounting statements for 2006 and 2007. Indeed, in its defence, the ESC does not admit that the regulatory accounting statements filed by UED for 2006 and 2007 comply with the Guideline. During the hearing on 28 November 2008, Mr Gray said:[41] “I don’t have authority to concede or acknowledge that provision of an equivalent PwC report [for UED] … would constitute a compliance [with UED’s Licence]”.
[41]Transcript 247.

In addition, my findings that the term “available” in cl 3.25.3 means “possession, custody or power” and that AAM’s costs information is within UED’s control mean that the ESC’s position is, in accordance with its letter of 19 April 2007 to UED, that UED is required to comply with the Guideline for 2006. As the ESC requires compliance with the Guideline, AAM is obliged to provide the actual costs information in accordance with the OSA and the proceeding is not hypothetical.

I am satisfied that AAM did not, in 2006 and 2007, keep its records in such a way as to enable it to provide all the costs information required by the Guideline in the form and subject to the verification required by the Guideline. However, Mr Garg gave evidence that it was possible to establish new cost centres and make other modifications to AAM’s accounting systems to provide a more accurate allocation of costs to UED. Although part of Mr Garg’s evidence was theoretical, on the basis of that evidence, I reject Mr Delany’s proposition that AAM cannot provide any information about AAM’s costs of operating UED’s distribution business in 2006 and 2007 in compliance with the Guideline over and above the information in the PwC reports. The PwC report for 2006 and the draft report for 2007 were not tendered in evidence by AAM[42] and Mr O’Callaghan did not give evidence about the substantive contents of the reports. AAM’s failure to call Messrs Leano, Lehman and Megarry enables me to infer that their evidence would not have assisted AAM in establishing Mr Delany’s proposition. However, the evidence given and the inferences that I am able to draw from that evidence do not enable me to make a finding as to precisely what further information could be provided, how readily that information could be obtained (with or without alterations to AAM’s accounting systems), what past periods could be covered, and whether the additional information would be useful and reliable and materially improve what would otherwise be in the PwC reports.
[42]AAM tendered those parts of the reports comprising the cover page, the covering letter from PwC to AAM and the letter of instructions from AAM’s solicitors to PwC.

The settlement offer that AAM has made, both in writing prior to the hearing and orally during the hearing, is not an appropriate substitute for compliance with the OSA. The PwC report setting out details of AAM’s actual costs information for 2006 and the draft PwC report setting out details of AAM’s actual costs information for 2007 were not tendered in evidence by AAM and therefore I cannot determine the adequacy and appropriateness of those reports. In any event, UED is entitled to receive the actual costs information in the form required by the OSA, which in turn reflects the form required by the Guideline. AAM is obliged to take all steps open to it to provide its costs information in the form required by the Guideline. While AAM cannot do the impossible, I am not satisfied that it has, to date, taken all steps open to it to provide its costs information in the form required by the Guideline.

It follows that, in my opinion, UED and the ESC acted reasonably in not accepting AAM’s offer of settlement.

From UED’s perspective, there was an additional reason, apart from those I have already discussed, for not accepting AAM’s offer of settlement. This relates to the condition in the offer that the actual costs information be disclosed to the ESC but not to UED. The OSA requires the actual costs information to be included in UED’s regulatory accounting statements which are provided to UED as well as being filed with the ESC. Accordingly, if AAM complies with its obligations under the OSA, its actual costs information will be provided to UED. This would not be the case under the offer of settlement. Mr Delany sought to justify the restriction in the offer of settlement on the basis that AAM does not want UED to have the actual costs information and be in a position to use it in negotiating the OSA fees for the renewal period 1 July 2006 to 30 June 2011 (see paragraph 26 of this judgment). I do not accept that the restriction is justified. If UED is entitled to receive AAM’s actual costs information under the OSA, it is entitled to use that information for the purposes of the OSA, including negotiations in relation to the OSA fees.

Mr Bick submitted that UED is entitled to the costs information under cl 5.2 of the OSA for the purposes of the fee negotiations in any event. It is not necessary for me to decide this issue.

From the ESC’s perspective, acceptance of the settlement offer would have involved an acknowledgment by it that provision of the PwC reports would constitute compliance with the Guideline, in circumstances where the ESC was of the view that the provision of those reports would not have constituted compliance with the Guideline. Requiring the ESC to give such an acknowledgment was unreasonable.

I also agree with the supplementary written submission made by Mr Bick after the Court of Appeal decision in Alinta Asset Management Pty Ltd v Essential Services Commission,[43] that the approach adopted by Hollingworth J in Alinta Asset Management Pty Ltd v Essential Services Commission (No 3)[44] with which the Court of Appeal concurred[45] is apposite in this proceeding. Her Honour concluded that the declarations sought in that case clarified the legal position and status of AAM at a particular time and that it was desirable to provide an authoritative curial statement to quell the controversy between the parties and for educative purposes in the relevant industry.[46]
[43][2008] VSCA 273.
[44][2007] VSC 353, [13], [28], [29].
[45][2008] VSCA 273, [247].
[46][2007] VSC 353, [13], [28], [29].

Relief sought

The orders sought by UED are set out in paragraph 51 of this judgment.

Mr Delany submitted that if I were satisfied that the OSA obliges AAM to include its actual costs information in UED’s regulatory accounting statements for 2006 and 2007, I should, in the exercise of my discretion, fashion any orders I made so as to do justice between the parties. He submitted that justice would be achieved by a declaration that AAM is to provide that which is offered in paragraphs 1 to 3 of the letter of 15 October 2008 (see paragraph 185 of this judgment) and an order that the relevant information remain confidential to the ESC and not be disclosed to UED until further order. He submitted that if the fee renegotiation is not concluded before the next price determination process, UED could, at that time, apply for access to the information. Mr Delany did not refer to any authority that conferred such a discretion on the Court.

I agree with Mr Bick’s submission that if the ESC is entitled to require provision of AAM’s actual costs information through UED by operation of the Guideline and the OSA, the information cannot be withheld from UED. Mr Delany’s proposal is tantamount to requiring the Court to rewrite AAM’s obligations under the OSA. This is something the Court will not do. Accordingly, I reject Mr Delany’s submission about the form of order to be made.

Mr Bick conceded that equity will not enforce that which cannot be done by decree of specific performance.[47] However, he referred to evidence that supported AAM’s ability to comply with the Guideline to a greater extent than the PwC reports, including AAM’s ability to modify its accounting program and the creation of allocation procedures to ring fence its accounts, the cost of which will be passed on to UED under the OSA. He also relied on the evidence of Mr Garg that more work can be done to allocate costs more accurately to UED.
[47]Seawell v Webster (1859) 29 LJ Ch 27.

Mr Bick submitted that the fact that UED must bear the cost of providing the actual costs information under the OSA is sufficient minimisation of any hardship to AAM.[48] He also submitted, in support of the making of an order for specific performance, that provision of the costs information is precisely the sort of obligation AAM should have contemplated might arise at the time when it entered the OSA.
[48]Hutchinson v Payne [1975] VR 175, 179.

Mr Delany did not submit that an order for specific performance should be refused on the ground that damages are an adequate remedy.[49] Nor did he submit that such an order, assuming it was not futile, would impose hardship on AAM.
[49]ANZ Executors and Trustees Ltd v Humes Ltd [1990] VR 615, 636-9.

Mr Bick referred to various steps AAM had taken to avoid having to provide its actual costs in accordance with the Guideline since its publication as a matter relevant to the Court’s discretion to grant relief. Mr Bick submitted that AAM’s conduct was motivated by a desire that UED not have access to costs information so that it could not use it for the purpose of the fee renegotiation under the OSA. These issues have not influenced my decision on whether to grant relief to UED or the form of that relief.

In all the circumstances, including, in particular, the discussion in paragraphs 192 to 208 of this judgment, I have concluded that it is appropriate to grant UED declaratory relief. In light of the discussion in paragraphs 196 and 197 of this judgment, I will invite further submissions from the parties in relation to specific performance.

Proposed orders

For the reasons set out in this judgment, I propose to make the following orders:

(a)a declaration that AAM was a related party of UED in 2006 and 2007 within the meaning of the Guideline;
(b)a declaration that AAM is obliged by the OSA to prepare regulatory accounting statements for UED’s distribution business in accordance with the Guideline for 2006 and 2007; and
(c)orders dismissing AAM’s counterclaim and reserving liberty to apply.

I will hear from the parties on the precise form of the orders including:

(a)whether, in addition to the proposed declarations, an order for specific performance is appropriate; and
(b)costs.

If, following the further submissions of the parties, I conclude that an order for specific performance is appropriate, such an order will need to be framed so that it clearly sets out what AAM must do and does not require AAM to do anything that it is legally and practically unable to do. The parties should address this issue in their further submissions and, if possible, seek to reach agreement on the form of any order for specific performance.

The proceeding will be listed for a mention at a time to be notified to deal with the above matters.

GLOSSARY OF TERMS AND ABBREVIATIONS

AAM	Alinta Asset Management Pty Ltd
AAS	Australian Accounting Standard
Alinta	The company known as Alinta Ltd from 8 May 2003 to 25 October 2006, Alinta 2000 Ltd from 25 October 2006 to 22 September 2008 and now known as Westnet Infrastructure Group Ltd
AMPCI	AMP Capital Investors Ltd, formerly AMP Henderson Global Investors Ltd
AMPIS	AMP Investment Services Pty Ltd
ANH	Alinta Network Holdings Pty Ltd
Capex	Capital expenses
DUET	DUET No 1 and DUET No 2 collectively
DUET No 1	Diversified Utility and Energy Trust No 1 (the trustee of which is AMPCI)
DUET No 2	Diversified Utility and Energy Trust No 2 (the trustee of which is AMPIS)
EI Act	Electricity Industry Act 2000 (Vic)
ESC	Essential Services Commission
ESC Act	Essential Services Commission Act 2001 (Vic)
FSA	Financial Services Agreement between UEDH and AMPCI dated 14 July 2003
Guideline	Electricity Industry Guideline No 3 Regulatory Information Requirements Issue No 6 published on 15 December 2006
Jemena	Jemena Asset Management Holdings Pty Ltd
KPIs	Key performance indicators
Licence	UED’s electricity distribution licence issued with effect from 3 October 1994 and last varied on 14 January 2005
MGH	Multinet Group Holdings Pty Ltd
Multinet	Multinet Gas Distribution Partnership comprising Multinet Gas (DB No 1) Pty Ltd and Multinet Gas (DB No 2) Pty Ltd
Opex	Operating expenses
OSA	Operating Services Agreement (see paragraph 22 of this judgment)
PIES	Pacific Indian Energy Services Pty Ltd
PIES Shareholders Agreement	Agreement between PIES, Alinta, ANH, AMPCI, MGH and UEDH dated 14 July 2003
PwC	PricewaterhouseCoopers
Tariff Order	Victorian Electricity Supply Industry Tariff Order 2005 (Vic)
UED	United Energy Distribution Pty Ltd
UED Group	UED, its parent Power Partnership Pty Ltd, and its parent UEDH
UEDH	United Energy Distribution Holdings Pty Ltd
UEDH Shareholders Agreement	A shareholders agreement executed on 14 July 2003 between UEDH, Alinta, AMPCI (in its capacity as trustee of DUET No 1) and AMPIS (in its capacity as trustee of DUET No 2)
UEMSA	United Energy Management Services Agreement between UEDH and PIES dated 14 July 2003

[2009] VSC 19

10 February 2009