AUSTRALIAN COMPETITION TRIBUNAL

 

Application by Ergon Energy Corporation Limited [2010] ACompT 6


Citation:

Application by Ergon Energy Corporation Limited [2010] ACompT 6



Review from:

Australian Energy Regulator



Parties:

ERGON ENERGY CORPORATION LIMITED

(ACN 087 646 062)



File number:

3 of 2010



Members:

MIDDLETON J (DEPUTY PRESIDENT),

MR R DAVEY AND MR R SHOGREN



Date of delivery of reasons:

13 October 2010



Date of hearing:

15, 16, 17, 20 and 21 September 2010

 

 

Place:

Melbourne

 

 

Category:

No Catchwords

 

 

Number of paragraphs:

54

 

 

Counsel for Ergon Energy Corporation Limited:

Mr P O’Shea SC with Mr Bradley

 

 

Solicitor for Ergon Energy Corporation Limited:

Minter Ellison Lawyers

 

 

Counsel for Australian Energy Regulator:

Mr P Hanks QC with Mr Gray, Ms R Ellyard, Mr T Clarke and Mr L Merrick

 

 

Solicitor for Australian Energy Regulator:

Corrs Chambers Westgarth

 
 
 



IN THE AUSTRALIAN COMPETITION TRIBUNAL

 

 

FILE NO 3 of 2010

 

RE:

APPLICATION UNDER SECTION 71B OF THE NATIONAL ELECTRICITY (QUEENSLAND) LAW FOR A REVIEW OF A DISTRIBUTION DETERMINATION MADE BY THE AUSTRALIAN ENERGY REGULATOR IN RELATION TO ERGON ENERGY CORPORATION LIMITED PURSUANT TO RULE 6.11.1 OF THE NATIONAL ELECTRICITY RULES

 

BY:

ERGON ENERGY CORPORATION LIMITED

(ACN 087 646 062)

 

 

MEMBERS:

MIDDLETON J (DEPUTY PRESIDENT),

MR R DAVEY AND MR R SHOGREN

DATE OF PUBLICATION OF REASONS FOR DECISION:

 

13 October 2010

PLACE:

MELBOURNE


REASONS FOR DECISION

INTRODUCTION

1                     On 30 September 2010, the Tribunal made the following announcement and directions:

OTHER MATTERS: the Tribunal has formed the view that a ground of review has been established for the purposes of section 71R(3) of the National Electricity (Queensland) Law in relation to the AER’s decision to remove the element of other one-off costs (other costs) from the control mechanism formula for the calculation of the price for the applicant’s quoted services during the regulatory period; and, therefore:

THE TRIBUNAL DIRECTS THAT: 

1.         By 4pm on 5 November 2010, the AER file and serve a report (the other costs report) addressing: 

(a)       the manner in which other costs incurred in providing the applicant’s quoted services during the regulatory period can be subjected to a price cap form of control, consistent with the Framework and Approach Paper (the other costs price cap mechanism); and

(b)       the inclusion of other costs that are subject to a price cap form of control in the formula for calculating the price of the applicant’s quoted services during the regulatory control period. 

2.         The other costs report is to be prepared by the AER after: 

(a)       the applicant has made submissions to the AER (to be submitted by 8 October 2010), proposing the other costs price cap mechanism and demonstrating its composition and the manner in which that mechanism would be applied; and

(b)       the AER has consulted with the applicant on the other costs price cap mechanism.

3.         If the applicant does not agree with the AER’s conclusion in the other costs report filed and served by the AER in accordance with paragraph 1, then by 4pm on 15 November 2010 the applicant file and serve submissions in response, identifying the parts of the other costs report with which it disagrees and stating the reasons for the disagreement.

4.         The application be adjourned to 22 November 2010.

2                     It will be observed that the Tribunal formed the view that a ground of review had been established for the purposes of s 71R(3) of the National Electricity (Queensland) Law (‘the NEL’) in relation to the decision by the Australian Energy Regulator (‘AER’) to remove the other one-off costs (‘other costs’) component from the control mechanism formula proposed by the applicant to calculate its price for quoted services during the 2010-2015 regulatory period.  The ground of review was that the AER made errors of fact in its findings of fact, and these errors of fact were material to the making of the decision.

3                     The Tribunal now gives reasons for that view being formed.

4                     The applicant, Ergon Energy Corporation Limited (‘Ergon Energy’) is an unlisted public company beneficially owned by the State of Queensland.   It owns and operates six electricity distribution networks in Queensland and associated connection assets.  It is relevant to have in mind that government ownership because it explains the overlay of Queensland Government policies in Ergon Energy’s review related material, such as its Procurement Policy Business Rules.

5                     Ergon Energy is registered as a distribution network service provider (‘DNSP’) under the National Electricity Rules (‘the Rules’).

6                     The respondent AER is a body corporate established by s 44AE(1) of the Trade Practices Act 1974 (Cth).

7                     The NEL applies as a law of Queensland by operation of s 6 of the Electricity – National Scheme (Queensland) Act 1997 (Qld).  

8                     The Rules made under the NEL, have the force of law in Queensland by operation of s 9 of the NEL.    

9                     Under the NEL and the Rules, the AER has responsibility for the economic regulation of electricity distribution services provided by DNSPs, including making statements of regulatory intent (‘SORIs’) in respect of DNSPs and making a distribution determination in respect of each DNSP.   

10                  In June 2009, Ergon Energy submitted to the AER a regulatory proposal for the regulatory control period from 1 July 2010 to 30 June 2015 (‘regulatory proposal’).  

11                  In November 2009, the AER made a draft distribution determination in relation to Ergon Energy (‘draft determination’). 

12                  In January 2010, Ergon Energy submitted to the AER a revised regulatory proposal (‘revised proposal’).  

13                  In May 2010, the AER made a final distribution determination in respect of Ergon Energy’s regulatory proposal and its revised proposal (‘final determination’). 

14                  On 15 July 2010, the Tribunal granted leave to Ergon Energy pursuant to s 71B(1) of the NEL to apply to the Tribunal for a review of the final determination in respect of the grounds specified in Ergon Energy's application dated 27 May 2010, which included ground 1 relating to ‘quoted services’.

15                  Quoted services are one of two types of alternative control service established by the AER for the purposes of Ergon Energy’s distribution determination.

16                  In Appendix A to the final determination, the AER listed 13 different types of quoted services supplied by Ergon Energy.  A feature that is common to each of these types of service is that the precise specification (and therefore cost) will vary from case to case.  Accordingly, it is necessary for Ergon Energy to provide a price to the customer each time such a service is requested.  In the event that a person requesting a quoted service cannot agree with Ergon Energy on the price to be charged, either party may notify an access dispute to the AER under cl 6.22 of the Rules.

17                  In its final determination, the AER decided to regulate pricing for a quoted service by approving a formula, specifically:

‘Pi = Li + Mi + CAi + GSTi 

where: 

Li         is the cost of labour involved in the delivery of the service (inclusive of on costs and overheads), calculated as the product of an hourly rate and the time spent by the personnel. This amount includes both travel time and time spent delivering the service. 

Mi        is the cost of non-capitalised materials expensed in the delivery of the service (inclusive of overheads). 

CAi      reflects the return on and return of non-system capital employed in the delivery of the service (for example, trucks and IT systems), which is calculated as a dollar per dollar of labour expenditure in accordance with section 18.3.3.3 of this decision. 

GSTi    the goods and services tax component of the service charge.’

18                  The AER rejected Ergon Energy’s proposal to include the following additional component for other costs’ (or ‘OCi’) in the quoted services formula:

OCi      other one-off costs (inclusive of overheads) relating to the delivery of the service, including hire or supply of additional equipment, assets or labour, and contingency costs. 

19                  As a consequence of this decision, Ergon Energy cannot include in a price for the delivery of a quoted service, costs such as the hire or supply of any additional equipment, assets or labour that may be required to deliver the service.

20                  Ergon Energy contended that the AER’s decision was affected by one or more errors of the type described in s 71C of the NEL.

21                  Ergon Energy submitted that if the Tribunal found that the AER’s decision was affected by one or more errors of the type described in s 71C of the NEL, the appropriate course for the Tribunal was to amend the AER’s distribution determination by inserting an other costs component into the quoted services formula, defined in the following terms:

OCi     other one-off costs (inclusive of overheads) relating to the delivery of the service, including hire or supply of additional equipment, assets or labour.

22                  Ergon Energy did not contend that an error was made by the AER in so far as the AER excluded ‘and contingency costs’ from the formula for the pricing of quoted services. 

MAIN ISSUE

23                  The main issue is whether the decision by the AER that it was not satisfied that the inclusion of a component of other costs in a formula Ergon Energy proposed to derive its prices for quoted services reflects the recovery of efficient costs and that therefore it was not appropriate to include that component in Ergon Energy’s formula, gives rise to a ground for review of the decision in terms of s 71C of the NEL.

BACKGROUND

24                  As already indicated, the decision means that Ergon Energy may not include other costs (for the hire or supply of additional equipment, assets or labour) in a price it charges for a quoted service.  Those costs may amount to more than $60 million over the five year regulatory period.  The AER does not dispute that other costs will be incurred by Ergon Energy but asserts that due to the paucity of information submitted to it by Ergon Energy, the AER could not (and now the Tribunal cannot) determine whether those costs would be incurred efficiently.

25                  An understanding of how this imbroglio arose and how it might be resolved, is to be found in the history pertaining to Ergon Energy’s inclusion of the other costs component of its quoted services formula and the AER’s rejection of it, read in the context of the AER’s functions and powers under the NEL and the Rules.

The AER’s Functions and Powers

26                  The AER assumed responsibility for regulating electricity distribution services in Queensland from 1 July 2010.  Prior to that date, the responsibility belonged to the Queensland Competition Authority (the QCA). 

27                  Chapter 6 of the Rules enables the AER to classify a distribution service that a DNSP provides as a ‘direct control service’ or a ‘negotiated distribution service’ (cl 6.2.1).  The Rules (cl 6.2.2(a)) state that ‘direct control services’ are to be further divided into two subclasses:

(1)                standard control services; and

(2)                alternative control services.

A classification forms part of a distribution determination and operates for the ‘regulatory control period’ for which the determination is made (cl 6.2.3) – in the present matter five years from 1 July 2010 to 30 June 2015.

28                  The Rules provide that the AER must make a distribution determination for each DNSP (cl 6.2.4(a)) and that the determination is to impose controls over the prices of ‘direct control services’, the revenue to be derived from direct control services or both (cl 6.2.5(a)).

29                  In anticipation of making a distribution determination, the AER must prepare and publish a framework and approach paper (cl 6.8.1(a)).  The Rules require that the framework and approach paper set out the AER’s likely approach (together with its reasons for its likely approach) in the forthcoming determination to, amongst other things, its classification of distribution services (cl 6.8.1(b)(2)).

30                  On 27 August 2008, the AER published a framework and approach paper entitled: “Classification of services and control mechanisms – Energex and Ergon Energy 2010 – 15” (the FAP).  In the FAP, ‘quoted services’ are classified as ‘alternative control services’.

31                  In deciding on a control mechanism for ‘alternative control services’, the AER must (cl 6.2.5(d)) have regard to, amongst other things:

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

(2)               the possible effects of the control mechanism on administrative cost of the AER, the Distribution Network Service Provider and users or potential users;

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

(4)              

(5)               any other relevant factor.

‘Quoted Services’, ‘Other Costs’ and communications between Ergon Energy and the AER

32                  As observed, the precise scope of work necessary to perform a quoted service, such as Ergon Energy designing and constructing a connection asset for a large customer, can not be known in advance.  That is, a ‘quoted service’ will vary from customer to customer along with the price that may be charged. 

33                  Having classified ‘quoted services’ as ‘alternative control services’ the AER’s FAP set out its likely approach to issues to be addressed by Ergon Energy when submitting its regulatory proposal for the 2010-2015 regulatory period, in the following paragraphs:

The AER will apply a formula based approach (a non-building block approach) to determine the efficient costs of providing quoted services under a price cap form of control in the first year of the regulatory control period and establish a price path for remaining years of the period. 

The AER will apply a formula based approach (a non-building block approach) to determine the efficient costs of providing fee based services under a price cap form of control in the first year of the regulatory control period and establish a price path for remaining years of the period. 

For all alternative control services the approved price is the maximum price Ergon is permitted to charge for a particular service.

A footnote to the paragraphs stated: “For quoted services the formula based approach may contain variable components whereas for fee based services the components for each formula are fixed.”

34                  Having referenced the above quoted paragraphs in the FAP and, in particular, the above quoted footnote to those paragraphs, Ergon Energy’s June 2009 regulatory proposal stated:

Ergon Energy has interpreted the above requirements to mean that, for Quoted Services, the components of the formula will be subject to a price cap form of control, but the final prices for the service will not be set in advance.  The costs of the individual components that are applied in the formula will be fixed where possible but the number of components used in the delivery of the service will be left variable. 

This means that Ergon Energy must provide in this Regulatory Proposal: 

•        A formula which it will use to develop the prices for Quoted Services; and

•        Values, wherever possible, for the component parts of the formula that it proposes. 

54.6.1  Control Mechanism Formula 

The following formula is proposed for Ergon Energy’s Quoted Services. 

Pi = Li + OCi = CAi – GSTi 

Where: 

Li = the cost of labour involved in the delivery of the service, calculated as the product of an hourly rate [inclusive of on-costs and overheads] and the time spent by the personnel involved.  The amount of time will include both travel time and the time spent delivering the service. 

Mi= the cost of non-capitalised materials expensed in the delivery of the service [inclusive of overheads].  For large new customer connection services, this could include large scale capital items which are charged directly to customers. 

OCi = other one-off costs [inclusive of overheads] relating to the delivery of the service, including hire or supply of additional equipment, assets or labour, and contingency costs.

GSTi = the Goods and Services Tax component of the service charge. 

CAi = a charge applied to reflect the use of non-system physical assets owned by Ergon Energy involved in the delivery of the service.  This charge reflects the return on and of non-system capital employed in the delivery of the service [e.g. trucks and IT systems].  This will be calculated by the following formula: 

CAi= CNSi + CVi 

Where: 

CNSi = a charge for non-system assets [excluding vehicles], comprising a return on and of non-system assets allocated to the delivery of Quoted Services.  This charge will be applied as a percentage of the sum of the total Labour [Li], Materials [Mi] and Other Costs [OCi] based on historical trends. 

CVi = a charge to reflect a return on and a return of vehicles used in the delivery of Quoted Services.  The return on capital will be calculated using a current cost accounting valuation of vehicles based on the classes set out in Table 164, and the approved weighted average cost of capital used for Standard Control Services.  The return of vehicles [depreciation] will be calculated based on the same asset valuation and an average life of 10 regulatory years.

By way of explanation of the other costs component of the formula, Ergon Energy’s regulatory proposal stated that it would charge for: “... ‘other costs’ at cost as they arise in the provision of each individual quoted service.”

35                  The following guidelines and instructions documenting Ergon Energy’s contracting, procurement and tendering practices and procedures were referenced in the regulatory proposal and form part of the s71R ‘review related material’ before the Tribunal:

Establish & Manage Contracts for Goods or Services – Guidelines  MP000901R100 V2 

Manage, Extend, Re-invite and Complete Contracts Work Instruction  MP000902W101 V1 

Issue Tender packs, Receive and Open Tender Works Instruction MP000901W101 V2 

Procurement Policy Business Rules  MP000200R100 V8 

Request Prepare and Advertise Tenders for Goods or Services Work Instruction  MP000901W100 V2 

EP19 Procurement Policy  V1

Evaluate, Recommend, Obtain Approval and Award Contract  MP000902W101 V2 

Ergon Energy’s counsel submitted that its adherence to these practices and procedures lay a foundation for a finding by the AER that other costs incurred by Ergon Energy in connection with the provision of quoted services would be efficiently incurred.

36                  In the lead-up to the AER issuing its November 2009 draft determination the formula was further explained by Ergon Energy in a series of e-mail exchanges with the AER.  The e-mails germane to the Tribunal’s consideration of the issue before it are summarised below.  In the first of those e-mails, dated 14 August 2009, the AER noted, amongst other things, that each component of the formula consists of variable elements and, relevantly, asked Ergon Energy to:

(a)               explain how its proposed formula incorporated the variability;

(b)               provide a list of all the formula component elements that could be applied in delivering quoted services;

(c)               provide the proposed capped price for each element; and

(d)               provide and explain a price path for each quoted services formula component; and

By e-mail dated 29 August 2009, Ergon Energy responded to (a) by indicating that consistent with the footnote to the FAP that is quoted in par [33] above, the high-level cost components in the formula are not intended to be constant for each quoted service and are comprised of sub-components specific to the quoted service provided.  The relevant part of Ergon Energy’s response to (b) stated:

The One-off Cost Component (OCi) is based on the cost of any one-off expenses relating to the delivery of the service.  One-off Costs may include:

  •          Hire or supply of additional equipment;

  •          Hire or supply of Assets or labour; and

  •          Contingency costs.

    These costs vary in accordance with the requirements of the particular service and are not known in advance.

    Ergon Energy’s response to (c) and (d) advised that capped prices were not applicable to the One-off Cost Component (OCi) of the formula.

    37                  On 1 October 2009, the AER requested, Ergon Energy to, amongst other things, “... provide an internal document (or price book) that sets out the 2009-10 base price for all materials that could be used in delivering quoted ... services”.  Ergon Energy’s response, dated 19 October 2009, confirmed advice in its earlier response that materials used in these services varies according to the work required and are not known in advance.  Its response went on to say that therefore it was not able to provide a list of materials that could be used in providing quoted services or the 2009-10 prices for these materials.  Ergon Energy’s response also referred to its notes of a teleconference, held on 10 July 2008, between the AER, Ergon Energy and Energex (another Queensland DNSP) in which Ergon Energy explained the arrangements for quoted services under the QCA and queried how a price cap for quoted services might work under the AER.  As summarised in Ergon Energy’s response, the arrangements with the QCA involved Ergon Energy submitting a pricing demonstration document each year setting out examples of potential prices that could be calculated for each service together with labour rates, on costs, overheads and a capital allowance to apply for the forth-coming financial year.  Ergon Energy’s response records the AER’s representative stating, in reply to the query on how a price cap might work under the AER, that: “the formula is the constraint and the formula elements are uncapped”.  As explained in Ergon Energy’s response, this statement, together with a statement in the AER’s FAP to the effect that it considered it appropriate to retain the approach of the QCA, was taken by Ergon Energy to mean the approach applied by the QCA would apply.  The response also provided the following detail why developing a full list of materials and base prices would result in “...significant costs and risks ...” to both the business and customers because:

  •          Ergon would need to develop and implement an additional new system for Quoted Services that used the materials prices submitted to the AER;

  •          Ergon would need to develop a price list to align with the services;

  •          The list would not be exhaustive so if a customer requires something that is not on the list either the customer can not have that item provided by Ergon Energy or Ergon Energy will not be able to pass on the cost of the item;

  •          The base price will diverge from the costs contained in Ergon Energy’s financial systems which will require significant reconciliation and explanation resulting in significant administrative costs; and

  •          There is a risk that the cost charged from the "price list" may vary from that contained in the financial systems.  The additional costs will either be borne by customers or Ergon Energy depending on whether the "price list" is lower or higher than the actual cost.

    38                  Ergon Energy’s response concluded to the effect that the QCA’s approach had removed these costs and risks and was what Ergon Energy had taken would be applied by the AER in the 2010-2015 regulatory period.

    39                  The AER’s November 2009 draft determination:

    (a)               added the words “(internal and external)” to the Li (cost of labour) component of the formula (par [34] above) Ergon Energy’s proposed to derive its prices for quoted services; and

    (b)               in its consideration of the Mi (materials) component of the formula noted (sans footnotes):

    The Qld DNSPs submitted that the materials component of the formula reflects the costs of  materials used in the provision of quoted services. 

    The Qld DNSPs did not provide a complete list of the materials that could be used in this component.  Ergon Energy stated that it was not practical to do so in light of the number of potential materials that could be used in the provision of these services. 

    The Qld DNSPs provided details of their capex planning and governance processes that underpin the provision of their electricity distribution services. The AER assessed the Qld DNSPs' capital governance frameworks in chapter7 of this draft decision and considered that Energex's processes are consistent with the achievement of the capex objectives and that Ergon Energy's capex governance framework provides adequate assurance that investment decisions are likely to be efficient. 

    The AER is aware that the same processes that underpin the provision of standard control services also underpin the provision of alternative control services.  Having found that these systems are robust in relation to standard control services, the AER considers it reasonable to extend this conclusion to alternative control services. 

    The AER is satisfied that the Qld DNSPs' capital governance frameworks provide a level of assurance that the Qld DNSPs procure and manage their materials efficiently.  The AER therefore considers the cost of materials used to derive the price of quoted services in the first regulatory year of the next regulatory control period are reasonable.

    (c)               approved the formula proposed to be used to derive the prices by Ergon Energy with the exception of the Li (labour) component as noted above and the deletion of the OCi (other costs) component and concluded that Ergon Energy’s quoted service formula is: Pi=Li+CNSi+CVi+GSTi.  That conclusion was based on the following reasons (sans footnotes) which focused on the contingency costs element of the other costs component of Ergon Energy’s formula:

    Ergon Energy's proposed formula included an 'other costs' component. It stated that total direct 'other costs' are calculated by summing the sponsor costs and the project risk held by asset manager contingency cost.  This contingency cost is derived from an assessment of the monthly probability and frequency of project delays such as those due to rain.

    Contingency costs are a financial representation of the risk involved with the provision of certain quoted services.  The inclusion of these contingency costs into the price cap formula passes these costs, and therefore the risk associated with the provision of a quoted service, to the customer.  Planning for contingencies is not unreasonable, however, the AER considers that it is not appropriate for a DNSP to impose contingency costs on all customers as contingencies may not eventuate and individual customers have different attitudes towards the risk associated with contingency costs. 

    The AER considers that contingency costs can be better managed as part of the commercial discussions between individual customers and a DNSP.  This way, the parties can agree on who will accept he risk associated with contingencies occurring. 

    The AER also considers that the inclusion of allowances for contingency costs provides no incentive for a DNSP to seek productivity gains or to improve its internal processes and procedures.  As such, the AER is not satisfied this component reflects the efficient cost of providing quoted services and therefore considers it is appropriate to remove the 'other costs' component from Ergon Energy's formula used to derive prices for certain quoted services in the next regulatory control period. 

    40                  As observed, on 14 January 2010 Ergon Energy submitted its revised proposal to the AER.  After addressing issues raised by the AER in relation to the Li (cost of labour) component of the formula Ergon Energy proposed to derive its prices for quoted services, Ergon Energy stated it did not accept the AER’s decision to remove the other costs component from the formula and went on to state: 

  •                     The AER has not understood the intent of the "other cost" component.  The explanation the AER referred to in its Draft Distribution Determination related to the explanation of how "other costs" were calculated for one scenario of a New Large Customer Design and Construct service - not the definition of "other costs" generally.

  •                     As discussed in section 5 4.6.1 of Ergon Energy's Regulatory Proposal, "other costs" relates to one-off service delivery costs including hire or supply of additional equipment, assets or labour and contingency costs.  This was also explained in Ergon Energy's response to AER.ERG.O7.2 on 29 August 2009.  That is, "other costs" does not just represent contingency costs but any "other" costs Ergon Energy incurs in performing a service such as hire of equipment or assets etc.

  •                     "Other costs" are incurred as the result of a request for a specific service from a customer.  That is, Ergon Energy would not otherwise incur those costs.  Therefore. it is appropriate that these costs be passed through to the customer.

  •                     The QCA accepted the inclusion of "other costs" (referred to as other direct costs) in the approved formula for 2008-09 and 2009-10.

  •                     Therefore, Ergon Energy believes that the "other cost" component should be included in the formula for Quoted Services.

    41                  Ergon Energy’s revised proposal was accompanied by additional documents, including a calculation of three large customer design and construction project scenarios and 34 other examples of different types of quoted services. 

    42                  In the exchange of e-mails between the AER and Ergon Energy that followed Ergon Energy lodging its revised proposal on 14 January 2010 and the AER publishing its final determination on 6 May 2010 the AER asked two questions of Ergon Energy relating to the other cost component of its proposed quoted services formula.  The first of those questions, which appeared in an attachment to an e-mail dated 19 April 2010, sought from Ergon Energy an explanation of how values for the three large customer design and construction project scenarios had been calculated in a spreadsheet it had provided with its revised proposal.  The second question sought an explanation of job descriptions for the three scenarios in the spreadsheet.  Ergon Energy provided two responses, both dated 21 April 2010.  One explained that the values had been sourced from its “Phoenix” estimating tool which is used to cost major projects and which provides information on labour and vehicles for specific scenarios.  The other provided an explanation of the three scenarios and advised that:

    (a)               the actual price for a customer will be calculated based on the requirements of the individual job; and

    (b)               the scenarios had been provided as examples to demonstrate the application of the quoted services formula and were therefore not the only scenarios that may occur.

    43                  Both of Ergon Energy’s responses invited the AER to: “Come back to us if you have any further questions.”  The AER did not respond to those invitations.

    44                  As observed above, the AER published its final determination on 6 May 2010.  The relevant part of the final decision states:

    In the draft decision the AER did not accept Ergon Energy's proposed 'other costs' formula component as it considered it inappropriate to impose allowances for contingency costs on all customers.1194 

    In its revised regulatory proposal, Ergon Energy submitted that the AER has not understood the intent of the 'other costs' formula component.  It added that the draft decision related to an explanation how 'other costs' were calculated for one scenario of a design and construction of a new large customer connection assets service and not 'other costs' generally.  Ergon Energy stated that 'other costs' relate to one-off service delivery costs including hire or supply of additional equipment, assets or labour and contingency costs.  It added that 'other costs' are incurred as a result of a customer request and if not for that request it would not incur these costs and it is therefore appropriate for these costs to be passed through to the customer.1195 

    Ergon Energy has applied the 'other costs' formula component to four of 37 illustrative quoted service examples and not to fee based services.  The four quoted services are the three examples of the provision of design and construction of a new large customer connection assets service and the removal or relocation of Ergon Energy's assets at customer's request service.1196 

    The AER notes that in Ergon Energy's illustrative quoted services examples 'other costs' expenditure in each example is an input.1197   It is therefore not possible to identify to what this expenditure relates.  Ergon Energy did not provide any information that supports its contention that 'other costs' hire or supply of equipment, assets or labour and not just contingency costs [sic]. The AER sought additional information from Ergon Energy.1198  It explained that its Phoenix estimating tool is used internally to cost projects and provides information on labour and vehicles for specific scenarios.  However, Ergon Energy did not explain what these scenarios were or the specific costs to which they relate.1199 

    The AER considers that Ergon Energy has not provided sufficient information that substantiates the  basis of its proposed 'other costs' formula component expenditure, which has precluded an assessment of the efficiency of that expenditure. 

    In the draft decision the AER considered that the inclusion of allowances for contingency costs provides no incentive for a DNSP to seek productivity gains or to improve its internal processes or procedures.  Quoted and fee based services are implemented at a customer's request.  Nevertheless, customers should only pay the efficient cost of providing those services. 

    The AER is not satisfied that the inclusion of the 'other costs' formula component reflects the recovery of efficient costs and therefore does not consider it appropriate to include that component in Ergon Energy's formula to be used to derive the prices for quoted services in the next regulatory control period.

                ____________________

    1194       AER, Draft decision, Queensland draft distribution determination, November 2009, p420.

    1195       Ergon Energy, Revised regulatory proposal, January2010, p231.

    1196       Ergon Energy, Revised regulatory proposal, January 20I0, attachment RP9I8c.

    1197       Ergon Energy, Revised regulatory proposal, January2010,attachments RP920c and RP921c.

    1198       AER, information request AER.ERG.RRP. 41, 19 April 2010.

    1199       Ergon Energy, response to information request AER.ERG.RRP.4I, 2l April 2010.  [own emphasis]

    Both parties agree that the first sentence appearing in bold in the above quotation contains a typographical error.  The Tribunal accepts the AER’s submission that the sentence should read:

    Ergon Energy did not provide any information that supports its contention that 'other costs' include the hire or supply of equipment, assets or labour and not just contingency costs.

    CONSIDERATION

    45                  This is an unusual case.  It was one that the Tribunal would not expect to arise again, and the Tribunal’s finding of errors of fact is specifically related to the background recited, and the facts and circumstances before it.

    46                  The Tribunal finds that the AER made an error of fact in its findings of fact, which was the finding that Ergon Energy’s costs would not be efficiently incurred in delivering quoted services.  This fact was one implicit in the way the AER went about its task and in concluding as it did.  It is not a question of the AER acting unreasonably or of it improperly exercising its discretion.  It is just that the AER made an error in finding this fact.  This was a material fact, in that the AER’s decision in relation to ‘other costs’ might have been different but for that error. 

    47                  The Tribunal also finds that the AER made another material error of fact, namely, that Ergon Energy did not provide any information that supported the contentions of Ergon Energy.  Sufficient information was provided that would have necessitated at least further enquiry by the AER as to ‘other costs’ (which would include the hire and supply of equipment, assets or labour) and not just focussing on contingency costs.  As Counsel for Ergon Energy contended, a proper foundation was laid by the material presented to the AER.  In the Tribunal’s view, information was provided which should have led the AER to make further enquiries, and specifically from Ergon Energy as offered. 

    48                  It is important to make a number of other comments. 

    49                  The Tribunal accepts that Ergon Energy had the prime responsibility to provide information to the AER for the AER to consider and evaluate.

    50                  Ergon Energy had a critical role to play in providing information to the AER to assist the AER in making a distribution determination which reflects the national electricity objective and the revenue and pricing principles.  Having failed to do so adequately in relation to other costs, we cannot characterise the AER’s decision in relation to other costs as unreasonable.  Nevertheless, as indicated above, the AER, in the circumstances of this case, should have made further enquiry from Ergon Energy. 

    51                  This is not to say that the concepts of onus or burden of proof are to be adopted in the present context.  The focus is upon the material placed before the AER, or upon the material available to the AER, to determine whether AER can or should be satisfied of a particular matter.

    52                  Nevertheless, an error of fact may occur, through no unreasonableness in the decision, or even unreasonable behaviour of the regulator. 

    53                  The AER was, and the Tribunal is, not able to properly comment on the materiality of this issue relating to ‘other costs’ in dollar terms due to the lack of sufficient information available to it. 

    54                  For the above reasons, the Tribunal considered errors of fact occurred, and directions should be made as suggested by the parties on the basis of a ground of review being established.

     

    I certify that the preceding fifty-four (54) numbered paragraphs are a true copy of the Reasons for Decision herein of the Honourable Justice Middleton (Deputy President), RC Davey and RF Shogren.



    Associate:


    Dated:         13 October 2010