AUSTRALIAN COMPETITION TRIBUNAL

Application by EnergyAustralia [2009] ACompT 7

RE: APPLICATION UNDER SECTION 71B OF THE NATIONAL ELECTRICITY LAW FOR A REVIEW OF A DISTRIBUTION DETERMINATION MADE BY THE AUSTRALIAN ENERGY REGULATOR IN RELATION TO ENERGYAUSTRALIA PURSUANT TO CLAUSE 6.11.1 OF APPENDIX 1 OF CHAPTER 11 OF THE NATIONAL ELECTRICITY RULES

BY: ENERGYAUSTRALIA

Applicant

AND: SOUTHERN SYDNEY REGIONAL ORGANISATION OF COUNCILS

Intervener

FILE NO 2 of 2009

JUSTICE MIDDLETON (DEPUTY PRESIDENT), MR R DAVEY AND MR R SHOGREN

16 OCTOBER 2009

MELBOURNE

IN THE AUSTRALIAN COMPETITION TRIBUNAL
	File No 2 of 2009

RE:	APPLICATION UNDER SECTION 71B OF THE NATIONAL ELECTRICITY LAW FOR A REVIEW OF A DISTRIBUTION DETERMINATION MADE BY THE AUSTRALIAN ENERGY REGULATOR IN RELATION TO ENERGYAUSTRALIA PURSUANT TO CLAUSE 6.11.1 OF APPENDIX 1 OF CHAPTER 11 OF THE NATIONAL ELECTRICITY RULES

BY:	ENERGYAUSTRALIA
	Applicant

AND	SOUTHERN SYDNEY REGIONAL ORGANISATION OF COUNCILS
	Intervener

THE TRIBUNAL:

JUSTICE MIDDLETON (DEPUTY PRESIDENT),

MR R DAVEY AND MR R SHOGREN

DATE OF DIRECTION:

16 OCTOBER 2009

WHERE MADE:

MELBOURNE

THE TRIBUNAL DIRECTS THAT:

1. The parties consult with the aim of reaching agreement on the directions or recommendations that may be made by the Tribunal in making its determination and remitting the matter to the AER, identifying precisely each public lighting issue which is agreed and each public lighting issue which is not agreed and which remains in contention

2. The parties report to the tribunal on or before 4:00pm on 19 October 2009 indicating a practicable and reasonable time prior to the date (27 November 2009) for the making of the Tribunal’s determination in which such consultation can be finalised and reported to the Tribunal pursuant the following direction.

3. Within five days of the conclusion of the consultation, the AER report in writing to the Tribunal each agreed direction or recommendation and each issue not agreed and which remains in contention.

IN THE AUSTRALIAN COMPETITION TRIBUNAL
	File No 2 of 2009

RE:	APPLICATION UNDER SECTION 71B OF THE NATIONAL ELECTRICITY LAW FOR A REVIEW OF A DISTRIBUTION DETERMINATION MADE BY THE AUSTRALIAN ENERGY REGULATOR IN RELATION TO ENERGYAUSTRALIA PURSUANT TO CLAUSE 6.11.1 OF APPENDIX 1 OF CHAPTER 11 OF THE NATIONAL ELECTRICITY RULES

BY:	ENERGYAUSTRALIA
	Applicant

AND	SOUTHERN SYDNEY REGIONAL ORGANISATION OF COUNCILS
	Intervener

THE TRIBUNAL:

JUSTICE MIDDLETON (DEPUTY PRESIDENT),

MR R DAVEY AND MR R SHOGREN

DATE:

16 OCTOBER 2009

PLACE:

MELBOURNE

REASONS FOR DIRECTIONS

INTRODUCTION

1 On 19 June 2009 the Tribunal granted leave to EnergyAustralia (‘EA’) to apply for a review of the determination entitled EnergyAustralia distribution determination 2009-2010 to 2013-2014 made by the Australian Energy Regulator (‘the AER’) on 28 April 2009 pursuant to cl 6.11.1 of transitional Ch 6 to the National Electricity Rules as set out in Appendix 1 of Ch 11 of the National Electricity Rules (‘the Transitional Rules’). On 21 August 2009 the Tribunal reserved its decision in this matter. Pursuant to s 71Q of the National Electricity Law (‘NEL’) the Tribunal extended the standard period for making its determination until 27 November 2009.

2 One of the issues involved for the Tribunal’s consideration and determination is public lighting.

3 The Tribunal is of the view that it cannot make an interim determination under the NEL. However, having reached the view that grounds of review have been established in relation to public lighting, the Tribunal considers that the parties should be advised of this view as soon as practicable to enable the re-determination process to proceed as soon as possible.

4 Subject to any legislative provision, the procedure of the Tribunal is within the discretion of the Tribunal. The Tribunal is empowered to make directions as and when it is appropriate. The Tribunal observes that the NEL does anticipate that within the review process, and prior to a determination being made, the Tribunal may come to the view that a ground of review has been established and that such a view be disclosed to the parties (see 71R(3)).

5 Therefore, on the basis that:

· the Tribunal is of the view that grounds of review have been established and that it will upon making its determination set aside the AER’s determination and remit the matter back to the AER to make its determination again, making directions or recommendations at least insofar as it relates to the constituent decision made under cl 6.12.1(12) of transitional Ch 6 specifying the control mechanism for the alternative control services of the construction and maintenance of public lighting infrastructure;

· the following reasons provide a basis for any directions or recommendations the Tribunal may make in respect of the proposed remittal;

· the Tribunal now indicates that upon making its determination, it will direct the AER to invite and consider submissions made on behalf of the Southern Sydney Regional Organisation of Councils (‘SSROC’) and EA;

· upon the remittal occurring, the AER will make a re-determination on the basis of any directions and recommendations of the Tribunal, not bound by a ‘review related matter’ (as defined in the NEL); and

· the Tribunal considers it expedient and efficient to make directions now to facilitate the implementation of its determination upon it being made, and to receive any submissions on the content of any directions or recommendations that should be made upon the proposed remittal.

The Tribunal makes the following directions:

· The parties consult with the aim of reaching agreement on the directions or recommendations that may be made by the Tribunal in making its determination and remitting the matter to the AER, identifying precisely each public lighting issue which is agreed and each public lighting issue which is not agreed and which remains in contention.

· The parties report to the tribunal on or before 4:00pm on 19 October 2009 indicating a practicable and reasonable time prior to the date (27 November 2009) for the making of the Tribunal’s determination in which such consultation can be finalised and reported to the Tribunal pursuant the following direction.

· Within five days of the conclusion of the consultation, the AER report in writing to the Tribunal each agreed direction or recommendation and each issue not agreed and which remains in contention.

6 For the purposes of this proceeding (including these directions), it is to be recalled that SSROC upon being given leave to intervene became a party to the review (see s 71N of the NEL).

7 The basis for these directions and the reasons for them follow.

BACKGROUND

8 EA provides public lighting services to approximately 100 public customers (primarily local councils) across an area which corresponds to EA’s distribution network area. Public lighting services essentially comprise:

(a) the operation, maintenance, repair, alteration, relocation and replacement of existing public lighting assets; and

(b) the financing, design and installation of new public lighting assets.

9 Public lighting assets comprehend all of the assets of a public lighting service provider or customer which are dedicated to the provision of public lighting. These include lamps, luminaries, mounting brackets and supports which fixtures are mounted, supply cables and control equipment; but do not include the public lighting services provider’s protection equipment (for example, fuses and circuit breakers).

THE TRANSITIONAL RULES

10 Clause 6.2.3B(b) of the Transitional Rules classifies public lighting services as alternative control services. An alternative control service is a distribution service that is a direct control service but not a standard control service. It follows that public lighting services are services provided by means of, or in connection with, a distribution system but which are not subject to a control mechanism based on a Distribution Network Service Provider’s (‘DNSP’) total revenue requirement.

11 Public lighting services are not subject to regulation under Pt C of the Transitional Rules (or equivalents). Clause 6.2.6 sets out the basis of the control mechanism for direct control services. However, unlike cl 6.2.6(a) (concerning standard control services), cl 6.2.6(b) and cl 6.2.6(c) (concerning alternative control services) contain no specific formula for the control mechanism.

12 Clause 6.2.6(c) of the Transitional Rules provides that the control mechanism for alternative control services ‘may (but need not) utilise elements of Part C (with or without modification)’, and lists examples of an appropriate control mechanism, including that the control mechanism might be based on a building block approach. The clause is otherwise silent in respect of a formula, instruction or method.

13 Clause 6.2.6(b) of the Transitional Rules requires the control mechanism for an alternative control service to have a basis stated in the distribution determination.

14 Clause 6.2.5(a) of the Transitional Rules provides that a distribution determination is to impose controls over the prices of direct control services, the revenue to be derived from direct control services, or both. Clause 6.2.5(c2) of the Transitional Rules provides that the control mechanism for alternative control services may consist of:

(a) a schedule of fixed prices;

(b) caps on the prices of individual services;

(d) tariff basket price control;

(e) revenue yield control;

(f) a combination of any of the above.

15 Clause 6.2.5(d) of the Transitional Rules provides that, in deciding on a control mechanism for alternative control services, the AER must have regard to:

(a) the potential for development of competition in the relevant market and how the control mechanism might influence that potential;

(b) the possible effects of the control mechanism on administrative costs of the AER, the DNSP and users or potential users;

(c) the regulatory arrangements (if any) applicable to the relevant service immediately before the commencement of the distribution determination;

(d) the desirability of consistency between regulatory arrangements for similar services (both within and beyond the relevant jurisdiction); and

(e) any other relevant factor.

16 It is established that a duty to have regard to specified factors requires a decision-maker to take a stated matter into account and to give weight to that matter as a fundamental element in making its determination: R v Hunt, Ex parte Sean Investments Pty Ltd (1979) 25 ALR 497 at 504; Queensland Medical laboratory and Others v Blewett and Others (1988) 84 ALR 615. See also Sc 2, cl 12(2) and (3) of the NEL. Further, the absence of an explanation for, and reasoning in support of, a conclusion reached by a decision-maker may reveal that the process of fact finding or decision making was in error: see eg Waterways Authority v Fitzgibbon (2005) 221 ALR 402, 429 [31] per Hayne J. A decision maker like the AER is required to deal with the substantial points raised, make findings on material questions of fact, refer to the material upon which findings are based, and provide an intelligible explanation of the process of reasoning leading to the ultimate conclusion.

17 Pursuant to cl 6.2.5(e) of the Transitional Rules, the AER was required to, and on 29 February 2008 did, publish a statement indicating its likely approach to the control mechanism for alternative control services. The approach consisted of setting a fixed schedule of prices for public lighting customers (mainly councils) for the first year of the regulatory control period based on a limited building block approach, and a price path for the ensuing years.

18 Clause 6.8.2(c)(3A) and (4) of the Transitional Rules (‘Submission of regulatory proposal’) provides:

(c) A regulatory proposal must include (but need not be limited to) the following elements:

(3A) for direct control services classified as alternative control services:

(i) the proposed control mechanism, a demonstration of the application of the proposed control mechanism, and the necessary supporting information;

(ii) in the case of a departure from the AER’s likely approach to the relevant control mechanisms for alternative control services (as indicated in a statement published under clause 6.2.5(e)) a statement of the reasons justifying the departure;

(4) for direct control services - indicative prices for each year of the regulatory control period.

19 Pursuant to cl 6.12.1(12) of the Transitional Rules, the AER’s draft, supplementary draft and final determination were predicated, inter alia, on a constituent decision by the AER on the control mechanism for alternative control services, being relevantly, public lighting services.

20 Clause 6.12.3 of the Transitional Rules prescribes the extent of the AER’s discretion in making distribution determinations.

21 Clause 6.12.3(a) provides that subject to this clause and other provisions of Ch 6 explicitly negating or limiting the AER’s discretion, the AER has discretion to accept or approve, or to refuse to accept or approve, any element of a regulatory proposal. That is, the discretion conferred upon the AER by cl 6.12.3 must be read as being qualified by and conditional upon the remainder of cl 6.12.3 so far as applicable.

22 Clause 6.12.3(f) provides that, if the AER refuses to approve an amount, value or methodology referred to in cl 6.12.1, the substitute amount, value or methodology on which the distribution determination is based must be:

(1) determined on the basis of the current regulatory proposal; and

(2) amended from that basis only to the extent necessary to enable it to be approved in accordance with the Rules.

CONSIDERATIONS

23 As previously indicated, the Tribunal has come to the view that directions should be made as soon as possible so that the AER can immediately commence to re-determine the issue of public lighting. In summary, it has come to this view because of the following factors:-

· the Tribunal is of the view that some grounds of review under s 71C of the NEL have been established by EA, which have been conceded by the AER but independently accepted by the Tribunal as being established;

· the Tribunal has come to the view that the issue of public lighting will need to be remitted to the AER in any event, and directions or recommendations will need to be made in respect of such remittal;

· the AER’s reasons for its determination on public lighting do not deal with many of the matters now being agitated before the Tribunal;

· the AER accepts that mistakes have occurred in its determination even though they may not amount to reviewable error; and

· there has been a limited ability of the parties to consider and make submissions both to the AER and the Tribunal on the issue of public lighting, particularly on the form of directions or recommendations that should be made in the event of remittal.

24 A summary given by the AER in its submission dated 12 August 2009 seems to the Tribunal to fairly represent the position:

The AER notes at the outset that it has been hampered in the making of the final determination and responding to EnergyAustralia’s application by the fact that EnergyAustralia pressed for the application of an annuity model for pre-July 2009 assets throughout the regulatory process, until it abandoned that position in EnergyAustralia’s outline. In pressing for an annuity model, EnergyAustralia was reluctant to provide robust building block models for the AER to review. The building block models that EnergyAustralia did provide to the AER contained errors and therefore required substantial adjustment by the AER. EnergyAustralia also changed its position with respect to inputs into the building block models that it provided throughout the regulatory process, in some cases without providing the AER with sufficient information and time to assess properly EnergyAustralia’s changed position.

EnergyAustralia’s outline alleges that the AER made a total of 20 errors in the methodologies it adopted, modelling it undertook and assumptions it made in making the final determination. EnergyAustralia also alleges that the AER’s control mechanism does not meet the statutory definition of a control mechanism. Most of the errors alleged by EnergyAustralia were not articulated in EnergyAustralia’s application for review and the AER was not put fairly on notice of these alleged errors until it received EnergyAustralia’s outline on 29 July 2009 and EnergyAustralia’s amended application for review on 6 August 2009. Furthermore, even EnergyAustralia’s outline is said to be “preliminary” and further detailed submissions are foreshadowed.

Despite the difficulties confronted by the AER as a result of the above conduct of EnergyAustralia, the AER has considered each of the 20 alleged errors and sets out its response to each of those errors in these submissions. In a number of cases, the AER concedes that the final determination contains an error as alleged by EnergyAustralia and that the determination should therefore be varied to correct that error. In some other cases, the AER has been unable to identify the substance of EnergyAustralia’s complaint and must therefore await further articulation from EnergyAustralia before responding.

25 In its submissions on public lighting to the Tribunal, dated 17 August 2009, the EA submitted:

As indicated the AER conceded that it made reviewable error in respect of:

(a) compensation for corporate income tax (¶20-21);

(b) the use of a lagged inflation index to roll forward regulatory asset base for pre-July 2009 assets (¶31-32);

(c) the use of lagged inflation within the calculation of depreciation in the pre-July 2009 model (¶33-34);

(d) the indexation of opex for expected inflation (¶35-36); and

(e) allowance for tax on capital contribution revenue (¶89-90).

The AER also makes a concession in respect of the “other opex”: ¶47; but this concession does not lead to a concession on the broader ground of review. Accordingly, this ground remains alive between the parties.

As a consequence of the above concessions, EnergyAustralia is not required to press the following indicated grounds of review:

(a) no allowance for tax on capital contribution revenue (Statement of Facts, Part 3, Chapter 3, [278] – [280]);

(b) real price path (Statement of Facts, Part 3, Chapter 3, [238] – [240]);

(c) single list of prices to be charged (Statement of Facts, Part 3, Chapter 3, [275]);

(d) 65% opex attributable to labour (Statement of Facts, Part 3, Chapter 3, [272] – [273]);

(e) number of pre-July 2009 public lighting assets (Statement of Facts, Part 3, Chapter 3, [208] – [213]);

(f) pre-July 2009 opex allocation (Statement of Facts, Part 3, Chapter 3, [276]).

Various additional matters are under mutual consideration by the AER and EnergyAustralia.

Subject to the matters referred to in the preceding paragraph, the following issues remain in dispute:

(a) the AER’s failure to approve EnergyAustralia’s operating expenditure proposal for post-July 2009;

(b) the AER’s decision in respect of the bulk lamp replacement cycle;

(c) the AER’s decision in respect of spot lamp change assumptions, and the related issue of additional labour costs for traffic routes;

(d) the average cost per luminaries; and

(e) the regulatory asset base used by the AER in the roll forward model for pre-July 2009 assets.

26 Since that submission the Tribunal has been in receipt of further submissions from the parties. In particular, SSROC filed and served submissions indicating it did not agree with the concessions of the AER, and sought to agitate matters otherwise ‘agreed’ between the AER and EA. Further, at least EA and SSROC, reserved for themselves the position to file further submissions if necessary.

27 In its original outline of submissions, EA indicated that its application was ‘factually dense and traverses various unrelated areas’. Undoubtedly, the matters raised by AE are disparate and complex, and upon setting aside the determination of the AER, a detailed consideration of spreadsheet modelling and an awareness of the interaction of any changes will be required. In light of the history of the way in which the issue of public lighting has been decided by the AER and the way in which the matter has proceeded before the Tribunal, there is a mismatch between the Application for Review and the way in which the application has now been put by EA.

28 The Tribunal lays no blame at the feet of any party, but merely states the position which now confronts the parties and the Tribunal.

29 Much of the reasoning of the AER in its determination in so far as it deals with public lighting is of limited assistance to an understanding of some of the disputes before the Tribunal. For instance, the AER properly conceded that the determination did not set out adequate explanation of its calculation of the ‘other’ opex amount of $18.12 per asset. It accepted that this established a ground of review under s 71C of the NEL and that the determination should be varied, although did not accept that the determination should be varied so as to substitute the figure $18.12 with the figure $26.57 as proposed by EA.

30 The Tribunal is satisfied that the EA on this aspect has established a ground of review under s 71C of the NEL. The AER has effectively failed to consider relevant matters so as to exercise its discretion correctly, which relevant matters were material to the determination or a relevant aspect of it: see s 71C(1)(c). The Tribunal is thus empowered to act under s 71P(2), and is obliged to consider the matters raised in s 71P(4).

31 The Tribunal does not have jurisdiction to make ‘consent orders’. The Tribunal must exercise its jurisdiction, and the power and duty under s 71P to make a determination, and be satisfied that EA has established a reviewable error: (see s 71C(2)).

32 The NEL contemplates that the Tribunal must make a determination after considering the grounds of review, and if a ground of review is established, then decide whether the matter should be remitted. In looking at each constituent decision the Tribunal may come to a view that the determination of the AER in one or other aspect is incorrect (that is, a ground of review is established), set aside the determination and vary it in accordance with the Tribunal’s view of the proper determination to make upon the application before the Tribunal. Alternatively, it may remit the matter to the AER to make the determination again, either with a direction or recommendation. Ideally, the end result should not require a recommencement of the entire process undertaken previously by the AER. The object of the remittal is to correct errors, leaving the AER to re-determine any aspects of the determination set aside which have not been singled out by the Tribunal as being in error. However, once the determination is set aside, if the AER is persuaded of error, other than that identified by the Tribunal, the AER has the power and the duty to correct that error in its re-determination.

33 As we have indicated, the Tribunal has come to the view that grounds of review have been established in relation to public lighting. The Tribunal explains its position in this regard later in these reasons. This would entitle the Tribunal to set aside the determination. The next question is then what to do in that event.

34 Section 71P(4) of the NEL obliges the Tribunal in deciding whether to remit a matter to the AER to make the determination again to have regard to the nature and relative complexities of the determination and the matter the subject of review.

35 The Tribunal is mindful that Pt 6 Div 3A of the NEL evinces a strong legislative intention to promote the expeditious resolution of an application (see s 71Q). The matter that is currently the subject of review involves vast amounts of money, touches upon the public interest and is a matter in which both the parties and EA’s customers need as early as possible resolution.

36 The Tribunal should endeavour to reach a final determination and make its own variation of the determination of the AER.

37 However, there is no doubt, based upon the background to the determination of the AER, the extent of the reasons for the AER determination on the aspect of public lighting itself, the history of the matter before the Tribunal, the nature of the submissions made by the parties to the Tribunal, the interaction of the various issues and the complexities of the AER determination and the matter the subject of review in respect of public lighting, that upon the Tribunal’s determination a remittal would need to occur for the AER to make the re-determination.

38 The resources available to the Tribunal, and the need to afford a proper opportunity for the making of submissions on the issues by the EA and SSROC, also favour remitting the matter to the AER.

39 The Tribunal now turns to various grounds of review raised in relation to public lighting, other than the alleged error in relation to weighted average cost of capital (‘WACC’) issues. If there are consequential effects on the determination for the alternative control service of public lighting following from the Tribunal’s determination on WACC then the AER will need to take into account the Tribunal’s determination on WACC as it affects standard control services. This aspect will need to await the Tribunal’s determination and its reasons for that determination.

Grounds of Review

Operating Expenditure

40 As the Tribunal has already indicated (par [29]) the AER accepts that it did not set out an adequate explanation in its determination of its calculation of the ‘other’ opex amount of $18.26 per asset and that the determination should be varied. The Tribunal is satisfied that the AER failed to consider whether the underlying assumptions in the EA proposal were cost-efficient and failed to make any adequate explanation for its decision. In particular, the AER failed to consider or have regard to the matters set forth in cl 6.2.5(d) of the Transitional Rules. In so failing to act and decide accordingly, the AER’s exercise of discretion was incorrect by application of each of the principles set out in [16] above.

41 The Tribunal does not criticise the AER for the way it approached this aspect – its error in the terms of s 71C(1)(c) of the NEL arose or substantially arose out of the manner and timing in which EA put its proposals and model for consideration by the AER.

42 However, it is not clear how the AER considers the determination should be varied. EA says that the Tribunal should substitute EA’s proposed amount. EA proposed what is called a top-down approach. It based its proposed annual amount of opex on the year-to-date spend in 2007-8. The AER did not accept the proposal on the basis that it would cover more than EA’s efficient cost. In the Tribunal’s view the AER was and is entitled to question whether the year-to-date spend represented efficient costs. The Tribunal is not satisfied, on the material before it, that the EA proposal should necessarily be adopted. This will be a matter for re-determination by the AER upon remittal.

Bulk Lamp Replacement Program

43 The AER submitted that even if EA were entitled to use its top-down approach, the AER would have to reduce the target opex because the bulk replacement program for bulbs should be three or four years rather than the proposed two and a half years.

44 The Tribunal agrees with the submissions of SSROC dated 9 August 2009 (omitting footnotes):

4.18 … EnergyAustralia alleges that the AER did not have regard to its 2004 Network Maintenance Standards Street Lighting Analysis Report. That is not so. The AER did have regard to the report, but was not persuaded by it given its age and the other material to which the AER had before it. It also had regard (as it was entitled to do) to SSROC’s submissions, to the bulk lamp replacement cycles of Integral and Country Energy and to Victorian benchmarks. As SSROC pointed out in its submission, since EnergyAustralia’s report:

(a) There were significant reasons for doubting EnergyAustralia’s report, including its unexplained age and its comingling of lamp failure data with photocell failure data;

(b) Luminaire mix had changed considerably since 2004;

(c) Lamp performance had improved since 2004, this being supported by trials carried out by EnergyAustralia itself on triphosphor fluorescent lamps (which were adopted since 2004).

4.19. EnergyAustralia has identified no basis for discerning error in the exercise by the AER of its discretion as to what constituted an efficient length for a bulk lamp replacement program. To the contrary, the AER’s consideration of this issue was comprehensive and considered all submissions made by all interested parties. Nor was it unreasonable in the requisite sense to determine maintenance charges on the basis of two bulk replacement programmes, for two different groupings of lamps.

45 However, as the matter is to be remitted, further consideration can be given to the issue by the AER if necessary. As a separate ground of review, the Tribunal is not satisfied that any reviewable error has been demonstrated by EA.

Spot Lamp Recycle Productivity Labour Assumptions

46 At the hearing the AER indicated that it accepted the submission of EA on this issue and did ‘not press’ its written submissions in relation to this issue. SSROC did not support the attitude taken by the AER at the hearing, and did not accept a reviewable error had been demonstrated by EA.

47 EA’s complaint in relation to the spot lamp replacement per day issue is that the AER rejected EA’s labour productivity assumptions as inefficient, and made its determination on the basis of an assumption that 25.33 spot lamp changes could be undertaken per day by two people in 8.33 hours (0.66 man hours per lamp), rather than EA’s assumption that each lamp required 1.33 man hours, or 2 on main roads. EA says that the AER wrongly assumed that the only task undertaken when spot lamp changes are performed is changing the lamp, and so therefore its comparison with Victorian benchmarks was inappropriate.

48 The AER benchmarked EA’s labour assumptions against those of comparable Victorian DNSPs and averaged the Victorian figures to produce a benchmark of 25.33 spot lamp replacements per day. This benchmarking was appropriate in considering what produced an efficient cost and was consistent with cl 6.2.5(d) of the Transitional Rules. The AER went further, and compared EA’s assumptions against those of the other NSW DNSPs. It was relevant for the AER to consider that EA’s assumed labour productivity was dramatically lower than all other distribution network providers in Victoria and New South Wales.

49 Spot replacement within a bulk replacement program is common among all DNSPs, and EA produced no material to suggest that the other networks did not also incorporate general maintenance tasks when undertaking a spot change. It was reasonable for the AER to believe that other networks did include general maintenance activities because they are required to do so. The AER was not satisfied that EA’s assumptions were cost-efficient. Further, in the absence of evidence from EA that general maintenance tasks take longer than the benchmark time provided and that traffic control on traffic routes cannot be undertaken by a two person crew, EA has not provided an adequate basis to depart from the AER’s assumption of 0.66 hours per spot maintenance task. The Tribunal can find no reviewable error in this aspect of the decision of the AER. Therefore, as a separate ground of review the Tribunal is not satisfied that any reviewable error has been demonstrated by EA. The AER may in its discretion wish to re-consider this aspect upon remittal, if necessary.

50 The Tribunal is mindful that this matter may interact with others, so as to potentially reduce EA’s public lighting opex by a large proportion.

Assumed Average Cost per Luminaire

51 The AER did ‘not press’ its original contention that EA should not be permitted to assume an average cost per luminaire of $44.82 and should instead assume an average cost per luminaire of $33.64 as set out in the AER final determination. The SSROC did not accept this concession of the AER. EA alleges that the AER erred in assuming that the average cost per luminaire of the bulk maintenance regime was $33.64 ($FY10) irrespective of the duration of the bulk maintenance cycle.

52 The amount of $33.64 per asset allowed by the AER was initially calculated on the basis of a value of $31.46 provided by EA on 30 January 2009, which the AER escalated by CPI for two years. EA calculated this amount by dividing the amount of $3,080,445 by the number of lights to be replaced, namely 97,901.

53 On 3 April 2009, EA revised this aspect of its proposal to put forward an amount of $41.81 per asset. EA calculated this amount by dividing $3,962,153 by the number of lights to be replaced, namely 99,660.

54 EA did not provide any explanation for the increase in the average cost per luminaire. The AER did not accept the increased amount, as on the material it was entitled to do.

55 As a separate ground of review, the Tribunal can find no reviewable error in this aspect of the decision of the AER.

56 On any remittal, the AER may wish to re-consider the matter if EA provide a satisfactory explanation. Again, we emphasise that this matter may interact with others, which will need careful consideration by the AER.

Substituted Opening Regulatory Asset Base

57 EA’s complaint is that in determining the opening regulatory asset base (‘RAB’) for public lighting rolled forward from the closing RAB in the 2004-2009 regulatory period, the AER did not adopt the regulatory depreciation allowance which EA wanted because the AER based depreciation on remaining life of nine years (based on straight line depreciation) for 1 July 2004 assets, whereas EA proposed an assumed remaining life of 16.2 years for assets at 1 July 2004. This is based upon the submission that the AER wrongly refused to recognise that that the Independent Pricing and Regulatory Tribunal (‘IPART’), the former regulator, had accepted EA’s claim for deferred depreciation in the 2004 to 2009 regulatory period. The AER was entitled to reject EA’s claims about deferred depreciation as EA did not substantiate that claim. There can be no basis suggesting that the AER did not consider the previous regulatory arrangements under the IPART determination. On this issue, the Tribunal can find no reviewable error. However, it may be that the AER did not have time to properly consider this matter and more material could have assisted it in determining whether EA had a claim. There is sought to be brought before us material in the form of a letter from IPART to EA that may assist the AER in considering the matter further. That material was not a review related matter: (see s 71R(6)). Once the determination of the AER is set aside and the matter is remitted, the Tribunal can direct or alternatively the AER can take into account the IPART letter (and other material) in determining what course of action it should take in relation to this issue.

Calculation of Fixed Price Path

58 The substance of EA’s complaint is that the AER has included a forecast for inflation for each year of the regulatory period, rather than providing for an adjustment each year based on actual inflation outcomes. EA submitted that it is exposed to windfall losses in the event that actual inflation is higher than forecast inflation in any year of the regulatory period.

59 There is some risk of windfall gains and windfall losses due to the fact that actual inflation may differ from forecast inflation. However, the range of any such gains and losses is narrow, particularly in the context of the other significant forecasts included in the model.

60 The Tribunal agrees with the submissions of the AER. The use of the forecast inflation to calculate the fixed price path is accepted regulatory practice and is also consistent with:

· the control mechanism that the AER has adopted for public lighting services (that is, a fixed schedule of charges for the first year of the regulatory period and a price path for the remaining years); and

· the AER’s use of forecast labour rates (without annual adjustment) in its modelling of a price path with the pre July 2009 model.

61 On this issue, the Tribunal can find no reviewable error.

Operating Expenditure Based Upon Old Inventory

62 The AER’s price schedule was based on assets at November 2008. In its final decision the AER proposed a mechanism by which changes in asset inventories from year to year are accounted for and specifically allowed for assets added between November 2008 and July 2009.

63 The AER accepts that those public lighting assets should be accounted for in the building block model. With the regulatory process leading to the final determination taking many months, and with DNSPs continuing to install public lighting assets throughout that period, it is inevitable that any final determination will not precisely account for all public lighting assets as at the date of the final determination. It is therefore also inevitable that adjustments must be made to inventory levels to take account of the construction of public lighting assets.

64 In the determination, the AER proposed a mechanism by which changes in asset inventories from year to year are to be accounted for by EA. That mechanism requires EA to submit, as part of its pricing proposal, the total charge it proposes to levy on each of its public lighting customers over the next regulatory year, including an explanation of any adjustments. The determination specifically referred to adjustments being made to account for changes in inventories in the previous regulatory year.

65 EA sought to argue that the control mechanism the AER purported to establish for pre July 2009 public lighting services as set out in Appendix P to the determination did not meet the statutory description of a control mechanism. EA has sought appropriate orders from the Tribunal directed at ensuring that the control mechanism satisfies the statutory description of a control mechanism. EA argued that it was inherent in the concept of a ‘control mechanism’ that such a mechanism is capable of being applied in a manner that delivers a certain predictable and transparent result even where parameters (such as actual inflation) may not be known at the time of the specification of the control mechanism. It was contended that the control mechanism should specify a formula, method or instruction by which the various inputs to the mechanism are determined and then specify how the mechanism operates.

66 EA’s regulatory proposal provided that each customer would be charged a price per component. That is, at the end of each year the total bill for each customer would have been calculated by multiplying the component price (CAP) by the inventory of each component and in so doing the charges paid by a customer reflected their inventory of public lighting assets actually providing a service.

67 EA argues that the AER’s decision to use the inventory of EA’s public lighting assets as at November 2008 and to not provide a mechanism for the total customer bill to be adjusted to reflect changes in a customer’s inventory was a departure from EA’s regulatory proposal and amended that regulatory proposal in a manner that was not necessary to enable it be approved in accordance with the Transitional Rules.

68 The Tribunal considers that there is a control mechanism included in the determination which does provide an adequate allowance for ongoing operating and maintenance costs for public lighting assets constructed between November 2008 and June 2009 and such control mechanism complies with the Transitional Rules.

69 The control mechanism is stated in the determination as being ‘a schedule of fixed charges in the first year of the next regulatory control period for assets constructed before 1 July 2009 and a schedule of fixed prices in the first year of the next regulatory control period for assets constructed after 30 June 2009 and a price path for the remaining years of the next regulatory control period’. This is a control mechanism.

70 It is also clear that the control mechanism accounts for public lighting assets constructed between November 2008 and June 2009. As the AER noted, the mechanism identified in the determination requires each DNSP, as part of its pricing proposal, to provide the AER with the total charges that it proposes to levy on each of its public lighting customers over the regulatory year, including an explanation of any adjustments that have been made for charges that account for changes in asset inventories in the previous regulatory year.

71 EA further contends that the AER has failed to make a constituent decision under cl 6.12.1(13) on how compliance with a relevant control mechanism is to be demonstrated. Although EA acknowledges that the AER purported to set this out at Ch 17.9 of the final determination, EA contends that the method by which compliance with the control mechanism is to be demonstrated must be separate from the control mechanism itself.

72 There is no merit in this contention. Clause 6.12.1(13) of the Transitional Rules state that the constituent decision is ‘a decision on how compliance with a relevant control mechanism is to be demonstrated’. Chapter 17.9 of the AER’s determination fulfils that requirement and is such a decision.

73 Next, EA submits that the control mechanism does not promote the national electricity objective or revenue and pricing principles set out under s 7 and s 7A of the NEL in that it creates regulatory uncertainty and lack of transparency and that it generates wasteful administrative costs.

74 The Tribunal does not accept this submission of EA. While some public lighting customers may, initially, be overcharged if certain public lighting assets are replaced part way through the year, reconciliation will occur as a result of the annual compliance process. Adjustments can then be made to changes in inventories in the previous regulatory year. The Tribunal does not accept that the control mechanism adopted by the AER does not promote the objectives of the Transitional Rules and the NEL.

75 EA also invokes cl 6.12.3(f) of the Transitional Rules to argue that the AER, in refusing to approve EA’s control mechanism, did not amend that control mechanism only to the extent necessary to enable the control mechanism to be approved in accordance with the Transitional Rules. This argument assumes that a control mechanism is an amount, value or methodology under cl 6.12.3(f).

76 Clause 6.12.3(f) does not apply to the control mechanism for alternative control services. Whilst a control mechanism may contain or incorporate an amount, value or methodology, a control mechanism itself is not an amount, value or methodology. The language of cl 6.12.3(f) is apposite to refer to, for example, the annual revenue requirement (cl 6.12.1(2)(i)), the total of the forecast capital expenditure (cl 6.12.1(3)), the total forecast operating expenditure (cl 6.12.1(4), the rate of return (cl 6.12.1(5)), the regulatory asset base (cl 6.12.1(6)), or the proposed pricing methodology for EA prescribed (transmission) standard control services (cl 6.12.1(20)). Each of those things are amounts, values or methodologies ‘referred to’ in cl 6.12.1.

77 It was submitted by the AER that it was empowered by cl 6.12.3(a) of the Transitional Rules to refuse to accept or approve any element of a regulatory proposal, including a DNSP’s proposed control mechanism, subject to its consideration of the factors in cl 6.2.5(d) of the Transitional Rules and the objectives of the NEL. In the Tribunal’s view this submission should be accepted.

78 Even if EA is correct in its contention that cl 6.12.3(f) applies, the Tribunal does not consider that the AER amended the basis of the regulatory proposal more than was necessary to enable it to be approved under the Transitional Rules. The EA has not demonstrated any objective basis that the AER’s approach is not the minimal approach necessary to set a control mechanism, considering the factors listed in cl 6.2.5(d) and the objectives of the NEL.

Connections Operating Costs

79 The AER has accepted that an allowance should be made for opex on pre July 2009 connections operating assets. EA seeks an order that the calculation of the operating expenditure component of the fixed charges of assets constructed before 1 July 2009 be varied to include the cost of maintenance for connections.

80 As it is proposed that the matter be remitted to the AER this matter can be further considered by the AER.

Capital Contribution on the Sunk Value of any Assets Replaced Early in their Economic Life

81 The AER has not specified a sufficiently clear or specific control mechanism for the determination of the charge for the residual capital value of the asset being replaced early. This amounts to a reviewable error, as this aspect of the decision is unreasonable within the meaning of s 71C(1)(d). Alternatively, the exercise of the AER’s discretion was incorrect in that the control mechanism is unclear or lacks specificity, which is an essential aspect of the control mechanism. Double-charging customers may occur unless sufficient specificity is included in the AER’s determination. EA seeks an order that the control mechanism provide for the separation out of the fixed capital charge from operating and maintenance charge associated with the public lighting component. As the matter will be remitted, the order sought by EA can be considered by the AER.

Additional Labour Costs for Traffic Routes (Capital Expenditure)

82 The AER concedes that the final determination should be varied to make allowance for the labour costs of construction of public lights located on traffic routes. EA seeks an order to vary the AER’s final determination model to allow two man hours to construct a public light and an additional hour in the case of a traffic route light. Whether such an order should be made it is a matter for the AER to consider. This can be considered by the AER on the remittal.

VLOOKUP Error

83 It seems to be accepted that there is an error in the use of ‘VLOOKUP’ formulas in material put to the AER.

84 EA made the following submission in its supplementary submissions:

11 Since the hearing of the matter in August 2009, EnergyAustralia has identified an additional error that relates to the use of “VLOOKUP” formulas that are used to “lookup” values, such as prices and quantities, from a list of values based on the name of the public lighting component. EnergyAustralia had identified this error on 28 April 2009 and notified the AER that it had found this error but, in the time available to it, had not been able to identify specific examples of the error. EnergyAustralia has now been able to identify a number of examples of this error and details of the error are set out in Appendix B. Considered in isolation, this error would result in EnergyAustralia over-recovering revenue associated with operating expenditure.

12 Key details as to the AER’s purported control mechanism were not made available to EnergyAustralia until the publication of the EnergyAustralia Distribution Determination and the AER’s Final Decision on 30 April 2009. EnergyAustralia was therefore not able to bring to the AER’s attention the errors and / or the unreasonable consequences that arise from the AER’s failure properly and adequately to specify a control mechanism.

85 This is also a matter for consideration by the AER on the remittal.

Miscellaneous

86 Other mistakes in reaching its decision were accepted by the AER. Consistent with the above, if the AER is or becomes satisfied of errors in the course of its re-determination, then upon remittal the AER can and should correct the errors.

CONCLUSION

87 Whilst the Tribunal has indicated that it has no jurisdiction to make ‘consent orders’, this does not mean that the parties should not use their best endeavours to reach agreement on the issues raised above. The Tribunal commends the parties and their legal representatives on their efforts to date.

88 Now that the Tribunal has indicated its views on the grounds of review and other matters raised by the parties, the parties may be better placed to consult and confer in the process of the re-determination by the AER on public lighting.

89 Upon receipt of the report from the AER in accordance with the Tribunal’s directions, the Tribunal will give any further directions necessary to make its determination in this proceeding.

I certify that the preceding eighty-nine (89) numbered paragraphs are a true copy of the Reasons for Direction herein of the Honourable Justice Middleton (Deputy President), Mr R Davey and Mr R Shogren.

Associate:

Dated: 16 October 2009

Counsel for EnergyAustralia:	Mr JT Gleeson SC with Mr PJ Brereton SC, Dr R Higgins and Ms A Rao

Solicitor for EnergyAustralia:	Gilbert + Tobin


Counsel for Australian Energy Regulator:	Mr P Hanks QC with Mr P Gray, Mr P Wallis and Dr V Priskich

Solicitor for Australian Energy Regulator:	Corrs Chambers Westgarth

Counsel for Southern Sydney Regional Organisation of Councils:	Mr FM Douglas QC with Mr WAD Edwards

Solicitor for Southern Sydney Regional Organisation of Councils:	HWL Ebsworth Lawyers

Date of Hearing:	10, 11, 12, 13, 14, 17, 18, 19, 20, & 21 August 2009

Date of Judgment:	16 October 2009