AUSTRALIAN COMPETITION TRIBUNAL

 

Application by United Energy Distribution Pty Ltd [2009] ACompT 10

ADMINISTRATIVE LAW – review of determination by the Australian Energy Regulator (AER) – whether the Australian Competition Tribunal has jurisdiction to hear appeals relating to errors of law – meaning of “based wholly or partly on an error of fact in a material respect” in s 55(2)(c)(ii) of the Essential Services Commission Act 2001 (Vic) – whether the AER’s determination involved an ‘error of fact’

 

COMPETITION LAW – pricing principles applicable to determination of budgets for the roll out of ‘advanced metering infrastructure’ in Victoria

 

Electricity Industry Act 2000 (Vic)

Essential Services Commission Act 2001 (Vic)

National Electricity (Victoria) Act 2005 (Vic)

National Electricity (Victoria) Amendment Act 2007 (Vic)

Trade Practices Act 1974 (Cth)

Trade Practices (Australian Energy Market) Act 2004 (Cth)

Edwards (Inspector of Taxes) v Bairstow [1956] AC 14 cited

Farmer v Cotton Trustees [1915] AC 922 cited

Hope v Bathurst City Council (1980) 144 CLR 1 cited

Handa v Minister for Immigration and Multicultural Affairs (2000)106 FCR 95 applied

Jones v Wrotham Park Settled Estates [1980] AC 74 applied

Vetter v Lake Macquarie City Council (2001) 202 CLR 439 cited

 

 

APPEAL BY UNITED ENERGY DISTRIBUTION PTY LTD (ABN 70 064 651 029) AGAINST A FINAL DETERMINATION OF THE AUSTRALIAN ENERGY REGULATOR (AER) PURSUANT TO AN AMI ORDER UNDER SECTIONS 15A AND 46D OF THE ELECTRICITY INDUSTRY ACT 2000 (VIC)

 

By UNITED ENERGY DISTRIBUTION PTY LTD

No 9 of 2009

 

 

APPEAL PURSUANT TO SECTION 29 OF THE NATIONAL ELECTRICITY (VICTORIA) ACT 2005 (VIC) AGAINST THE FINAL DETERMINATION OF THE AUSTRALIAN ENERGY REGULATOR DATED OCTOBER 2009 IN RELATION TO THE 2009-11 AMI BUDGET APPLICATION SUBMITTED BY JEMENA ELECTRICITY NETWORKS (VIC) LTD FOR THE VICTORIAN ADVANCED METERING INFRASTRUCTURE REVIEW

 

By JEMENA ELECTRICITY NETWORKS (VIC) LTD

No 10 of 2009

 

 

 

 

 

JUSTICE FINKELSTEIN (president)

R F SHOGREN

m M STARRS

23 DECEMBER 2009

MELBOURNE

IN THE AUSTRALIAN COMPETITION TRIBUNAL
	File No 9 of 2009

RE:	APPEAL BY UNITED ENERGY DISTRIBUTION PTY LTD (ABN 70 064 651 029) AGAINST A FINAL DETERMINATION OF THE AUSTRALIAN ENERGY REGULATOR (AER) PURSUANT TO AN AMI ORDER UNDER SECTIONS 15A AND 46D OF THE ELECTRICITY INDUSTRY ACT 2000 (VIC)
BY:	UNITED ENERGY DISTRIBUTION PTY LTD Applicant

 

MEMBERS:	JUSTICe FINKELSTEIN (PRESIDENT) R F SHOGREN M M STARRS
DATE OF DETERMINATION:	23 DECEMBER 2009
PLACE:	MELBOURNE

 

 

THE TRIBUNAL DETERMINES THAT:

 

1                         The appeal be allowed in part.

2                         The decision of the Australian Energy Regulator (AER) as set out in its Final determination: Victorian advanced metering infrastructure review 2009–11 AMI budget and charges applications (AMI Final Determination) be varied as set out in paragraphs 3 and 4 below.

3                         Related party margins/management fees of $13.1 million in respect of United Energy Distribution Pty Ltd (UED) be included in the AER AMI budget period Approved Budget (within the meaning of the Order in Council made on 28 August 2007 under sections 15A and 46D of the Electricity Industry Act 2000 (Vic) (as amended by Orders in Council made on 12 November 2007, 25 November 2008 and 31 March 2009)) for UED.

4                         Tables numbered 5, 3.4, 4.16, 4.31 and 5.15 of the AMI Final Determination be deleted and replaced with the following tables:

Table 5:        UED ($ per meter)

Annual metering charge	2010		2011
	proposed	Tribunal decision	proposed	Tribunal decision
Single phase single element	71.80	71.80	92.12	92.12
Single phase single element with contactor	73.30	73.30	94.02	94.02
Three phase direct connected	81.01	81.01	103.89	103.89
Three phase CT connected	86.40	86.40	110.82	110.82

 

Table 3.4:     Tribunal decision—approved budget for UED ($’000s, real 2008)

	2009	2010	2011
UED revised proposed capex	65,403	51,373	69,780
UED revised proposed opex	7,253	13,498	19,780
UED proposed related party margins	4,113	3,672	5,069
Tribunal decision—UED capex	65,403	51,373	69,780
Tribunal decision—UED opex	7,253	13,498	19,780

Source:   UED, AMI Budget Application 2009-11 to the Australian Energy Regulator, 27 February 2009, budget templates (confidential), and AER analysis.

Note:      Totals may not add due to rounding.

Table 4.16:   Tribunal decision on UED’s metering assets base, 2006–11 ($’000s, real 2008)

	2006	2007	2008	2009	2010	2011
Opening metering asset base	0	6,367	11,230	14,312	101,595	132,467
Pre start date AMI capital costs	N/A	N/A	N/A	35,066	N/A	N/A
Capital expenditure	6,733	5,890	4,633	65,403	51,373	69,780
Depreciation	366	1,026	1,552	13,186	20,501	25,673
Disposals	0	0	0	0	0	0
Closing metering asset base	6,367	11,230	14,312	101,595	132,467	176,574

Note:        Capital expenditure is net of customer contributions.

                  Pre-start AMI capital costs include a WACC adjustment for the time value of money.

Table 4.31: Tribunal decision—UED revenue requirements ($’000s, nominal)

	2009	2010	2011
Return on capital	9,126	11,678	15,813
Depreciation	10,083	18,927	24,091
Operating & maintenance costs	7,615	14,533	21,842
Tax liability	0	0	0
Offset of costs and revenues 2006–08	-5,827	N/A	N/A
Total revenue requirement	20,996	45,138	61,746

N/A =       Not applicable.

Table 5.15:   Tribunal determination—UED AMI charges, per annum, per meter ($, nominal)

	2010	2011
Single phase single element	71.80	92.12
Single phase single element with contactor	73.30	94.02
Three phase direct connected	81.01	103.89
Three phase CT connected	86.40	110.82

 

5                         The AER make any variations to the AMI Final Determination required as a consequence of paragraphs 2-4 above.

IN THE AUSTRALIAN COMPETITION TRIBUNAL
		File No 10 of 2009
RE:	APPEAL PURSUANT TO SECTION 29 OF THE NATIONAL ELECTRICITY (VICTORIA) ACT 2005 (VIC) AGAINST THE FINAL DETERMINATION OF THE AUSTRALIAN ENERGY REGULATOR DATED OCTOBER 2009 IN RELATION TO THE 2009-11 AMI BUDGET APPLICATION SUBMITTED BY JEMENA ELECTRICITY NETWORKS (VIC) LTD FOR THE VICTORIAN ADVANCED METERING INFRASTRUCTURE REVIEW
BY:	JEMENA ELECTRICITY NETWORKS (VIC) LTD Applicant

 

MEMBERS:	JUSTICe FINKELSTEIN (PRESIDENT) R F SHOGREN M M STARRS
DATE OF DETERMINATION:	23 DECEMBER 2009
PLACE:	MELBOURNE

 

THE TRIBUNAL DETERMINES THAT:

 

1          The appeal be allowed in part.

 

2          The decision of the Australian Energy Regulator (AER) as set out in its Final determination: Victorian advanced metering infrastructure review 2009–11 AMI budget and charges applications (AMI Final Determination) be varied as set out in paragraphs 3 and 4 below.

 

3          Related party margins/management fees of $8.4 million in respect of Jemena Electricity Networks (Vic) Ltd (JEN) be included in the AER AMI budget period Approved Budget (within the meaning of the Order in Council made on 28 August 2007 under sections 15A and 46D of the Electricity Industry Act 2000 (Vic) (as amended by Orders in Council made on 12 November 2007, 25 November 2008 and 31 March 2009)) for JEN.

 

4          Tables numbered 3.3, 4.13 and 4.28 of the AMI Final Determination be deleted and replaced with the following tables:

 

 

Table 3.3:     Tribunal decision—approved budget for JEN ($’000s, real 2008)

	2009	2010	2011
JEN proposed capex	54,607	31,940	34,044
JEN proposed opex	3,921	8,738	13,464
JEN proposed related party margins	3,313	2,303	2,689
Tribunal decision– JEN capex	54,607	31,940	34,044
Tribunal decision – JEN opex	3,921	8,738	13,464

Source:    JEN, Advance Infrastructure Roll out Budget Application from Jemena Energy Networks (VIC) Ltd, 27 February 2009, budget templates (confidential) and AER analysis.

Note:        Totals may not add due to rounding.

Table 4.13:   Tribunal decision on JEN’s metering asset base, 2006–11 ($’000s, real 2008)

	2006	2007	2008	2009	2010	2011
Opening metering asset base	0	5,507	9,280	13,076	75,934	92,980
Pre start date AMI capital costs	N/A	N/A	N/A	17,452	N/A	N/A
Capital expenditure	5,592	4,000	4,136	54,607	31,940	34,044
Depreciation	86	227	340	9,201	14,895	17,997
Disposals	0	0	0	0	0	0
Closing metering asset base	5,507	9,280	13,076	75,934	92,980	109,027

Note:    Capital expenditure is net of customer contributions.

          Pre-start AMI capital costs include a WACC adjustment for the time value of money

Table 4.28:   Tribunal decision—JEN revenue requirements ($’000s, nominal)

	2009	2010	2011
Return on capital	6,436	8,427	10,337
Depreciation	7,007	13,767	17,089
Operating & maintenance costs	4,116	9,408	14,867
Tax liability	0	0	0
Offset of costs and revenues 2006–08	7,605	N/A	N/A
Total revenue requirement	25,165	31,603	42,293

N/A = Not applicable.

 

5          The AER make any variations to the AMI Final Determination required as a consequence of paragraphs 2-4 above.

IN THE AUSTRALIAN COMPETITION TRIBUNAL
	No 9 of 2009

RE:	APPEAL BY UNITED ENERGY DISTRIBUTION PTY LTD (ABN 70 064 651 029) AGAINST A FINAL DETERMINATION OF THE AUSTRALIAN ENERGY REGULATOR (AER) PURSUANT TO AN AMI ORDER UNDER SECTIONS 15A AND 46D OF THE ELECTRICITY INDUSTRY ACT 2000 (VIC)
BY:	UNITED ENERGY DISTRIBUTION PTY LTD Applicant
	No 10 of 2009
RE:	APPEAL PURSUANT TO SECTION 29 OF THE NATIONAL ELECTRICITY (VICTORIA) ACT 2005 (VIC) AGAINST THE FINAL DETERMINATION OF THE AUSTRALIAN ENERGY REGULATOR DATED OCTOBER 2009 IN RELATION TO THE 2009-11 AMI BUDGET APPLICATION SUBMITTED BY JEMENA ELECTRICITY NETWORKS (VIC) LTD FOR THE VICTORIAN ADVANCED METERING INFRASTRUCTURE REVIEW
BY:	JEMENA ELECTRICITY NETWORKS (VIC) LTD Applicant

 

MEMBERS:	JUSTICe FINKELSTEIN (PRESIDENT) R F SHOGREN M M STARRS
DATE:	23 DECEMBER 2009
PLACE:	MELBOURNE

 

REASONS FOR DETERMINATION

Introduction

1                                             These are two appeals from a determination by the Australian Energy Regulator (AER), published on 30 October 2009. By that determination, the AER rejected certain components of the proposed budget for metering services submitted by each appellant. The appeals are being heard together as they raise similar issues.  Those issues are:  (1) What is the jurisdiction of the Australian Competition Tribunal to hear appeals against a determination of the AER? This depends upon the proper construction of several provisions of the National Electricity (Victoria) Act 2005 (NEV Act); (2) Do the grounds upon which each appellant relies here fall within the Tribunal’s jurisdiction? This  involves an examination of the grounds stated in the notices of appeal and the application to those grounds of the NEV Act; and (3) If the grounds are available, have they been made out?  This requires an investigation into aspects of the determination. 

Regulatory context

2                                             In July 2006 the Victorian government decided to introduce advanced metering infrastructure (AMI) to certain Victorian electricity consumers.  The new meters, often referred to as “smart meters”, must be installed by electricity distribution network service providers (DNSPs).  A DNSP must hold a licence under the Electricity Industry Act 2000 (Vic) to distribute or supply electricity.  The obligation to install the new meters was created by the imposition of a new licence condition. 

3                                             The charges which may be made by DNSPs for the installation of the smart meters are regulated by Orders in Council made under ss 15A (which permits charges to be set for connection to any distribution system) and 46D (which permits specification of metering infrastructure to be installed by a licensee) of the Electricity Industry Act.   The initial order was made on 28 August 2007 and published in the Victorian Government Gazette S200. Amending Orders in Council were made on 12 November 2007 (Victorian Government Gazette S286), 25 November 2008 (Victorian Government Gazette S314) and 31 March 2009 (Victorian Government Gazette G14). Collectively they will be referred to as “the AMI Order”. 

4                                             The AMI Order provides for metering charges to be set using a ‘building blocks’ approach by reference to actual costs or, to the extent that actual costs are not available, forecast costs.  The building block for a year comprises a return on capital, depreciation of metering equipment, maintenance and operating expenditure and an allowance for corporate income tax:  see AMI Order, cl 4(1)(a) and (b). 

5                                             The AMI Order initially provided for the Essential Services Commission (ESC), a Victorian statutory corporation, to set the metering charges.  Following the agreement between the Commonwealth, the states and territories to establish national electricity laws, the Australian Energy Regulator (AER) was established by amendments to the Trade Practices Act 1974 (Cth): the amendments were introduced by the Trade Practices (Australian Energy Market) Act 2004 (Cth).  In 2007 the National Electricity (Victoria) Amendment Act inserted a new Part IV (comprising ss 17 to 29) into the NEV Act.  This part provided for the transfer from the ESC to the AER of certain of the ESC’s regulatory functions, powers and duties: see s 23.  Among the powers that were transferred were the ESC’s powers under the AMI Order. For this reason, references in the AMI Order to the ESC must be treated as references to the AER.

6                                             Under the AMI Order, the first step in the process of setting metering charges is for the DNSP to submit a budget application to the AER:  AMI Order, cl 5.  The budget application must contain expenditure for the Regulated Services (which include metering installation services and metering data services) and set out the total Opex and Capex for the relevant years:  AMI Order, cl 5B.1(a) and (b).  Expenditure is defined to include “cost and may include:  (a) actual expenditure; [and] (b) forecast expenditure”:  AMI Order, cl 2.  ‘Total Opex and Capex’ is defined as “the sum of (a) maintenance and operating expenditure; and (b) capital expenditure, for the provision of Regulated Services”:  AMI Order, cl 2.1.  The budget application must relate the expenditure to scope:  AMI Order, cl 5B.1(d).

7                                             The next step is for the AER to review the budget and determine to approve or reject the budget giving reasons:  AMI Order, cl 5C.1.  The AER must approve the budget unless it establishes one of two things.  The first is that the expenditure (or part thereof) is for activities outside scope at the time of commitment to that expenditure and at the time of the determination: AMI Order, cl 5C.2(a).  Schedule 2 to the AMI Order defines the activities that are “within scope”.  Relevantly, paragraph S2.1 of the schedule provides that:  “Activities within scope are those activities reasonably required:  (a) for the provision of Regulated Services; and (b) to comply with a metering regulatory obligation or requirement.”  The second basis for rejecting a budget is where the expenditure (or part thereof) is “not prudent”:  AMI Order, cl 5C.2(b).  Broadly, expenditure is assumed to be prudent unless the AER can establish certain matters to the contrary. For example, where the cost is already incurred under a contract existing before a certain date, the ESC must accept the cost unless it can establish that the contract was not let in accordance with a competitive tender process, and that the costs were either more likely than not to not be incurred, or would involve a substantial departure from reasonable commercial standards:  AMI Order, cl 5C.3.

8                                             The procedures leading to approval or refusal of a budget are as follows.  In the first instance the AER must prepare a draft determination approving or rejecting the budget.  If the draft determination is to reject the budget, the AER must state what new budget it would approve.  The DNSP then has 20 business days within which to apply for approval of an amended budget:  AMI Order, cl 5C.5.

9                                             The only basis upon which the AER is able in its draft determination to reject a submitted budget is that it includes expenditure which it has determined is outside scope at the time of commitment to that expenditure and at the time of the determination or not prudent:  see AMI Order, cls 5C.2 and 5C.8.

10                                          When an application is made for approval of an amended budget, the AER must approve the amended budget if it accords with the budget the ESC stated it would approve:  AMI Order, cl 5C.6.

11                                          If the AER rejects an amended budget it must determine an Approved Budget :  AMI Order, Cl 5C.7.  In that connection the AER can only remove from an amended budget expenditure it has established as being outside scope at the time of commitment to that expenditure and at the time of the determination, or expenditure it has established is not prudent:  AMI Order, cl 5C.8.

The appellants’ outsourcing arrangements

12                                          Each appellant is a DNSP and is required to install smart meters at its existing customers’ premises.  In all they are required to install approximately  one million meters. 

13                                          Each appellant retained Alinta Asset Management Pty Ltd (now known as Jemena Asset Management (6) Pty Ltd)  (AAM) to carry out its obligations under what is referred to as the Advanced Interval Meter Rollout (AIMRO).  A joint program was seen as an opportunity for the appellants, Jemena Electricity Networks (Vic) Ltd (JEN) and United Energy Distribution Pty Ltd (UED), to reduce the cost and the risk associated with meeting their respective rollout obligations.

14                                          AAM is related to each of JEN and UED. JEN and AAM have the same holding company.  That holding company also holds 34.1% of the shares in UED.

15                                          The arrangement pursuant to which AAM is to perform functions for JEN is recorded in an agreement styled AIMRO Services Requirements.  The agreement between UED and AAM, which is referred to as the Amended and Restated AIMRO Services Requirements Agreement is, in substance, in the same terms.  For the purpose of these appeals it will be sufficient to refer only to the JEN agreement. 

16                                          The work to be carried out by AAM is described generally in clause 4 of the JEN agreement. In substance that work involves managing a program, and providing services, for the design, procurement, implementation and deployment of the AIMRO.  Among other things, the work requires the preparation of management plans (cl 6); the preparation of budgets (cl 7); and the provision of core personnel to oversee the works, among them persons who are to be dedicated to the project (cl 8).  As part of its management obligations a program director and program management officer is to be appointed (cl 10). 

17                                          The consideration which JEN is required to pay for the work carried out on its behalf is explained in some detail.  The consideration has two principal components.  The first is described as “Project Costs”.  This is the proportion of “Incremental Costs” allocated to JEN (the remaining proportion being payable by UED): cl 1.3 and cl 1.5 of Schedule 2 of the JEN Agreement.  Incremental Costs are relevantly defined as:

“the aggregate of the cost to AAM (calculated on an open book basis and excluding corporate overheads) for each of the following: 

(a)        all costs, disbursements and other amounts payable to those contractors    (including Vendors) providing goods or services only for the purposes of        AIMRO;

(b)        the costs, disbursements and other amounts payable to those contractors (including Vendors) providing goods or services for the purposes of AIMRO;

(c)        backfill costs for Personnel…; and

(d)        accommodation costs…

incurred by AAM in connection with performing its obligations…” 

18                                          The second component of the consideration is what is described as the AAM Management Fee.  This fee is [commercial-in-confidence].  Although the fee is described as a “management fee”, it comprises both a fee component to recover certain management costs and associated overheads, and a profit component.

The appellants’ budgets

19                                          To meet its obligations under the AMI Order each appellant submitted to the AER its budget application for the years 2009 to 2011.  Each application noted that JEN and UED had established a joint program for the rollout and that AAM had been retained to carry out the work.  More particularly, the JEN budget application stated that part of JEN’s cost of participating in the joint program is “a management fee paid to AAM for the delivery of the AIMRO program on JEN’s network.”  UED’s budget application also referred repeatedly to a “gross margin” payable by UED to JEN, which is a reference to the management fee.

20                                          AAM prepared a detailed report in support of each budget application which was submitted to the AER.   The report provided an explanation of the basis for the joint program and described work which AAM was to perform.  The report pointed out that the scope of works involved a management component “to manage, monitor and report on performance”.  The report went on to explain that:  “The program management function ha[d] been established to manage the risk and ensure performance of the Program.  For programs of the size of [AIMRO] it is the industry practice to commit program management resource to secure a timely, cost efficient and quality program outcome.”  There is then a detailed description of the AIMRO program management toward the back of the report. 

21                                          Together with its budget application, UED also submitted an expert’s report by Ferrier Hodgson.  The report dealt with the reasonableness of the management fee.    The author, Mr Meredith, concluded that the fee was “reasonable and efficient”; the relevant industry range being approximately [commercial-in-confidence]% to [commercial-in-confidence]%.  Mr Meredith’s report also contained a detailed description of the services AAM is to perform in respect of the AIMRO.  The program management aspect was described as:  (i) planning; (ii) monitoring and tracking of progress; (iii) management of issues and risks; (iv) recruitment of contract resources. 

22                                          In its draft determination published in July 2009, the AER approved each appellant’s budget in most respects. Save for rejecting certain items from UED’s budget which are irrelevant for the purposes of these appeals, the AER concluded that each category of cost, including the management fee payable to AAM, was within scope and prudent.  The draft determination referred to an independent review of the AAM contract which found the fees payable to AAM to be reasonable.  The AER stated that it “found this independent review to be reasonable.  However, the AER noted that the [AMI] order does not permit it to undertake an efficient cost review of AMI related party margins.”

23                                          Clause 10.2 of the AMI Order required the AER to allow not less than 30 business days for submissions on the draft determination before making a final determination.  In its draft determination the AER provided a timetable for the receipt of submissions on the draft.  The timetable required any submission to be provided by 11 September 2009.

24                                          The AER received submissions from several persons.  A detailed submission was received from the Consumer Utilities Advocacy Centre (CUAC).  The CUAC’s submission referred to the “related party margins”. It claimed (as was the fact) that those costs had not been competitively tendered.  It also asserted that the AMI Order did not permit the AER to undertake an efficient cost review of AMI related party margins. The submission raised the possibility that such margins might result in ‘double-dipping’, in the sense that a related party may include a profit component in its costs, which could result in additional costs being passed on to consumers. 

25                                          The Department of Primary Industries, Victoria, also made a submission, which was filed well out of time.  In its submission, the Department referred to the AER’s assertion that “the revised Order does not permit the AER to undertake an efficient cost review of AMI related party margins.”  The Department expressed its disagreement with that conclusion.  It pointed out that:  “If the cost estimates are contract costs, then the AER can assess whether the electricity distributor has undertaken a competitive tendering process.  In assessing whether the electricity distributors have undertaken a competitive tender process, the AER should have regard to the consideration of related party transactions in the current regulatory determination by the Victorian Essential Services Commission… If the cost estimates are not contract costs, then the AER is able to access information by using its information gathering powers … and assessing whether there has been a substantial departure from the commercial standard that a reasonable business would exercise in the circumstances.”

26                                          It is to be noted that the Department did not contend that the AER had erred in its conclusion that the management fee was within scope. 

27                                          Neither appellant replied to these submissions.

28                                          The AER published its final determination on 30 October 2009.  In that determination the AER reconsidered whether the management fee to be paid to AAM was within scope and, without any prior hint or warning, concluded that it was not.  The AER report stated at pp 40-41:

“The AER considers that the costs proposed for related party margins and management fees are not reasonably required for the provision of regulated services, as defined in the revised Order.  In reaching this conclusion the AER has closely reviewed the contracts between … JEN/UED and AAM in relation to services associated with the AMI rollout.  In both cases, the DNSPs’ [sic] engaged their related party to undertake the AMI rollouts on their behalf, and perform all procurement, solution selection and project management required to achieve the AMI rollout obligations.  In providing services to meet the DNSPs’ rollout obligations, the related parties charge the DNSPs a margin on top of incurred costs.  … 

Contracts … between JEN/UED and AAM… incorporate the payment of margins and management fees over and above the costs incurred by their related parties, often added to the contract costs as a percentage of actual incurred costs.  The AER notes that the services delivered under the related party contracts already incorporate management costs, such as the provision of program management offices, corporate services, provision of a CEO and other overheads.  In most related party contracts reviewed by the AER, these costs are incorporated into the cost build up, and in addition, a margin is applied to actual incurred costs as a ‘management fee’ or an explicit ‘margin’.  In other cases, margins are determined by the related party’s ability to incur costs under an established total contract value. In these cases the AER used  audited regulatory account data to identify the margin paid to the related party. 

Accordingly, in accordance with cl 5.C.2(a), the AER has established that the margins and management fees quoted in these contracts do not reflect costs associated with any activity (including any potential in-scope activities) that is reasonably required in the provision of regulated services.  Rather, they represent an additional margin above all other costs and activities identified in the relevant contracts and by the DNSPs in their budget applications and subsequent information.”

 

The report also stated that (at p 41):

“The AER notes that, in making this determination on the DNSP’s charges for 2010-2011, clause 5D.6 of the revised Order requires DNSPs to include details of their actual expenditures attributable to regulated services for 2006-2008 as per their audited regulatory accounting statements. The ESCV’s Electricity Industry Guideline No. 3 – Regulatory Information Requirements (Guideline 3) specifies the ESCV’s requirements for the collection, allocation and recording of business data by the Victorian DNSPs. Guideline 3 also excludes management fees and related party margins from DNSPs’ costs in their regulatory accounting statements. Accordingly, the charges for 2010 and 2011 determined in section 5 below do not include any related party margins or management fees which were incurred under AMI contracts in 2006-2008, as these were not included in regulatory accounting statements as per Guideline 3.”

Grounds of appeal

29                                          As a result the budget submitted by JEN was reduced by $8.4 million and the budget submitted by UED was reduced by $13.1 million.  It is the decision to make those deductions which gives rise to each appeal. 

30                                          This is a convenient point to consider the grounds of appeal.  Each notice of appeal complains that the AER has erred in fact and in law in numerous respects.  Without going into too much detail, UED’s notice of appeal essentially asserts that the AER erred in:

(1)  holding that the management fee was outside scope, mischaracterising the activities to which the management fee relates;

(2)  holding that clause 5D.6 of the AMI Order, in combination with Guideline 3, prevented the AER from including management fees and related party margins in the charges for 2010-2011; and

(3)  rejecting the management fee on the basis that the costs claimed as the fee are not reasonably required for the provision of activities within scope (the real issue being whether the activities were reasonably required for the AIMRO).

31                                          In the case of JEN, the notice of appeal raises substantially the same grounds as those raised by UED. JEN also contends that the AER breached rules of natural justice and did not observe the AMI Order’s procedures by rejecting JEN’s budget in its final determination, having accepted JEN’s budget in its draft determination.

The extent of the Tribunal’s jurisdiction

32                                          The first issue that must be resolved is whether an appeal lies to the Tribunal when the decision of the AER involves, or is based on, an error of law.  According to the appellants, the appeal provisions found in the NEV Act do not restrict the grounds of appeal when the appeal is in respect of a determination under the AMI Order.  Thus, so it is said, any error, whether of law or fact, is appellable.  The AER on the other hand contends that, properly construed, the NEV Act restricts appeals from a determination of the AER under the AMI Order to a determination which is based wholly or partly on an error of fact in a material respect.

33                                          To resolve this dispute it is necessary, first, to consider the grounds of appeal that were available under the Essential Services Commission Act 2001 (Vic) (ESC Act) against a decision of the ESC before its functions were transferred to the AER.

34                                          Appeals from a determination of the ESC were governed by ss 55 and 56 of the ESC Act.  Relevantly, those provisions provide:

55(1)    A person who is aggrieved by –

            (a)        a requirement made by the Commission under section 37; or

            (b)        a decision of the Commission to disclose information or the contents                     of a document given to the Commission by that person under a notice                         given under section 38(2)(c) or 38(2)(d); or

            (c)        a determination of the Commission –

            may appeal against the requirement, decision or determination in accordance        with this section.

55(1A)…

55(2)    The only ground for an appeal –

            (a)        under subsection (1)(a) is that the requirement –

                        (i)         was not made in accordance with the law; or

                        (ii)        is unreasonable having regard to all the relevant                                                  circumstances;

            (b)        under subsection (1)(b) is that the decision –

                        (i)         was not made in accordance with the law; or

                        (ii)        is unreasonable having regard to all the relevant                                                  circumstances;

            (c)        under subsection (1)(c) is that –

                        (i)         there has been bias; or

                        (ii)        the determination is based wholly or partly on an error of                                     fact in a material respect.

55(3)    A person must lodge a notice of the appeal with the Registrar –

            (a)        in the case of an appeal under subsection (1)(a) or (1)(b), within 14                      working days after the person is given the notice; or

            (b)        in the case of an appeal under subsection (1)(c), within 21 working                       days after the determination is published.

 

…

56(1)    An appeal must be heard by an appeal panel consisting of 3 members –

            (a)        being a chairperson and 2 other persons appointed by the Registrar;                     and

            (b)        of which at least one must have knowledge of administrative law or                     of the law of procedure and evidence.

            …

56(4)    An appeal must be heard and decided –

            (a)        in the case of an appeal under section 55(1)(a) or 55(1)(b), within 7                      working days of the appeal panel being constituted, or if the appeal                       panel requires further time, within a further period not exceeding 7                working days; or

            (b)        in the case of an appeal under section 55(1)(c), within 30 working                        days of the appeal panel being constituted, or if the appeal panel                                requires further time, within a further period not exceeding 15                                     working days.

56(5)    If an appeal panel requires further time under subsection (4), the chairperson        must notify the Registrar in writing.

 

35                                          Section  37 of the ESC Act provides that if the ESC considers that it is necessary to do so for the purposes of performing its functions, the ESC may require a person whom the ESC believes has relevant information or a relevant document to provide that information or document to the ESC.  Section 38 provides that if, in the exercise of its powers, the ESC obtains confidential or commercially sensitive information the ESC must not disclose that information unless it is of the opinion that the disclosure would not cause detriment to the person supplying it, or if it would, the public benefit in disclosure outweighs that detriment.

36                                          There are several observations to be made about ss 55 and 56.  First, there is no doubt that an appeal against a determination of the ESC under the AMI Order was available by reason of s 55(1)(c).  Second, the only grounds for such an appeal were those specified in s 55(2)(c), that is actual bias or that the determination was based wholly or partly on an error of fact in a material respect.  Critically for present purposes it is to be noted that there was no right to appeal against a determination under the AMI Order solely in respect of an error of law.  If the ESC had, in any respect, erred solely in law, that error could only be corrected by a supervising court on an application for judicial review.

37                                          The right of appeal against a determination of the AER is conferred by s 29 of the NEV Act, which is one of the provisions introduced in 2007.  Section 29(1) provides:

(1)        This section applies if the AER, in exercise or performance, or purported exercise or performance, of a relevant regulatory function or power conferred on it under section 23, makes –

            (a)        a requirement under section 37 of the Essential Services                                  Commission Act 2001; or

            (b)        a decision to disclose information or the contents of a document                           given to the AER by a person under a notice given by the AER under                        section 38(2)(c) or 38(2)(d) of the Essential Services Commission                     Act 2001; or

            (c)        a determination that –

                        (i)         revokes and substitutes the 2006–2010 distribution pricing                                    determination or a subsequent determination applying to                                       charges for connection to, and the use of, distribution                                                systems in Victoria; or

                        (ii)        amends –

                                    (A)       the 2006–2010 distribution pricing determination; or

                                    (B)       a subsequent determination applying to charges for                                              connection to, and the use of, distribution systems in                                            Victoria; or

            (d)        a decision or determination under the AMI Order.

38                                          It will be seen that there now is a right of appeal in respect of four specific types of decision.  Two mirror directly the appeal provisions in s 55(1) of the ESC Act, namely (1) an appeal in respect of a requirement under s 37 (a decision to obtain information or documents); and (2) an appeal in respect of a decision made under s 38(2)(d) (a decision to disclose confidential information).

39                                          The two remaining types of decision in respect of which there is a right of  appeal, determinations relating to the 2006-2010 distribution pricing determinations and a determination under the AMI Order, were not separately mentioned in s 55(1).  Each, however, was a determination that fell within the general right of appeal given by s 55(1)(c).

40                                          The dispute concerning the grounds of appeal that are available in respect of the right of appeal conferred by s 29(1)(d) against a determination under the AMI Order comes about because of s 29(3).  That subsection provides:

Sections 55 and 56 of the Essential Services Commission Act 2001 apply to an appeal under this section as if –

(a)        a reference in those sections to section 55(1) were a reference to subsection        (1) of this section; and

(b)        in section 55(3) for “the Registrar” there were substituted “the Tribunal”; and

(c)        section 56(1) to (3) and (5) were omitted; and

(d)        a reference in those sections to the Commission were a reference to the AER;     and

(e)        a reference in those section to an appeal panel were a reference to the                Tribunal.

41                                          On a literal application of ss 55 and 56 of the ESC Act to an appeal under s 29 there would be, as the AER points out, no limit to the grounds of appeal under s 29(1)(d), no time limits within which an appeal must be brought, and no timetable for the handing down of a decision on the appeal.  These limits applied when the ESC was the decision-maker.  These limits still apply in relation to the other decisions in respect of which an appeal lies. Clearly, the intention was for the limits to apply to all types of decisions.

42                                          As a general rule, a court is required to give effect to the literal words of a statute.  But this rule is not of universal application.  For instance, if it is clear that the literal meaning of the words used by Parliament will produce a result that plainly is not what was intended, then a court is permitted to depart from the literal meaning.  Indeed, if what was intended is clear, the court should give effect to that intention, where necessary changing the language of the enactment by adding, deleting or substituting new words.  This approach was sanctioned by Lord Diplock in Jones v Wrotham Park Settled Estates [1980] AC 74and applied by the Federal Court in Handa v Minister for Immigration and Multicultural Affairs (2000)106 FCR 95 [13] – [17].

43                                          The means of curing the problem created by Parliament is not to substitute for the words “under subsection (1)” in s 55(2)(c) the words “under ss 29(1)(c) or 29(1)(d)” for that would be rewriting the wrong statute.  It is to be solved by redrafting (or reading) s 29(3) so that when it applies s 55 and s 56 to appeals from determinations of the AER, it does so on the basis that appeals under each of s 29(1)(c) and 29(1)(d) are regulated by s 55(2)(c).

44                                          Read in this way, the legislation provides that an appeal will only lie against a determination of the AER under the AMI Order on the ground that either (1) there has been bias (which is not alleged) or (2) the determination is based in whole or in part on an error of fact in a material respect.

45                                          What is required to establish the ‘based on error of fact’ ground of appeal? The first step is to identify whether a determination involves an error of fact. It is often difficult to determine whether what a decision-maker has decided is a question of law, a question of fact or a mixture of the two.  Professor Wade has described what he refers to the “simpler and more logical doctrine” as being that once the facts of a particular case have been found, the question whether those facts satisfy a legal definition or requirement is a question of law:  Wade & Forsyth, Administrative Law, 9th ed at 943.  This follows the approach of Lord Parker in Farmer v Cotton Trustees [1915] AC 922, 932 who said that once the material facts had been fully found and the only question is whether the facts were such as to bring the case within the provisions of some statutory enactment, the question was one of law only. 

46                                          This approach, however, is not the modern approach.  A “more sophisticated and less logical” approach (at least according to Professor Wade at 944) is required.  The first step under this approach is to construe the statute or statutory instrument to discern its proper meaning.  That process is a question of law.  Once the instrument has been construed, the question whether the facts as found satisfy the statutory description is essentially a question of fact:  Edwards (Inspector of Taxes) v Bairstow [1956] AC 14, 33; Hope v Bathurst City Council (1980) 144 CLR 1.  This is because, in most cases, the question whether the facts satisfy a statutory criterion involves questions of degree and evaluation and those are essentially matters of fact.  There is one qualification.  If the decision-maker reaches a conclusion that was simply not open, ie where the facts as found necessarily fall within the statutory criteria, a contrary decision is wrong in law:  Hope v Bathurst City Council (1980) 144 CLR 1; Vetter v Lake Macquarie City Council (2001) 202 CLR 439. 

47                                          If there is an error of fact, the next step is to consider whether the determination is “based wholly or partly” on that error. For a determination to be based on an error of fact, it is not necessary to show that the ultimate fact in issue is incorrect.  It is sufficient if a fact relied upon to prove an ultimate fact was both a material fact and incorrect.  Moreover, provided the determination is based wholly or partly on such an erroneous fact, the determination is appellable even if the decision-maker was required also to resolve questions of law in order to arrive at that determination.  While it is not necessary to decide the point in this case, it is also likely that, on an appeal, the Tribunal may be required to consider and resolve legal issues which relate to, or arise from, the factual error.  On the other hand, discrete legal issues unrelated to any factual error (eg, a denial of natural justice or a failure to observe required procedures), cannot be considered by the Tribunal.

Was the AER’s determination based wholly or partly on an error of fact?

48                                          It is worth repeating that the central issue for the AER to determine was whether expenditure is for activities that are reasonably required for the provision of metering services.

49                                          The question whether an item of expenditure is “reasonably required” for the provision of regulated services requires the resolution of two issues:  (a) in respect of what activity is the expenditure incurred; and (b) is that activity reasonably required for the provision of regulated services? 

50                                          The first issue is plainly an issue of fact.  The relevant inquiry is not, as the AER would have it, the question whether facts as found fall within cl 5C.2.  Rather the issue is that whether the factual conclusion about the management fee is correct or not.  If it is incorrect the decision of the AER is based, at least in part, on an error of fact. 

51                                          The second issue requires there to be a relationship or connection between two subject-matters (the activity and the metering services).  Whether there is a sufficient relationship is a matter of judgment.  Once again, that is a factual inquiry.

52                                          Prima facie, then, the question whether a management fee is for an activity within scope is a factual inquiry.

53                                          The AER’s approach in rejecting the management fee seems, however, to involve both a factual enquiry and a legal analysis of sorts. As best as one can tell, the AER’s reasoning involved the following steps.  First it said that the contracts with AAM provided for management services, namely the provision of a program management office, corporate services, provision of a CEO and other overheads.  Second, it said that the cost of providing those management services was incorporated into the “cost build up” (which appears to be a reference to costs payable under the contract, separate to the management fee).  Third, it said that the management fee (also described, accurately enough, as “an explicit ‘margin’”) is an additional margin “over and above the costs incurred by the related parties.”  Fourth, the AER concluded that the management fees “do not reflect costs associated with any activity (including in-scope activities) that is reasonably required in the provision of regulated services”, and that the management fees were not “for” an activity within scope.

54                                          There are a number of premises critical to the AER’s reasoning.  The first is that all costs incurred by AAM are already covered under the contract, separately from the management fee. This premise is incorrect, as a matter of fact. While the contract requires AAM to provide management services in several respects, the only cost that must be paid in respect of the provision of those services is the “backfill costs for Personnel”.  The contract makes clear that those costs are confined to the wages payable to certain persons permanently assigned to the AIMRO program on a full time basis and to the wages payable for persons engaged to fill the place of those permanently assigned. The backfill costs do not incorporate the wages of all AAM staff who might be involved in the management of the project. In this context, it is important to note that the contract specifies that other AAM staff do have functions, and are required to undertake activities, as part of the AIMRO program.  Similarly, there may be other non-wage costs associated with management, none of which is included in the Incremental Costs. As the contract expressly records, “management time and cost will … not be invoiced or charged to the program”.

55                                          The second premise is that, to the extent that the management fee is simply a profit margin for the related party, the fee is necessarily for activities outside scope. This premise is incorrect, as a matter of both fact and law. The regulatory principles set out in cl 4 of the AMI Order refer to a building block approach based on, among other things, operating expenditure of the distributor. If a distributor outsources activities, the operating expenditure of the distributor will necessarily incorporate a margin it pays to the party providing the outsourced services. So long as the third party is performing activities within scope, then the profit margin payable to the third party is a cost for those activities within scope. It may be that the profit margin payable is not prudent, but that is a separate matter. In this case, the AER did not establish that the management fee was not prudent. (We are not to be taken as suggesting that in other contexts involving electricity pricing determinations, related party margins are to be treated in the same way.)

56                                          A third premise which the AER may have relied upon is that it was entitled to reject the management fee on the basis that the costs claimed as a management fee do not reflect the true costs of management activities which are within scope. To the extent that the AER relied on this premise, the premise is incorrect as a matter of law. The AER can reject an item in a budget relating to activities which are not reasonably required for the provision of regulated services and to comply with a metering regulatory obligation or requirement. It cannot reject an item in a budget on the basis that the cost of the activity is not reasonably required. As noted above, the AER might separately reject such an item on the basis that it is not prudent.

57                                          In light of the above, we are satisfied that there have been errors of fact, that those errors were material, and that that the AER’s ultimate determination to reject the management fees was based at least partly on those errors.

58                                          If a ground of appeal is made out the Tribunal may vary the determination to correct the error or set aside the determination and remit it to the AER for amendment:  see s 56(7)(d).

59                                          In this case we propose to vary the determination to include in the case of each of JEN’s and UED’s budgets the management fee claimed in the budget application.  To reach this conclusion we have considered whether there is any other issue which might permit the AER to reject the management fee.  We are satisfied there is none for reasons which we will now briefly explain.

60                                          In its final determination the AER referred to the ESCV’s Electricity Industry Guideline No. 3, a guideline which specifies the requirements for the collection, allocation and recording of business data by a DNSP.  The guideline does not permit the DNSP to record management fees and related party margins in its accounting statements. 

61                                          The AER seems to be of the opinion (once again its precise view is not altogether clear) that the guideline’s exclusion of management fees and related party margins permits the AER to exclude those items from the budget.  This, of course, is incorrect.  The AER’s opinion (if that is the opinion that it holds) is based on a misreading of the AMI Order.  We have mentioned what must be included in a budget application, namely expenditure for regulated services, actual and anticipated, and the total Opex and Capex for the budget period.  Clause 5D.6 imposes an obligation on an applicant for budget approval to provide information to the AER.  In addition to the information required by cl 5 of the AMI Order, an applicant must also provide to the AER details of its actual expenditure for the relevant years as derived from the applicant’s accounting statements.  This is a requirement to provide the AER with information from which it is able to verify the claimed budget expenditure.  On no view does cl 5D.6 purport to restrict what expenses are recoverable. 

62                                          Accordingly, no purpose is served in remitting the applications for budget approval to the AER. 

63                                          So far as orders are concerned, it seems that all that will required is to allow the appeal and vary the AER’s final determination, as set out in Table 3.3 and 3.4 of the final determination, to add back the management fee. The appellants should submit draft minutes of orders for the Tribunal’s consideration. If it is thought other consequential variations need be made to the determination, then they also should be included in the draft minutes, but the appellants are requested to provide a brief explanation for those additional variations.

 

I certify that the preceding sixty-three (63) numbered paragraphs are a true copy of the Reasons for Determination (public version) herein of the Honourable Justice Finkelstein, R F Shogren & M M Starrs.

Associate:

Dated:         23 December 2009

Counsel for United Energy Distribution Pty Ltd:	Mr W T Houghton QC Mr D C Gration
Solicitor for United Energy Distribution Pty Ltd:	Johnson Winter & Slattery
Counsel for Jemena Electricity Networks (Vic) Ltd:	Mr N J O’Bryan SC Mr C M Archibald
Solicitor for Jemena Electricity Networks (Vic) Ltd:	Freehills
Counsel for the Australian Energy Regulator:	Mr P Hanks QC Dr V M Priskich
Solicitor for the Australian Energy Regulator:	Corrs Chambers Westgarth

Date of Hearing:	21 December 2009
Date of Determination:	23 December 2009