These laws will be applied to over $35 billion worth of energy network assets and will affect over 12 million customer connections to Australia’s gas and electricity networks. The framework will have wide-reaching and direct impacts on energy distribution businesses, their customers and the Australian economy at large.

Whilst the national energy reform laws have introduced many new legal obligations, there are significant areas that have been maintained from the former electricity laws, regulations and rules, and the soon to be former gas laws. Some of these areas have been tested by administrative tribunals and through the court system which has interpreted and clarified aspects of the legal framework and thereby contributed to minimising regulatory risk. Many of the generic principles and insights established by these courts and tribunals will be as relevant to the new national energy laws as the previous regime. As an example, below are three cases which provide some important principles relevant to the national energy reform laws.

1. East Australian Pipeline Pty Limited v ACCC – High Court Decision

In September 2007, the High Court handed down its decision in the matter of East Australian Pipeline Pty Limited v Australian Competition and Consumer Commission1. This matter arose from the ACCC decision which included a lower initial capital base (ICB) by applying section 8.10 of the Gas Code2.

The High Court reaffirmed elements of a previous appeal body’s decision on the ACCC pricing decision3. The High Court made several findings:

- In response to the Australian Competition and Consumer Commission’s (ACCC) method of using an ‘idiosyncratic approach’ to determine the ICB, the High Court stated that ‘idiosyncrasy in valuing an initial capital base is capable of distorting the proper calculation of a rate of return4. - The regulator by misapplying the process set out in the Gas Code could distort future investment in essential infrastructure5.

Several broad regulatory implications can be inferred from the Court’s decision:

Recognition of need to reduce regulatory risk

The High Court has recognised regulatory risk and the importance of minimising it. It was acknowledged that “The greater the degree of uncertainty and unpredictability in the regulatory process, the greater will be the perceived risk of investment. The greater the perceived risk of investment, the higher will be the returns sought6.”

Standard of administrative review

Two judges of the High Court - Gummow and Hayne JJ considered the interpretation of the word ‘unreasonable’ with respect to merits appeal and have determined that it is to be used as “the basis for inferring the presence of one or more of the well established grounds which render a decision incorrect7.” This is an important distinction which further clarifies the previous interpretation of ‘unreasonableness’ by the Federal Court which rejected the interpretation to be just Wednesbury unreasonableness which is a higher standard of unreasonableness.

Interpretation of multi-part provisions

Gummow and Hayne JJ provided guidance on the phrase ‘should be considered’ which is a common term in the new energy rules. They held that the interpretation requires that all factors in a multi-part provision are to be considered and applied, instead of the regulator being able to select some factors in isolation of the other listed factors8.

2. ETSA Utilities’ appeal to the Essential Services Commission

In April 2005, the South Australian Essential Services Commission made its decision in response to ETSA Utilities’ appeal against aspects of the South Australian Essential Services Commission’s electricity distribution pricing decision.

The main issues raised and responses to the review application was the Commission’s reaffirmed decision to set the value of the easements or infrastructure ‘rights of way’ held by ETSA to be $6 million as at 1 July 1999 instead of ETSA’s valuation of $224.5 million to be indexed to July 2005 dollars and the Commission’s decision on a key rate of return parameter – the equity beta – where the Commission adopted an initial value of 0.8, but subsequently raised its estimate to 0.9.

From the above decisions, several broad regulatory implications can be inferred from the Court’s decision. These include the finding that issues of regulatory continuity and certainty around individual cost of capital parameters can be a key consideration for merits review. The Court emphasised the need for long term continuity in investment signals given the 30-40 year life of the assets. This decision also highlights that review processes continue to reinforce that regulatory errors and failures to weigh evidence appropriately have a high potential risk to network business.

3. Moomba-Adelaide Pipeline System Appeal

In December 2003 the Australian Competition Tribunal (the Tribunal) issued its judgement in response to Epic Energy’s appeal against the ACCC in the matter of Application of Epic Energy South Australia Pty Ltd [2003] ACompT5.

The judgement considered an appeal by Epic Energy under the Gas Pipeline Access Law against the decision by the ACCC to draft and approve its own Access Arrangement for the Moomba-Adelaide Pipeline System (MAPS).

The appeal focused on two aspects of the ACCC drafted Access Arrangement:

- The appropriate value to adopt in an estimate of ‘line pipe’ costs undertaken for the purpose of establishing an optimised replacement cost value for the MAPS. This issue related to the selection methodology adopted by the ACCC for determining a feasible cost of pipeline to use to establish a replacement cost value. This arose out of a need to establish an initial capital base for the pipeline. - The decision of the ACCC to require a recent expansion of pipeline system capacity to be automatically ‘covered’ (i.e. regulated) through the operation of the ACCC drafted Access Arrangement.

Estimation of values where a range of credible values exists

Several broad regulatory implications can be inferred from the Court’s decision, in determining an estimate of ‘line pipe’ costs, selecting the lowest or a low single point value from a credible range of potential values for a cost estimate subjects the service provider to imbalanced risk and a prudent service provider would not base future investment planning on accessing the lowest cost product in the lowest cost market9. Instead, a more appropriate method of estimating ‘line pipe’ costs, is to use at least one of three methodologies – the use of an arithmetic mean, a modified arithmetic mean (with highest and lowest figures excluded) or a median value10.

What lessons should be remembered?

The above cases have clarified numerous aspects of the National Gas and Electricity Codes and accompanying legislation which will remain relevant under the new National Electricity and Gas Legislative packages. The cases have set precedents which have provided greater predictability, improved quality, and transparency in regulatory decision-making.

References

East Australian Pipeline Pty Limited v Australian Competition and Consumer Commission [2007] HCA 44. Section 8.10, National Third Party Access Code for Natural Gas Pipeline Systems. EAPL v ACCC [2007] HCA 44, at paragraph 51 EAPL v ACCC [2007] HCA 44, at paragraph 51 EAPL v ACCC [2007] HCA 44, at paragraph 59 EAPL v ACCC [2007] HCA 44, at paragraph 50 EAPL v ACCC [2007] HCA 44, at paragraph 80 EAPL v ACCC [2007] HCA 44, at paragraph 86 Application of Epic Energy South Australia Pty Ltd [2003] ACompT5 [63, 94] Application of Epic Energy South Australia Pty Ltd [2003] ACompT5 [64]