An important decision of the High Court handed down on 27 September 2007 has resolved an area of uncertainty in the regulation of gas infrastructure under the National Third Party Access Code for Natural Gas Pipeline Systems (the Code) and heralds the return of economic principles to the centre of the statutory scheme for gas access regulation.
The case involved the correct determination of the capital assets constituting the pipeline system for the Moomba to Sydney Natural Gas Pipeline System, being a critical component in the calculation of Reference Tariffs permitted to be charged for use of the pipeline under the Access Arrangement approved under the Code.
The Australian Competition and Consumer Commission (ACCC), as regulator of the pipeline, had rejected the owner’s proposed valuation based on the pipeline’s Depreciated Optimised Replacement Cost (or DORC) and adopted a novel approach to valuing the capital base by taking the value of the optimised replacement cost, adjusted to take into account amounts the pipeline owner had used for depreciation in the past. In adopting this approach, the ACCC argued that its task under the Code is not merely a valuation exercise and that, provided it takes into account all the statutory considerations required by the Code, it has a broad discretion to arrive at a value representing a blending of all the relevant factors.
The High Court rejected the ACCC’s argument that it was sufficient if the value of the capital base that it determined fitted into the relevant factors and held that the relevant Code provisions require the regulator to give primacy to one of the valuation methodologies specified in the relevant Code provisions (which include DORC) or another well-recognised valuation methodology. The judgment of the majority of the High Court emphasised that such a construction of the Code would provide greater certainty and predictability in the regulatory process, consistent with the Code objective of not distorting investment decisions in Pipeline transportation systems or in upstream or downstream industries.
Significantly, the High Court also acknowledged that the methodologies referred to in the Code must not be inconsistent with the overarching principles of the Code directed to economic efficiency. Accordingly, although the decision limits the scope of the ACCC’s discretion, regulators are likely to be pleased with the High Court’s finding that principles of economic efficiency are the overarching requirement of the Code. This aspect of the decision has the potential to considerably simplify a number of elements of the decision-making process under the Code and endorses the economic regulation focus that was almost universally adopted by Australian regulators prior to the landmark decision of the WA Supreme Court involving the Dampier to Bunbury Natural Gas Pipeline which required regulators to take into account broader social, political and public interest considerations when approving an Access Arrangement under the Code.
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