Australia: Judicial review gains momentum in the Australian energy market

Last month, we wrote about the types of decisions which may be open to judicial review under the Administrative Decisions (Judicial Review) Act 1977 (Cth) (ADJR Act). This article uses the Australian energy market as a case study on how judicial review operates.

Two recent judicial review decisions by the Full Court of the Federal Court of Australia, coupled with recent amendments to the Competition and Consumer Act 2010 (Cth) (CCA), will likely promote greater recourse to judicial review, reinforcing the important role of administrative law in the functioning of Australian energy markets.

The Australian Energy Regulator (AER) is the government body which supervises the Australian national electricity and gas markets.

Operating under the CCA, the AER among other things makes determinations on the maximum revenues that electricity and gas transmission and distribution networks can earn on their regulated businesses. These amounts are for the most part ultimately recovered from customers through network charges on electricity and gas bills.

Tribunal powers down

Prior to the introduction of the Competition and Consumer Amendment (Abolition of Limited Merits Review) Act 2017 (Cth) (Amending Act), AER decisions were subject to limited merits review by the Australian Competition Tribunal.

The process was limited by the grounds specified as available under the CCA; an applicant had to demonstrate an error of fact, incorrect exercise of discretion, or unreasonableness by the AER.

The Amending Act abolished the limited merits review as an avenue for challenge. However decisions made by the Tribunal were prior to the Amending Act, and continue to be, vulnerable to the broader grounds of judicial review. Following the abolition of limited merits review by the Amending Act, AER decisions are directly subject to judicial review by the Federal Court.

As we have outlined in other publications, judicially reviewable errors of law may manifest in breaches of the rules of natural justice and procedural fairness, decisions not authorised by enactment, improper exercises of power, errors of law on the face of the record, fraud and decisions that were an exercise of power in such an unreasonableness way that no reasonable person could make such a decision.

Below we review two recent cases which, although decided under the previous regime, may shed light on the new regulatory environment.

AER's appeal generates heat

In April and June 2015, the AER determined the maximum revenues that NSW and ACT electricity and gas networks (NSW/ACT Networks) could earn. For the 2014 to 2019 period, the AER rejected $7 billion of the $30 billion revenue proposed by the businesses (Ausgrid, Endeavour Energy, Essential Energy, ActewAGL and Jemena Gas Networks (NSW)).¹ The determinations were based, at least in part, on findings that the NSW/ACT Networks were not operating as efficiently as others. The AER also determined a lower rate of return and corporate tax allowance, consistent with market trends.

Numerous grounds add up to high voltage dispute

On the (previously available) limited merits review sought by those NSW/ACT Networks, the Australian Competition Tribunal (Tribunal) directed the AER to remake its decisions in relation to the networks' operating expenses, cost of corporate income tax and cost of debt.

The AER then applied for judicial review of the Tribunal's decision under the ADJR Act on the following grounds:

• the Tribunal failed to undertake its review function lawfully by failing to properly construe and apply the grounds of review under the National Electricity Law (NEL) and National Gas Law (NGL);
• in contravention of the NEL and NGL, the Tribunal allowed the providers to raise, in relation to whether a ground of review existed, matters that were not raised and maintained in submissions to the AER before the reviewable regulatory decisions were made;
• the Tribunal erred in its construction of new provisions in the National Electricity Rules (NER) and the National Gas Rules (NGR) relating to the determination of the rate of return on capital, the value of imputation credits (gamma) and the operating expenditure criteria; and
• the Tribunal's decision was otherwise infected with reviewable errors, including reasoning that was irrational, unreasonable and/or uncertain.

On 24 May 2017, while agreeing with the AER in respect of the Tribunal's construction of the rules regarding gamma, the Full Court dismissed the AER's application regarding the Tribunal's rulings on return on debt and operating expenses, finding that the Tribunal's construction of the NER and NGR on these points did not involve an error of law.² As the application was dismissed, the AER is required to remake its decisions.³

Black out for network's appeal

More recently, in SA Power Networks,⁴ the Full Court of the Federal Court dismissed an appeal by SA Power Networks to charge more for electricity distribution, which would have increased bills for consumers.

The AER's decision denied the company's application to receive $4.53 billion from customers over the 2015 to 2020 period,⁵ and instead allocated $3.84 billion. The Tribunal upheld the decision. SA Power Networks then applied for judicial review of the Tribunal's findings under the ADJR Act. The company claimed that, in the course of reviewing the AER's decision on a limited merits review, the Tribunal had made 21 judicially reviewable errors in interpreting provisions of the NER in three key areas:

• the determination of cost of corporate income tax (gamma);
• return on debt; and
• forecast labour costs escalation.

Arguments full of hot air

On 18 January 2018, the Full Court ruled against SA Power Networks on all 21 grounds and ordered the company to pay costs. The Court found that the construction of the NER which had been adopted was correct, the Tribunal had not misunderstood its functions, and procedural fairness had been accorded. Accordingly, the application was dismissed and the AER's allocation was enforced.

Watt about legislative reform?

Following a great deal of discontent expressed by various stakeholders, the Amending Act was passed by both Houses in late 2017. The Amending Act applies to AER decisions, past or future, unless an application for limited merits review was made before 21 June 2017 (when the reforms were announced).

To date, no judicial review applications have been made under the reforms.

Lights out for limited merits review

The Amending Act abolished limited merits review by the Tribunal of decisions made under energy laws, though there is a carve out for decisions relating to the disclosure of confidential or protected information. Where the NEL or NGL gives the Tribunal the power to make decisions about the disclosure of confidential or protected information, any application about disclosure can be brought to the Tribunal.

Review process recircuited

Under the new regime, review of AER decisions lies to the Federal Court by way of judicial review.

Some critics suggest that the Federal Court may lack the technical credentials possessed by the Tribunal, however the overwhelming majority of commentary recognises the changes are a victory for consumers.

Importantly:

• judicial review offers a more transparent avenue for challenging AER decisions; and
• faster resolution of legal challenges will bolster both regulatory certainty for networks and price certainty for consumers.
  Nevertheless, the Full Court's decisions on the AER's NSW/ACT Networks and SA Power Networks decisions demonstrate the difficulties associated with judicial review challenges.

Footnotes

¹ Applications by Public Interest Advocacy Centre Ltd and Ausgrid [2016] ACompT 1 (ACT 1 of 2015, ACT 4 of 2015) (Ausgrid); Applications by Public Interest Advocacy Centre Ltd and Endeavour Energy [2016] ACompT 2 (ACT 2 of 2015, ACT 6 of 2015); Applications by Public Interest Advocacy Service Ltd and Essential Energy [2016] ACompT 3 (ACT 3 of 2015); Application by ActewAGL Distribution [2016] ACompT 4 (ACT 5 of 2015) (together NSD 415 of 2016, NSD 416 of 2016, NSD 418 of 2016 and NSD 419 of 2016); and Application by Jemena Gas Networks (NSW) Ltd [2016] ACompT 5 (ACT 8 of 2015) (NSD 420 of 2016).

² Australian Energy Regulator v Australian Competition Tribunal (No 2) [2017] FCAFC 79 and Australian Energy Regulator v Australian Competition Tribunal (No 3) [2017] FCAFC 80.

³ Following publication of draft determinations and consultation with stakeholders, the AER's final decisions are due to be remade in October 2018.

⁴ SA Power Networks v Australian Competition Tribunal (No 2) [2018] FCAFC 3.

⁵ Application by SA Power Networks [2016] ACompT 11.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.