AUSTRALIAN COMPETITION TRIBUNAL

 

Re:  Application by ElectraNet Pty Ltd [2008] ACompT 1



COMPETITION LAW – application for leave to apply for a review of a decision of the Australian Energy Regulator by the Australian Competition Tribunal pursuant to s 71B of the National Electricity Law – review sought of transmission determination on revenue proposal by applicant – where Regulator required amount for easement transaction costs to be removed from proposal on the basis that they were deemed to be already included in the proposal as part of depreciated transmission line costs – serious question to be tried as to whether there was sufficient evidence before the Regulator which enabled it to be satisfied that the easement transaction costs were not already taken account of in the proposal – serious question to be tried whether grounds of review in s 71C of the National Electricity Law made out – leave granted.

 


 


 


National Electricity (South Australia) Act 1996 (SA)

Corporations Act 2001 (Cth) s 237(2)(d)

National Electricity Law:  ss 71A, 71B, 71C, 71E, 71F

National Electricity Rules Ch 6A


Castlemaine Tooheys Ltd v South Australia(1986) 161 CLR 148, applied

Australian Broadcasting Corporation v Lenah Game Meats Pty Ltd (2001) 208 CLR 199, cited

Australian Broadcasting Corporation v O’Neill (2006) 227 CLR 57, applied

Beecham Group Ltd v Bristol Laboratories Pty Ltd (1968) 118 CLR 618, cited


RE:     APPLICATION UNDER SECTION 71B OF THE NATIONAL ELECTRICITY LAW FOR A REVIEW OF A TRANSMISSION DETERMINATION MADE BY THE AUSTRALIAN ENERGY REGULATOR IN RELATION TO ELECTRANET PTY LIMITED PURSUANT TO CLAUSE 6A.13.1 OF THE NATIONAL ELECTRICITY RULES

 

BY:      ELECTRANET PTY LIMITED

 

1 of 2008

 

 

JUSTICE GOLDBERG, DR JILL WALKER & PROFESSOR CLIFF WALSH

23 JUNE 2008

MELBOURNE



AUSTRALIAN COMPETITION TRIBUNAL

 

 

1 of 2008

rE:

APPLICATION UNDER SECTION 71B OF THE NATIONAL ELECTRICITY LAW FOR A REVIEW OF A TRANSMISSION DETERMINATION MADE BY THE AUSTRALIAN ENERGY REGULATOR IN RELATION TO ELECTRANET PTY LIMITED PURSUANT TO CLAUSE 6A.13.1 OF THE NATIONAL ELECTRICITY RULES

 

BY:      ELECTRANET PTY LIMITED

Applicant

JUDGES:

JUSTICE GOLDBERG, DR JILL WALKER & PROFESSOR CLIFF WALSH

DATE OF ORDER:

23 JUNE 2008

WHERE MADE:

MELBOURNE

 

THE TRIBUNAL DETERMINES THAT:

 

1.                  Leave is granted to ElectraNet Pty Limited pursuant to s 71B(1) of the National Electricity Law to apply to the Australian Competition Tribunal for a review of the final decision of the Australian Energy Regulator entitled “ElectraNet transmission determination 2008-09 to 2012-13” dated 11 April 2008 and published on the Australian Energy Regulator’s website on 30 April 2008.




AUSTRALIAn competition tribunal

 

 

1 of 2008

RE:

APPLICATION UNDER SECTION 71B OF THE NATIONAL ELECTRICITY LAW FOR A REVIEW OF A TRANSMISSION DETERMINATION MADE BY THE AUSTRALIAN ENERGY REGULATOR IN RELATION TO ELECTRANET PTY LIMITED PURSUANT TO CLAUSE 6A.13.1 OF THE NATIONAL ELECTRICITY RULES

 

BY:      ELECTRANET PTY LIMITED

Applicant

members:

 

JUSTICE GOLDBERG (PRESIDENT)

DR JILL WALKER

PROFESSOR CLIFF WALSH

DATE:

23 JUNE 2008

PLACE:

MELBOURNE


REASONS FOR DECISION

Introduction

1                     The matter before the Tribunal is an application by ElectraNet Pty Limited (“ElectraNet”) pursuant to s 71B of the National Electricity Law (which is set out in the schedule to the National Electricity (South Australia) Act 1996 (SA)) for leave to apply to the Tribunal for a review of a final decision of the Australian Energy Regulator (“AER”) entitled “ElectraNet Transmission Determination 2008‑09 to 2012‑13” and dated 11 April 2008, which was published on the AER website on 30 April 2008 (“the Decision”).

2                     Under the National Electricity Law and the National Electricity Rules the AER is responsible for the economic regulation of electricity transmission services provided by transmission network service providers in the national electricity market. 

3                     Chapter 6A of the National Electricity Rules covers, generally, the economic regulation of transmission services.  Chapter 6A sets out the obligations of the AER to make transmission determinations for transmission network service providers in respect of prescribed transmission services and negotiated transmission services.  In particular, Ch 6A regulates the revenue that may be earned by transmission network service providers from the provision by them of transmission services that are the subject of transmission determinations. 

Statutory Scheme for Review of AER Decisions

4                     Section 71B(1) of the National Electricity Law provides:

“An affected or interested person or body, with the leave of the Tribunal, may apply to the Tribunal for a review of a reviewable regulatory decision”.

 

A “reviewable regulatory decision” is defined in s 71A of the National Electricity Law as meaning:

“(a)     A network revenue or pricing determination that sets a regulatory period;

 

(b)       any other determination (including a distribution determination or transmission determination) or decision of the AER under the Rules that is prescribed by the Regulations to be a reviewable regulatory decision,

 

but does not include a decision of the AER made under Division 6 of Part 3”.

 

The Decision falls within sub-para (a) of this definition.

 

5                     Section 71C(1) of the National Electricity Law provides that an application for a review of a reviewable regulatory decision can only be made on one or more of the following grounds:

“(a)     the AER made an error of fact in its findings of facts, and that error of fact was material to the making of the decision;

 

(b)       the AER made more than 1 error of fact in its findings of facts, and that those errors of fact, in combination, were material to the making of the decision;

 

(c)        the exercise of the AER’s discretion was incorrect, having regard to all the circumstances;

 

(d)       the AER’s decision was unreasonable, having regard to all the circumstances.”

 

Section 71C(2) provides that it is for the applicant to establish a ground for review.

 

6                     There are limitations on the jurisdiction of the Tribunal to grant leave under s 71B of the National Electricity Law for the review of a reviewable regulatory decision.  The primary threshold which an applicant for a review must cross is found in s 71E of the National Electricity Law which provides:

“Subject to this Subdivision, the Tribunal must not grant leave to apply under section 71B(1) unless it appears to the Tribunal that there is a serious issue to be heard and determined as to whether a ground for review set out in section 71C(1) exists.”

 

7                     The Tribunal is also obliged to refuse to grant leave to a person or body to apply under s 71B(1) of the National Electricity Law if the application is about an error relating to revenue amounts below a specified threshold.  Section 71F provides:

“(1)     This section applies if –

(a)        leave to apply under section 71B(1) is in relation to a reviewable regulatory decision that is a network revenue or pricing determination; and

 

(b)        the ground for review relied on by the applicant relates to the amount of revenue that may be earned by a regulated network service provider that is specified in or derived from that decision.

 

(2)       Despite section 71E, the Tribunal must not grant leave to apply under section 71B(1) even if there is a serious issue to be heard and determined as to whether a ground for review set out in section 71C(1) exists unless the amount that is specified in or derived from the decision exceeds the lesser of $5 000 000 or 2% of the average annual regulated revenue of the regulated network service provider.”

 

8                     The Tribunal must also refuse to grant leave to apply under s 71B(1) if the circumstances provided for in s 71G apply.  The Tribunal may also refuse to grant leave to apply under s 71B(1) if the circumstances provided for in s 71H apply.  The circumstances contemplated by ss 71G and 71H of the National Electricity Law do not arise in the present application.

Background 

9                     ElectraNet is the owner and manager of the electricity transmission system in South Australia.  In December 2002 the Australian Competition and Consumer Commission (“the Commission”) determined ElectraNet’s current revenue cap for the period from 1 January 2003 to 30 June 2008 under the National Electricity Code which has now been superseded by the National Electricity Law.  On 31 May 2007 ElectraNet submitted to the AER its revenue proposal, proposed negotiating framework and proposed pricing methodology for the period 1 July 2008 to 30 June 2013 pursuant to the provisions of cl 6A.10.1 of the National Electricity Rules. 

10                  Clause 6A.10.1 of the National Electricity Rules provides:

“(a)     A Transmission Network Service Provider must submit to the AER a Revenue Proposal and a proposed pricing methodology relating to the prescribed transmission services that are provided by means of, or in connection with, a transmission system that is owned, controlled or operated by that provider:

 

(1)        if any of those prescribed transmissionservices are subject to a transmission determination, 13 months before the expiry of the period in respect of which that transmission determination applies; or

 

(2)        if any of those prescribed transmission services are not subject to a transmission determination, 3 months after being required to do so by the AER.

 

(b)       At the same time as it submits a Revenue Proposal under paragraph (a), the provider must also submit to the AER a proposed negotiating framework.

 

(c)        The Revenue Proposal and the proposed negotiating framework must comply with the requirements of, and must contain or be accompanied by such information as is required by, the submission guidelines made for that purpose under this rule 6A.10.

 

(d)       The proposed negotiating framework must also comply with the requirements of clause 6A.9.5.

 

(e)        A proposed pricing methodology must:

 

(1)        give effect to and be consistent with the Pricing Principles for Prescribed Transmission Services; and

 

(2)        comply with the requirements of, and contain or be accompanied by such information as is required by, the pricingmethodology guidelines made for that purpose under rule 6A.25.”


11                  In its revenue proposal, ElectraNet proposed an adjustment to its regulatory asset base (“RAB”) as at 1 July 2008 to reflect the costs of easements.  The RAB for a transmission system owned, controlled or operated by a transmission network service provider is the value of those assets that are used by the provider to provide prescribed transmission services.  The adjustment sought related to two categories of costs:

(a)        landowner compensation costs, in respect of which $29.1 million was proposed to be included in the RAB;

 

(b)        easement transaction costs, in respect of which $52.8 million was proposed to be included in the RAB as at 1 July 2008.

 

12                  On 9 November 2007 the AER published a draft decision in respect of ElectraNet’s revenue proposal which did not accept all aspects of ElectraNet’s revenue proposal.  In its draft decision, as referred to in its final decision, the AER concluded:

“… that ElectraNet had not provided sufficient evidence to satisfy the AER that these [easement transaction] costs were not already included in the RAB as a part of transmission line costs.  Accordingly, the AER required that the allowance for easement transaction or acquisition costs be removed from the opening RAB.”

 

13                  The draft decision approved the total revenue cap for ElectraNet over the next regulatory control period (1 July 2008 to 30 June 2013) of $1,195 million.  ElectraNet subsequently provided the AER with further information which the AER took into consideration.  ElectraNet contended that there was sufficient information provided to the AER to demonstrate that easement transaction costs were not already included in the RAB as part of transmission line costs. 

14                  In its final decision the AER:

(a)                approved a maximum allowed revenue for ElectraNet which increases from $226 million in 2008‑09 to $304 million in 2012‑13. 

(b)               determined ElectraNet’s opening RAB to be $1,265 million for the next regulatory control period, as at 1 July 2008. 

(c)                included in the RAB the $29 million for easement compensation costs which ElectraNet had proposed but it did not include the $53 million sought by ElectraNet for easement transaction costs.

 

15                  In its final decision the AER applied an approach which it had taken in earlier decisions and determined that the easement transaction costs were deemed to be already included in transmission line costs unless ElectraNet could prove otherwise. 

16                  The AER reached the following conclusion:

“On the basis of the above considerations and the available information provided in both the original and revised revenue proposals, ElectraNet has not been able to provide sufficient evidence to enable the AER to be satisfied that these costs were not already taken account of in the RAB as a part of depreciated transmission line costs.  The AER considers that it is not reasonable to assume that easement transaction costs have not been paid for by customers in the past and, therefore, does not accept ElectraNet’s proposal that easement transaction costs be added to the RAB.

 

Accordingly, the AER confirms its draft decision conclusion not to accept ElectraNet’s proposal for easement transaction or acquisition costs of $53 million to be added to the RAB.  The AER requires the easement transaction or acquisition costs to be removed from the opening RAB.”

 

Regulatory Framework

17                  The determination of the revenue that may be earned by a transmission network service provider for each regulatory year of a regulatory control period is required to be made using a building blocks approach.  The building blocks include both an allowance for the return of capital (through depreciation charges) and a return on undepreciated capital.  The capital base is referred to as the RAB.

18                  The value of the RAB is relevant to the determination of the amount of revenue that may be earned by a transmission network service provider because:

(a)        the return on capital for each regulatory year is calculated by applying a rate of return for the relevant transmission network service provider for that regulatory control period to the value of the RAB for the relevant transmission system as at the beginning of that regulatory year;

 

(b)        depreciation allowances are based on the RAB.

19                  Section 16(l) of the National Electricity Law provides that the AER must, in performing or exercising an AER economic regulatory function or power, amongst other things, perform or exercise that function or power in a manner that will or is likely to contribute to the achievement of the national electricity objective.  That objective is to promote efficient investment in, and efficient operation and use of, electricity services for the long term interests of consumers of electricity with respect to price, quality, safety, reliability and security of supply of electricity and the reliability, safety and security of the national electricity system.

 

20                  Section 16(2) provides that the AER must take into account the revenue and pricing principles when exercising a discretion in making those parts of a transmission determination relating to direct control network services.  A direct control network service is an electricity network service which the National Electricity Rules specify as a service the price for which, or the revenue to be earned from which, must be regulated under a transmission determination, or if the Rules do not do so, the AER specifies, in a transmission determination, as a service the price for which, or the revenue to be earned from which, must be regulated under the transmission determination:  s 2B National Electricity Law.

 

21                  The revenue and pricing principles are set out in s 7A of the National Electricity Law.  These principles include the following:

(a)        A regulated network service provider should be provided with a reasonable opportunity to recover at least the efficient costs the operator incurs in:

 

(i)         providing direct control network services; and

 

(ii)        complying with a regulatory obligation or requirement or making a regulatory payment.

 

(b)        A regulated network service provider should be provided with effective incentives in order to promote economic efficiency with respect to direct control network services the operator provides.  The economic efficiency that should be promoted includes:

 

(i)         the efficient investment in a transmission system with which the operator provides direct control network services;

(ii)                the efficient provision of electricity network services; and

(iii)       the efficient use of the transmission system with which the operator provides direct control network services.

 

(c)        Relevantly, regard should be had to the RAB with respect to a transmission system adopted in any previoustransmission determination or determination or decision under the National Electricity Code.

 

22                  A price or charge for the provision of a direct control network service should allow for a return commensurate with the regulatory and commercial risks involved in providing the direct control network services to which that price of charge relates.

Regulatory Asset Base Background

23                  According to ElectraNet the following facts and circumstances can be established.  (In due course these facts and circumstances will need to be supported by evidence.  For present purposes it is sufficient to have evidence in relation to the matters referred to later in these reasons in par [51]).  In 1995 Hill Michael and Associates Pty Ltd (“HMA”) was engaged by the Electricity Trust of South Australia (“ETSA”) to undertake a valuation of the South Australian electricity network assets as at 30 June 1995.

24                  In 1998 Sinclair Knight Merz Pty Ltd (“Sinclair Knight Merz”) was engaged by the Electricity Reform and Sales Unit of the South Australian Government’s Department of Treasury and Finance to establish a valuation of the ETSA Transmission Infrastructure as at 30 June 1998.  The assessment conducted by Sinclair Knight Merz was an overview based on the HMA valuation for June 1995 and a review of changes since 1995 covering:

(a)        changes in modern equivalent asset rates since 1995 taking into account improvements in work practices and increased competition;

 

(b)        additions and deletions since 1995;

(c)        depreciation since 1995.

 

25                  The Sinclair Knight Merz 1998 valuation included a valuation for line transmission costs which excluded the value of easements.

26                  The jurisdictional valuation of the South Australian network assets was established in 1999 by the South Australian Government and was used for the Electricity Pricing Order.  The valuation was established by rolling forward the Sinclair Knight Merz 1998 valuation from 1 July 1998 to 1 July 1999.  Easements were incorporated at a book value of $3.1 million as part of the jurisdictional valuation.

27                  On 31 October 2000 the sale of the South Australian network assets to ElectraNet was completed.  On 16 April 2002, ElectraNet submitted its first revenue proposal to the Commission.  ElectraNet proposed that its opening RAB value be revised to incorporate a revaluation of easements.  A valuation performed by Sinclair Knight Merz in 2002 on behalf of ElectraNet suggested a higher value of $54 million.

28                  The Commission commissioned a report from Meritec (entitled “ElectraNet SA asset base review report to the ACCC”) which recommended in July 2002 that $36 million be introduced to the RAB to recognise easement acquisition costs based on a valuation by Maloney Field Services in 2000.

29                  On 11 December 2002, the Commission made its first revenue determination in relation to ElectraNet’s network assets and established the initial RAB, which determined the revenue cap to apply to ElectraNet’s transmission network for the period 2003‑2007/08.  The Commission based its valuation of the initial RAB on the valuation established by the South Australian Government as the jurisdictional asset valuation for ElectraNet as at 1 July 1999 and did not otherwise include an amount in the RAB for the cost of easements other than the book value amount of $3.1 million that had been incorporated into the jurisdictional value

30                  The decision of the Commission in 2002 in relation to ElectraNet’s proposal to have its easements revalued was that:

(a)        It noted that, as stated in the Draft Regulatory Principles, it preferred to value easements on actual costs suitably indexed for timing differences;

 

(b)        It noted that ElectraNet had stated that it was unable to provide actual (historical) costs but instead it had worked out a proxy value;

 

(c)        It stated that it did not believe that valuing easements using deprival value (used by MFS, Meritec and ElectraNet) was appropriate;

 

(d)        It used the same figure of $3.1 million (indexed to 1 January 2003 to $3.4 million) as its valuation for easements in its decision.

 

31                  ElectraNet’s easement transaction costs adjustment contained in its revenue proposal submitted to the AER on 31 May 2007 was based on the recommendation of $36 million, made by Meritec in 2002 and a valuation performed by SKM in 2002 which suggested a higher value of $54 million.  The mid‑point of the range established by these two valuations was $45 million.  ElectraNet proposed that this mid‑point, indexed by CPI to give a value of $52.8 million, should be added to the RAB as at 30 June 2008.

32                  The AER’s draft decision published on 9 November 2007 including the following observations:

(a)        whilst the AER recognised that the revaluation of ElectraNet’s transmission line conducted by Sinclair Knight Merz may have excluded undepreciated easement costs, no evidence as to the exact nature and quantum of these costs was provided;

 

(b)        the Commission considered, as set out in its decision for SP PowerNet in 2002, that easement transaction costs were already included in transmission line costs unless the transmission network service provider could prove otherwise;

 

(c)        in the absence of any evidence to suggest otherwise, easement transaction costs would be deemed to be already included as part of transmission line costs;

 

(d)        the allowance for easement transaction costs should be removed from ElectraNet’s opening RAB proposal.

 

33                  On 18 January 2008 ElectraNet submitted a revised revenue proposal pursuant to cl 6A.12.3 of the National Electricity Rules, which included its proposal for easement transaction costs of $53 million to be added to the RAB.

34                  On 11 April 2008 the AER made its final decision (published on 30 April 2008) on ElectraNet’s revised revenue proposal pursuant to cl 6A.13.1 of the National Electricity Rules.  The AER decided:

(a)        there was insufficient evidence to satisfy it that easement transaction costs were not already included in the RAB as a part of transmission line costs;

 

(b)        while the revaluation of ElectraNet’s transmission lines may have excluded easement transaction costs, no further evidence as to the exact nature and quantum of these costs was provided by ElectraNet;

 

(c)        in the absence of evidence as to the exact nature and quantum of easement transaction costs, it was reasonable that easement transaction costs be deemed to be already included in the RAB as a part of transmission line costs.

Grounds of Review

35                  In relation to these issues, it is ElectraNet’s contention that:

(a)        The cost or value of ElectraNet’s easements (other than for a minor amount of $3.1 million) was not included in the initial RAB of ElectraNet’s transmission network;

 

(b)        There is no evidentiary basis to conclude that the initial RAB incorporated easement costs including easement transaction costs, as a part of transmission line costs or otherwise.

36                  The grounds upon which ElectraNet relies in support of its application for a review of the AER’s determination are that:

(a)               the AER made an error of fact in its findings of fact, which was material to the making of the decision, or alternativel,y the AER made more than one error of fact in its findings of fact which were, in combination, material to the making of the decision namely that:

(i)                  the AER’s implied finding that easement transaction costs were, or may have been already, included in the RAB as a part of transmission line costs was an error of fact;

(ii)                the AER’s finding that there was insufficient evidence that easement transaction costs were not already included in the RAB as a part of transmission line costs was an error of fact,

because easement transaction costs were not already included in the RAB and the evidence before the Commission was that easement transaction costs were not already included in the RAB;

(b)               the exercise of the AER’s discretion was incorrect, having regard to all the circumstances, in not allowing any easement transaction costs:

(i)                  on the basis that there was insufficient evidence to satisfy it that easement transaction costs were not already included in the RAB as a part of transmission line costs where the evidence was that easement transaction costs were not already included in the RAB;

(ii)        on the basis that there was no evidence as to the exact nature and quantum of the costs in circumstances where there was evidence that historical records of actual easement transaction costs were not available, and there was alternative evidence as to the nature and quantum of costs which provided a sufficient basis on which the AER could have exercised regulatory discretion to make an allowance for easement transaction costs;

(c)                the decision was unreasonable, having regard to all the circumstances because:

(i)                  it was unreasonable to deem the easement transaction costs to be already included in the RAB as a part of transmission line costs given the evidence that these costs were not included in the RAB;

(ii)        it was unreasonable to conclude that there was insufficient evidence to satisfy the AER that easement transaction costs were already included in the RAB as a part of transmission line costs given the evidence that these costs were not included in the valuation which formed the basis for the RAB;

(iii)       it was unreasonable to proceed on the basis that the evidence provided by ElectraNet as to easement transaction costs did not constitute probative evidence as to the nature and quantum of easement transaction costs on which it could approve easement transaction costs for inclusion in the RAB;

(iv)                   it was unreasonable to require as the only basis on which it would approve easement transaction costs for inclusion in the RAB that ElectraNet provide evidence of the exact nature and circumstances of such costs, including the circumstance that historical records of these costs were not available to ElectraNet.

Consideration

37                  The AER does not oppose the grant of leave to ElectraNet to apply under s 71B for review of its decision.  ElectraNet’s proposed grounds for review depend upon Electranet being able to establish that there was evidence before the AER from which it could be concluded that easement transaction costs were not already included in the RAB. 

38                  As noted earlier, the Tribunal must not grant leave to ElectraNet to apply for a review of the Determination unless it appears to the Tribunal that there is a serious issue to be heard and determined as to whether a ground for review set out in s 71C(1) exists. 

39                  The concept of “a serious issue to be heard and determined” should be analysed and applied by reference to the learning and principles applicable to the grant of interlocutory injunctions.  It is also a concept found in s 237(2)(d) of the Corporations Act 2001 (Cth) which relates to the power of the Court to grant leave to a party to bring a statutory derivative action on behalf of a company. 

40                  In Castlemaine Tooheys Ltd v South Australia (1986) 161 CLR 148 at 153 Mason ACJ addressed the principles governing the grant or refusal of interlocutory injunctions in the following terms:

“In order to secure such an injunction the plaintiff must show (1) that there is a serious question to be tried or that the plaintiff has made out a prima facie case, in the sense that if the evidence remains as it is there is a probability that at the trial of the action the plaintiff will be held entitled to relief; (2)  …”

 

In Australian Broadcasting Corporation v Lenah Game Meats Pty Ltd (2001) 208 CLR 199, Gleeson CJ endorsed this observation and said at 217-218:

“…a plaintiff seeking an interlocutory injunction must be able to show sufficient colour of right to the final relief, in aid of which interlocutory relief is sought.  … In McCarty v North Sydney Municipal Council (1918) 18 SR (NSW) 210 at 211-212 the Chief Judge in Equity described the proposition that a plaintiff seeking an interlocutory injunction must show at least a probability that he will succeed in establishing his title to the relief sought at the final hearing as ‘so well established that no authority is really needed in support of it’.

If the [party seeking an interlocutory injunction] cannot show a sufficient colour of right of the kind sought to be vindicated by final relief, the foundation of the claim for interlocutory relief disappears.”

 

41                  Callinan J also addressed the issue of the test for an interlocutory injunction and at 296 said:

“In my opinion, the correct test is whether the applicant can demonstrate either a reasonably arguable case on both the facts and the law, or that there is a serious question to be tried.  These tests it seems to me are to the same effect.”

 

42                  In Australian Broadcasting Corporation v O’Neill (2006) 227 CLR 57 Gummow and Hayne JJ considered the enquiries that should be made when the Court was considering whether to grant an interlocutory injunction.  They said (at 82) that the relevant principles in Australia are those explained in Beecham Group Ltd v Bristol Laboratories Pty Ltd (1968) 118 CLR 618 where the Court noted that in such circumstances it addressed two main enquiries, the first of which was:

“… whether the plaintiff has made out a prima facie case, in the sense that if the evidence remains as it is there is a probability that at the trial of the action the plaintiff will be held entitled to relief …”

 

Gummow and Hayne JJ said:

“By using the phrase ‘prima facie case’, their Honours did not mean that the plaintiff must show that it is more probable than not that at trial the plaintiff will succeed;  it is sufficient that the plaintiff show a sufficient likelihood of success to justify in the circumstances the preservation of the status quo pending the trial.”

 

Gummow and Hayne JJ (at 82) noted that with reference to this first enquiry the High Court in Beecham had said:

“How strong the probability needs to be depends, no doubt, upon the nature of the rights [the plaintiff] asserts and the practical consequences likely to flow from the order he seeks.”

 

Gummow and Hayne JJ said at 84:

“… the requisite strength of the probability of ultimate success depends upon the nature of the rights asserted and the practical consequences likely to flow from the interlocutory order sought.”

 

The Tribunal has applied these principles and tests in reaching its decision in this application.

43                  ElectraNet has been given an opportunity to seek an adjustment of the RAB in respect of easement transaction costs in establishing its opening RAB for the regulatory control period from 1 July 2008 to 30 June 2013.  This opportunity is found in cl 11.6.13 of the National Electricity Rules which provides:

ElectraNet easements transitional provisions

 

(a)       In this clause 11.6.13:

 

current regulatory control period means the regulatory control period for ElectraNet commencing on 1 January 2003 and ending on 30 June 2008.

 

Determination means the South Australian Transmission Network Revenue Cap Decision of the ACCC dated 11 December 2002.

 

easement means easements referred to in the Determination.

 

(b)       Without limiting the operation of the new Chapter 6A, in establishing the opening regulatory asset base for ElectraNet for the regulatory control period subsequent to ElectraNet’s current regulatory control period, the AER may also consider adjustments to the regulatory asset base for ElectraNet that relate to easements, as agreed by letter dated 3 August 2004, between the ACCC and ElectraNet.”

 

The letter dated 3 August 2004 from the Commission to ElectraNet states:

“Thank you for your letter of 12 July regarding the case for adjusting ElectraNet’s regulatory asset base.

 

I note that ElectraNet will be making a submission to the ACCC seeking an adjustment to its regulatory asset base before the ACCC rolls forward ElectraNet’s asset base at the next revenue reset 1 July 2008.

 

The ACCC’s preference to roll forward a TNSP’s asset base reflects its views as to the best approach, under the Code, to asset valuation into the future.  However, the decision on ElectraNet’s asset base will be made at the re-set of its revenue cap in accordance with the requirements of the Code.

 

As previously noted by ACCC staff, the ACCC would consider revaluation of ElectraNet’s asset base if ElectraNet was able to establish that such a step accords with the reasonable expectations of ElectraNet’s investors.”

 

44                  The effect of cl 11.6.13 of the National Electricity Rules is that ElectraNet has a once only opportunity, in the terms of the letter, to seek adjustments to the RAB and it only has this opportunity in relation to the regulatory control period commencing on 1 July 2008.

45                  ElectraNet submitted that its grounds for review could be established by reference to statements made by Sinclair Knight Merz who had carried out the 1998 jurisdictional asset valuation of the assets which formed part of the assets which ElectraNet had purchased earlier from Electricity Trust of South Australia. 

46                  In its draft determination the AER did not accept ElectraNet’s proposal for an adjustment of $53 million in respect of easement transaction costs.  The AER concluded at that time that:

“… ElectraNet had not provided sufficient evidence to satisfy the AER that these costs were not already included in the RAB as a part of transmission line costs.”

 

ElectraNet did not accept this conclusion in the draft determination and informed the AER that statements provided by Sinclair Knight Merz who carried out the 1998 jurisdictional asset valuation established this fact. 

47                  In its final determination the AER picked up this submission and said:

“ElectraNet’s view is that SKM stated unequivocally that its transmission line asset valuation database did not include any elements of route selection or easement acquisition costs and that all aspects of these costs were excluded from the 1998 valuation.  The SKM asset valuation was adopted as the jurisdictional asset valuation, and therefore ElectraNet stated that there can be no doubt that easement transaction costs were excluded from the line valuation.  Accordingly, it stated that on this basis customers have not paid for easement transaction costs.”

48                  The AER approached the issue on the basis of determining whether ElectraNet had provided sufficient evidence to satisfy it that the easement transaction costs were not already included in the RAB as a part of transmission line costs.  The critical question then arises whether there is a serious issue to be heard and determined whether ElectraNet had provided such sufficient evidence. 

49                  The AER determined that the easement transaction costs sought by ElectraNet were “deemed to be already included” in transmission line costs unless ElectraNet could prove otherwise. 

50                  ElectraNet sought to prove otherwise in its revised revenue proposal in which, according to the AER in its final determination [p 12]:

“… ElectraNet restated SKM’s statement that its 1998 valuation of ElectraNet’s transmission line costs did not include any easement acquisition or route selection costs. While the AER recognises that the optimised depreciated replacement cost (ODRC) revaluation of ElectraNet’s transmission lines may have excluded undepreciated easement transaction costs, no further evidence as to the exact nature and quantum of these costs was provided by ElectraNet in its revised revenue proposal.  In the absence of such evidence, the AER considers it is reasonable that transaction costs be deemed to be already included as a part of transmission line costs.

 

Moreover, the AER notes that SKM’s statement is documented in a file note and was made in response to the comments and observations made in the Meritec report to the ACCC titled ElectraNet SA asset base review report to the ACCC.”

 

51                  The Sinclair Knight Merz file note to which the AER referred is headed “ELECTRANET SA Asset Valuation Review” and, relevantly, is in the following terms:

ELECTRANET SA Asset Valuation Review

The following information and comments are provided in response to the comments and observations made in Section 5.3.2 of Meritec report to the ACCC titled ‘Electranet SA Asset Base Review’.  We also refer to the Electranet SA document ‘Clarification of Transmission Line and Easement Costs’  dated 9 May 2002.

 

ELECTRANET DOCUMENT DATED 9 MAY, 2002.

 

SKM has reviewed the above-mentioned document, and concurs completely with its contents and observations.  In particular, while the HMA report of 1995 made reference to ‘typical easement acquisition and route selection costs’, the report also indicated that ‘easement costs were to be excluded’ from the final valuation. SKM’s comparison of line construction costs in 1998 with the costs included by HMA in their 1995 valuation report also tended to confirm that it was unlikely that any significant additional costs, other than normal line design and construction costs, were included in the HMA valuation.  If an element of such costs were included, it would appear that they were of such insignificant proportions as not to be ‘material’ to the final valuation.

 

SKM’s project manager for the 1998 Electranet valuation review was Mr Kerrod Beaton, who is still engaged by the company, and is actively involved in transmission line valuations for transmission companies across Australia.  Mr Beaton is also involved in the continuous updating of the SKM asset valuation database, and has recently confirmed that no elements of easement acquisition or route selection costs are included, or were ever included in SKM valuations.

 

SKM can categorically and unequivocally confirm that its transmission line asset valuation database does not include any elements of route selection or easement acquisition costs.  The database is constructed on the clear assumption that the transmission line is to be constructed on an existing easement.

 

If the SKM valuation of 1998 is considered to be the jurisdictional asset valuation, then we can confirm that all aspects of route selection and easement acquisition costs are excluded.

 

MERITEC REPORT (DRAFT) DATED JUNE, 2002.

 

SKM has reviewed section 5.3.2 of this report, and makes the following comments on the observations reported under the sub-heading ‘Initial rates for Replacement of Assets in the jurisdictional Valuation’.

 

Para 1 – SKM has advised Electranet that the SKM Review of the HMA 1995 valuation definitely did not include any allowance for route selection or easement acquisition costs.  Our comparison of SKM 1998 unit rates with HMA 1995 unit rates also led SKM to believe that there was no significant provision for such costs.  It was not possible to be definitive about this however.  SKM unit rates normally include an EPCM (Engineering Procurement and Construction Management) allowance of 15%, but not corporate overheads.  These overheads may be considered to be similar.

 

Para 2 – SKM’s examination of the HMA report suggests that some elements of route selection may have been included in the HMA valuation, but if so were of a minor amount, did not impact on the materiality of the final valuation, and were not included in the SKM 1998 valuation review.

 

Para 3 – While it may be correct that there were elements of route selection and EIS costs in the HMA 1995 valuation, these were not carried forward into the SKM 1998 valuation.

 

Para 4 – SKM did state in the 1998 Valuation Review that we agreed with the gross line replacement rates used by HMA, and this involved allowance for cost escalation from 1995 to 1998, variations in estimating practices, and was based on SKM’s review of a nation-wide survey of transmission line estimates, involving six State transmission companies and a transmission line contractor.  In essence, the SKM 1998 prices were constructed independently, and did not simply carry forward the HMA estimates.

 

We make the following comments on the section of the Meritec report headed ‘SKM and HMA Acquisition Cost Models’.

 

Para 5 – We do not agree with the statement that ‘some of the types of activities associated with easement acquisition in the Electranet report are also typically incurred in engineering assessment of transmission line development and there is a blurring of costs that often cannot be separated between line development and easement acquisition.’  SKM has always successfully separated these costs, without any ‘blurring’.”

 

52                  As noted earlier in para [16] above, the AER concluded that ElectraNet had not been able to provide sufficient evidence to enable it to be satisfied that the easement transaction and acquisition costs were not already taken account of in the RAB as a part of depreciated transmission line costs.  The AER reached this conclusion on the basis of “the above considerations and the available information provided in both the original and revised revenue proposals”.  The “available information” included the Sinclair Knight Merz file note.

53                  In its final determination the AER referred to the Meritec report (referred to in the Sinclair Knight Merz file note) to the Commission and noted that:

“the language reflected in other sections of the SKM file note is less definitive about whether the transmission line asset valuation data base did not include any elements of route selection or recent acquisition costs and that all aspects of these costs were excluded from the 1998 valuation.” 

 

The AER used as an example of “less definitive” language of Sinclair Knight Merz the following paragraph from its file note:

“Para 1 – SKM has advised ElectraNet that the SKM review of the HMA 1995 valuation definitely did not include any allowance for route selection or easement acquisition costs.  Our comparison of SKM 1998 unit rates with HMA 1995 unit rates also led SKM to believe that there was no significant provision for such costs.  It was not possible to be definitive about this however.  SKM unit rates normally include an EPCM (Engineering Procurement and Construction Management) allowance of 15%, but not corporate overheads.  These overheads may be considered to be similar. [emphasis added]”

 

54                  The Tribunal considers that, consistently with the authorities and principles referred to above, there is a serious issue to be heard and determined whether, at least on the basis of the Sinclair Knight Merz file note, there was sufficient evidence before the AER which enabled it or should have enabled it, to be satisfied that the easement transaction costs were not already taken account of in the RAB as a part of depreciated transmission line costs.  It is arguable that, in reaching the conclusion referred to in para [16] above, that ElectraNet had not been able to provide sufficient evidence to enable the AER to be satisfied that the easement transaction costs were not already taken account of in the RAB as a part of depreciated transmission line costs, had only considered one part of the Sinclair Knight Merz file note upon which it relied for its conclusion and had not taken into account the other parts which supported ElectraNet’s argument.  In reaching its final conclusion on the issue of the inclusion of easement transaction costs in the RAB the AER appears to have disregarded or paid no attention to all the statements made in the Sinclair Knight Merz file note referred to in para [51] above. 

55                  This serious issue raises for consideration whether the AER made an error of fact material to its decision in not taking into account, or giving sufficient weight to, the statements in the Sinclair Knight Merz file note which supported ElectraNet’s argument.

56                  The Tribunal is satisfied that there is a serious issue to be heard and determined whether the AER should have taken into account and accepted statements contained in the Sinclair Knight Merz file note such as:

“… the HMA report of 1995 made reference to ‘typical easement acquisition and route selection costs’, the report also indicated that ‘easement costs were to be excluded’ from the final valuation.”

 

And again,

“Mr Beaton is also involved in the continuous updating of the SKM asset valuation data base, and has recently confirmed that no elements of easement acquisition or route selection costs are included, or were ever included in SKM valuations.”

 

And again,

“SKM can categorically and unequivocally confirm that its transmission line asset valuation database does not include any elements of route selection or easement acquisition costs.  The data base is constructed on the clear assumption that the transmission line is to be constructed on an existing easement.”

 

And again,

“If the SKM valuation of 1998 is considered to be the jurisdictional asset valuation, then we can confirm that all aspects of route selection and easement acquisition costs are excluded.”

 

These statements also raise a serious issue to be heard and determined whether the exercise of the AER’s discretion was correct in the manner in which it dealt with the contents of the Sinclair Knight Merz file note and whether its decision was unreasonable having regard to the contents of the file note.

57                  The Tribunal is therefore satisfied that the grounds upon which the ElectraNet relies in support of its application for a review of the AER’s determination which are set out in para [36] above are such that there is a serious issue to be heard and determined whether those grounds have been made out.

58                  The Tribunal is also satisfied that the threshold provided for in s 71F of the National Electricity Law which ElectraNet must cross in order to obtain leave is satisfied.  The Tribunal is satisfied that “the amount that is specified in or derived from the decision exceeds the lesser of $5 000 000 or 2% of the average annual regulated revenue” of ElectraNet. 

59                  The average annual regulated revenue of ElectraNet over the regulatory control period, without the inclusion of easement transaction costs of $52.8 million in the RAB, will be $263.74 million.  Two per cent of this amount is $5.27 million.  Accordingly, the threshold to be crossed is whether “the amount that is specified in or derived from the decision exceeds $5,000,000 …”.  The “amount that is specified or derived from the decision” is not the $52.8 million which ElectraNet attributes to easement transaction costs but rather the amount of the revenue forgone over the whole of the regulatory control period if the $52.8 million is excluded from the RAB at 1 July 2008.

60                  ElectraNet and the AER differed as to the methodology by which they determined whether the threshold provided in s 71F had been crossed, although they were in agreement that it is the total revenue amount over the whole of the regulatory control period which is in issue, rather than the annual revenue amount.  We agree with that view.  The threshold has been crossed whichever methodology is used.

61                  ElectraNet submitted that its total revenue forgone over the regulatory control period, absent inclusion in its RAB of the $52.8 million it had claimed for easement transaction costs, would be $29.67 million, which is far in excess of the $5 million threshold.  ElectraNet derived this amount by applying a weighted average cost of capital of 10.65 per cent to the easement transaction costs of $52.8 million (multiplied by a cumulative inflation index) which results in an increase in ElectraNet’s revenue over the whole of the regulatory control period under consideration of $29.67 million.

62                  The AER submitted that the amount of revenue that may be earned by ElectraNet which is in issue should be determined by subtracting the smoothed maximum allowed revenue in the final decision from the smoothed maximum allowed revenue which would be derived if the claimed easement transaction costs of $52.8 million were included in the opening RAB and rolled forward.  According to ElectraNet, the application of the AER’s methodology results in the amount of the revenue forgone over the whole of the regulatory control period, if the $52.8 million is excluded from the opening RAB, being $23.56 million.  The AER did not provide an estimate of the outcome of the application of its methology but agreed that the revenue amount in issue well exceeds the $5 million threshold.

63                  For present purposes the Tribunal does not need to determine which methodology is correct.  Suffice it to say that there is a serious issue to be heard and determined as to which methodology is correct.  The determination of that issue is better left for a final hearing where all relevant evidence can be placed before the Tribunal.

64                  The decision of the Tribunal is that leave is granted to ElectraNet pursuant to s 71B(1) of the National Electricity Law to apply to the Australian Competition Tribunal for a review of the final decision of the Australian Energy Regulator entitled “ElectraNet transmission determination 2008-09 to 2012-13” dated 11 April 2008 and published on the AER’s website on 30 April 2008.

I certify that the preceding sixty-four (64) numbered paragraphs are a true copy of the Reasons for Decision herein of the Honourable Justice Goldberg, Dr Jill Walker & Professor Cliff Walsh.



Associate:


Dated:         23 June 2008


Counsel for ElectraNet Pty Ltd

M Sloss S.C, and P Gray


Solicitor for ElectraNet Pty Ltd                               Gilbert + Tobin


Counsel for Australian

N O’Bryan S.C. and M Borsky

Energy Regulator


Solicitor for Australian

Corrs Chambers Westgarth

Energy Regulator


Date of Hearing:

16 June 2008

 

 

Date of Judgment:

23 June 2008