AUSTRALIAN COMPETITION TRIBUNAL

 

Re:  Application by ElectraNet Pty Limited (No 3) [2008] ACompT 3



COMPETITION LAW – review of decision of Australian Energy Regulator (AER) pursuant to s 71C of National Electricity Law – AER required to determine regulatory asset base (RAB) of ElectraNet for regulatory control period of five years from 2008 – ElectraNet the transmission network service provider for electricity in South Australia – setting RAB provides foundation for regulation of revenue during regulatory control period – provision in rule 11.6.13(b) of National Electricity Rules to allow adjustments to RAB for easements in determination – AER adjusted amount allowed for easement compensation costs (amounts paid to landowners) in RAB in determination – ElectraNet also claimed adjustment to RAB for easement acquisition or transaction costs – AER refused to make adjustment to RAB for easement acquisition or transaction costs – consideration of national electricity objective and revenue and pricing principles – consideration of ACCC Draft Statement of Principles and Statement of Principles background paper – whether AER erred in material fact in not being satisfied that RAB did not include allowance for easement acquisition or transaction costs – whether AER erred in deciding to make no allowance in RAB for those costs because no satisfactory basis for quantifying them was available – consideration of grounds of review under s 71R of the Law – Tribunal found that AER erred in material factual finding because easement acquisition or transaction costs not included in ElectraNet’s opening RAB – Tribunal satisfied that material showed proper foundation for determining appropriate adjustment to opening RAB for those costs.



 



National Electricity (South Australia) Act 1996 (SA)

National Electricity Law, ss 7, 7A, 16, 71C, 71P and 71R

National Electricity Rules, rr 6A, 11 Schedule A

Gas Pipelines Access (South Australia) Act 1997 (SA), s 39

Electricity Corporations Act 1994 (SA)

Public Corporations Act 1993 (SA)

Electricity Trust of South Australia Act 1946 (SA)

Restructuring and Disposal Act 1999 (SA)

ACCC Draft Statement of Principles, May 1999

ACCC Statement of Principles for the Regulation of Transmission Revenues – background paper, December 2004

National Electricity (South Australia) (New National Electricity Law) Amendment Bill (SA)

National Electricity (South Australia) (New National Electricity Law) Amendment Act 2005 (SA)

 


 

Australian Competition and Consumer Commission v Australian Competition Tribunal (2006) 152 FCR 33

Re Application by Epic Energy South Australia Ltd, [2004] ATPR 41-977; [2003] ACompT 5

Application by GasNet Australia (Operations) Pty Ltd [2003] ACompT 6

Application by Optus Mobile Pty Limited & Optus Networks Pty Ltd [2006] ACompT 8, at [297]


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 MANSFIELD, DEPUTY PRESIDENT, Mr Robin Davey, DR JILL WALKER , MEMBERS

30 SEPTEMBER 2008

melbourne


GENERAL DISTRIBUTION



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 MANSFIELD, MR ROBIN DAVEY & DR JILL WALKER

 

DATE OF ORDER:

30 SEPTEMBER 2008

WHERE MADE:

MELBOURNE

 

THE TRIBUNAL DETERMINES THAT:

 

1.                  The ElectraNet transmission determination 2008-09 to 2012-13 made by the Australian Energy Regulator on 11 April 2008 be varied by increasing the opening regulatory asset base of ElectraNet Pty Limited by the sum of $36.1m in respect of easement transaction or acquisition costs, such sum to be adjusted for CPI movements from 1 July 2000 to the commencement of the said determination.





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 MANSFIELD (DEPUTY PRESIDENT)

mr robin davey

DR JILL WALKER

 

 

DATE:

30 SEPTEMBER 2008

PLACE:

MELBOURNE

 

 


 

 

BACKGROUND TO THE APPLICATION.................................................................

[1]

Leave to apply............................................................................................................

[1]

Leave to intervene......................................................................................................

[4]

Provisions of the Law relevant to the Tribunal’s review..........................................

[5]

THE REGULATORY FRAMEWORK........................................................................

[9]

The national electricity objective and the revenue and pricing principles...............

[12]

ELECTRANET’S REGULATORY ASSET BASE......................................................

[16]

THE ACCC’S DETERMINATION OF ELECTRANET’S RAB...............................

[25]

The ACCC’s Draft Statement of Principles..............................................................

[28]

The ACCC’s determinations of transmission network revenue caps generally......

[39]

The ACCC’s Statement of principles – background paper......................................

[49]

THE AER’S DETERMINATION OF ELECTRANET’S RAB..................................

[53]

ELECTRANET’S SUBMISSIONS TO THE TRIBUNAL

[62]

ISSUES ARISING FROM THE APPLICATION........................................................

[107]

THE SUFFICIENCY OF THE EVIDENCE.................................................................

[112]

The valuations before the AER.................................................................................

[112]

The MFS 1997 Report............................................................................................

[113]

The June 2000 Information Memorandum...........................................................

[118]

The MFS 2000 Report............................................................................................

[121]

The SA Department of Treasury and Finance August 2001 letter......................

[122]

The Meritec 2002 Report........................................................................................

[127]

The sufficiency of the valuations...............................................................................

[136]

SELECTION OF AN APPROPRIATE VALUATION ...............................................

[162]

Additional easement transaction cost valuations......................................................

[162]

The HMA 1995 Report...........................................................................................

[166]

The SKM 2000 Report............................................................................................

[172]

The SKM 2002 Report............................................................................................

[181]

The 2002 draft Meritec Report...............................................................................

[184]

The Tribunal’s discretion...........................................................................................

[190]

A reasonable approach to the valuation of easements.............................................

[192]

The consistency/certainty tenet.................................................................................

[200]

Whether a valuation “... falls within the range of choice reasonably open …”.......

[209]

The June 2000 Information Memorandum and the SA Treasury and Finance August 2001 Letter $3.1m valuations....................................................................

[210]

The MFS 1997 Report, the MFS 2000 Report, the SKM 2002 Report and the Meritec 2002 Report...............................................................................................

[212]

The SKM 2000 Report

[213]

The HMA August 1995 Report..............................................................................

[214]

An acceptable valuation – the MFS valuations.........................................................

[219]

WHETHER EASEMENT COMPENSATION COSTS SHOULD BE INCLUDED IN ELECTRANET’S RAB?..........................................................................................

[226]

ECCSA’s Submission.................................................................................................

[226]

ECCSA’s ‘book value’ argument...............................................................................

[229]

ECCSA’s reliance on international cases and treatises...........................................

[232]

Accountancy principles v economic concepts............................................................

[235]

Book value not “... within the range of choice reasonably open ...”........................

[237]

ECCSA’S OTHER CONTENTIONS............................................................................

[241]

CONCLUSION...............................................................................................................

[258]


REASONS FOR DECISION


BACKGROUND TO THE APPLICATION

Leave to apply

1                     On 23 June 2008 the Tribunal, (the then President, Goldberg J, Dr J Walker and Professor C Walsh) granted leave to ElectraNet Pty Limited (ElectraNet) to apply to the Tribunal for a review of a final decision, dated 11 April 2008, of the Australian Energy Regulator (the AER) entitled ElectraNet transmission decision 2008-09 to 2012-13.

2                     The leave was granted pursuant to s 71B(1) of the National Electricity Law (the Law) set out in the Schedule to the National Electricity (South Australia) Act 1996 (SA).  The reasons for the Tribunal’s decision to grant leave appear in Application by ElectraNet Pty Ltd [2008] ACompT 1.

3                     The leave was granted on one issue identified by ElectraNet arising from the AER final decision.  ElectraNet seeks a review of the AER’s rejection of its proposal to adjust its regulatory asset base (RAB) by including $52.8m in respect of easement transaction costs incurred in acquiring easement rights prior to 1 July 1999.  These easement transaction costs were said by ElectraNet to comprise costs necessarily incurred in acquiring the easement rights (excluding landowner compensation costs), including fees and costs incurred in surveying, drafting, valuation, negotiation, conveyancing, Lands Title Office and other government registration charges, mortgage production fees and reimbursement of professional fees incurred by landowners.  The easement transaction costs do not include landowner compensation costs paid directly to landowners for the acquisition of easement rights, as the AER allowed an adjustment to ElectraNet’s RAB of $29.1m for the landowner compensation costs.

Leave to intervene

4                     On 28 July 2008 the then President of the Tribunal (Goldberg J) granted leave pursuant to s 71L(2) of the Law to the Energy Consumers Coalition of South Australia (ECCSA) to intervene in the review.  The order limited ECCSA to presenting evidence and documents and making submissions in relation to:

(a)                its contention that $52.8 million or thereabouts should not be included in ElectraNet Pty Limited’s opening regulatory asset base as at 1 July 2008 to the extent to which evidence and documents are not presented and submissions are not made by the Australian Energy Regulator in relation to that issue;

(b)               the matters raised in Annexure “C” to the affidavit of David Headberry filed and sworn on 23 July 2008 in relation to its contention that $29.1 million or thereabouts should not be included in ElectraNet Pty Limited’s opening regulatory asset base as at 1 July 2008 in respect of easement compensation costs.

See: Application by ElectraNet Pty Ltd [2008] ACompT 2

Provisions of the Law relevant to the Tribunal’s review

5                     The review of the decision of the AER is conducted under Div 3A of the Law.  The available grounds of review are specified in s 71C(1).  They are that the AER made an error or errors of fact in its findings of facts which error or errors in combination were material to the making of the decision under review, or that the AER’s exercise of discretion was incorrect having regard to all the circumstances, or that its decision was unreasonable, having regard to all the circumstances.

6                     Although ElectraNet’s application for review raised each of those grounds, they were not each pressed on the hearing.  It was common ground that the “single fundamental issue” to be decided was whether the AER’s consideration of ElectraNet’s RAB for the relevant regulatory control period in relation to easements was incorrect or unreasonable, having regard to all the circumstances.  It will be necessary to explore the scope of the “single fundamental issue” later in these reasons.

7                     Section 71C(2) of the Law says that it is for ElectraNet to establish the ground of review which it pursued.

8                     Section 71R identifies the matters to be considered by the Tribunal in making its determination.  As it was referred to in the course of submissions, it is convenient to set it out in full.  It provides:

(1)               Subject to this section, the Tribunal, in reviewing a reviewable regulatory decision, must not consider any matter other than review related matter.

 

(2)               The Tribunal, in reviewing a reviewable regulatory decision, must have regard to any document –

 

(a)               prepared, and used, by the AER for the purpose of making the reviewable regulatory decision; and

(b)               that the AER has made publicly available.

 

(3)               In addition, if in a review, the Tribunal is of the view that a ground of review has been established, the Tribunal may allow new information or material to be submitted if the new information or material –

 

(a)                would assist it on any aspect of the determination to be made; and

(b)                was not unreasonably withheld from the AER when it was making the reviewable regulatory decision.

 

(4)               Subject to this Law, for the purpose of subsection (3)(b), information or material not provided to the AER following a request for that information or material by it under this Law or the Rules is to be taken to have been unreasonably withheld.

 

(5)               Subsection (4) does not limit what may constitute an unreasonable withholding of information or material.

 

(6)               In this section –

 

Review related mattermeans –

 

(a)                the application for review and submissions in support of the application; and

(b)                the reviewable regulatory decision and the written record of it and any written reasons for it; and

(c)                in the case of a reviewable regulatory decision that is a network revenue or pricing determination – any document, proposal or information required or allowed under the Rules to be submitted as part of the process for the making of the determination; and

(d)                any written submissions made to the AER before the reviewable regulatory decision was made; and

(e)                any reports and materials relied upon by the AER in making the reviewable regulatory decision; and

(f)                 any draft of the reviewable regulatory decision; and

(g)                any submissions on the draft of the reviewable regulatory decision or the reviewable regulatory decision itself considered by the AER; and

(h)                the transcript (if any) of any hearing conducted by the AER for the purpose of making the reviewable regulatory decision.

 

THE REGULATORY FRAMEWORK

9                The Law and the National Electricity Rules (the Rules) provide the economic and legal framework for the regulation of the revenues of transmission network service providers (TNSPs) operating in the national electricity market.

10                  ElectraNet is the principal electricity TNSP in South Australia.  It acquired that business in October 2000 from an entity then called Transmission Lessor Corporation (and previously called ETSA Transmission Corporation) established by the South Australian government to provide the electricity transmission network service as a step towards its privatisation.

11                  When the Law commenced on 1 July 2005, the AER became the economic regulator of TNSPs in the national electricity market, taking over that role from the Australian Competition and Consumer Commission (the ACCC) which had had the role of economic regulator of transmission services in South Australia since 1 January 2001.  The ACCC first administered a South Australian Pricing Order and, from 1 January 2003, operated under a precursor to the Rules, the National Electricity Code (the Code).

The national electricity objective and the revenue and pricing principles

12                  The Law requires that in performing or exercising its economic regulatory functions or powers the AER must:

·               do so in a manner that will, or is likely to, contribute to the achievement of the national electricity objective (s 16(1)); and

·               take into account the revenue and pricing principles (s 16(2)).

13                  The national electricity objective, found in s 7 of the Law, is:

... to promote efficient investment in, and efficient operation and use of, electricity services for the long term interest of consumers of electricity with respect to:

 

(a)        price, quality, safety, reliability and security of supply of electricity; and

 

(b)        the reliability, safety and security of the national electricity system.


14                  The revenue and pricing principles set out in s 7A of the Law include the following:

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

 

(a)                providing direct control network services; and

 

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

 

(3)               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 –

 

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

 

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

 

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

 

(4)               Regard should be had to the regulatory asset base with respect to a distribution system or transmission system adopted –

 

(a)                in any previous –

 

(i)         as the case requires, distribution determination or transmission determination; or

 

(ii)         determination or decision under the National Electricity Code or jurisdictional electricity legislation regulating the revenue earned, or prices charged, by a person providing services by means of that distribution system or transmission system; or

 

(b)        in the Rules.


(5)               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 service to which that price or charge relates.

 

(6)               Regard should be had to the economic costs and risks of the potential for under and over investment by a regulated network service provider in, as the case requires, a distribution system or transmission system with which a regulated network service provider provides direct control network services.

 

15                  The national electricity objective provides the overarching economic objective for regulation under the Law: the promotion of efficient investment in the long term interests of consumers.  Consumers will benefit in the long run if resources are used efficiently, i.e. resources are allocated to the delivery of goods and services in accordance with consumer preferences at least cost.  As reflected in the revenue and pricing principles, this in turn requires prices to reflect the long run cost of supply and to support efficient investment, providing investors with a return which covers the opportunity cost of capital required to deliver the services. 

ELECTRANET’S REGULATORY ASSET BASE

16                  The Rules require the AER to determine a TNSP’s revenue for each year of a regulatory control period (of not less than five years) using a number of “building blocks” set out in rule 6A.5.4 of the Rules including indexation of the provider’s RAB (or capital base) used to provide the regulated services at the commencement of the regulatory period.

17                  Schedule 6A.2 to Chapter 6A provides that ElectraNet’s RAB for the first regulatory year must be determined by rolling forward an RAB of $823.75m as at 1 January 2003 set out in a table in clause S6A.2.1(c)(1) of the Schedule.

18                  Under the Code previously administered by the ACCC, a provider’s RAB at the commencement of a regulatory control period was not “locked in” and might have been revalued if, for example, ElectraNet could have persuaded the ACCC to increase the amount it allowed for the value of ElectraNet’s easements in its 11 December 2002 South Australian Transmission Network Revenue Cap 2003-2007/8 Decision (the ACCC’s 2002 ElectraNet decision).  (For reasons appearing below, the value of ElectraNet’s easements were in contention in that decision and remained in contention following the decision.)

19                  With the change from the Code to the Rules, however, a provider’s RAB became “locked in” and the only adjustment to a provider’s RAB are those permitted by Clause S6A.2.1(c)(2) and clause S6A.2.1(f).

20                  Anticipating that the permitted adjustments would not have allowed ElectraNet to make an adjustment to its RAB in respect of the value of its easements, ElectraNet requested that the Rules recognise that the value of its easements remained in contention.

21                  As a result of ElectraNet’s request, rule 11.6.13(b) provides that:

Without limiting the operation of the new Chapter 6A, in establishing the opening regulatory asset base for ElectraNet ... the AER may also consider adjustments to the regulatory asset base for ElectraNet that relates to easements, as agreed by letter dated 3 August 2004, between the ACCC and ElectraNet.


22                  The letter referred to in rule 11.6.13(b) was written in the context of an earlier proposal by the ACCC to “lock in” RABs under the Code at a time when ElectraNet, having failed to achieve an increase in the value of its easements in the ACCC’s 2002 ElectraNet decision, was expecting to be able to revisit the issue in 2007.  The letter noted that ElectraNet would:

... 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.


23                  The letter also stated:

The ACCC’s preference to roll forward a TNSP’s [transmission network service provider’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.


24                  The provisions of rule 11.6.13(b) and the ACCC’s letter to ElectraNet are consistent with the focus in the national electricity objective and the revenue and pricing principles on the promotion of efficient investment and the provision of returns commensurate with the regulatory and commercial risks involved in providing a direct control network service.


The ACCC’s determination of ElectraNet’s RAB

25                  Section 7A(4) of the Law (para [14]) requires, in effect, that in determining ElectraNet’s opening RAB for the current regulatory control period, the AER should have regard to ElectraNet’s 1 January 2003 RAB determined in the ACCC’s 2002 ElectraNet decision.

26                  As indicated earlier, in that decision the ACCC rejected ElectraNet’s proposed revaluation of easements in respect of both compensation and transactions costs.  In its revised proposal, ElectraNet had proposed the incorporation of $27.5m for easement compensation costs, being a historical proxy value derived from actual Victorian historical data, and $87m, being the replacement value of transactions costs, as estimated by Sinclair Knight Merz in 2002.  Instead, the ACCC determined to roll forward the “book value” of $3.1m for easements incorporated in the jurisdictional valuation, although it accepted that it had the discretion to revise that valuation under the Code.  The final decision stated that:


... the Commission prefers to value easements on actual costs suitably indexed for timing differences.  ElectraNet, however, has stated that it is unable to provide actual (historical) costs.  Instead it worked out a proxy value based on SPI’s easement values.

 

In the draft decision, the Commission stated that its role is not to supplement ElectraNet’s application.  It maintains this view.  Therefore the Commission has used the same figure of $3.1 million (indexed to 1 January 2003 is $3.4m) in this decision.


27                  The ACCC’s determination of ElectraNet’s RAB needs to be read in the context of:

·        the ACCC’s May 1999 Draft Statement of Principles for the Regulation of Transmission Revenues (Draft Statement of Principles);

·        the ACCC’s determinations of transmission network revenue caps generally; and

·        the ACCC’s Statement of Principles for the Regulation of Transmission revenues – background paper (Statement of Principles – background paper).


The ACCC’s Draft Statement of Principles

28                  The ACCC’s Draft Statement of Principles was issued in May 1999 in the context of it becoming the transmission revenues regulator in the National Electricity Market, on a progressive basis, commencing with NSW and the ACT from 1 July 1999, then Queensland from 1 January 2002 and Victoria and South Australia from 1 January 2003.

29                  The arrangements for the operation of the National Electricity Market were set out in the Code.  The Code provided that the ACCC would develop a set of guidelines outlining how it would exercise its powers to regulate transmission revenues and the Draft Statement of Principles was issued in response to that provision.

30                  While the ACCC’s Draft Statement of Principles was issued in response to a provision in the Code, it was “... not ... legally binding ...” and it was recognised by the ACCC that the framework proposed in its Draft Statement of Principles “... may not be appropriate in all the circumstances facing all regulated entities ...”.

31                  In issuing its Draft Statement of Principles the ACCC stated that it:

intends to use ... [them] ... as a guide and recognises that tradeoffs may need to be made between providing regulatory certainty and working with the flexibility required to deliver the best regulatory outcomes.

 

32                  In outlining its approach to setting a TNSP’s RAB, the ACCC’s Draft Statement of Principles noted that:

For the initial price reviews,... [the Code] ... puts a cap on the value of sunk assets (assets in place on 1 July 1999).  It states that the value of these assts is to be determined by the Jurisdictional Regulator or to be consistent with the regulatory asset base established in the participating jurisdiction, provided the value does not exceed the assets’ deprival value.

 

33                  The Draft Statement of Principles also noted that, as the ACCC assumed the role of transmission revenue regulator, existing and new assets could be revalued on a basis determined by the ACCC but that it did not have an unlimited discretion in that regard as the Code stipulated that it must have regard to, amongst other things, the Council of Australian Governments’ (COAG) agreement that deprival value was the preferred approach to valuing network assets.  It is understood that the Code defined deprival value as inclusive of optimisation, that is, deprival value is the minimum of optimised replacement cost and economic value.

34                  The ACCC’s Draft Statement of Principles sets out what it saw as a ‘circularity’ problem with COAG’s preferred optimised deprival value approach.  Observing that the main economic principle for assessing the economic value of an asset is that its value to an investor is equal to the net present value of the expected future cash flows generated by the asset, the ACCC noted that there is a practical difficulty in making this assessment for a regulated monopoly because its future cash flows are to be determined by the regulator.

35                  The ACCC went on to note that:

·        one approach to eliminate the potential circularity would be to interpret COAG’s deprival value as an optimised replacement cost (ORC) valuation;

·        an economic interpretation of ORC would mean that it sets a cap on the RAB;

·        the ORC valuation would have to be adjusted to take account of depreciation resulting in a depreciated optimised replacement cost (DORC) valuation

·        the DORC valuation of a network is its depreciated replacement cost if the network were optimised to minimise the forward looking cost of delivering the service it provides and is consistent with:

o       the price charged by an efficient new entrant and with the price that would prevail in the industry in long run equilibrium; or

o       the price that firm would pay for existing assets in preference to replicating them.

36                  Noting a number of attractions of the DORC methodology from an economic efficiency viewpoint, including:

·        replication of a competitive or contestable market; and

·        the potential for a DORC derived revenue stream to minimise:

o       tariff rate shock as it becomes necessary to replace assets, and

o       the risk of by-pass,

the ACCC decided to adopt the methodology to determine a TNSP’s RAB.

37                  Because of perceptions that:

·        the value of an easement in an alternative use is questionable;

·        for consistency, it would seem appropriate to value an optimised portfolio of easements, rather than a TNSP’s actual portfolio;

·        an easement does not deteriorate in the same way as a mechanical asset and it would not be appropriate to write it off over time;

·        an easement might be resold at a price exceeding its initial cost, thus giving rise to issues of the rate of return that might apply to easements and how they might be included in the RAB on a continuing basis; and

·        a DORC value would reflect an easement’s market value and, given an easement’s strong link with real estate values, there was a likelihood of its value escalating in excess of the CPI,

the ACCC was concerned about how to introduce easements into the regulatory framework in a consistent way applying the DORC valuation methodology.

38                  The ACCC addressed its concerns by proposing in its Draft Statement of Principles that an easement be incorporated in a TNSP’s RAB at the actual cost to the provider of obtaining the easement updated periodically in line with what would be the DORC based valuation of the easement.

The ACCC’s determinations of transmission network revenue caps generally

39                  In the first of its determinations, the January 2000 TransGrid determination, the ACCC considered it appropriate to include TransGrid’s easements in the RAB at their historic purchase cost rolled forward to 1 July 1999.  Properly documented historic cost records were not, however, available.  In the absence of such records, the ACCC used values identified in the oldest available valuation as a proxy for those costs being an ODRC (optimised depreciated replacement cost or DORC) value determined during a 1996 valuation.  The proxy 1996 value was $312m but the rolled forward value is not stated.

40                  Table 1 in ElectraNet’s May 2007 Easement Value Adjustment Submission to the AER shows a 1 July 1999 value of TransGrid’s easements of $402m and a per kilometre value of $32,419.00.

41                  The value of EnergyAustralia’s easements were determined using historic cost based on transfer values when EnergyAustralia was formed as a new entity in 1989.  That amount was $56.4m.  Indexed to 1 July 1999, the easements were valued by the ACCC at $72.5m.

42                  While the ACCC’s third determination, the February 2001 Snowy Mountains determination, notes that the Snowy Mountains Hydro Electricity Authority supported the ideas in the ACCC’s Draft Statement Principles dealing with the valuation of easements, it would appear that the ACCC did not use actual costs to determine a value for the Authority’s easements but drew on a 1998 valuation as reviewed by its consultant.

43                  The easement value adopted in the ACCC’s fourth determination, the Powerlink November 2001 determination, was based on a summation of previous easementvaluationsrolled forward.  This, the ACCC said, was similar to the approach in the TransGrid and EnergyAustralia matters. 

44                  Table 1 in ElectraNet’s May 2007 Easement Value Adjustment Submission to the AER shows that the rolled forward value of Powerlink’s easements was $174.9m and the per kilometre value was $15,616.00.

45                  In its fifth determination, the December 2002 SPI PowerNet determination, the ACCC used historic costs (including landowner costs settled separately from compensation for the acquisition of easements) to arrive at a figure of $88.9m to be rolled forward to 1 January 2003 indexed by CPI. 

46                  ElectraNet’s May 2007 Easement Value Adjustment Submission to the AER shows that the rolled forward value of SPI PowerNet’s easements was $94.5m and the per kilometre value was $14,538.00.

47                  The sixth transmission network revenue cap determination, the ACCC’s 2002 ElectraNet decision, the ACCC used, as discussed in para [26], a 30 June 1999 easement book value of $3.1m  rolled forward to 1 January 2003 to arrive at a figure of $3.4m. 

48                  Based on the figure of $3.4m and 5600 kilometres of transmission lines, ElectraNet’s May 2007 Easement Value Adjustment Submission to the AER shows a per kilometre value of its easements at $607.00.

The ACCC’s Statement of principles – background paper

49                  With the benefit of its experience in determining the transmission revenue caps in the above six matters, the ACCC reviewed its May 1999 Draft Statement of Principles.

50                  The review resulted in a December 2004 Statement of principles for the regulation of electricity transmission revenues (Statement of Principles) and the ACCC’s Statement of Principles – background paper of that date.

51                  Like the Draft Statement of Principles, the Statement of Principles – background paper notes that itdoes not form part of the Code and that the application of the Statement of Principles to a particular TNSP would depend on the individual circumstances of the case.

52                  In addressing the question of how easements should be valued, the ACCC’s Statement of Principles – background paper states:

Appendix C considers the ACCC’s approach to easements.  The ACCC has decided to adopt a historic cost approach or, where data is not available, a benchmark approach based on historical data.

 

The AER’s determination of ElectraNet’s RAB

53                  Appendix S to ElectraNet’s May 2007 Revenue Proposal submitted to the AER addressed the issue whether ElectraNet’s investors did have a reasonable expectation in terms of rule 11.6.13(b) and the ACCC’s letter (paras [21] to [23]).  On the basis that the investors did have such an expectation, ElectraNet sought an easement value adjustment of $81.9m to be added to its RAB calculated as follows:

            $29.1m               for compensation; and

            $52.8m               for procurement (transaction) costs.

            $81.9m

54                  Briefly, in the absence of historic costs, ElectraNet’s compensation figure was a proxy derived from data that formed the basis of the ACCC’s December 2002 SPI PowerNet determination (para [45]).  That data was used to arrive at a 2002 dollar figure which was escalated to the 2007-2008 figure of $29.1m.  The model used publicly available Australian Bureau of Agricultural and Resource Economics and Australian Bureau of Statistics land value data to translate the Victorian historical easement compensation cost information into the South Australian context.  It did this by finding the ratio relationship between land values in similar regions of South Australia and Victoria.  These ratios were then applied to the Victorian cost information and ElectraNet easement area information to establish ElectraNet’s indexed historical easement compensation costs.

55             Again briefly, ElectraNet’s figure of $52.8m for easement transaction costs was also a proxy based on the mid-point of two numbers, namely:

         $36m      derived by Meritec Pty Ltd (Meritec) in a July 2002 report for the ACCC entitled ElectraNet SA Asset Base Review (the Meritec 2002 Report), from two Maloney Field Services (MFS) valuation reports of 28 February 1997 and 17 August 2000 (respectively, the MFS 1997 Report and the MFS 2000 Report); and

         $54m      derived by Meritec in the Meritec 2002 Report from an April 2002 Sinclair Knight Merz (SKM) Report to ElectraNet (the SKM 2002 Report).

56                  The May 2007 revenue proposal submitted by ElectraNet to the AER took a simple average of these numbers (with no escalation being applied to the figure of $36m to convert it to a 2002 dollar value), being $45m, and then escalated this figure of $45m to a 2007-08 dollar value giving a value of $52.8m.

57                  The AER accepted ElectraNet’s proposal that an adjustment for easement compensation costs of $29.1m should be added to its RAB.  In doing so, the AER stated:

In the absence of historical cost data, the methodology used to determine the proxy costs is appropriate and adding these costs to the RAB is consistent with the AER’s regulatory responsibilities.

 

58                  The AER did not, however, accept ElectraNet’s proposal that easement transaction costs of $52.8m should be added to its RAB.  ElectraNet’s January 2008 Revised Revenue Proposal submitted in response to the AER’s Draft Determination made four points why the AER should allow ElectraNet’s claim for easement transaction costs.  A summary of those points and the AER’s response to them follows:

·        Realisation of investor expectations.  That is, investors purchased ElectraNet with a reasonable expectation that the easements would be re-valued and factored this expectation into their purchase decision.

o       The AER was satisfied that investors had a reasonable expectation that the regulator would at least be able to consider revaluation of the easements and the value has been reconsidered.

·        Consistency with the National Electricity Objective to promote efficient investment in electricity services.

o       The AER considered that the Law provides little guidance whether and how it should revalue ElectraNet’s easements.

·        ElectraNet’s easements are undervalued in comparison to values allowed by the ACCC in other transmission revenue determinations.

o         The AER’s final decision does not directly address this point in its consideration of ElectraNet’s claim for easement transaction costs but, in the context of its claim for compensation costs, did recognise that “... the current easement value is not consistent with easement values for comparable businesses, and in light of previous decisions, considers it appropriate to revalue ElectraNet’s easements.”

·        Preservation of regulatory certainty and the reliance investors can place on a regulator’s undertaking (presumably a reference to the August 2004 letter from the ACCC to ElectraNet summarised in paras [22] and [23]).

o         The AER responded that its draft decision did consider past decisions and statements of policy by the ACCC (in particular its Draft Statement of Principles) and applying the approach taken in those decisions, including consideration of the desirability of regulatory certainty, determined that easement transaction costs were deemed to be included in transmission line costs unless the TNSP could prove otherwise.

59                  Expanding upon its decision that easement transaction costs were deemed to be included in transmission line costs unless proved otherwise, the AER noted that ElectraNet’s Revised Revenue Proposal restated a statement by SKM in an 8 June 2002 File Note (the SKM 2002 File Note) that a 1998 valuation it had undertaken did not include any easement acquisition or route selection costs and observed that:

·      while the AER recognises that the SKM 1998 valuation 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; and

·      “In the absence of such evidence, the AER considers it is reasonable that transaction costs be deemed to be already included as part of transmission line costs.”

60                  Observing that SKM’s statement was documented in a file note and was made in response to the Meritec 2002 Report, the AER noted:

·      what it described as “... Meritec’s conclusion that some acquisition (transaction) costs would have already been capitalised with the transmission line costs; however, the exact nature and quantum of these amounts is a grey area.”; and


·        that the Meritec 2002 Report contained what the AER described as a “caveat” which the AER quoted, adding its own emphasis as follows:

Meritec has looked at the cost of acquisition and sought to assess a realistic value for costs should they not be recognised in the jurisdictional valuation and considered by ACCC as able to be included.

 

 

·        that SKM’s language in other sections of the note was “... less definitive about whether the transmission line asset database did not include any elements of route selection or easement acquisition costs and that all aspects of those costs were excluded from the 1998 valuation.  For example the AER notes the language used in:

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 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 by the AER]

 

61                  As noted above, the AER concluded by stating that it:

... does not accept ElectraNet’s proposal that easement transaction or acquisition costs of $53 million should be added to the RAB.  ElectraNet has been unable to provide sufficient evidence to satisfy the AER that these costs were not already included in the RAB as part of transmission line costs.  The AER therefore requires the amount for easement transaction or acquisition costs be removed from the opening RAB.

 

ELECTRANET’S SUBMISSIONS TO THE TRIBUNAL

 

62                  ElectraNet’s submissions suggested that the Tribunal needed to consider its application in five steps, namely:

(1)               What is the scope and nature of the review function of the Tribunal under Subdivision 2 of Division 3A of the National Electricity Law?

(2)               What is the scope of “review related matter” which may be considered by the Tribunal in this review (s 71R(1) and (6))?

(3)               Does the methodology adopted in a Hill Michael and Associates’ report entitled Valuation of ETSA Transmission Assets (the HMA 1995 Report) or in a SKM 1998 valuation set out in its May 2000 report entitled ETSA Transmission SKM Report (the SKM 2000 Report), which established a valuation of ETSA’s transmission infrastructure assets as at 30 June 1998 based on the HMA 1995 Report identify what cost items were included in the South Australian government’s Jurisdictional Value in 1999?

(4)               The fundamental issue identified in para [6]:  Did the Jurisdictional Valuation and the RAB include the limited class of easement transaction costs which ElectraNet sought in the adjustment?

(5)               If the AER erred in its finding / was unreasonable in its decision whether the RAB included easement transaction costs, in what manner should the Tribunal exercise the power under s 71P(2) of the National Electricity Law?

63    The first of those issues can be dealt with quite shortly.

64    In Australian Competition and Consumer Commission v Australian Competition Tribunal (2006) 152 FCR 33 (ACCC v ACT), the Full Court (French, Goldberg and Finkelstein JJ) considered the function of the Tribunal in a review under s 39(2)(a) of the Gas Pipelines Access Law (the Gas Law)established as Schedules 1 and 2 to the Gas Pipelines Access (South Australia) Act 1997 (SA).  It is common ground that the grounds of review under s 71C of the Law are relevantly to the same effect.  The Full Court said at [176]:

The Tribunal has not been given a purely substitutive function in relation to the review of the ACCC’s discretion.  That is to say, if the ACCC has exercised its discretion on correct principles and if the particular exercise of the discretion was open to it within the framework of the Code, the Tribunal is not empowered to set aside that decision simply because it thinks another decision would have been preferable.  This is emphasised by the provision in s 39(2)(a)(ii) of the ground of review based on unreasonableness.  The exercise of a discretion is not unreasonable simply because another decision-maker would have come to a different view.  On the other hand unreasonableness in s 39(2)(a)(ii) is not limited to cases in which the exercise of the discretion was so unreasonable that no reasonable person could have so exercised it.

 

65                  Section 71C(1) is drafted a little more precisely than s 39(2) of the Gas Law because s 71C(1)(d) separately addresses the unreasonableness of the AER’s decision as a ground of review distinct from s 71(1)(c) which refers to “incorrectness” in the AER’s exercise of its discretion.  Section 39(2)(a)(ii) of the Gas Law prescribed as a ground of review that the regulator’s exercise of its discretion was incorrect or was unreasonable having regard to all the circumstances.  Even so, the Full Court in ACCC v ACT after referring to the remarks of the Tribunal (Cooper J presiding) in Re Application by Epic Energy South Australia Ltd, [2004] ATPR 41-977; [2003] ACompT 5 at [30], then continued at [177]-[178].

That passage does not limit the ground of unreasonableness to so called Wednesbury unreasonableness.  It is compatible with the wider view of “unreasonableness” which would pick up logical error or irrationality in the decision.  The ACCC’s submission which would limit the unreasonableness ground to so called Wednesbury unreasonableness is not accepted.

 

The concept of “unreasonableness” imports want of reason.  That is to say the particular discretion exercised by the ACCC is not justified by reference to its stated reasons.  There may be an error in logic or some discontinuity or non sequitur in the reasoning.  It may be that the decision has an element of arbitrariness about it because there is an absence of reason to explain the discretionary choices made by the ACCC in arriving at its conclusion.

 

66                  In addition, of course, the exercise of a discretion may miscarry because it is based upon a misconstruction or misapplication of the relevant principles or methodologies or factors required to be considered by the Law or by the Rules, or by a failure to have regard to a mandatory relevant factor as prescribed by the Law or by the Rules, or where its exercise is affected by the regulator taking into account a factor extraneous to those relevant by reason of the Law and the Rules.  No such error is said by ElectraNet to arise in this matter.

67                  Those remarks concern the exercise of the regulator’s discretion.  Section 39(2)(a)(i) of the Gas Law refers alternatively to review of the regulator’s decision because of an error in the findings of fact.  It is relevantly the same as s 71C(1)(a) and (b), save for the latter requiring also that the error or errors of fact be material to the making of the decision.  The Full Court in ACCC v ACT at [171]-[172] pointed out that findings of fact may concern the existence of an historical fact being an event or circumstance;or an opinion about the existence of a future fact or circumstance (including opinions formed by the regulator “based upon approaches to the assessment of facts or methodologies which it has chosen to apply”).  The realm of “opinion” facts in that sense is not one which arises on this application.

68                  As the Tribunal noted earlier in these reasons, s 71R limits the matters which the Tribunal may consider on its review to “review related matter” as defined in s 71R(6).  It is only if a ground of review is made out that the Tribunal may allow new information or material to be submitted, if it would assist on any aspect of the determination to be made and was not earlier unreasonably withheld from the AER:  see s71R(3).  Also, s71O prevents a party to a review, other than the AER, from raising any matter that was not raised in submissions to the AER before its decision was made.

69                  The overall picture, clearly enough, is that the Tribunal’s review is not at large, but is a review of the AER’s decision on the factual and legal grounds available, but only on the material provided to or before the AER.  Within those confines, the Tribunal may therefore consider the merits of whether the material provided to or before the AER leads to a finding or findings of material fact different from those made by the AER, or that it exercised its discretion wrongly, or that its decision in all the circumstances was unreasonable.  ElectraNet by reason of s71C(2) must establish a ground of review.

70                  In the light of those comments, it is necessary to understand clearly the error or errors which ElectraNet sets out to establish.  The respective submissions reveal a significant difference in what is said to be the applicable test to identify error on the part of the AER.

71                  The AER says that the “single fundamental issue” concerns how it exercised its discretion and that it is not shown that its exercise of its discretion was incorrect or unreasonable.  The primary finding of the AER (as identified in its submission) was that:

… there was insufficient evidence to satisfy it that easement acquisition or transaction costs had not already been included in the regulatory asset base.

 

of ElectraNet as part of transmission line costs.

72                  If the decision of the AER were based upon the exercise of a discretion, that discretion could be reviewed and set aside on the ground that its exercise was incorrect.  The decision in ACCC v ACT makes it clear that the concept of incorrectness extends beyond “Wednesbury unreasonableness”, but on the other hand does not extend simply to where the Tribunal would have exercised the discretion in a different way.

73                  If the decision of the AER were based upon a material error of fact, demonstrated by analysis of the “review related matter”, the Tribunal considers that a ground of review will have been made out.  There is no reason why the Tribunal needs to be satisfied that the factual finding of the AER was illogical or irrational.  The structure of s 71C(1) does not support such a restriction.  The Tribunal, within the confines of the “review related matter”, is simply required to decide whether there was an error or errors of fact in the AER’s findings that is or are material to the making of the decision.  In making that assessment, it is intended by s 71R(1) and (6) to place itself in the position of the original fact finder and to decide on that material the fact or facts in issue on the review application.  To that extent, s 71C contemplates a merits review of the AER’s factual findings.

74                  Overarching the specific grounds of review in s 71C(1)(a)-(c) is the ground of unreasonableness in s 71C(1)(d).  The unreasonableness must be of the AER’s decision itself, not of a step in its factual findings or its reasoning.  It is important to recognise that it is the AER’s decision which must be unreasonable having regard to all the circumstances before that ground is enlivened.

75                  Consequently, it is important to properly characterise the reviewable error or errors in the AER’s decision, as propounded by ElectraNet, so as to properly address the question of whether a ground of review has been made out.

76                  Obviously, in undertaking that characterisation, other decisions will be of limited use.

77                  In Epic Energy, the ground of review relied upon was confined to s39(2)(a)(ii) of the Gas Law, namely that the exercise of the regulator’s discretion was incorrect or was unreasonable having regard to all the circumstances; see at [8][16].  One of the two matters leading to the Tribunal varying the decision was that the regulator had unreasonably chosen the lowest cost estimate for line pipe to establish the initial capital base of the Moomba to Adelaide Pipeline System, because it was not

… an exercise of discretion that a reasonable person would have made in all the circumstances.  It falls beyond the boundaries of what a prudential commercial operator would objectively be expected to do in these forward looking planning circumstances [at 95].

 

Hence, the Tribunal concluded that the regulator’s determination with respect to the allowable cost of line pipe was unreasonable.

78                  The other ground upon which s 39(2)(a)(ii) of the Gas Law was enlivened in that case concerned the regulator’s assessment of the “System Primary Capacity” of the pipeline by taking into account expansion of capacity of a power station.  It was found that the regulator had taken that into account erroneously because there were no factual circumstances to support a reasonable conclusion that Epic Energy would be able to exercise market power in a relevant market:  see at [113]-[120].  The Tribunal at [121] described the inclusion of the expansion capacity as “an error, and unreasonable in all the circumstances”.

79                  That illustrates the need to identify clearly the ground or grounds of review relied upon by ElectraNet.  However, that is a task more usefully undertaken when the Tribunal considers in detail ElectraNet’s contentions.

80                  The second “preliminary issue” raised by ElectraNet is the content of the “review related matter” specified in s 71R(6).  ElectraNet contended that the following documents (not included in the four volumes of the Review Book) which the Tribunal will call “the disputed documents” should be included in the review related matter:

(1)               the HMA 1995 Report;

(2)               the SKM 2000 Report;

(3)               the SKM 2002 Report;

(4)               Meritec report to the ACCC:  ElectraNet SA Asset Base Review (draft) of June 2002 (the 2002 draft Meritec Report);

(5)               ElectraNet, Comments on Meritec Draft Asset Base Report of 12 June 2002;

(6)               email from Meritec to ElectraNet re Easement Numbers of 13 June 2002;

(7)               email from ElectraNet to Meritec re Easement Numbers of 14 June 2002;

(8)               email from ElectraNet to Meritec / ACCC re Easement Numbers of 17 June 2002 and attached spreadsheet entitled ElectraNet Easement Acquisition Valuation 16-6-02 v 6 Optimised (ownership basis); and

(9)               email from ElectraNet to Meritec / ACCC re Easement Acquisition Costs of 18 June 2002.

81                  The clear intention of s 71O(2) precluding a party other than the AER from raising on review a matter not raised in submissions before the AER, and s71R confining the material which the Tribunal may consider in a review, is to ensure that parties before the AER present the material and submissions they wish to make.  They cannot hold back material or submissions, even by oversight, so as to present fresh material or a different case on review.  The AER said that those provisions prevent regulatory “gaming” by TNSPs.  There is nothing to indicate that ElectraNet was engaging in such a risky strategy on this review.

82                  ElectraNet’s bases for seeking to refer to the disputed documents were because they fell within s71R(6)(c) as documents or information allowed under the Rules to be submitted to the AER (in particular rule 6A.10.1 and rule 11.6.13), or within s 71R(6)(e) as reports and materials relied upon by the AER in making its determination.  At present it is not necessary to address those questions because, at least in the first place, the Tribunal determined to endeavour to decide the review without reference to the disputed documents.  If, as a result of that process, it decides that ElectraNet has made out a ground for review of the AER determination, then – subject to applying s 71R(3) – it will not be necessary to consider the detailed submissions on the topic.

83                  The next two steps in ElectraNet’s submission entailed its contentions about reviewable error on the part of AER.  They were expressed in its written outline as follows:

Does the methodology of the HMA 1995 valuation, or the methodology of the SKM 1999 valuation (September 1999) identify the cost items that were included in the Jurisdictional Valuation in 1999?

 

Was the AER’s consideration of the opening RAB for ElectraNet for the regulatory control period 2008 – 2013 in relation to easements incorrect or unreasonable, having regard to all the circumstances?

 

84                  The AER in its outline of submissions in response addressed those questions as if they raised one question only, namely, whether the AER’s consideration of the opening RAB in relation to easements was incorrect or unreasonable.  It contended that, on the basis of ElectraNet’s revised revenue proposal and its consideration of relevant matters, it “confirmed the views stated in its Draft Decision” and that “[in] the circumstances of this exercise of discretion by the AER under Rule 11.6.13, the consideration by the AER was not unreasonable or incorrect”.

85                  This characterisation by the AER of the relevant part of its determination as the exercise of a discretion directs attention to its reasons for its conclusion in relation to easements.

86                  The AER published a draft ElectraNet transmission determination 2008-09 to 2012-13 (the AER Draft Determination) on 9 November 2007.  That draft addresses ElectraNet’s proposal to revalue its easements in its RAB, as contemplated by Rule 11.6.13(b) of the Rules.  The AER was satisfied that the criterion to enliven its power to review the RAB in respect of easements was made out.

87                  ElectraNet’s proposal was to revalue landowner compensation costs for easements on an “indexed proxy historical adjustment” to $29.1m to be added to its opening RAB.  As noted earlier, that proposal was accepted by the AER in its final determination.

88                  ElectraNet’s proposal in respect of easement acquisition or transaction costs was to select the mid-point of two numbers as outlined in [55] to arrive at a figure of $52.8m. 

89                  A brief South Australian government submission to the AER of 24 August 2007 was that no allowance for easement transaction costs should be made:

… as it was likely that these costs would have either been expensed at the time or capitalised along with the total cost of building the asset at the time of the establishment of the easement and the construction of the asset.

90                  ECCSA broadly supported the position of the South Australian government.

91                  The AER noted that the Meritec 2002 Report had been commissioned by the ACCC, the then regulator, for the purpose of reviewing ElectraNet’s RAB for the ACCC’s 2002 ElectraNet decision.  It also noted that the Meritec 2002 Report concluded that some “acquisition (transaction) costs would have already been capitalised with the transmission line costs” but that the “nature and quantum” of those amounts was a “grey area”.  Hence, the Meritec 2002 Report added:

Meritec has looked at the cost of acquisition and sought to assess a realistic value for costs should they not be recognised in the jurisdictional valuation and considered by the ACCC as able to be included.

 

92                  The SKM 2002 File Note said that its review of the HMA 1995 valuation definitely did not include any allowance for route selection or easement acquisition costs.

93                  The AER Draft Determination then concluded:

While the AER recognises that the ODRC revaluation of ElectraNet’s transmission lines may have excluded undepreciated easement transaction costs, no evidence as to the exact nature and quantum of these costs has been provided.

 

This position is consistent with the ACCC’s decision for SPI PowerNet in 2002.  In that decision, SPI PowerNet, like ElectraNet, proposed a hybrid methodology that separated easement costs into compensation and transaction costs.  The ACCC considered that transaction costs were already included in transmission line costs unless the TNSP could prove otherwise.  SPI PowerNet could not provide sufficient evidence to suggest that transmission costs were separately valued.  It did, like ElectraNet, provide a letter by SKM stating that line replacement costs did not include transaction costs.  However, the ACCC decided that, in the absence of any evidence to suggest otherwise, transaction cots would be deemed to be already included as a part of transmission line costs.

 

On the basis of the above considerations and the available information, the AER has assumed that easement transaction costs have 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.

 

94                  It decided that ElectraNet had not been able to provide sufficient evidence to enable the AER to be satisfied that easement acquisition or transaction costs were not already included in the RAB as part of transmission line costs.

95                  That approach is consistent with the ACCC’s 2002 ElectraNet decision.

96                  The ACCC noted that the jurisdictional valuation included $3.1m for easements.  ElectraNet contended then that that figure did not represent the actual value of easements.  By letter dated 10 August 2001 (the SA Department of Treasury and Finance August 2001 letter) to the ACCC the South Australian Department of Treasury and Finance acknowledged that asset valuations consistent with the approach set out in the ACCC’s Draft Statement of Principles had not been undertaken.  It accepted that fair market value had in fact been paid for line easements, and that the amount of $3.1m book value in the jurisdictional asset base was inadequate.

97                  ElectraNet at that time claimed deprival value of compensation costs, valued at about $111m in the MFS 1997 Report (and indexed by inflation to $136m), and separately replacement value of easement acquisition costs, valued by SKM in the SKM 2002 Report at $87m, rather than (as the ACCC described it) the “MFS valuation of acquisition costs which amounted to about $20m.  The Meritec 2002 Report was described by the ACCC as having considered that most of the acquisition costs were already captured in the valuation of other assets, but it had assessed the acquisition costs at $36m.

98                  As observed in para [26] the ACCC adhered to the book value of easements, indexed to $3.4m at 1 January 2003.  It was not prepared to accept a deprival value for the claimed compensation costs, because of the special characteristics of easements and because it would mean unreasonably high returns to TNSPs and unacceptably high cost to transmission customers.

99                  Following the AER Draft Determination, ElectraNet submitted its Revised Revenue Proposal of 18 January 2008 to which the Tribunal has already referred.

100               The Revised Revenue Proposal confronted directly the AER (and the ACCC) conclusion that there was insufficient evidence for the AER to be satisfied that easement transaction costs were not already included in the RAB as part of the transmission line costs.  It referred to the SKM 2002 File Note in support of its proposition to the contrary.  It repeated the description of easement transaction costs as:

… costs incurred to acquire the rights to easements, which include costs for surveying, drafting, valuation fees, negotiations, conveyance costs, Land Titles Office and other government charges, mortgage production fees and reimbursement of professional fees incurred by the land owners.

 

and its reliance on the Meritec 2002 Report as setting the lower line and the SKM 2002 Report as setting the upper line for easement transaction costs.  After referring to its May 2007 Revenue Proposal, ElectraNet presented a table of transmission line circuit lengths and easement values; ElectraNet resubmitted its May 2007 proposal to include easement transaction costs of $53m in its RAB.

101               What is apparent is that ElectraNet did not, either before or after the AER Draft Determination, submit to the AER material concerning the inclusion or otherwise of easement transaction costs, or of their quantification, different from that presented to the ACCC prior to the ACCC’s 2002 ElectraNet decision.

102               The AER Determination, which the Tribunal has already briefly considered, referred to ss 16(2) and 7A(3) of the Law but noted that those provisions provided little guidance as to whether, and how, the AER should revalue ElectraNet’s easements.  Then, after referring to the easement compensation costs, and to the ACCC’s earlier decisions in TransGrid, Energy Australia and SPI PowerNet, the AER continued:

Applying the approach taken in the above mentioned decisions, the AER determined that the easement acquisition or transaction costs were deemed to be already included in transmission line costs unless the TNSP could prove otherwise.  Accordingly, the AER did not accept ElectraNet’s proposal for easement transaction or acquisition costs of $53 million to be added to the RAB.  This position was consistent with the ACCC’s decision for SPI PowerNet (now SP AusNet) in 2002.

 

In its revised revenue proposal, 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.  As set out in the draft decision the AER noted Meritec’s conclusion that some acquisition (transaction) costs would have already been capitalised with the transmission line costs; however, the exact nature and quantum of these amounts is a grey area.

 

Accordingly, the valuation Meritec calculated contained the following caveat:

 

Meritec has looked at the cost of acquisition and sought to assess a realistic value for costs should they not be recognised in the jurisdictional valuation and considered by ACCC as able to be included.

[emphasis added]

 

The AER also notes that the language reflected in other sections of the SKM file note is less definitive about whether the 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.  For example, the AER notes the language used:

 

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]

 

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.

 

103               So, the AER decided not to accept ElectraNet’s Revised Revenue Proposal.

104               The relevant fact in issue was whether easement transaction costs were or were not already taken into account in the RAB as part of depreciated transmission line costs.  It was for ElectraNet to satisfy the AER that they were not, because otherwise the foundation for ElectraNet’s claim would not exist.  ElectraNet did not satisfy the AER of that fact.

105               Now, by reason of s 71C(2), ElectraNet must establish that fact to the satisfaction of the Tribunal.

106               That is a lengthy process to identifying the character of the ground, or at least one of the grounds, relied upon by ElectraNet to justify its review application.  It is not, at least at this point, a challenge to the correctness of any discretion on the part of the AER.  It is simply a claim that, on the material before the AER – the review related matter – it made an error of fact by not being persuaded that easement transaction costs were not included in the RAB.

ISSUES ARISING FROM THE APPLICATION

107               As noted in para [6], ElectraNet and the AER agreed that the proceedings raised a single fundamental issue, namely, “... was the AER’s consideration of ElectraNet’s opening regulatory asset base for the relevant regulatory control period in relation to easements incorrect or unreasonable, having regard to all the circumstances?”

108               The fundamental issue raises two questions:

·        First, whether ElectraNet provided sufficient evidence to the AER to satisfy it that easement transaction costs for which ElectraNet sought an adjustment were not already taken into account in ElectraNet’s RAB?  Or, to put it another way, whether the material showed that the AER erred in fact in concluding that the evidence did not establish that the claimed easement transaction costs were not already taken into account in ElectraNet’s RAB?  It is clear that any such error was material to the AER’s determination.

·        Second, if the Tribunal were to find that the AER were in error in finding that those ElectraNet has not been able to provide sufficient evidence, whether there is a valuation of ElectraNet’s easement transaction costs from which the Tribunal may determine a figure that it may direct the AER to include in ElectraNet’s RAB?

109               ECCSA also raised the issue whether the figure allowed by the AER in respect of easement compensation costs should be included in ElectraNet’s RAB.

110               ElectraNet was able to establish error on the part of the AER without the necessity of the Tribunal considering the disputed documents.  Accordingly, it was not necessary for the Tribunal to decide the issue raised by ElectraNet whether those documents were “review related matter” in terms of s 71R(1) and (6).  Having found error, the Tribunal did, however, have recourse to certain of the disputed documents under s 71R(3) for the purpose it refers to.  The reasons for doing so are explained below.

111               The following paragraphs first address the fundamental issue agreed by ElectraNet and the AER by answering the questions posed in para [108] and then address the issue raised by ECCSA.

THE SUFFICIENCY OF THE EVIDENCE

The valuations before the AER

112               In determining ElectraNet’s RAB, the AER had before it the following “review related matter” reports on valuations or assessments of ElectraNet’s easements:

·        The MFS 1997 Report.  Maloney Field Services, Assessment of Deprival Value Land and Easement Assets of ETSA Transmission, 28.02.97.

·        The June 2000 Information Memorandum.  The ElectraNet SA Information Memorandum, 27.06.00.

·        The MFS 2000 Report.  Maloney Field Services, Assessment of Deprival Values, 17.08.00.

·        The SA Treasury and Finance August 2001 letter

·        The Meritec 2002 Report.  Meritec Pty Limited: ElectraNet SA Asset Base Review, 00.07.02.

The following paragraphs summarise those reports along with other “review related matter” relevant to an understanding of them..

The MFS 1997 Report

113               The MFS 1997 Report was prepared for ETSA Transmission.  ETSA Transmission Corporation (trading as ElectraNet SA), a subsidiary of ETSA Corporation was established under the Electricity Corporations Act 1994 (SA) and by regulations under the Public Corporations Act 1993 (SA).  ETSA Transmission Corporation later changed its name to Transmission Lessor Corporation, the name of the South Australian government entity which ultimately came to sell the electricity transmission system in South Australia to ElectraNet.  The June 2000 Information Memorandum (para [118]) prepared for potential investors in ElectraNet references the report and the report itself was exhibited in the data room at the time of the sale of ElectraNet SA by the South Australian government.  The report assesses the ‘deprival value’ of ETSA’s easement assets at $227,188,400.

114               The MFS 1997 Report states, under the heading “Definition and Components of Deprival value”:

A well accepted Industry definition of ‘Deprival Value’ is:-

 

‘The entire loss, both direct and indirect, that might be expected to be incurred by an Entity if that Entity were deprived of the asset at reporting date (or the amount that would represent sufficient compensation to restore it to the position it formerly occupied if for some reason it was deprived of the said asset).’

 

The formal definition as above, is often expressed in more colloquial terms as follows:-

 

“What sum of money would be offered or paid by an Entity so as to ensure the retention of its assets rather than to lose those assets?”

 

OR

 

“What amount of money would an Entity be prepared to pay to retrieve all of the assets that it might have been deprived of?”

115               The copy of the MFS 1997 Report in the material that was before the Tribunal was incomplete.  It did not include the “spreadsheets” said to show “details” of MFS’s “workings and estimates and resultant conclusions”.

116               While the detail was not available, it may be concluded from a reading of the report that in arriving at the $227m valuation MFS:

·                    assessed “... ‘the order of magnitude’ that would need to be paid in compensation ...” to an owner of land “... if an Easement ... was to be acquired over those properties at this current point in time.”(ie: 1997); and

·                    added an allowance to those estimates of compensation to “... cover the numerous other costs and expenses which are an integral part of an Easement Procurement Program in the late 1990’s.” 

117               The spreadsheets accompanying the MFS 2000 Report show 1997 figures of:

            $204,548,400     for compensation, incorporating capital gains tax; and

            $22, 638,000      for procurement (transaction) costs.

            $227,186,400

The June 2000 Information Memorandum

118               The June 2000 Information Memorandum was prepared by the South Australian Electricity Reform and Sales Unit (ERSU) for potential investors interested in acquiring ElectraNet.

119               Table 4.16 “Regulated Asset Base as at 30 June 1999” of the memorandum shows a “book value” for easements of $3.1m.

120               The paragraphs following Table 4.16 note that:

·        the value of easements was incorporated into the RAB at book value, since asset valuations consistent with the approach set out in the ACCC’s Draft Statement of Principles had not been undertaken;

·        as discussed in Section 4.8.2 of the Information Memorandum, the ACCC is formulating its approach to the regulation of transmission revenues, including the valuation of easements; and

·        an independent valuer assessed the value of the easements at $227.2m as at 28.02.97 (cf: the deprival valuation in the MFS 1997 Report in [117] above).

The MFS 2000 Report

121               Prepared for Transmission Lessor Corporation (trading as ElectraNet SA) prior to the sale of its business and assets by the South Australian Government, the MFS 2000 Report assessed 1997 deprival values excluding and including capital gains tax and a 2000 deprival value per transmission line.  The total 2000 deprival value was assessed at $153, 367, 210.  The $153m is comprised of:

            $115,999,210     for compensation; and

            $37,368,000       for procurement (transaction) costs.

            $153,367,210


The SA Department of Treasury and Finance August 2001 letter

122               The SA Department of Treasury and Finance letter, dated 10 August 2001, responded to a request, made by the ACCC in the course of its 2002 determination of ElectraNet’s 2003-2008 revenue cap, for the Department “... to provide the opening asset value, broken down by asset classes, for the South Australian electricity transmission network as at 1 July 1999.”

123               The letter referred to earlier advice from ERSU that “the Sinclair Knight Merz (SKM) valuation of the ElectraNet SA transmission system as at 1 July 1998 was $652.0m ...” and stated that “Details of the SKM valuation, based on optimised depreciated replacement cost, are provided in Appendix 1 Table 1”.

124               Table 2 in a confidential Appendix 1 to the letter (which was handed up in the course of submissions to complete the record comprising the letter) replicates Table 4.16 to the June 2000 Information Memorandum (para [119]) showing a figure for easements in the RAB as at 30 June 1999 of $3.1m.

125               The fourth paragraph of the letter provides an explanation, in terms similar to the June 2000 Information Memorandum (para [120]), why easements were included in the table at book value and notes that:

Independent valuations of the transmission easements suggest a substantially higher value than $3.1m.

 

126               The concluding paragraphs to the letter state:

ElectraNet believes that the National Electricity Code (NEC) allows the ACCC to have some discretion with respect to the RAB and that the RAB should be adjusted to provide a fair and reasonable allowance for the valuation of easements ... .

 

Treasury and Finance agrees that the ACCC has some discretion to amend the RAB from 1 December 2002.  Clause 6.2.3(d)(1)(iii) of the NEC allows for the assets to be valued at a value “... consistent with the regulatory asset base established in the participating jurisdiction ...”.

 

The Meritec 2002 Report

127               The Meritec 2002 Report was prepared for the ACCC in the course of its 2002 determination of ElectraNet’s 2003-2008 revenue cap.

128               During the ACCC’s determination process:

·                  the 2002 draft Meritec report, one of the disputed documents, was provided to ElectraNet and to SKM who had prepared an April 2002 assessment of ElectraNet’s easement acquisition costs (which is another of the disputed documents); and

·                  concerns were raised at a meeting held on 1 and 2 May 2002 involving ElectraNet, the ACCC, Meritec and ‘urbis’ (a property consultant assisting Meritec) whether any easement acquisition costs that ElectraNet had determined by reference to the SKM 2002 Report were already included in the valuation of its transmission lines.

129               ElectraNet addressed these concerns by way of a submission, dated 9 May 2002, to the ACCC entitled Clarification of Transmission Line Easement Costs.  The submission discusses how ElectraNet’s proposed opening asset base had been derived as follows (sans footnotes):

2.         Discussion

 

ElectraNet SA’s opening asset base ... has been determined from a roll forward of the jurisdictional asset valuation, as required by the ACCC.  The jurisdictional asset valuation base was derived from a valuation of ElectraNet SA’s assets by SKM as at 30 June 1998.

 

The SKM valuation reviewed an earlier 1995 valuation by Hill Michael and Associates (HMA) ...

 

The HMA report includes typical easement acquisition and route selection costs (including environmental impact assessement and informing the government and public of the need for the line and possible options), but makes it clear that:

 

‘The ETSA brief requested that easement costs be excluded and the database collates easement costs separately.’

 

There exists some uncertainty whether the route selection costs identified in the HMA report were excluded as well as the easement costs.

 

However, even if the HMA transmission line valuation included route selection costs this does not change the important conclusion that these costs were excluded from the jurisdictional asset valuation, which was based on the results of the 1998 SKM valuation and not the earlier HMA valuation.

 

...

 

The report of the SKM 1998 valuation states that the SKM unit costs do not include easements.  ElectraNet SA has verified that the SKM unit costs in this report are identical to those included in an asset valuation report prepared by SKM at around the same time for six major Transmission Network Service providers.  This report is very explicit and states that:

 

‘The costs of line route selection, environmental impact assessment, easement survey, and easement negotiation and compensation were not included.  The costs are costs to build a line on an existing easement.’

...

 

SKM used its 1998 unit costs (excluding all easement acquisition and route selection costs) to assess whether any adjustment was required to HMA  1995 unit costs and therefore the 1995 transmission line valuation.

 

Consequently, the jurisdictional asset valuation clearly excluded easement and route selection costs because it was derived from the SKM valuation, which excluded these costs.

 

This means that the easement establishment or transaction costs that are included in SKM’s April 2002 assessment can be appropriately added to the jurisdictional valuation without any double counting of route selection or any other costs.  This has been confirmed with SKM.

 

3.         Conclusion

 

A review of the available documentation and discussions with SKM has confirmed that the jurisdictional asset valuation made no allowance for any costs associated with easement acquisition, including route selection costs.  This conclusion holds irrespective of whether route selection costs were or were not included in the 1995 HMA valuation.


130               In support of its above quoted conclusion, ElectraNet submitted to the ACCC the SKM 2002 File Note prepared by SKM in response to the 2002 draft Meritec report and ElectraNet’s 9 May 2002 submission to the ACCC.

131               The SKM 2002 File Note states, amongst other things, that:

·                    SKM had reviewed the ElectraNet May 2002 submission to the ACCC and that SKM “... concurs completely with its contents and observations.”; and

·                    “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.”


132               The SKM 2002 File Note also commented on the draft 2002 Meritec Report and made the following observations, amongst others, on paragraphs that appeared in the draft under a 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 there was no significant provision for such costs.  It was not possible to be definitive about this howeverSKM 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 - ... In essence, the SKM 1998 prices were constructed independently, and did not simply carry forward the HMA estimates.

 

133               A comparison of the several valuations of ElectraNet’s easement acquisition costs which were available to Meritec excluding what, in Meritec’s words, are “... costs already included in the asset base” as it appears in its July 2002 report is as follows:

Model

Date

Total value

Rate

Comments

HMA

1995

$23.7 million

$4700/km

Based on length of line

SKM

2002

$59 million

$13100/km

Based on length of lines in

1999

SKM

2002

$78 million


Based on easement

numbers from ElectraNet

SKM(2)

2002

$54 million

$10,400/o’ship

Revised SKM model using

number of ownerships (5199)

MFS (1)

2000

$36 million

$7288/o’ship

Based on estimated

easement ownerships in

2000 (4939)

ATCocks

1997


$10900/o’ship

Victorian model based on

number of easement

ownerships.


(1)  Based on easement ownerships from ElectraNet in 2002

(2)  ElectraNet advice dated 17 and 18 June 2002

134               The Meritec 2002 Report valued ElectraNet’s easements at $173m comprised of:

$137m         for compensation, derived by Meritec from the MFS 2000 Report, and

$36m           for acquisition costs, derived by Meritec from the MFS 2000 Report and based on estimated easement ownerships in 2000.

135               Meritec did not recommend the figure of $54m for acquisition costs derived by it from the 2002 SKM Report because “The SKM model and the ElectraNet adjustment give higher values and are based on recent work done in Victoria, SA, NSW and Queensland to establish easements for specific projects.”  This, Meritec said, “... may lead to inconsistencies in the cost components and their ranges.  The comparative costings would be project based and not reflective of a regular business process of easement acquisition.”

The sufficiency of the valuations

136               Having considered those valuation reports or assessments with the other material relevant to an understanding of them canvassed above the Tribunal is:

·                    satisfied that ElectraNet was able to provide sufficient evidence to satisfy the AER that the claimed transaction or acquisition costs were not already included in ElectraNet’s RAB; and

·                    of opinion that the AER was in error in finding that “ElectraNet has been unable to provide sufficient evidence that these costs were not already included in the RAB ...”.

137               In other words, the Tribunal considers that without reference to the disputed documents, the relevant “review related matter” leads to the finding of fact that the claimed easement transaction or acquisition costs were not included in ElectraNet’s RAB when $3.1m (adjusted subsequently to $3.4m) was provided in the RAB for easements.  The AER made a finding of fact which was in error in reaching a finding to the contrary.  As the Tribunal has noted, the AER did not contest the proposition that, if it made such an error, that error was material to the making of its determination.

138               First, the conclusion to be drawn from a reading of the “review related matter” valuations or assessments reports listed in para [112] along with other “review related matter” relevant to an understanding of them canvassed in para [113] to [135] as a whole, and in particular the SKM 2002 File Note quoted in  para [131] and [132] (as explained in ElectraNet’s 9 May 2002 submission to the ACCC quoted in para [129]), makes it clear that while preparing its 1998 valuation, although SKM may have reviewed the HMA 1995 Report, which may have included some easement transaction costs (in the form of route selection costs, including environmental impact assessment and approval), the SKM 1998 valuation:

·      did not include such costs or any allowance for such costs;

·      did not carry forward HMA estimates; and

·      did not carry such cost forward to its 1998 valuation.

Indeed, the passages from the SKM File Note quoted in  para [132] are unequivocal in those regards.

139               Secondly, the AER is wrong to say (as it did in its determination, quoted in [60] and [102] above) that certain passages from the SKM 2002 File Note  are “...less definitive ...” than other passages in the file note.  The “less definitive” language relates to the HMA 1995 valuation, not the SKM valuation, from which the jurisdictional valuation and ElectraNet’s RAB were derived.

140               To put it another way, the AER lead itself into error by the emphasis it gave to the passages it quoted from the Meritec report and the SKM 2002 File Note, so as to conclude that ElectraNet’s jurisdictional valuation may have included the claimed easement transaction costs.  At the same time it appears to have ignored the unequivocal statement to the contrary by SKM who, as may be seen from the SA Department of Treasury and Finance August 2001 letter, was responsible for that valuation.

141               Furthermore, while Meritec did not accept that the SKM valuation excluded all easement transaction costs, it did accept that it excluded some easement transaction costs, and it was able to distinguish the two elements and place a value on the excluded costs.  The passage from the Meritec report quoted in the AER decision is incorrectly described as a “caveat” on these views - rather it described the pre conditions for adding the Meritec valuation to the RAB.  ElectraNet’s claim only relates to the transactions costs which Meritec agreed were not already included in the RAB.  So, even accepting Meritec’s assessment of the SKM 1998 valuation, the AER would have been in error in concluding that the easement transaction costs claimed by ElectraNet were already included in the RAB.

142               Thirdly, the AER also lead itself into error by concluding that consistency with ACCC determinations regarding easement valuations and its Draft Statement of Principles required:

·        the AER to determine “... that easement acquisition or transaction costs were deemed to be already included in transmission line costs unless the TNSP could prove otherwise”; and consequently

·        ElectraNet to produce “... evidence as to the exact nature and quantum ...” of its easement transaction costs.

143               The conclusion ignores statements in the Draft Statement of Principles to the effect that they are not legally binding (para [30]), are but a guide and that tradeoffs may need to be made between providing regulatory certainty and working with the flexibility required to deliver the best regulatory outcomes (cf: para [31]).  Furthermore, both the previous ACCC determinations and the ACCC’s Statement of principles – background paper had accepted the use of benchmark or proxy values for easements where historic records were not available, and indeed the AER itself accepted a proxy valuation for the historic compensation costs.

144               Also, the AER’s approach appears inappropriately to run together two separate issues.  They are whether ElectraNet’s RAB included an allowance for easement transaction costs, and (if it did not) how those costs should or might be established or quantified.  The AER referred to earlier ACCC decisions as showing the methodology for establishing proxy historical landowner compensation costs.  It then “applied” that approach to conclude that easement acquisition costs were deemed to be already included in transmission line costs unless ElectraNet could prove otherwise.  The Tribunal considers that line of reasoning may confuse the “whether” question with the “how much” question.  That is because, assuming that a TNSP should establish its easement transaction costs by proxy historical cost evidence, it does not follow from the absence of such evidence that easement transaction costs were in fact included in its RAB.

145               Indeed, senior counsel for the AER at one point in the course of submissions acknowledged that, if ElectraNet had presented a reliable historical proxy with “properly articulated justification” for easement transaction costs, its claim would probably have been allowed “because that’s what happened with the compensation costs”.  That position would appear to proceed from the assumption that easement transaction costs were not included in ElectraNet’s RAB.

146               At the least, it appears to the Tribunal that there is some tension between that position and the AER’s refusal to accept that the claimed easement transaction costs had not already been allowed for in ElectraNet’s RAB.  The proposition that the failure of ElectraNet to produce an acceptable historical proxy costing for the claimed easement transaction costs lead to its claim in that respect being rejected is a different proposition from it saying that the claimed easement transaction costs were, or may have been, already included in the transmission line costs and previously capitalised.  The AER’s insistence on a reliable historical proxy costing basis would require identification of the tasks involved in easement acquisition (identified in [para 3] above), and the costs of performing them.  But whether or not easement transaction costs were included in ElectraNet’s RAB is a question logically prior to, and different from, the question of how the amount of those costs should be proved if they are not already in the RAB.  The AER also said in submissions that it would be apparent whether there was double counting because the presentation of an acceptable, historical proxy costing would indicate what is likely to have been recovered as “ordinary overheads of the business” and so not eligible to be allowed as part of the easement transaction costs.  Again, it is not apparent to the Tribunal why that should be the case.  Provided the matters covered by the expression “easement transaction costs” are clearly identified – as they have been – proof of the amount (whether by actual historical cost or by historical proxy cost or on some other basis) would not necessarily, or even probably, expose whether those costs had already been brought to account if the available material did not do so.

147               Finally, the Tribunal observes that the qualified terms of the Meritec 2002 Report to which the AER referred does not in fact point to a conclusion on whether easement transaction costs were included in ElectraNet’s RAB different from that the Tribunal has reached. 

148               As noted above, the AER regarded the Meritec 2002 Report as containing a “caveat” that its valuation of easement transaction costs was provided “should they not be recognised in the jurisdictional valuation and considered by ACCC as able to be included”.

149               That comment by Meritec is in the opening part of its discussion under the heading “Easements”.  It then discusses, at length under separate sub-headings “Easement Compensation Costs” and “Easement Acquisition”.  It is to the discussion under the latter heading that Meritec has expressed the “caveat”.

150               Meritec was of the view that costs of acquisition that are associated with the development of an asset should be recognised, and so turned to consider whether that had been done in the valuations it was to consider, in particular the HMA 1995 Report and the 1998  SKM valuation.  The conclusion in the Meritec 2002 Report was as follows on that topic:

In our opinion an allowance for the route selection, environmental impact assessment and approvals was incorporated in the HMA 1995 valuations and retained through the SKM 1998 review.

 

If there is to be consideration of a provision for easement acquisition costs in the asset base then it is necessary to define the value of such an allowance.

151               To the extent that easement transaction costs include such things as route selection costs, and costs of environmental impact assessment and approvals, it appears therefore that Meritec proceeded on the basis that such costs had been included in the 1995 HMA valuation and retained in the 1998 SKM review, so that consideration of any further allowable easement transaction costs should not include those elements.

152               Then Meritec discussed the models presented to the ACCC to achieve that outcome.  At that time, ElectraNet’s modelling (which produced easement transaction costs of some $21,000 per kilometre of easement and $104.3m in total) did not sufficiently isolate activities associated with easement acquisition from those typically associated with engineering assessment of transmission line development, so that there was on that modelling a “grey area”.  It recommended to ElectraNet that, for the future, it ensure such costs were separately captured.

153               Meritec then said that the ElectraNet claim needed to be modified to ensure it excluded route selection costs and environment impact assessment including public consultation (as they were, or may have been, included in the earlier valuations).  It continued:

SKM modelling suggests the costs for acquisition not related to route selection, environmental impact study, cultural and heritage assessment and public consultation are of the order of $13,100 per km of lines taking account of all the types of land impacted by easements in SA.  If this is applied to the approximate 4500km of easements existing at the time of the jurisdictional valuation the resulting amount is $59 million.

 

ElectraNet has applied this model to deal with acquisition costs on an ownership basis and this adjusts the amount to $54 million.  If the route selection, environmental impact studies and public consultation costs are added to this the value comes to $87 million.

 

154               Then it considered other information which, its discussion indicates, did not have the more extensive elements of route selection costs and the like but were confined to easement acquisition costs as “procurement costs”, in particular those in the MFS 1997 and 2000 Reports.  It significantly reduced the MFS figures to exclude “route evaluation, environmental and archaeological costs already built into the HMA values in 1995 and brought forward through the SKM valuation in 1998”.  With separate values for “farming/rural” and “fringe/urban” per easement kilometre, that produced a figure of $36m for easement acquisition costs.  Meritec said that figure, on that model, was “not previously allowed in the asset base”.  It said:

We recommend altering the asset base to account for some easement acquisition costs but not all the categories identified by SKM or Maloney Field Services as a provision has already been made for the costs that are more in line with asset establishment than easement acquisition.

We recommend an allowance of $36 million be introduced to the asset base before July 2000 to recognise easement acquisition costs.

 

155               The final recommendation was made after reconsidering all the models and (as Meritec said) excluding costs already included in the asset base.

156               In the view of the Tribunal, the Meritec 2002 Report did not ultimately provide a basis for the AER’s understanding that it provided a “caveat” in the manner the AER took it.  It appears to have recognised that there was, in the valuation reports and in ElectraNet’s then claim for easement transaction costs, some overlap between those costs and costs of route selection and the like.  It appears to have recognised the need to isolate what are strictly easement acquisition costs, and to have done so.  The Tribunal does not consider that the Meritec 2002 Report then had the rider that it is still unclear whether the confined easement acquisition costs had already been taken into account in the earlier valuations.

157               The Tribunal has reached its conclusion of factual error on the part of the AER independently of its analysis of the Meritec 2002 Report.  But it does not consider that the AER incorrectly regarded that Report as saying that its valuation of easement transaction costs was conditional upon it being demonstrated that easement transaction costs were excluded from the earlier valuations.  To the contrary, the Tribunal regards that Report as confirmatory of its own conclusion.  It should also be recalled that the current claim by ElectraNet for an allowance for easement transaction costs to be included in its RAB is confined so as clearly to exclude route selection costs and environmental assessment costs and other costs not directly related to the acquisition of easements.

158               The Tribunal, on this aspect of its decision, finally remarks upon the very limited role played by the South Australian government in the decision of the AER.  It was the owner and operator of the transmission infrastructure and lines in the period when the easements were procured.

159               The Electricity Trust of South Australia (ETSA) was established pursuant to the Electricity Trust of South Australia Act 1946 (SA) for the purpose of carrying on the business of generating, transmitting and distributing electricity in South Australia.  ETSA was a South Australian government monopoly, vertically integrated, providing electricity including functions of generation transmission, distribution and retail.  ETSA became ETSA Corporation in 1994:  Electricity Corporations Act 1994 (SA).  By that Act, provision was made for the separation of the functions of generation transmission, distribution and retail provision of electricity.  In 1995, four subsidiaries of ETSA were established by regulations made under the Public Corporations Act 1993 (SA) in relation to the separate functions of electricity transmission, electricity generation, electricity retail and distribution, and gas trading functions.  Relevantly, ETSA Transmission Corporation (trading as ElectraNet SA) was established for the purpose of conducting the electricity transmission functions previously carried out by ETSA.  The transmission system, as part of the restructuring, was transferred to ETSA Transmission Corporation, although the interests in land on which the transmission system was located remained with ETSA Corporation.  On 1 October 1998, ETSA Transmission Corporation then commenced trading under the name ElectraNet SA.  On 12 October 1998, certain further assets and liabilities associated with the transmission of electricity were transferred from ETSA Corporation to ETSA Transmission Corporation to complete the separation of the distribution, retail and transmission functions from ETSA Corporation.

160               On 11 June 1999, under the Restructuring and Disposal Act 1999 (SA), the restructuring of South Australia’s electricity businesses was completed as a prelude to their privatisation.  Then, on 20 January 2000 ETSA Transmission Corporation changed its name to Transmission Lessor Corporation (although it continued to trade under the name ElectraNet SA) leading up to the Information Memorandum published by the Electricity Reform and Sales Unit of the Department of Treasury and Finance of South Australia, for persons who had indicated an interest in acquiring the business of Transmission Lessor Corporation. 

161               By reason of that position, if anyone had hard information to indicate that easement transaction costs of the nature claimed by ElectraNet had been included in the RAB, or had been either wholly or partly brought to account in line transmission costs or by being expensed annually in some other way, it was the South Australian government.  It proffered no such information.  As the Tribunal noted, its brief written submission to the AER was unsupported by any primary material or by any analysis of material available to it.  And, on the other hand, its June 2000 Information Memorandum was to the contrary – that no asset valuations of easements consistent with the ACCC’s Draft Statement of Principles had been made when the initial “book value” figure of $3.1m was specified, and its letter from the SA Department of Treasury and Finance of August 2001 pointed out that:

·         independent valuations of the easements suggested a substantially higher figure than $3.1m;

·        ElectraNet SA believes that the Code allowed the ACCC some discretion to adjust the RAB to provide a fair and reasonable allowance for the valuation of easements; and

·        Treasury and Finance agreed that the ACCC had the discretion.

SELECTION OF AN APPROPRIATE VALUATION

Additional easement transaction cost valuations

162               Having found that a ground of review has been established, the Tribunal has available to it in addition the reports listed in para [112].  The Tribunal is empowered to receive them under s 71R(3) and is satisfied both that their receipt would assist in determining whether, and if so in what amount, there should be an allowance in ElectraNet’s opening RAB for easement transaction costs and that the material was not unreasonably withheld from the AER:  see s71R(3)(a) and (b).  The AER did not submit that that material was unreasonably withheld from it.  Indeed, although the Tribunal did not have to decide if that material, comprising the disputed documents, was “review related matter”, there was a reasonable argument that it fell within that description, as falling under s71R(6)(c) and/or s 71R(6)(e).  The Meritec 2002 Report referred to each of the documents comprising the disputed documents, at least as a footnoted reference or source, and each of the four valuation reports (the first four of the disputed documents) was in the ACCC files or its database apparently available to the AER, and the remainder of the disputed documents were provided to the ACCC in the course of its consideration leading to the ACCC’s 2002 ElectraNet decision.  For the purposes of s 71R(1), however, the Tribunal does not have to determine whether, in those circumstances, either that the disputeddocuments or any of them were relied upon by the AER so as to come within s 71R(6)(e) or that the expression “information required or allowed under the Rules to be submitted” in s 71R(6)(c) encompasses them.

163               In the event that the Tribunal received the disputed documents under s 71R(3), the AER also presented a folder containing a further 13 documents.  The Tribunal also received and has considered that material, although ultimately it was not the subject of any significant submission either orally or in the written submissions of AER.  It largely comprises communications between ElectraNet and the ACCC between June 2001 and February 2003 debating the claim by ElectraNet to have its RAB include easement transaction and compensation costs, both factually and legally – that is, as to the operation and application of the law (including an advice from counsel).  That material did not ultimately contain any matters of sufficient significance to require separate discussion in the Tribunal’s reasons.

164               For ease of reference, it is convenient to identify the disputed documents received from ElectraNet under s 71R(3) before discussing their contents.  They are:

·        The HMA 1995 Report. 

 

·        The SKM 2000 Report.  

 

·        The SKM 2002 Report. 

 

·        The 2002 draft Meritec Report. 

 

·        ElectraNet’s Comments on Meritec Draft Asset Base Report, dated 12 June 2002.

 

·        e-mails passing between ElectraNet and the ACCC, dated 17 and 18 June 2002 .


165               The following paragraphs summarise the reports and canvass the material.

The HMA 1995 Report

166               The HMA 1995 Report, prepared on an Optimised Deprival Value (ODV) basis for ETSA, provides a valuation as at 1 July 1995 of ETSA’s transmission line easement costs ($23.7m) and route selection costs ($15.6m).

167               The ODV method is described in Appendix A to the National Grid Management Council’s (NGMC) Network Pricing Code of Conduct, the General Principles of which are quoted in the report as follows:

The process of determining the Deprival Value of network assets involves the engineering optimisation of the system configuration and its components in conjunction with independent auditing.

 

The optimised replacement cost is the current replacement cost of the existing assets adjusted for:

 

·                    any installed over capacity

·                    any sub-optimal configuration of the system

·                    technical obsolescence, including lower cost network alternatives.

When calculating the deprival value of a system, two aspects must be optimised:

 

·                    the configuration and rating of network elements, and

·                    the value of individual system elements.

An optimised network shall not have a greater capacity or quality of supply than is currently installed, nor shall it exceed that required by the Code.  The process

 

of optimisation results in either retaining or reducing the gross replacement cost of a system.

 

168               A description of the Line Cost Estimation Program used in compiling the report appears in Appendix F to the report and lists the costs of 24 significant “line cost” items.  The first two items listed:

Route selection, environmental impact assessments, approvals

 

Easement survey, acquisition, registration, compensation

 

fall into the category of easement acquisition and compensation costs and the other 22 items may be described as associated with the engineering, design and construction of the transmission lines.

169               Under the heading: “Easement and Route Selection Costs” the HMA 1995 Report states:

The costs allowed for – easement acquisition and route selection (which includes environmental impact assessments and informing the government and public of the need for the lines and possible options) are typically as follows:

 

            Line Type                       Easement Cost                        Route Selection Cost

                                                            $/km                             $/km

 

132Kv Single Cct Light              4210                             2277

275Kv Double Cct Heavy          5250                             4000

 

These costs are for rural terrain and are subject to increase by the ‘Terrain Factors’ explained previously.

 

The ETSA brief requested that easement costs be excluded and the data base collates easement costs separately.

 

170               The report then summarises its “Transmission Line Database Results” as follows:

Valuations

Owner

Total cost

excl

Esmts,IDC

$000

Esmt

 

 

$000

IDC Cost

 

 

$000

Total Cost

incl

IDC

$000

Dep Cost

Excl

Esmts, IDC

$000

TD

679567

22937

7115

686683

409929

Non

ETSA

24178

749

 

24178

21287

Total

703746

23686

7115

710861

431216


It appears from reading the HMA 1995 Report as a whole that:

“TD”                is a reference to ETSA’s Transmission Database;

“IDC”              means “Interest During Construction”;

“Non ETSA”    is a reference to non-ETSA transmission lines 275Kv to Heywood Substation from the Victorian border and 132Kv to Olympic Dam.

171               The summary’s “Esmt” figure of $23,686,000 is the sum of multiplying the typical “Easement Cost $/km” by the “ Line Route Length” in the report’s “ETSA Transmission Line Replacement Database”.  It does not include the sum of a like multiplication of the typical “Route Selection Cost $/km”, namely, $15,591,521.

The SKM 2000 Report

172               The SKM 2000 Report was prepared for the Electricity Reform and Sales Unit of the South Australian Government’s Department of Treasury and Finance.  The report combines three SKM reports, namely, an Asset Valuation report (dated September 1999) a Network Assets report (dated November 1998) and a Network Operation report (dated November 1998).

173               In the words of the report, it:

... establishes a valuation of ETSA Transmission Infrastructure Assets as at 30 June 1998, based on the Hill Michael and Associates Valuation Report (30 June 1995) and an overview of changes since 30 June 1995 ....


174               Under the heading “3.1 Asset Valuation Information” the SKM 2000 Report reiterates that it is based on the HMA 1995 Report and states:

Sinclair Knight Merz regularly updates its valuation data to reflect current developments and the impact of improvements in work practices and increased competition.

We have also had regard to NSW Treasury Asset Valuation Guidelines and the National Grid Management Council (NGMC) Guidelines.

The database and spreadsheet information available from HMA are very extensive.  Their analysis requires detailed knowledge of their make-up and it has not been possible to undertake detailed revision exercises to determine the precise extent of valuation changes that could arise from this review exercise.

 

175               Under the heading “3.2 Valuation Revision and Completeness”, the report states:

There are some exclusions from the initial HMA report that have to be considered in the total valuation of ETSA Transmission as an entity for sale.  These include:

 

·                    Easements

·                    Telecommunications assets (separate later report)

 

The valuation covered by this report includes the telecommunications assets but the valuations of easements ... are excluded.  Some comments regarding the excluded valuations are made in ... this report.


176               Part 4 of the SKM 2000 Report headed Valuation Principles (Methodology) states:

Some differences exist between the Hill Michael and this valuation review in the following areas:

 

 

·                    Easement values.

177               While easements were excluded from the SKM 2000 Report, it does canvass easement values.  It notes that the HMA 1995 Report values easements at unit rates while the SKM database recommends an historic cost plus a CPI escalation factor.  Referring to the easement values in the HMA 1995 Report that are set out above, SKM noted:


The values for the 132Kv lines are low compared with the costs for the recent 65km Waterloo-Hummocks line which indicated costs of approx. $8300/km for the easement costs and $7000/km for the environmental approval/line design.  These values indicate that easement values may be understated.”

 

... ... ...

 

A recent easement appears to have cost considerably more that values used in the HMA report.  This may indicate that easement values in some areas could be increased.  No value has been placed on this aspect at this stage.

 

178               Part 5 of the SKM 2000 Report is entitled “Unit Costs – Modern Equivalent Assets (MEA)”.  Under the heading “5.1 Transmission Lines” it states:

There are some minor differences in the base unit costs used in the HMA report and the SKM database.  These are shown in Table 5.1 ...

 

Note 4 to Table 5.1 states:

 

HMA and Sinclair Knight Merz costs do not include easements or interest during construction.

 

179               After expanding on the differences between SKM and HMA, Part 5.1 to the SKM 2000 Report concludes:

The net result is that HMA and Sinclair Knight Merz methodologies have given practically the same valuation.

 

180               Using its database and methodology, SKM valued the Optimised Depreciated Replacement Cost of the ETSA Transmission Corporation network assets at $652m.  The note to Table 5.1 in the report quoted in para [178] makes it clear that easements were excluded from the valuation.

The SKM 2002 Report

181               This report was prepared for ElectraNet in the course of the ACCC’s 2002 determination of ElectraNet’s 2003-2008 revenue cap.  It applies the results of a study of typical costs to acquire transmission line easements in South Australia to a valuation of the replacement cost of ElectraNet’s easements (excluding property owner compensation costs) to arrive at 1 July 2001 figures of:

·        $162.9m (including Cultural Heritage assessment); and


·        $111.5m (excluding Cultural Heritage assessment).


182               The transaction cost figures are based on, or related to, the number of properties, not a pure per kilometre basis.  Thus, the “fixed costs” (ie: costs that remain fixed irrespective of the length of the easement) were calculated directly from the number of properties provided by ElectraNet while the variable costs were calculated from ElectraNet’s categorisation of its system into the following line types:

·        Case A: Pure Rural (50% private land, 50% crown land) with 1 private property per kilometre, 1 crown property per 10 km of crown land.

 

·        Case B: Rural /Regional (75% private land, 25% crown land) with 2 private property per kilometre, 2 crown property per 10 km of crown land.

 

·        Case C: Fringe Urban (100% private land) with 8 properties per km of line.

 

183               The report states that:

SKM has drawn on its own expertise in this area, as well as specialist land valuation consultants with experience in transmission line easement negotiations, to develop a bottom up approach to estimating easement acquisition costs …


The report also states that:

 

The easement acquisition costs developed in the SKM model have been checked against actual costs to acquire transmission line easements for various known recent projects in Australia.

 

The 2002 draft Meritec Report

184               Following the ACCC providing a copy of the 2002 draft Meritec Report to ElectraNet, it provided to the ACCC a document entitled Comments on Meritec Draft Asset Base Report, dated 12 June 2002, setting out further analysis of the SKM 2002 Report.  An exchange of e-mails between ElectraNet and the ACCC also followed the draft Meritec report being provided to ElectraNet.  Prior to the exchange of e-mails and ElectraNet’s and SKM’s comments on the draft Meritec 2002 Report (paras [129] and [131]-[132]), the draft contained the following comparison of acquisition costs derived from several of the reports outlined above excluding what were, in Meritec’s words, “... costs already included in the asset base”.


Model

Date

Total Value

Rate

Comments

HMA

1995

$23.7 million

$4700/km

Based on length of line

SKM

2002

$65.5 million

$13100/km

Based on length of line in

1999

MFS

2000

$30.0 million

$7900/o’ship

Based on estimated

easements in 2000

A T Cocks

1997


$10900/0’ship

Victorian model based on

number of easements


185               That comparison was revised in light of ElectraNet’s Comments on Meritec Draft Asset Base Report, dated 12 June 2002, the e-mails exchanged between ElectraNet and the ACCC and SKM’s comments on the draft Meritec 2002 Report.  The revised comparison as it appared in the final Meritec 2002 Report is reproduced in para [133].

186               ElectraNet’s Comments on Meritec Draft Asset Base Report, dated 12 June 2002, and the e-mails exchanged between ElectraNet and the ACCC assist a reader to understand the differences between the revised comparison in the final Meritec 2002 Report (reproduced at para [133]) and the comparison in the draft Meritec 2002 Report (reproduced at para [184]).  The comments and emails are summarised in paras [187] to [189].

187               ElectraNet’s Comments on Meritec Draft Asset Base Report, dated 12 June 2002, suggested that:

·        as the SKM easement acquisition cost was derived on a per property basis, not a per kilometre basis, the Meritec adjusted SKM figure of $65.5m should be $78.0m; and

·        the number of easements on which the MFS figure of $30m was based was understated.

188               One e-mail from ElectraNet to the ACCC, dated 17 June 2002:

·        provided a revision of the sums of easement length, properties and ownership included in the Case A, B and C scenarios referred to in para [182]; and

·        applied the SKM April 2002 easement acquisition cost model to the number of easement ownerships rather than easement properties to arrive at a valuation of $86.6m at 1 July 2001 (compared with the $111.5m in the SKM 2002 Report which ElectraNet had, to that point, been claiming as easement acquisition costs).

189               An e-mail, dated 18 June 2002, from ElectraNet to the ACCC confirmed that ElectraNet was claiming the amended figure of $86.6m for easement acquisition costs.

The Tribunal’s discretion

190               The Tribunal accepts the AER’s submission that the terms of rule 11.6.13(b) of the Rules (para [21]) make it plain that the AER had a discretion, but no obligation, to make adjustments to ElectraNet’s RAB relating to easements.

191               Section 71P(3) of the Act provides that in making a determination under s71P(2) to vary the AER’s decision, the Tribunal has all the functions and powers of the AER, which includes the exercise of the discretion to adjust ElectraNet’s RAB relating to easements.

A reasonable approach to the valuation of easements

192               DORC has become generally accepted as the most appropriate value to attach to assets when they are first brought into a RAB.  Historic sunk assets are generally valued at DORC and new investments are allowed in at cost, as long as those investments are considered to be “prudent and efficient” (effectively ORC).  DORC is the value which would leave a potential investor indifferent between acquiring an old sub-optimal existing asset and a new optimised asset to deliver the service.  It provides a valuation consistent with the long run marginal cost of service provision, supports the maintenance of the capital required to deliver the service looking forwards, and prices and investor returns which would be expected to occur in a competitive market and hence promotes the efficient allocation of resources.  Use of an appropriate weighted average cost of capital (WACC) should ensure that risk is appropriately accounted for.  In the long run, investors would not expect to do better by investing their capital elsewhere. 

193               Both compensation and transaction costs are relevant components of easement investments and it is appropriate that investors are compensated for the opportunity cost of the capital required for both elements.

194               The ACCC and the AER, after initially adopting a DORC approach to the valuation of easements, moved to a view that because easements are different to other assets, they should only be incorporated into the RAB at historic cost rolled forward by CPI (see the ACCC’s Draft Statement of Principles and its Statement of Principles – background paper).  If historic costs are not available, a proxy can be used.  Their reasons for adopting this approach relate to the fact that easements are unlike other assets in that they do not wear out and have no alternative use, and there is no real market for easements, many of which are acquired under compulsory acquisition, making valuation particularly difficult and prone to error.  The use of a (D)ORC valuation which reflected escalating property values would appreciate more rapidly than CPI, providing windfall gains to investors and price shocks for consumers.  The Tribunal has been alert to avoid such an outcome.

195               There is merit in the ACCC and the AER’s approach.  The use of indexed historic cost, and an appropriate WACC, maintains investors financial capital intact, it covers the opportunity cost of their financial capital.  If the easements ever needed to be replaced and/or could be sold on the open market and used for something else, it could be argued that an ORC valuation would be more appropriate, in order to maintain the operational value of the capital, i.e. to cover the costs of replicating the easements today, and to reward investors for using the easements to supply the transmission service, rather than selling them to be used for some other purpose.  If either of these characteristics applied, the value of historic easements in the RAB might need to reflect the value of the land on which they reside.  However, neither of these circumstances do apply to easements.  The easements never need to be replaced and, as the Tribunal understands on the submissions and material before it, ElectraNet does not have the option of selling them on the open market to be used for some other purpose.  It can only relinquish the easement rights back to the owner of the property or sell them as an integral part of the electricity business. 

196               Transactions costs are not affected by the issue of land values.  They may, however, have risen by more than CPI, particularly in recent years, due to the additional costs associated with environmental impact assessments and native title and escalating professional fees.  Furthermore, transactions costs are tied to the establishment of the easements, just like the compensation costs, which never need to be replaced.

197               Accordingly, the Tribunal considers that the use of historic cost indexed by CPI, as preferred by the AER, is an appropriate way to value historic easements in the RAB in order to compensate investors for the opportunity cost of their capital. 

198               Senior Counsel for the AER also emphasised the fact that the cost of historic easements is “irretrievably sunk”.  This is not given the same emphasis in the ACCC’s Draft Statement of Principles or its Statement of Principles – background paper.  Many investments are sunk, but if investors were not provided with a return on those investments they would never be made.  Only if the investments become redundant should they no longer receive the opportunity cost of the capital invested in them.  In the case of easements, it is not the fact that the costs are sunk that makes them different, it is the fact that they never need to be replaced (and hence are not depreciated) and the fact that they have no significant alternative use.  Not to provide a return on sunk investments just because they are sunk would involve the regulator engaging in ex post opportunism and would not be consistent with the promotion of future efficient investment and the national electricity objective.

199               The privatisation value of the easements is a form of historic cost and was used to determine the value of easements in the ACCC’s 2000 Energy Australia decision [para 41].  It is what ElectraNet’s investors paid to acquire the assets as part of the electricity transmission business.  However, it would not be appropriate to simply adopt ex post whatever ElectraNet actually paid for the assets, as this would encourage ex ante inflation of the acquisition price and inefficient investment (just as new investment is subject to the “prudent and efficient” requirement before being added to the RAB).  Rather, it is necessary to look at what ElectraNet would reasonably have paid for the assets, taking into account all the information available to them at the time.  This included the Draft Statement of Principles, some of the ACCC decisions discussed above (which indicated both the approach to be taken and what might be considered reasonable per km valuations), the Information Memorandum and the MFS valuations.  ElectraNet by its investors could have reasonably expected that easements, including both compensation and transaction costs involved in their establishment, would be re-valued for purposes of the RAB by the ACCC, using either indexed historic costs, if available, or a proxy, including possibly a deprival based value.  Historic costs were not available, so resort was had to a proxy.

The consistency/certainty tenet

200               Lest its decision gives rise to investor uncertainty, in exercising the discretion, as if standing in the shoes of the AER, the Tribunal is mindful of the need for consistency between its decision in this matter and other regulatory decisions, not only in the electricity industry but also other regulated industries, such as the gas and telecommunications industries where the Tribunal has a role.

201               Efficient investment in the long term interests of consumers will not be promoted if investors perceive a significant risk that the rules will change and they will not be able to recover the opportunity cost of capital reasonably invested.  The minimisation of regulatory risk, consistent with the promotion of efficient investment, is one of the tenets that has driven the development of regulatory regimes in Australia.  That tenet is reflected in the objective of the Law and in the revenue and pricing principles embodied in the Law.

202               The consistency tenet is also to be seen in the ACCC’s Draft Statement of Principles and its Statement of principles – background paper (albeit with a proper caveat to the effect that each case must be decided on its merits).

203               In an ideal world, application of the consistency/certainty tenet would see the Tribunal, having found error in this matter, direct the AER to include easement transaction costs in ElectraNet’s RAB at historic cost, as espoused by the ACCC.  That course is not, however, available to the Tribunal because (and as the AER accepted in determining the amount of easement compensation costs) the historic costs of ElectraNet’s easements are not available.  Senior Counsel for the AER confirmed in submissions that ElectraNet did not have access to records of the historic costs of the easements or of their acquisition.

204               In the absence of historic cost data, the ACCC espoused a benchmark approach based on historical data – see Appendix C to its Statement of principles – background paper.  However, the Tribunal simply does not have before it sufficient material to adopt such an approach.  While it might remit the matter back to the AER with a direction to adopt such an approach, there is no certainty that the AER would have an adequacy of historical data to comply with such an approach.

205               Thus, consistent with:

·        the 2000 TransGrid revenue cap determination (where the ACCC used values identified in the oldest available valuation as a proxy for those costs being an ODRC value –para [39]); and

 

·        2001 Powerlink revenue cap determination (where the ACCC used a summation of previous easement valuations –para [43]),

 

the Tribunal has examined all the valuations and other material available to it to ascertain whether they might provide a proxy to determine a value for easement transaction costs to be included in ElectraNet’s RAB.

206               In undertaking that examination, the Tribunal was mindful of the nature of a valuation in a regulatory context as outlined by the ACCC in its Draft Statement of Principles:

While there is a wide range of asset valuation methodologies, there is no single approach that is appropriate in all circumstances.

 

In determining an appropriate asset valuation methodology economic principles and analysis do not provide an unambiguous decision rule for the valuation of existing sunk assets.  Rather economic principles provide lower and upper bounds – scrap value and replacement cost.  Within these bounds there is opportunity for regulatory judgement.

 

207               The ACCC’s approach to regulatory valuations is reflected in the Tribunal’s approach in other matters that have come before it.  In the EAPL matter, the Tribunal recognised:

Valuation is far from an exact science and there is considerable room for choice and discretion in the task.  It will nearly always have aspects of estimation and approximation (Federal Commissioner of Taxation v St Helens Farm (ACT) Pty Ltd (1980-1981) 146 CLR 336 per Mason J at 381).

 

(Application by East Australian Pipeline Limited [2004] ACompT 8, at [27].)


208               Also, in the GasNet matter, the Tribunal observed that there may be, “... no single correct figure ...” and that where what is proposed “... falls within the range of choice reasonably open ...” it is beyond the power of a regulator not to approve it – see Application by GasNet Australia (Operations) Pty Ltd [2003] ACompT 6, at [29].

Whether a valuation “... falls within the range of choice reasonably open …”

209               The issue now facing the Tribunal in exercising its discretion is whether there is a valuation of ElectraNet’s easement transaction costs that “... falls within the range of choice reasonably open ...” that is consistent with the ACCC’s preferred approach of indexed historic costs, or a reasonable proxy, and with the reasonable expectations of ElectraNet’s investors.  Each valuation is assessed on that basis.

The June 2000 Information Memorandum and the SA Treasury and Finance August 2001 Letter $3.1m valuations

210               The $3.1m easement “book value” in the June 2000 Information Memorandum and the SA Treasury and Finance August 2001 letter (paras [119] and [124]) may be put to one side if for no other reason than it does not provide the Tribunal with a value for ElectraNet’s easement transaction costs.

211               Also, compared to easement values allowed by the ACCC in setting other TNSPs’ revenues, $3.1m is not, in the words of GasNet “...within the range of choice reasonably open ...”.  All things being equal, based on unchallenged per kilometre comparisons submitted by ElectraNet (paras [40], [44], [46] and [48]) the $3.1m results in a per kilometre value of $607.00 compared to per kilometre easement values determined by the ACCC for:

·        TransGrid         $32,419.00;


·        Powerlink         $15,616.00; and


·        SPI PowerNet  $14,538.00.


The MFS 1997 Report, the MFS 2000 Report, the SKM 2002 Report and the Meritec 2002 Report

212               While each of the MFS 1997 and 2000 Reports, the SKM 2002 Report and the Meritec 2002 Reports assesses ElectraNet’s easement transaction costs at a value “...within the range of choice reasonably open ...”, they do not produce the ideal proxy in terms of a value of those costs vis a vis an optimised network.

 

The SKM 2000 Report

213               The SKM 2000 report comments on the HMA 1995 Report’s approach to easement valuation but does not, however, provide an easement valuation, let alone a valuation of easement transaction costs.

The HMA 1995 Report

214               The Meritec 2002 Report includes in its comparisons (paras [133] and [184]) of easement transaction costs an HMA 1995 Report figure of $23.7m, treating the figure as if there were no compensation component in it.

215               If, as the Meritec 2002 Report suggests, the HMA 1995 Report excludes compensation, adoption of the HMA 1995 Report’s valuation of $23.7m for ETSA’s transmission database easement transaction costs would be consistent not only with the ACCC’s preference for an optimised valuation, but also with the approach in its TransGrid and Powerlink determinations (paras [39] and [43]) where, in the absence of historic cost records, it used values identified in optimised valuations as a proxy for those costs.

216               The Tribunal is not, however, satisfied that the $23.7m figure appearing in the HMA 1995 report (paras [166 ff]) excludes compensation.  As observed above, in listing the items used in compiling its report, HMA include “Easement ... compensation”.

217               The HMA summary under the heading “Easement and Route Selection Costs” (para [169]) separates:

·        “Easement Costs” , on the one hand, which (at the dollar per kilometre rates shown) total $23.7m; and

 

·        “Route Selection Cost”, on the other, which (at the dollar per kilometre rates shown) total $15.6m.


218               While a literal reading of HMA’s summary under the heading “Easement and Route Selection Costs” (para [169]) suggests that the figure of $23.7m for easement costs in ETSA’s transmission line database in HMA’s “Valuation” summary (para [170]) relates purely to acquisition (transaction) costs, the list of items included under that heading in the HMA report suggests that it also includes compensation costs.

An acceptable valuation – the MFS valuations

219               For reasons stated, the Tribunal is therefore of the opinion that the valuations available to it are either:

·        irrelevant (the June 2000 Information Memorandum, the SA Treasury and Finance August 2001 letter, and the SKM 2000 Report);

·        indecisive in their definition of easement transaction costs (the HMA 1995 Report); or

·        inconsistent with the ACCC’s and the AER’s preference for historic costs or a proxy valuation based on an optimised network (the MFS 1997 and 2000 Report, the SKM 2002 Report and the Meritec 2002 Reports).

220               However, the Tribunal must also bear in mind, as discussed above, that:

 

·        the ACCC’s approach expressed in its statements and determinations is not legally binding and allows for regulatory judgement; and

 

·        the ACCC’s recognition that its statements are a guide only and that tradeoffs may need to be made to deliver the best regulatory outcome.

 

221               It has found that in ElectraNet’s RAB there is no component for the claimed easement transaction costs.  It further bears in mind, as the AER acknowledged, that ElectraNet does not have available to it records of its predecessors in title to the easements to establish the historical easement transaction costs, or even such records as would enable it to provide a sound basis for an assessment of the overall proxy historical cost for them.

222               Upon the whole of the evidence, and for the reasons discussed, the Tribunal has decided in the particular circumstances of this matter, to adopt as a proxy for ElectraNet’s historic easement transaction costs, the oldest valuation available to it.  That valuation is the MFS 1997 Report, as up-dated by the MFS 2000 Report (the MFS valuation) and adjusted in the Meritec 2002 Report to remove those elements of easement transactions costs included by HMA in its valuation of route selection costs associated with ElectraNet’s transmission line assets, and thought by Meritec to be carried through to the SKM valuation, the jurisdictional valuation and the RAB.  While not accepting that those items are already incorporated in the RAB, ElectraNet is no longer claiming any additional amount for them.

223               The MFS valuation produced a figure for ElectraNet’s easement acquisition costs of $37.4m (para [121]).  Adjusted for the revised easement ownerships as per the summary in the Meritec 2002 Report and removing those items associated with route selection costs, it provides a figure of $36.1m (para [133]).  This is the value ElectraNet used as the start for its mid-point claim outlined in para [54] and [55].

224               The MFS valuation of ElectraNet’s easement transaction costs (as adjusted by Meritec) produces a figure of $36.1m which, combined with the easement compensation costs of $29.1m allowed by the AER, ($65.2m) results in a per kilometre figure of $11,625.00 which, even allowing for CPI adjustments, would appear to be “... within the range of choice reasonably open ...” as previously determined by the ACCC and set out in paragraph [211] above.

225               The Tribunal notes, as it observed in para [120], the June 2000 Information Memorandum prepared for potential investors in ElectraNet referred to the 1997 MFS valuation and it was exhibited in the data room at the time of the sale.  It may well have influenced potential investors when they formed their “reasonable expectations” of an asset base revaluation referred to in the letter from the ACCC to ElectraNet as enshrined in Chapter 11 of the Rules.  Those expectations are integral to clause 11.6.13(b) of the Rules and to incorporating an opportunity cost of capital in the RAB which encourages efficient investment for the long term benefit of consumers, consistent with the national electricity objective and the revenue and pricing principles (paras [13] and [14]).  The MFS 2000 valuation (as adjusted by Meritec) provides a suitable proxy for the historic privatisation value of easement transaction costs, consistent with what ElectraNet could have reasonably expected the ACCC to adopt when considering a revaluation of it’s easement assets.  The Tribunal considers its conclusions, therefore consistent with those considerations.

WHETHER EASEMENT COMPENSATION COSTS SHOULD BE INCLUDED IN ELECTRANET’S RAB?

ECCSA’s Submission

226               In reaching the conclusion the Tribunal has just expressed, it has not overlooked the submissions of ECCSA.  Its submissions, in one sense, should have been dealt with as a first step in the Tribunal’s consideration because they attacked the AER determination allowing the amount of $29.1m for compensation acquisition costs to be added to ElectraNet’s RAB.  They also sought to support the AER’s determination not to increase ElectraNet’s RAB by any allowance for easement transaction costs.

227               The Tribunal decided to defer the consideration of the position taken by ECCSA.  Its submissions were, on the whole, not aligned with the AER’s reasoning in disallowing any adjustment of ElectraNet’s RAB for easement transaction costs.  Nor did its submissions directly confront the AER’s reasoning for adjusting ElectraNet’s RAB for easement acquisition costs.  The Tribunal therefore considered it appropriate to explain why it rejected those contentions separately, and at this point, in its reasons.

228               ECCSA made the following two submissions:

Submission 1

 

That the amount of $52.8 million or thereabouts for ‘easement transaction costs’ should not be included in ElectraNet’s opening regulatory asset base as at 1 July 2008.

 

Submission 2

 

That the amount of $29.1 million or thereabouts for ‘easement compensation costs’ should not be included in ElectraNet’s opening regulatory asset base as at 1 July 2008.


ECCSA’s ‘book value’ argument

229               Briefly, drawing on accountancy principles ECCSA argued in support of its submissions that the AER was in error in allowing an amount for easement transaction and compensation costs other than the $3.1m jurisdictional “book value” identified in the June 2000 Information Memorandum and the South Australian Treasury and Finance August 2001 letter to the ACCC.

230               Relying on Federal Commissioner of Taxation v Western Suburbs Cinemas Ltd (1952) 86 CLR 102, at paras 13-14, Dr Dwyer for ECCSA submitted that because it is, in Dr Dwyer’s words, a “basic rule” of accounting that all costs incurred by a business must either be expensed and charged against revenue or capitalised and carried forward in the balance sheet, the necessary inference to be drawn from the figure of $3.1m “book value” was that any other costs that ElectraNet may have incurred in relation to easements had been expensed and there was no justification for imposing a charge on customers in respect of costs already recouped.

231               Accordingly, Dr Dwyer supported the ACCC’s decision to reject ElectraNet’s claim for easement transaction costs and submitted that the Tribunal may find that:

·        the AER was, in terms of s71C(1)(c) of the Law, incorrect in the exercise of its discretion; or

 

·        the AER’s decision was, in terms of s71C(1)(d) of the Law, unreasonable


in allowing $29.1m for easement compensation costs into the RAB, because the AER did not have regard to:

·        the material underpinning the ACCC’s 2002 decision; or

 

·        what Dr Dwyer described as “... the relevant law regarding the valuations of easements ...”.


ECCSA’s reliance on international cases and treatises

232               Insofar as “... the relevant law...” referred to by Dr Dwyer embraced United States and United Kingdom case law referred to in, and filed with, a belated ECCSA Supplementary Submission, nothing was put to the Tribunal to give them a contextual relevance to the issue before it.  As observed by the Tribunal in the 2006 Optus matter:

In order to place any reliance upon ... international ... analysis it would be necessary to know ... about the regulatory environment within which they were determined, the state of the relevant markets and the socio-economic environment ...

 

Application by Optus Mobile Pty Limited & Optus Networks Pty Ltd [2006] ACompT 8, at [297].

233               Absent a contextual relevance to the issue before it, the Tribunal found the international case law referred to of little help.  This is particularly so of the United States case law which the Tribunal understands may have been decided in the context of “rate of return regulation”  rather than the incentive based regulation applicable to the issue before it.  The following  succinct description of ‘rate of return regulation’ in the ACCC’s Draft Regulatory Principles speaks for itself in explaining why United States material may have little, if any, relevance to the issue before the Tribunal:

Rate of return regulation embodies micro management of the regulated entity, and is a form of cost plus regulation in that the company normally can only persuade its regulator to change its prices and revenue if it can show that its costs have changed.  Revenue requirements are derived from operating costs plus capital costs plus a return on capital, with the latter being the company’s only source of profits.  The incentive for cost economy in rate of return are weak, and economists have criticised rate of return’s efficiency properties.

 

234               Likewise, the Tribunal found no value vis a vis the issue before it in the several treatises on the development of the United States law on valuation of public utilities which were referred to in, and filed with, the ECCSA Supplementary Submission.  Again nothing of substance was put to the Tribunal by Dr Dwyer to assist the Tribunal to see how those treatises might have a direct relevance to the issue before it.   

Accountancy principles v economic concepts

235               The main reason for not accepting ECCSA’s “book value” argument is its foundation in, and reliance on, accountancy principles.  The regulatory context, the context in which the search for the value of ElectraNet’s easements is being conducted is, however, governed by economic concepts.  This is clear from a reading of the national electricity objective and of the revenue and pricing principles to be found in ss 7 and 7A of the Law, in particular 7A(3) which speaks in terms of a service provider being provided with effective incentives in order to promote economic efficiency.  Those provisions are discussed more fully earlier in these reasons.

236               The Tribunal’s view about the regulatory context in which the search for the value of ElectraNet’s easements is being conducted is governed by economic concepts is confirmed by reference to the Second Reading Speech on the introduction of the National Electricity (South Australia) (New National Electricity Law) Amendment Bill (South Australian House of Assembly Hansard, 9 February 2005, p 1451) which states (at p 1452):

The national electricity market objective in the new National Electricity Law is to promote efficient investment in, and efficient use of, electricity services for the long term interests of consumers of electricity with respect to price, quality, reliability and security of supply of electricity, and the safety, reliability and security of the national electricity system.

 

The market objective is an economic concept and should be interpreted as such.  For example, investment in and use of electricity services will be efficient when services are supplied in the long run at least cost, resources including infrastructure are used to deliver the greatest possible benefit and there is innovation and investment in response to changes in consumer needs and productive opportunities.

 

The long term interests of consumers of electricity requires the economic welfare of consumers, over the long term, to be maximised.  If the National Electricity Market is efficient in an economic sense the long term economic interests of consumers in respect of price, quality, reliability, safety and security of electricity services will be maximised.

...

Applying an objective of economic efficiency recognises that, in a general sense, the national electricity market should be competitive, that any person wishing to enter the market should not be treated more or less favourably than persons already participating in the market, and that particular energy sources or technologies should not be treated more or less favourably than other energy technologies.

 

The National Electricity (South Australia) (New National Electricity Law) Amendment Act 2005 (SA) introduced the Law, so that Speech indicates its economic foundations.

Book value not “... within the range of choice reasonably open ...”

237               Another reason for not accepting ECCSA’s argument that ElectraNet’s easements be valued at a “book value” of $3.1m is the value simply does not, as observed in para [211], “... fall within the range of choice reasonably open ...”.

238               Indeed, as may be seen by reference to the comparison of per kilometre dollar easement values in para [211], acceptance of ECCSA’s argument that ElectraNet’s easements be valued at a “book value” of $3.1m would fly in the face of the equal treatment of participants as described in the Second Reading Speech quoted above.  While the Second Reading Speech was referring to the equal treatment of incumbents and potential entrants, the same principle applies to the equal treatment of incumbents, as expressed for instance in the ACCC’s Draft Statement of Principles.

239               The inequality that would result from acceptance of a ‘book value’ was recognised by the ACCC in both its Draft Statement of Principles and its Statement of Principles – background paper.  The latter document states:

At the time the ACCC assumed responsibility for setting the revenues of TNSPs  in the NEM [national electricity market], one approach would have been to adopt the pre-existing book values of those companies and use them as the basis for setting future revenues.  However, there were a number of problems with this approach including:

·                    inconsistent accounting approaches across states and

·                    poor historical records.

All jurisdictional regulators in the NEM determined the value of TNSPs’ assets using the DORC valuation methodology, with the exception of easements which , in some cases, were valued using a historic cost approach.

 

240               While, as observed (para [52]), the ACCC’s ultimate preferred approach was to value an easement on undepreciated indexed historic costs, or where data was not available, a benchmark approach, moving from an approach of periodically updating the value in line with its DORC based valuation (as expressed in its Draft Statement of Principles), the fundamental problems of using a “book value” for an easement or other asset remains, namely:

·      easements in different networks having different book values due to different legislative foundations and different purchasing practices; and

·      inconsistent past accounting practices between transmission network service providers with respect to how much of an easement may have been capitalised.

ECCSA’S OTHER CONTENTIONS

241               ECCSA’s remaining arguments are encapsulated in the following headings to its Submission:

·        Purpose of opening regulatory base.

·        ElectraNet must prove costs were incurred and not recovered.

·        AER’s evidential doubts should have led it to reject both easement claims.

·        Valuations are inferior evidence of “costs” compared to expenditure records.

·        National Electricity Law allows recovery of costs actually incurred.

·        ElectraNet must prove previous accounting is wrong.

·        ElectraNet had no “legitimate expectations”.

·        ElectraNet easement valuations erroneous in any case.

·        Easement valuations not relevant in any case.

·        The opening regulatory asset base is closed.

242               The following paragraphs deal with each of ECCSA’s arguments as encapsulated in the above headings seriatim:

243               ECCSA argued that:

·        the RAB should have regard to costs actually incurred and which have not been recouped from users either in the form of costs expensed or included as a cost as a depreciated amount.

 

·        historic accounting evidence of costs incurred should be preferred in determining the opening RAB because this provides an objective record of the way the asset base has been valued.

244               The short comment to be made in relation to those contentions is that both easement compensation and transaction costs are relevant components of easement investments and that under the Law it is appropriate that investors are rewarded for the opportunity cost of the capital required for both elements.  While it is possible that transaction costs were expensed in the historical accounts of ETSA, the Tribunal has found that those costs (apart from a book value cost of $3.1m) were not included in ElectraNet’s opening RAB.  ElectraNet’s investors purchased the easements as an integral part of the electricity transmission business and the value of those easements includes both the compensation and transaction costs that were required to establish them.  All of the valuations treat transaction costs as a capital item and when new easements are incorporated into the RAB, both compensation and transaction cost elements will be included.  If the historical costs, or a proxy for the historical costs acceptable to the AER, had been available to it, it is likely from what senior counsel for the AER said that the AER would have further adjusted ElectraNet’s RAB to include easement transaction costs.  The Tribunal, for the reasons it has given, has been prepared to determine a figure for the easement transaction costs on the whole of the material before it.

245               ECCSA also argued that if ElectraNet is to succeed it must demonstrate:

·        the figure of $3.1m is incorrect; and

 

·        if it is incorrect, any other figure has not been previously recouped.

 

246               Those matters have already been addressed in the Tribunal’s reasons. 

247               ECCSA further argued that the reasoning that led the AER to conclude that it was not reasonable to assume that easement transaction costs had not been paid for in the past should have led the AER to reject ElectraNet’s claim for compensation costs.  ECCSA concluded from that proposition that the AER was in error in accepting a value to be substituted for historical costs and to allow $29.1m for compensation costs when there were accounting records demonstrating that all save $3.1m in easement costs had been expensed or previously depreciated.

248               The same contention was put to the AER and rejected by it.  The Tribunal reiterates its comments above about the economic principles underlying the establishment of an RAB, the need for investors to recover the opportunity cost of capital appropriately employed in the provision of services and the reasonableness of an indexed historic cost approach to the valuation of easement assets in that context.  The AER’s acceptance of an amount of $29.1m as a proxy for the indexed historic costs of easement compensation was consistent with the national electricity objective, the promotion of regulatory certainty and the reasonable expectations of ElectraNet’s investors. 

249               The compensation cost element of the proxy value proposed by ElectraNet was soundly based on a formula using actual historic costs in Victoria translated into the circumstances of South Australia.  Hence it was appropriately accepted by the AER and indexed forward to maintain its real value.  This was in preference to the much higher MFS valuation, which was originally proposed by ElectraNet in 2002, but which would have incorporated the windfall gains associated with rising property values if ORC was used for easement compensation values.  Accordingly, the AER’s decision on compensation costs is not incorrect or unreasonable.  The use of an historic book value, unindexed, as proposed by ECCSA, would not compensate investors for the opportunity cost of capital reasonably invested in the business.

250               ECCSA next argued that:

·        ElectraNet is in error in seeking to have valuations of easement costs accepted as evidence of costs actually incurred which should be included in the opening RAB;

 

·        a valuation is not a cost but, in the absence of historic evidence, may be accepted as evidence that there may have been costs previously incurred; and

 

·        accounts prepared on a historic cost basis are direct evidence of all capital costs not expensed or recouped by way of depreciation or amortization.

 

251               That position fails to appreciate what the Law and the Rules expect of an RAB: the promotion of efficient investment in the long term interests of consumers.  As noted at the outset, consumers will benefit in the long run if resources are used efficiently, ie if investors receive a return on efficient investment which covers the opportunity cost of the capital required to deliver the services.  While consumers might benefit today from the lowest possible prices which do not provide an adequate return on investment, such prices are not in their long term interest, contrary to what Dr Dwyer for ECCSA described as the “legitimate expectations of consumers”.  If those prices were sustained, they would not generally support the allocation of sufficient resources, including capital, to maintain and increase the supply of the affected service in accordance with the value consumers place on it.  This would be contrary to the promotion of efficient investment and the long term interest of consumers.

252               Again ECCSA’s argument is ill founded because of its focus on accountancy principles and disregard for the economic concepts that underpin the establishment of the regulatory regime as expressed in the national electricity objective and the revenue and pricing principles in the Law.  Apart from the $3.1m “book value” which is manifestly wrong and which the SA Department of Treasury and Finance August 2001 letter puts in the context of an independent valuation suggesting a substantially higher value, there are no historic accounting records available to demonstrate what ElectraNet’s easements may have cost or how those costs may have been treated.  So much was accepted by the AER.  Nevertheless, as the Tribunal has done, the material should be assessed to determine if, in accordance with the Law’s objectives and its requirements, some proper foundation for valuing the easements of ElectraNet as part of its RAB has been demonstrated.

253               For the same reasons, ECCSA’s argument that the Law only allows recovery of costs actually incurred is based on a misunderstanding of the national electricity objective. 

254               As observed elsewhere, s 71C(2) of the Law provides that it is for ElectraNet to establish a ground for review.  Rule 11.6.13(b) read in conjunction with the ACCC’s letter referred to in the rule clearly envisages that the AER may adjust ElectraNet’s RAB in relation to easements if ElectraNet were able to establish that such a step accords with the reasonable expectations of ElectraNet’s investors.  Nothing in the rule suggests a burden above and beyond s 71C(2) as asserted by ECCSA, to the effect that “... ElectraNet must demonstrate that the accounts of its predecessor from whom it purchased the business were wrong” as a precondition to the exercise of the power and the functions in rule 11.16.3.

255               In support of its assertion ECCSA put forward that “The accounts provided by the SA government clearly state that the value of easements transferred to ElectraNet is $3.1m.  This is the value for easements set by the participating jurisdiction.”  What is put by ECCSA is, to say the least, an over statement of the South Australian government’s position.  The $3.1m “book value” is manifestly not the value of the easements on any real measure.  It was not put forward as such.  It was advanced in the June 2000 Information Memorandum and in the SA Treasury and Finance August 2001 letter in the context of an independent valuation suggesting a substantially higher value.

256               Contrary to ECCSA’s submission, the Tribunal is satisfied that the SA Treasury and Finance August 2001 letter does constitute reason to change from the “book value”.

257               The balance of ECCSA’s contentions can be dealt with together.  The issue as to ElectraNet and its investors’ legitimate expectations was resolved by the AER.  Rule 11.6.13(b) provided ElectraNet with the opportunity to have its RAB adjusted in the current regulatory control period if it showed that accorded with the reasonable expectations of its investors.  It satisfied the AER of that fact.  Nothing has been put by ECCSA to show that factual conclusion was wrong.  That did not necessarily lead to an adjustment of the RAB; that was a separate step.  It simply entitled ElectraNet to have the AER, and on review the Tribunal, consider whether to make an adjustment to its RAB in respect of easements.  The contention of ECCSA that the RAB was “closed” by the ACCC’s 2002 ElectraNet decision overlooks rule 11.6.13(b).  Its complementary argument that the easement valuations available to the AER and to the Tribunal are irrelevant to the task of considering how, if at all, the RAB should be adjusted is also erroneous for the reasons already given.

CONCLUSION

258               For the reasons given, the Tribunal has determined that ElectraNet has established that the AER erred in the manner identified.  Pursuant to s 71P of the Law it is required to make a determination itself, and it proposes to vary the reviewable regulatory decision of the AER.  In doing so, it has all the functions and powers of the AER under the Law and the Rules:  s 71P(3).

259               The Tribunal has reached the further conclusion that the opening RAB of ElectraNet should be adjusted by having added to it the sum of $36.1m for easement transaction costs  indexed by CPI from 1 July 2000 (that being the next date after the completion of the MFS 2000 valuation on 30 June 2000) to 1 July 2008, in addition to the sum of $29.1m added by the AER in the ElectraNet transmission determination 2008-09 to 2012-13 for easement compensation costs.

 

I certify that the preceding two hundred and fifty-nine (259) numbered paragraphs are a true copy of the Reasons for Decision herein of the Honourable Justice Mansfield, Mr Robin Davey and Dr Jill Walker.



Associate:


Dated:         30 September 2008


Counsel for the ElectraNet Pty Ltd:

M Sloss SC and P Gray

 

 

Solicitor for the ElectraNet Pty Ltd:

Gilbert & Tobin

 

 

Counsel for Australian Energy Regulator:

N O’Bryan SC and M Borsky

 

 

Solicitor for Australian Energy Regulator:

 

Corrs Chambers Westgarth

 

 

Counsel for Energy Consumers’ Coalition of South Australia:

T Dwyer

 

 


Date of Hearing:

13 & 14 August 2008

 

 

Date of Decision:

30 September 2008