On 13 October 2010 the Australian Competition Tribunal (Tribunal) published reasons for the decisions it made on 30 September 2010 in review proceedings by ETSA Utilities (ETSA) and Ergon Energy Corporation Limited (Ergon Energy) of electricity distribution price review determinations by the Australian Energy Regulator (AER). The ETSA decision concerned the AER's rejection of ETSA's claim for an addition to be made to its opening regulatory asset base in respect of easements. The Ergon Energy decision dealt with the AER's decision to remove the 'other one-off' costs component from the control mechanism formula Ergon Energy proposed for calculating its price for quoted services.
The decisions are interim decisions in the sense that the Tribunal has decided that the AER has fallen into error in particular aspects of the relevant price review determinations but is seeking further information to assist it in making its determination, in which it will make orders to address those AER errors.
Who is affected and how are these decisions relevant?
These decisions are particularly relevant to regulated network service providers in the electricity industry and pipeline service providers in the gas industry. Regulated network service providers in the electricity industry can seek leave of the Tribunal to apply for review of a network revenue or pricing determination made by the AER on the grounds contained in the National Electricity Law. Pipeline service providers can seek leave of the Tribunal to apply for review of an applicable access arrangement decision made by the AER on the grounds contained in the National Gas Law. The regulatory framework governing merits review by the Tribunal of an applicable access arrangement decision by the AER established by the National Gas Law, including in particular the grounds for review, is substantively similar to that governing merits review by the Tribunal of a network revenue or pricing determination under the National Electricity Law.
These decisions are examples of the Tribunal:
- utilising the exception to the limitation on the material it can consider in a review of an AER determination or decision established by both the National Electricity Law and the National Gas Law;
- finding that the AER had incorrectly exercised its discretion by not considering material submitted by an electricity distributor in sufficient detail having regard to the circumstances; and
- finding that the AER had made an error of fact by not making further enquiries where an electricity distributor had provided sufficient information that would have necessitated further enquiry.
In addition, in the Ergon Energy decision, the Tribunal commented on the critical role service providers play in providing information to the AER to assist it to make a network revenue or pricing determination (or, by analogy, an applicable access arrangement decision) that reflects the national electricity objective and the revenue and pricing principles established by the National Electricity Law (or, by analogy, the national gas objective and the revenue and pricing principles established by the National Gas Law).
Material before the Tribunal on review
In a review under the National Electricity Law or the National Gas Law, the Tribunal faces a limitation on the material that it can consider. The information the Tribunal can consider can be broadly described as information before the AER in making its regulatory decision (including, for example, submissions to the AER and reports/materials relied on by the AER in making the decision), the AER's reasons for the decision, the application to the Tribunal for review and submissions in support of that application.
There is, however, an exception to this limitation - where the Tribunal considers a ground of review has been established, the Tribunal can allow new information or material to be submitted if it would assist it on any aspect of the determination to be made, and was not unreasonably withheld from the AER when it was making the regulatory decision under review.
ETSA provides electricity distribution network services in South Australia. The Tribunal decided that a ground of review had been established in relation to the AER's rejection of ETSA's claim for an addition to be made to its opening regulatory asset base (RAB) in respect of easements extant as at 1 July 1999.
ETSA claimed that the AER had:
- exercised its discretion incorrectly and made an unreasonable decision on the value of easements in the opening RAB; and
- made errors of fact in respect of the value of easements in the opening RAB that were material to its decision.
ETSA sought an adjustment to the opening RAB as at 1 July 2005 of $116,161,569.
There was a threshold issue before the Tribunal of whether the AER had the power to make an adjustment to ETSA's opening RAB. The Tribunal decided this issue in the affirmative.
The Tribunal then turned to consider the substantive question. The Tribunal found that the AER did not consider the valuation submitted to it in detail. Rather, the Tribunal adopted the valuation of $6 million by the Essential Services Commission of South Australia (ESCOSA) in its 2005-2010 price determination (prior to the AER, ESCOSA was responsible for determining ETSA's revenue).
The Tribunal decided that the AER's failure to consider the valuation in detail was an incorrect exercise of discretion because:
- the valuation figure was only a partial value of the relevant easements; and
- ESCOSA's analysis was largely in response to the deprival valuation methodology advanced by ETSA at that time and ETSA was now advancing a different methodology for valuing easements being an index historical cost methodology.
The Tribunal directed the AER to file and serve any report addressing the easement estimates relied on by ETSA by 5 November 2010 and gave ETSA the ability to respond to that report by 17 November 2010. On 22 November 2010, the Tribunal ordered that the AER's final determination be varied so that:
- the opening RAB at 1 July 2005 (including alternative control metering services) to apply to ETSA is $2,614,997,066; and
- the opening RAB at 1 July 2010 for standard control services to apply to ETSA is $2,899,972,375 (including the original allowance by the AER of $6 million indexed).
Ergon Energy Decision
Ergon Energy provides electricity distribution network services in Queensland. The Tribunal decided that a ground of review had been established in relation to the AER's removal of the 'other one-off' costs component from the control mechanism formula Ergon Energy proposed to calculate its price for quoted services during the 2010-2015 regulatory period.
The AER's decision had the result that Ergon Energy could not include in a price for a quoted service costs such as the hire or supply of any additional equipment, assets or labour that may be required to deliver the service. Those costs could add up to more than $60 million over the five year regulatory period.
The Tribunal found that:
- the AER made an error of fact in finding that Ergon Energy's costs would not be efficiently incurred in delivering quoted services. This was a material fact and, but for that error, the AER's decision on 'other costs' might have been different; and
- the AER made an error of fact in finding that Ergon Energy did not provide any information that supported its contention that 'other costs' include the hire or supply of equipment, assets or labour and not just contingency costs. The Tribunal found that Ergon Energy provided sufficient information which should have led the AER to make further enquiries as to 'other costs'. The Tribunal noted that Ergon Energy had invited the AER to ask it any questions it might have about the information it had provided.
The Tribunal did, however, note that Ergon Energy had a 'critical role' in providing information to the AER to assist in making a distribution determination. Since Ergon Energy had failed to do this in respect of 'other costs', the Tribunal could not characterise the AER's decision as unreasonable. Even so, the AER should have made further enquiries of Ergon Energy.
The Tribunal has ordered that the AER file and serve by 8 December 2010 a report addressing the manner in which 'other costs' incurred in providing Ergon Energy's quoted services can be subjected to a price cap form of control, and the inclusion of other costs that are subject to a price cap form of control in the formula for calculating Ergon Energy's price for quoted services. The AER should prepare the report after Ergon Energy has made submissions to the AER in respect of the 'other costs' price cap mechanism and the AER has consulted with Ergon Energy on that mechanism.
The Tribunal gave Ergon Energy on opportunity to respond to the AER's report by 15 December 2010 and adjourned the application to a date to be fixed. It seems likely there will be a further hearing before the Tribunal makes its decision.
The decisions considered above are examples of the Tribunal taking a proactive role in its review of decisions by regulators. The Tribunal's use of the exception to the limitation on the material it can consider in a review of a determination (in these cases by requesting the AER to provide reports on particular matters) shows that it views its role as to make a final binding decision on review, which if required varies the regulator's final determination. The alternate, less active, course would be for the Tribunal, if it found error with the regulator's decision, to remit the matter to the regulator for it to vary its decision having regard to any direction or recommendation of the Tribunal. However, it is clear that the Tribunal considers itself equipped to make decisions on how the regulator's decision should be varied, rather than to remit matters to the regulator. By taking the more proactive role on review the Tribunal is truly stepping into the shoes of the regulator.
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