AUSTRALIAN COMPETITION TRIBUNAL
Application by Jemena Gas Networks (NSW) Ltd (No 3)  ACompT 6
Application by Jemena Gas Networks (NSW) Ltd (No 3)  ACompT 6
Australian Energy Regulator
ACT 5 of 2010
JUSTICE FINKELSTEIN (PRESIDENT)
PROFESSOR D ROUND
MR R STEINWALL
Date of decision:
National Gas Law, ss 23, 245, 246, 261
National Gas Rules, rr 69,76-9, 91, 364
Application by Energex Ltd (No 2) Re  ACompT 7
Application by Energex Ltd (Distribution Ratio (Gamma)) (No 3), Re  ACompT 9
Arthur Murray (NSW) Pty Ltd v Federal Commissioner of Taxation (1965) 114 CLR 314
Blyth v Birmingham Waterworks Co (1856) 11 Exch 781; 156 ER 1047
Bolam v Friern Hospital Management Committee  1 WLR 582
BP Oil Refinery (Bulwer Island) Ltd v Federal Commissioner of Taxation (1991) 33 FCR 594
Federal Commissioner of Taxation v Western Suburbs Cinemas Ltd (1952) 86 CLR 102
Glasgow Corp v Muir  AC 448
Hallstroms Pty Ltd v Federal Commissioner of Taxation (1946) 72 CLR 634
John Fairfax & Sons Pty Ltd v Federal Commissioner of Taxation (1959) 101 CLR 30
Jones v Wrotham Park Settled Estates  AC 74
Kammin’s Ballrooms Co Ltd v Zenith Investments (Torquay) Ltd  AC 850
Kingston v Keprose Pty Ltd (No 3) (1987) 11 NSWLR 404
Mount Isa Mines Ltd v Federal Commissioner of Taxation (1992) 176 CLR 141
New South Wales v Fahy (2007) 232 CLR 486
Saraswati v R (1991) 172 CLR 1
Sun Newspapers Ltd v Federal Commissioner of Taxation (1938) 61 CLR 337
Vairy v Wyong Shire Council (2005) 223 CLR 422
Vaughan v Menlove (1837) 3 Bing NC 468; 132 ER 490
W Thomas & Co v Federal Commissioner of Taxation (1965) 115 CLR 58
Wyong Shire Council v Shirt (1980) 146 CLR 40
Date of hearing:
6 and 7 December 2010
Number of paragraphs:
Counsel for the Applicant:
Solicitor for the Applicant:
Gilbert + Tobin
Counsel for the Australian Energy Regulator:
Mr C Scerri QC, Mr P Wallis, Dr V Priskich
Solicitor for the Australian Energy Regulator:
Australian Government Solicitor
Counsel for TRUenergy Pty Ltd:
Mr P Gray
Solicitor for TRUenergy Pty Ltd:
Mallesons Stephen Jaques
Counsel for the AGL Entities:
Mr M H O’Bryan
Solicitor for the AGL Entities:
ACT 5 of 2010
APPLICATION UNDER SECTION 245 OF THE NATIONAL GAS LAW FOR A REVIEW OF A FULL ACCESS ARRANGEMENT DECISION MADE BY THE AUSTRALIAN ENERGY REGULATOR PURSUANT TO RULE 64 OF THE NATIONAL GAS RULES
JEMENA GAS NETWORKS (NSW) LTD
JUSTICE FINKELSTEIN (PRESIDENT)
PROFESSOR D ROUND
MR R STEINWALL
25 FEBRUARY 2011
REASONS FOR DECISION
1 Jemena Gas Networks (NSW) Ltd (JGN) operates a gas distribution network made up of four covered pipelines, through which natural gas is delivered to consumers in parts of New South Wales. The National Gas Law (NGL) and the National Gas Rules (NGR) regulate the revenue JGN may derive from the provision of pipeline services and also regulate the terms of supply. JGN seeks to review a full access arrangement decision made by the Australian Energy Regulator (AER) in relation to its gas distribution network. The access arrangement decision deals with the tariff (ie price) JGN may charge for the provision of pipeline services and, in a reference services agreement (RSA), the terms and conditions that regulate the provision of those services. The aspects of the decision the subject of complaint concern an aspect of the calculation of the tariff and one of the terms of supply. Two parties (one is a group of companies) have, by leave, intervened in the review application. They seek the review of other terms of the RSA with which they are dissatisfied.
2 The price which a service provider such as JGN may charge for its services is, according to the NGR, determined using a “building block approach”: NGR, r 76. In essence (but not in detail) the underlying idea is that the price should equal cost (including opportunity cost): ie there should be no economic rent. Thus total revenue is calculated as a “fair” rate of return on the projected capital base plus depreciation on the projected capital base, the cost of income tax, increments or decrements from incentive mechanisms to encourage gains in efficiency and forecast operating expenditure: r 76. The projected capital base is made up of the opening capital base plus forecast conforming capital expenditure less depreciation and the forecast value of pipeline assets to be disposed of: r 78.
3 Calculating the fair rate of return on capital can be a complex exercise. The rate of return should reflect the degree of risk that the service provider faces in making the investment and the need to protect consumers from excessive charges. Two aspects of the calculation are the debt risk premium, which is the extra return a service provider acquires for investing in infrastructure rather than a risk free asset and the value of the assumed utilisation of imputation credits, which is used to calculate the allowance for the cost of income tax. The value of the assumed utilisation of imputation credits is represented by gamma.
4 The provisions of an access arrangement, including the terms of the services agreement, must be consistent with the national gas objective, which is “to promote efficient investment in, and efficient operation and use of natural gas services for the long term interests of consumers of natural gas”: NGL, s 23.
5 JGN complains about the AER’s decision in determining the capital base, the debt risk premium, gamma and the terms upon which it must provide services. The complaint about gamma is similar to another complaint which is presently before the Tribunal in applications brought by Energex Ltd, Ergon Energy Corp Ltd and ETSA Utilities (see Re Application by Energex Ltd (No 2)  ACompT 7; Re Application by Energex Ltd (Distribution Ratio (Gamma)) (No 3)  ACompT 9). The parties here have agreed to defer consideration of that issue until the Tribunal has handed down its decision in those matters. It is likely that the Tribunal will follow that decision in this application.
6 For reasons which are not necessary to explain, the Tribunal could not deal with the debt risk premium issue as the parties’ submissions were not finalised when the hearing commenced. Accordingly, a further hearing has been scheduled to deal with that issue.
7 The Tribunal was able to hear the parties on (1) JGN’s complaints concerning the calculation of the capital base (mine subsidence and deduction of WACC); (2) JGN’s complaint concerning the terms of supply (liability and indemnity clauses); and (3) the interveners’ complaints about the terms of supply (liability and indemnity clauses, security for payment and minimum billing period intervals). Rather than wait until the Tribunal has completed the hearing on all issues, the Tribunal has decided to publish its reasons on the issues that have been argued so the parties know where they stand, albeit final orders cannot be made.
Grounds of review
8 The Tribunal has power to review decisions of the AER: NGL, s 245. The grounds of review are confined to material errors of fact, incorrect exercise of discretion and unreasonableness: s 246(1). For a discussion of those grounds see Re Application by ActewAGL Distribution  ACompT 4 at  to  and the cases therein referred to.
Capital expenditure: Mine subsidence
9 To put the issue in its context it is convenient, first, to make reference to the relevant rules:
78 Projected capital base
The projected capital base for a particular period is:
(a) the opening capital base;
(b) forecast conforming capital expenditure for the period;
(c) forecast depreciation for the period; and
(d) the forecast value of pipeline assets to be disposed of in the course of the period.
79 New capital expenditure criteria
(1) Conforming capital expenditure is capital expenditure that conforms with the following criteria:
(a) the capital expenditure must be such as would be incurred by a prudent service provider acting efficiently, in accordance with accepted good industry practice, to achieve the lowest sustainable cost of providing services;
(b) the capital expenditure must be justifiable on a ground stated in subrule (2).
(2) Capital expenditure is justifiable if:
(c) the capital expenditure is necessary:
(i) to maintain and improve the safety of services; or
(ii) to maintain the integrity of services; or
(iii) to comply with a regulatory obligation or requirement; or
(iv) to maintain the service provider's capacity to meet levels of demand for services existing at the time the capital expenditure is incurred (as distinct from projected demand that is dependent on an expansion of pipeline capacity); or
The definitions of terms used in these rules are found in r 69. Two definitions are presently relevant namely:
capital base, in relation to a pipeline, means the capital value to be attributed, in accordance with this Part, to pipeline assets.
capital expenditure means costs and expenditure of a capital nature incurred to provide, or in providing, pipeline services.
10 The precise issue in dispute is whether expenditure which JGN refers to as “mine subsidence expenditure” is of a capital nature. The expenditure concerns the Wilton-Newcastle trunk pipeline. The pipeline passes through an area where long-wall coalmining is conducted. Long-wall mining can cause ground subsidence that may stress or damage a nearby pipeline. In 200304 the pipeline was damaged as a result of subsidence caused by mining activities. Remedial work was undertaken and the cost treated as capital expenditure in JGN’s financial accounts.
11 In its regulatory proposal submitted in August 2009, JGN included a net amount of $5.7 million in the opening capital base for the regulatory period 2005-10 and $5.5 million for forecast capital expenditure. The opening capital base figure was calculated as follows: (1) The Independent Pricing and Regulatory Tribunal of New South Wales (IPART) (JGN’s regulator prior to the AER) had approved forecast capital expenditure on mine subsidence of $1.1 million in the 2005-10 Access Arrangement; (2) JGN’s actual capital expenditure on mine subsidence for 2005-10 was $18.98 million; (3) This meant that JGN had spent an additional amount of approximately $17.8 million, of which $13.7 million was funded by contributions from third parties, leaving approximately $4.1 million unfunded; and (4) $4.1 million plus the $1.1 million approved by IPART, adjusted for inflation, amounts to $5.7 million.
12 The anticipated work was briefly described as: (1) Extending the original trench, installing new pipe supports, reinforcing the pipeline; (2) Replacing the existing coating and refurbishing with new, more enduring coating, which would provide a higher level of protection; (3) Restoring easements, beds and banks of watercourses with improved hydrological design (ie a better drainage system), contour banks to divert stormwater, stabilising creek beds and banks, re-establishing riparian vegetation; (4) Excavating and exposing the pipe to allow it to settle; (5) Monitoring ongoing stress; and (6) Reinstating trunk operating pressures to the maximum allowable once all the work has been completed.
13 The AER retained Wilson Cook & Co, a firm of engineering and management consultants, to review JGN’s regulatory proposal, including its treatment of mine subsidence expenditure. As to this expenditure the report stated:
The work appears necessary but the question arises: why should the expenditure be capitalised if, as we presume, no new assets were created or the lives of existing assets, when repaired, were not thereby extended? We therefore consider that this expenditure should not be added to the regulatory asset base, although there ought to be a mechanism for the business to recover its efficient costs.
14 In its draft decision, the AER adopted the Wilson Cook view. The draft decision puts it this way:
Jemena submits $17.8 million ($2,007-08) was spent on mines subsidence in excess of the amount approved by the IPART in the earlier access arrangement period. The Wilson Cook report considers that the work was necessary, but recommends that this amount should not be added to the capital base. The AER agrees with the conclusions in the Wilson Cook report that the costs of repairs to pipelines damaged by mines subsidence are expenses, not capital expenditure. As outlined in the Wilson Cook report this is because the nature of this expenditure does not either create an asset or extend the life of an existing asset to justify that the amount of expenditure can be added to the capital base.
15 JGN did not agree with the Wilson Cook report, or with the AER’s adoption of it in the AER’s draft decision. In JGN’s “initial response to the draft decision” it pointed out that the capitalisation of mine subsidence expenditure was consistent with its capitalisation policy. It repeated its view that expenditure on mine subsidence was capital in nature and therefore should be included in the capital base. Its response went on to explain (at p 36):
[T]he expenditure on mines subsidence will ensure that damage as result of mines subsidence is eliminated as a risk factor for the pipeline. Without the expenditure, there is a very high risk that a pipeline rupture would occur at some time in the future with severe consequences for the provision of services, for public safety and for the pipeline assets themselves. Alternatively the pipeline could become so unsafe that some or all of it would have to be replaced prematurely. In that sense the expenditure has the effect of extending the life of the pipeline. It is the most economical means of mitigating the risk and will not be a recurrent expenditure. It is prophylactic in nature and has enduring value for the remaining life of the pipeline.
16 In addition, JGN provided to the AER a report from Parsons Brinckerhoff, an engineering consultancy, regarding the effect of the subsidence expenditure. In that report Parsons Brinckerhoff expressed the opinion that “where ad hoc replacement results in lengths greater than 12 metres of main, these renewals do in fact extend the service life of the sections replaced and reduce future capital expenditure when those areas of the network are renewed by extending the service life of the sections replaced in an ad hoc manner”.
17 Importantly, JGN also submitted a report from Ernst & Young, a well known firm of accountants. The report reviewed JGN’s capitalisation policy. That policy was based on Australian Accounting Standard AASB 116 and the AASB Framework for the Preparation and Presentation of Financial Statements.
18 AASB 116 is headed “Property, Plant and Equipment”. It is stated to have the following objective:
The objective of this Standard is to prescribe the accounting treatment for property, plant and equipment so that users of the financial statements can discern information about an entity’s investment in its property, plant and equipment and the changes in such investment. The principal issues in accounting for property, plant and equipment are the recognition of the assets, the determination of their carrying amounts and the depreciation charges and impairment losses to be recognised in relation to them.
19 Paragraph 7 deals with the “recognition” of an asset as follows:
The cost of an item of property, plant and equipment shall be recognised as an asset if, and only if:
(a) it is probable that future economic benefits associated with the item will flow to the entity; and
(b) the cost of the item can be measured reliably.
20 Paragraph 10 provides:
An entity evaluates under this recognition principle all its property, plant and equipment costs at the time they are incurred. These costs include costs incurred initially to acquire or construct an item of property, plant and equipment and costs incurred subsequently to add to, replace part of, or service it.
21 Paragraphs 12 and 13 deal with the recognition of costs subsequent to the initial recognition of the cost of the asset as follows:
12. Under the recognition principle in paragraph 7, an entity does not recognise in the carrying amount of an item of property, plant and equipment the costs of the day-to-day servicing of the item. Rather, these costs are recognised in profit or loss as incurred. Costs of day-to-day servicing are primarily the costs of labour and consumables, and may include the cost of small parts. The purpose of these expenditures is often described as for the ‘repairs and maintenance’ of the item of property, plant and equipment.
13. Parts of some items of property, plant and equipment may require replacement at regular intervals. For example, a furnace may require relining after a specified number of hours of use, or aircraft interiors such as seats and galleys may require replacement several times during the life of the airframe. Items of property, plant and equipment may also be acquired to make a less frequently recurring replacement, such as replacing the interior walls of a building, or to make a non-recurring replacement. Under the recognition principle in paragraph 7, an entity recognises in the carrying amount of an item of property, plant and equipment the cost of replacing part of such an item when that cost is incurred if the recognition criteria are met. The carrying amount of those parts that are replaced is derecognised in accordance with the derecognition provisions of this Standard…
22 Paragraphs 67 and 70 deal with the “derecognition” of assets as follows:
67. The carrying amount of an item of property, plant and equipment shall be derecognised:
(a) on disposal; or
(b) when no future economic benefits are expected from its use or disposal.
70. If, under the recognition principle in paragraph 7, an entity recognises in the carrying amount of an item of property, plant and equipment the cost of a replacement for part of the item, then it derecognises the carrying amount of the replaced part regardless of whether the replaced part had been depreciated separately. If it is not practicable for an entity to determine the carrying amount of the replaced part, it may use the cost of the replacement as an indication of what the cost of the replaced part was at the time it was acquired or constructed.
23 After describing JGN’s capitalisation policy, Ernst & Young set out its conclusion on the characterisation of the mine subsidence expenditure. The conclusion was that the key provisions and requirements of JGN’s policy relating to property, plant and equipment were consistent with the provisions of AASB 116. Ernst & Young noted that they were not asked to consider whether the costs incurred in relation to each different project met the criteria in AASB 116 relating to “elements of cost”, including the “directly attributable” requirement, nor whether all the costs incurred could be reliably measured. As a result, Ernst & Young said they “have assumed that they do”. Based on this assumption, the report went on to say:
We have not received any breakdown of the different types of costs incurred in relation to the Appin mine subsidence and therefore are not able to provide comments / views about the treatment of the various individual components in turn. Instead, we have had to provide our conclusions based upon a high level assessment of the major components comprising the total balance, with management and other relevant personnel providing explanations, assertions and representations regarding the nature of these costs. Given this, we make no assertion that all of these costs incurred would have in fact met the criteria for capitalisation.
24 With that qualification in mind Ernst & Young made the following observations in relation to the mine subsidence work:
• The pipeline could be reasonably defined as a separate item of plant within JGN’s overall network of assets;
• Recoating of the pipeline with an anticorrosion application is considered to have increased the life of the pipeline by 30-40 years;
• Prior to recoating, the pipeline asset was moved from its original location, had additional supports added, was reinforced and was realigned to ensure no fractures occurred. This work had the effect of improving the stability of the pipeline and making it stronger – ie effectively resulting in an improved asset; and
• The existing location of the pipeline was then returned to its condition prior to the construction of the pipeline. Given these costs were incurred in making good the area where the pipeline was previously located it would be appropriate to expense these costs.
25 The Ernst & Young report also stated that JGN had initially budgeted for the mine subsidence work to cost $500,000 but the work in fact cost $25.035 million. The report explained:
Management have confirmed that this $25.035m has been capitalised and recorded within Jemena’s fixed asset register over the period 2004 to 2009. We have been advised that a breakdown of this total by the different types of activities listed above is not readily available given the changes in ownership and personnel during the duration of this work, and the limited timeframe in which this advice has been prepared.
26 The AER considered JGN’s submissions and the reports it had procured and made its final decision in June 2010. As regards mine subsidence the decision states (at 69-70):
The access arrangement proposal proposes to add the value of mine subsidence expenditure to the value of the asset as capital expenditure. While the expense is necessary to ensure the asset continues to perform its intended function, the AER notes the asset continues to perform the same function that it performed before the repairs became necessary. Further, the repair does not add to the expected remaining asset life beyond what was expected previous to the repair becoming necessary. The AER considers that no evidence is being provided that an asset is being replaced as a result of this capital expenditure. If this was the case then the access arrangement proposal should provide information to support how the capital base is affected. The revised access arrangement proposal does not provide this information.
Based on the AER’s analysis and considerations set out in the mine subsistence section for the earlier access arrangement period, the AER agrees with the 2010 Wilson Cook report and considers that the forecast mine subsidence is a repair or improvement of a portion of the pipeline in nature and that it is necessary. The AER does not consider that the proposed mine subsidence work is capital in nature because the work is not demonstrated to increase the life or capacity of the pipeline asset as a whole. The AER maintains the view in the draft decision and consistent with the 2010 Wilson Cook report considers mine subsidence is not conforming capital expenditure under r. 79(1) of the NGR. (citations omitted)
27 The AER ultimately removed $4.6 million from JGN’s opening capital base (leaving the $1.1 million of mine subsidence expenditure approved by IPART) and removed $5.5 million from JGN’s forecast capital expenditure and in lieu thereof included $3 million in JGN’s forecast operating expenditure.
28 JGN complains that the AER has taken the view that “capital expenditure” is different from the accounting concept of capital and has wrongly ignored that JGN has, for at least several years, capitalised its mine subsidence expenditure under a policy consistent with AASB 116, as confirmed by Ernst & Young. Moreover, JGN also contends that the AER wrongly interpreted “capital expenditure” as being limited to expenditure which creates a new asset or increases the life or capacity of an existing asset as a whole (rather than any part of the asset) beyond that originally intended. This is said to be an error in the interpretation of the term “capital expenditure” in rule 69.
29 By the time of the hearing the AER had, in some measure, moved away from the approach to mines subsidence expenditure it had taken in its final decision. Now the point being made was that JGN had not provided sufficient information to enable the expenditure to be characterised as capital, whether being for “property plant or equipment” under AASB 116 or for the creation of new assets or extending the life of existing assets as required by Wilson Cook.
30 While the AER ran the argument that there was insufficient evidence to conclude the expenditure was capital expenditure, it did not abandon the argument that the Wilson Cook approach was the correct approach for identifying what was capital expenditure.
31 The Tribunal is of the view that an inquiry directed at ascertaining whether an item of expenditure is or is not a capital expense according to accounting standards is an unhelpful proxy for the real inquiry. The true enquiry is whether or not an expense is a capital expense according to the proper legal meaning of “capital”. We acknowledge that in Hallstroms Pty Ltd v Federal Commissioner of Taxation (1946) 72 CLR 634, 646, Dixon J said that the concepts of capital and income were derived from “a very general conception of accounting [and] perhaps of economics”. But in Arthur Murray (NSW) Pty Ltd v Federal Commissioner of Taxation (1965) 114 CLR 314, 318-19 the High Court made it clear that, at least for income tax purposes, the issue involves more than ascertaining what was a proper bookkeeping method for recording transactions. What is involved, according to the High Court, depends upon “the judicial understanding of the meaning which the words [in the taxing statute] convey”. So it is here: The expression “expenditure of a capital nature” is a statutory (or at least a quasi-statutory) expression, and its meaning must be ascertained and then applied to the facts. If accounting standards adopt the proper legal meaning then the accounting standards may be used as a proxy. If not, the accounting standards must be put to one side.
32 The NGR do not define what is “expenditure of a capital nature”. The ideas of capital expenditure on one side and its opposite, operating expenditure, on the other, should be understood to refer to what is in commerce commonly understood by those expressions. The distinction between capital expenditure and operating expenditure according to their ordinary meanings was explained by Dixon J in two cases, Sun Newspapers Ltd v Federal Commissioner of Taxation (1938) 61 CLR 337 and Hallstroms. It is, in essence, the distinction between expenditure on the structure or organisation set up to earn a profit and the operation of that organisation. The usual matters to which regard will be had to determine on which side of the line expenditure falls are: (1) The nature of the advantage obtained by the expenditure; (2) The manner in which the advantage is to be used; and (3) Whether the payment is periodic or “once and for all”.
33 So in Mount Isa Mines Ltd v Federal Commissioner of Taxation (1992) 176 CLR 141, 147-8 the High Court said:
Although as general conceptions it may not be difficult to distinguish between the profit-yielding subject and the process of operating it, the practical application of these conceptions is another matter and often gives rise to a difference of degree rather than of kind. In the resolution of problems of this type, Dixon J. identified three matters which will assist in determining whether particular expenditure falls into the category of capital or revenue. They are: (1) the character of the advantage sought and, in this respect, its lasting qualities and recurrence may play a part; (2) the manner in which the advantage is to be used, relied upon or enjoyed and, in this respect as well, recurrence may play a part; and (3) the means adopted to obtain the advantage, that is, whether a periodical reward or outlay is provided to cover its use or enjoyment for periods commensurate with the payment or whether a final provision or payment is made so as to secure future use or enjoyment.
The fact that no tangible asset or benefit of an enduring kind is acquired as a result of the expenditure does not of itself preclude a finding that expenditure is on capital account. It certainly points the way but it is not determinative. Likewise, the recurrence of a specific item of expenditure is not a test; it is a relevant consideration the weight of which depends upon the nature of the expenditure. (citations omitted)
What was said in the second paragraph just quoted echoes what Dixon J said in John Fairfax & Sons Pty Ltd v Federal Commissioner of Taxation (1959) 101 CLR 30, 36, that it is not always necessary to obtain an enduring benefit for expenditure to be on the capital side. And, likewise, if expenditure is not made “once and for all” it may still be capital expenditure.
34 While the applicable principles are relatively easy to state, often a distinction between the two types of expenditure is difficult to draw in practice. The answer then “depends on what the expenditure is calculated to effect from a practical and business point of view, rather than upon the juristic classification of the legal rights, if any, secured, employed or exhausted in the process”: Hallstroms at 648 per Dixon J.
35 What these principles show is that the Wilson Cook definition of capital expenditure is too narrow. It is too narrow because, among other things, it would wrongly exclude from the capital side expenditure which does not provide a tangible or enduring benefit.
36 There may also be an issue as regards the application of AASB 116 as a proxy. The recognition principle in paragraph 10 includes not only the cost of acquiring or constructing property, plant or equipment (which would be a capital expenditure according to ordinary concepts) but also the cost of servicing that plant and equipment. That type of expenditure would not be capital expenditure, however, according to ordinary concepts. As we understand it, contrary to AASB 116, the cost of maintaining an income-producing asset (eg the cost of “servicing” plant and equipment) is an operating expense. At least it is an operating expense when it is to repair defects resulting from the operations of the person who incurs the expense: W Thomas & Co v Federal Commissioner of Taxation (1965) 115 CLR 58, 72.
37 How then is one then to characterise the mine subsidence expenditure that JGN incurred or will incur? There is a relatively detailed description of the relevant work in the documents JGN provided to the AER. That work was summarised by the AER in its submission as follows:
(a) At Un-named Creek, for a period of time concluding in approximately June 2009, JGN “monitored the Trunk main stress using strain gauges installed on Trunk Main”. This monitoring confirmed that “the Trunk main is not affected by the mining” at this location. As a result, in June 2009, JGN put forward a business case to “remove the gauges and survey lugs and repair coating” of the pipeline between August and December 2009. JGN also appears to have taken steps to “rehabilitate” the site.
(b) At [redacted] Creek, JGN has exposed the pipeline across the creek and placed it on “temporary pipe supports”. JGN then monitored the main stress “by reviewing pipe strain readings from data of the strain gauges installed on the Trunk Main ... supplemented by pipe and ground surveys”. This monitoring was “ongoing” as at December 2009 and is expected to continue each year until the “[redacted] Creek Rehabilitation” at an annual cost of approximately $250,000. As at 2009, the “major [redacted] Creek rehabilitation works (current estimate of $4.5M) [were] planned for 2012/13 commence”. The nature of these “major” works has not been explained in any of the business cases put forward by JGN.
(c) At Simpsons Creek, the mine subsidence works appeared to commence in approximately late 2003 and involved the following 4 stages:
i. “Stage 1 Works – Preliminary land works” consisting of construction of site fencing, a survey to determine the pipe location, construction of a sediment basin, silt control and site signage, levelling the site, installing access roads, hardstands and dumpsites, installing buildings and services and engaging on site security guards;
ii. “Stage 2 Works – Pipeline excavation” consisting of beaching removal, excavating and exposing the bottom of the pipe in the creek area, excavataing [sic] bellholes under the pipe for jacks, engaging staff to operate heavy machinery, construction of trench breakers, sandbagging, construction of a diversion bank for storm water, removal of the pipe coating for the placement of strain gauges and testing of the welds (and subsequent replacement of the coating where it had been removed), testing of the welds, lifting the pipeline onto pipeline supports, installing strain gauges and engaging on site security guards;
iii. “Stage 3 Works – Pipeline monitoring” consisting of reviewing strain gauge readings, adjusting pipeline supports, undertaking ground surveys and engaging on site security guards; and
iv. “Stage 4 Works – Reinstatement (and rehabilitation)” consisting of reinstating the rock bank of the creek, filling the trench, removing the sediment basin, restoring the surface contours of the site to the pre-works state, grading over access tracks and reseeding the ground, demobilising the equipment and engaging on site security guards.
(d) The Stages 1 and 2 work at Simpsons Creek was completed by June 2004 and therefore does not form part of the costs in issue before the Tribunal. Stage 3 lasted from approximately June 2004 until approximately January 2007. In respect of Stage 4, JGN “completed the Trunk Main MAOP reinstatement of 6.895 MPa in late 2007”. By 25 August 2009, the site had been “fully restored” such that “no further [mine subsidence work] will be necessary at this location”. The entries in JGN’s asset register that refer to “Simpsons Creek” have dates between 31 July 2008 and 31 May 2009, which suggests that they relate to works involving “rehabilitating” or “restoring” the site after the reinstatement of full pressure in the pipeline.
(e) At [redacted] Creek and Creek [redacted], JGN has undertaken (or plans to undertake) work to “expose the pipeline, decouple, re-align and then rebury and restore at both sites”. Each site also “requires Rehabilitation Stage”. (citations omitted)
38 Putting to one side for the moment “monitoring”, the other work is directed to restoring the pipeline. It may or may not add to the life of the pipeline: the evidence is equivocal but suggests it will add to its life. It is not correct to describe the work (and proposed work) as maintenance work. It is not work that arises from causes associated with the operation of the pipeline. The work is being (or will be) undertaken to restore and preserve the capital asset (the pipeline) rather than to improve its capacity to withstand further damage from coal mining activities. Ordinarily work done in renewing a major or important part of plant or equipment can be treated as capital expenditure, depending upon the extent of the work: see Federal Commissioner of Taxation v Western Suburbs Cinemas Ltd (1952) 86 CLR 102, where the cost of replacing the ceiling in a theatre was held to be capital expenditure. In our opinion mine subsidence expenditure (other than that incurred for monitoring) should be treated as capital expenditure.
39 The cost of “monitoring” plant and equipment is not readily treated as capital expenditure. On the one hand preliminary investigations and the like undertaken to determine whether, by reason of the occurrence of a specific event, an item of plant has been damaged may be a capital expense. We think this type of expenditure should be treated as capital expenditure if it is actually followed up by capital works: see eg BP Oil Refinery (Bulwer Island) Ltd v Federal Commissioner of Taxation (1991) 33 FCR 594, 604, where there is a suggestion that this is the correct view. On the other hand the cost of “monitoring” is unlikely to be a capital expense if no damage shows up.
40 Although we are satisfied that the AER has applied an incorrect test, there are problems. First, we have not been able to extract the cost of “monitoring” from the overall mine subsidence costs. Nor do we know when (if at all) the monitoring was followed by restoration works. It is, therefore, not possible for the Tribunal to determine which of the claimed capital expenditure is in fact properly characterised as capital expenditure.
41 In these circumstances it is, we think, appropriate to set aside this part of the AER’s decision and remit the matter to the AER for reconsideration. The key issues that must be addressed are: (1) the precise nature of “monitoring” and its cost; (2) the degree of connection between “monitoring” and any capital works that were undertaken; and (3) if there is no connection, whether the cost of “monitoring” can be sufficiently determined so that it can be separated from capital works.
Capital expenditure: Deduction of WACC
42 The question is whether the AER has power to reduce JGN’s opening capital base in order to remove the effect of the rate of return on capital of the difference between JGN’s estimated and actual capital expenditure in the 2005-10 access period?
43 Rule 77(2)(a) of the NGR provides:
If an access arrangement period follows immediately on the conclusion of a preceding access arrangement period, the opening capital base for the later access arrangement is to be:
(a) the opening capital base as at the commencement of the earlier access arrangement period (adjusted for any difference between estimated and actual capital expenditure included in that opening capital base);
(b) conforming capital expenditure made, or to be made, during the earlier access arrangement period;
(c) any amounts to be added to the capital base under rule 82, 84 or 86;
(d) depreciation over the earlier access arrangement period (to be Part 9 Price and revenue regulation
Division 4 The Capital base
National Gas Rules 2009 55
calculated in accordance with any relevant provisions of the access arrangement governing the calculation of depreciation for the purpose of establishing the opening capital base); and
See rule 90.
(e) redundant assets identified during the course of the earlier access arrangement period; and
(f) the value of pipeline assets disposed of during the earlier access arrangement period.
44 JGN’s opening capital base at the commencement of the previous access arrangement period included an amount for estimated capital expenditure in 2004-05 of $88.6 million. JGN’s actual capital expenditure in that year was $68.3 million, being $20.3 million less than had been estimated and approved by IPART.
45 We should point out the difference between ‘estimated’ and ‘forecast’ capital expenditure. Forecast capital expenditure is expenditure that is anticipated to occur in the future access period for which the AER is formulating an access arrangement. Estimated capital expenditure is expenditure in the last part of the current access period. The need to estimate capital expenditure arises because future access arrangements are finalised prior to the end of the current access arrangement to ensure a smooth transition between periods – and, consequently, the actual amount of capital expenditure is not available at the time of formulating the future access arrangement.
46 In its final decision, the AER reduced JGN’s opening capital base at the commencement of the 2005-10 access arrangement period by $20.3 million to account for the difference between estimated and actual capital expenditure in 2004-05. This accorded with r 77(2)(a) and JGN now concedes that the reduction was appropriate.
47 The AER reduced JGN’s opening capital base by a further $13.1 million to remove the effect of the rate of return and inflation on the difference between JGN’s estimated and actual capital expenditure in 2004-05. Approximately $2 million was removed for inflation and approximately $10.1 million for the rate of return.
48 JGN accepts that the amount to be removed from the opening capital base should be expressed in nominal 2009-10 dollars (ie the figure should be adjusted for inflation). It disputes, however, that the NGR permits an adjustment to remove the effect of the rate of return on capital.
49 In its final decision, the AER stated: “These adjustments are made in order to remove the benefit JGN received by applying the rate of return to the estimated capital expenditure instead of the lower actual capital expenditure which JGN incurred. The AER considers that this adjustment is justified; to not do so would allow JGN to accrue a benefit on expenditure which it did not incur. Further, these adjustments are consistent with the national gas objective set out in section 23 of the NGL”. In other words, the AER proceeded on the basis that under r 76, JGN is only entitled to earn a rate of return on actual capital expenditure, not estimated expenditure, and that this may necessitate adjustments of the capital base in later periods.
50 In S6.2.1(e)(3) of the National Electricity Rules (NER), there is a requirement that the rate of return be adjusted to account for the difference between estimated and actual capital expenditure:
(3) The previous value of the regulatory asset base must be adjusted for the difference between:
(i) the estimated capital expenditure for any part of a previous regulatory control period where that estimated capital expenditure has been included in that value; and
(ii) the actual capital expenditure for that part of the previous regulatory control period.
This adjustment must also remove any benefit or penalty associated with any difference between the estimated and actual capital expenditure.
51 JGN’s argument is simple: unlike the position in the NER, there is no express power in the NGR for the AER to make an adjustment to remove the effect of the rate of return on what turned out to be an overestimation of capital expenditure.
52 The AER’s position can also be explained quite simply. A network is entitled to earn a rate of return on its capital investment. Because estimation of capital expenditure in the final part of the current access period is unavoidable, the NGR allows networks to claim a rate of return on capital expenditure which they estimate will be incurred in the final part of the current regulatory period. If actual capital expenditure is less than estimated capital expenditure then the network has been paid a rate of return on capital expenditure it did not incur. Likewise, if actual capital expenditure is greater than estimated capital expenditure then the network has not been paid a rate of return on capital expenditure it has incurred.
53 For the AER to adjust the capital base to remove the rate of return, the AER must show that there is a gap in the rules which the Tribunal is permitted to fill. A court (or tribunal) can fill a gap when words have been omitted (see for eg Kammin’s Ballrooms Co Ltd v Zenith Investments (Torquay) Ltd  AC 850) or where, because of inadvertence, parliament has failed to deal with a matter which is required to be dealt with if the purpose of the Act is to be achieved (Kingston v Keprose Pty Ltd (No 3) (1987) 11 NSWLR 404, 422; Saraswati v R (1991) 172 CLR 1). In Jones v Wrotham Park Settled Estates  AC 74, 105-106 Lord Diplock explained the conditions that were satisfied in Kammin’s Ballroom Co Ltd to justify the court filling a gap in the legislation:
First, it was possible to determine from a consideration of the provisions of the Act read as a whole precisely what the mischief was that it was the purpose of the Act to remedy; secondly, it was apparent that the draftsman and Parliament had by inadvertence overlooked, and so omitted to deal with, an eventuality that required to be dealt with if the purpose of the Act was to be achieved; and thirdly, it was possible to state with certainty what were the additional words that would have been inserted by the draftsman and approved by Parliament had their attention been drawn to the omission before the Bill passed into law. Unless this third condition is fulfilled any attempt by a court of justice to repair the omission in the Act cannot be justified as an exercise of its jurisdiction to determine what is the meaning of a written law which Parliament has passed. Such an attempt crosses the boundary between construction and legislation. It becomes a usurpation of a function which under the constitution of this country is vested in the legislature to the exclusion of the courts.
54 The second reading speech for the National Gas (South Australia) Bill 2008 and the Australian Energy Market Agreement 2005 show that the gas and electricity rules are intended to operate in harmony and be administered consistently where appropriate. Although the NGL was passed after the National Electricity Law (NEL), it was the intention of the Ministerial Council on Energy (MCE), the body designated with the task of creating national energy regulation, that when drafting the NGR it would not seek to replicate the detail contained in the NER. In fact, the NGR is less than half the size of the NER. But, while not replicating the level of detail in the NER, the MCE intended for there to be consistency and commonality between electricity and gas regulation: see the MCE’s explanation of the initial NGR.
55 The Tribunal is convinced that neither the South Australian Minister (who made the initial NGR and NER) nor the Australian Energy Market Commission (AEMC) (the body which now makes the NGR and NER) intended that gas networks would be allowed to keep the return on capital of an over-estimation while electricity networks would not. We think that in light of the extrinsic materials to which we have referred, it was intended for the same approach to be applied for both electricity and gas regulation. Filling the gap in the NGR is also consistent with the national gas objective of promoting efficient investment in natural gas services because it minimises the incentive to overestimate or underestimate the amount of capital expenditure. We think the omission of an express power to remove the rate of return was due to the rule makers endeavouring to create a more simplistic set of rules than the NEL.
56 Finally, we would say that for the sake of clarity and in case we are wrong, it would be desirable for the rules to be amended to expressly provide for this adjustment.
Reference services agreement: Liability and indemnity clauses
57 The RSA has exclusion from liability and indemnity clauses. They are to the effect that “[t]he Service Provider will not be liable for, and the User will indemnify and hold the Service Provider harmless from and against, any and all Damages or claims in connection with or arising as a result of [certain events and circumstances]”. The following clauses of the RSA contain an exclusion of liability and indemnity clause to this effect:
Event / Circumstances
Revocation of authorisation of overruns
Right of commingle
Consequences of JGN exercising rights in respect of Out-of-Specification Gas under cl 10.2
Gas Testing by User
Pressure at Receipt Point
No liability for disconnection
Suspension by Service Provider
Liability for interruptions or curtailments
Contribution to loss or damage
58 Clause 28.7(a) of JGN’s proposed RSA differed from the other liability and indemnity clauses set out above in that it sought to regulate liability generally under the RSA by reducing the liability of a party for damage suffered by the other party to the extent that the damage was caused by the negligent or unlawful act or omission of the other party.
59 This position may be contrasted with that which preceded under the 2005 access arrangement. Under that arrangement a user was only liable for loss arising from:
(a) personal injury to JGN’s employees, agents and contractors arising from the user’s acts or omissions under the access arrangement;
(b) damage to JGN’s property arising from the user’s acts or omissions under the access arrangement;
(c) any breach of the access arrangement by the user which causes that loss or damage;
(d) an unauthorised overrun;
(e) any claim by a third party arising out of JGN’s actions to suspend supply of gas;
(f) inaccurate or misleading information supplied by the user to JGN in connection to a gas swap, or the user’s participation in a gas swap in certain circumstances; and
(g) any claim made by the user’s customers arising out of JGN’s implementation of load shedding procedures.
60 On 10 November 2009, EnergyAustralia made a submission to the AER seeking certain amendments to the exclusion from liability and indemnity clauses of JGN’s then proposed RSA. EnergyAustralia did not object to a gas network service provider seeking to reasonably exclude and limit its liability. Nor did it propose a reasonable service provider standard to qualify the exclusion from liability and indemnity clauses in the proposed services agreement. EnergyAustralia did submit that the proposed liability and indemnity exclusions went beyond what was reasonable. It submitted that the proposed RSA should expand on the circumstances in which, and events where, users are liable, and should expand on the scope of users’ liability, as compared to the circumstances, events and scope of liability in the 2005 access arrangement.
61 In addition, EnergyAustralia submitted that “it is only reasonable for such a Service Provider to seek to [e]xclude liability for anything which is beyond its own control or which is caused by the User or other parties using the Service Provider’s Network”. EnergyAustralia's concerns broadly fell into two categories: (1) specific liability exclusions and indemnities applicable to specific identified events and circumstances; and (2) general liability exclusions and indemnities for negligence and breach of the RSA.
62 Also on 10 November 2009, AGL made a submission to the AER in relation to the proposed RSA, which dealt with, among other matters, the exclusion from liability and indemnity clauses. AGL did not propose a reasonable service provider standard to qualify the exclusion from liability and indemnity clauses. AGL did comment on a number of issues in relation to the exclusion from liability and indemnity clauses, including:
(a) clause 5.6(b).
The indemnity being proposed is very broad and should be limited to damages caused by Users. AGL can’t suggest wording as we are not aware of the type of damages that would be caused in these circumstances.
If Jemena means that they revoke the authorisation and then AGL has an overrun, clause 6.2 applies. Unless Jemena mean they aren’t liable to AGL and are trying to say we indemnify them for our loss. If this is the case the clause may be acceptable if it refers to ‘User’s Damage’
AGL’s Proposed Approach and suggested rewording of a specific Clause
Clause 5.6(b) requires clarification on the outcomes that the Service Provider is seeking in this clause. AGL requests clarification on the circumstances that the indemnity will apply.
(b) Clause 10.1(3).
10.1(e) is it practicable to qualify this indemnity to only apply where the User injected the gas?
This query is consistent with the general principle that a party should only be required to indemnify in relation to actions or omissions within its control. A User cannot control the actions of another User and should not be liable for them.
AGL’s Proposed Approach and suggested rewording of a specific Clause
AGL requests the insertion of “acting reasonably” to the end of Clause 10.1(a)(ii)
(c) Clause 10.3(d).
AGL sees that this indemnity is too broad. AGL is concerned that the clause as it is should indemnify the Service Provider for say, another User causing loss.
AGL’s Proposed Approach and suggested rewording of a specific Clause
AGL requires a wording amendment to the clause to provide limitation on the indemnity. AGL suggests that the wording “of the giving of direction or the cessation of Gas delivery under clause 10.2 or” should be deleted so that the indemnity is limited to the relevant User’s failure only
(d) Clause 14.9(b).
AGL is concerned that the Service Provider has the ability to amend minimum and maximum receipt point pressure at any time (see Annexure 6) Previously the requirement was “after reasonable notice” but there was no right of appeal
AGL’s Proposed Approach and suggested rewording of a specific Clause
AGL requests that the phrase “after reasonable notice” be inserted. AGL requests the inclusion of a right of appeal.
(e) Clause 15.12.
This is a new clause and AGL requests that the clause be amended to reflect the liability of the Service Provider for their negligence. If the Service Provider takes action or fails to take action and the User has not contributed to this act/omission then the Service Provider should be liable.
AGL’s Proposed Approach and suggested rewording of a specific Clause
AGL does not support the inclusion of this clause. The Service Provider should be liable for the negligence that they cause. This is also applicable for clause 24.3(b)
(f) Clause 24.3(b).
AGL requests that this clause needs to be altered. The Service Provider should be liable for damage.
AGL’s Proposed Approach and suggested rewording of a specific Clause
AGL does not support this clause. The Service Provider should be liable for acts/omissions that cause damages.
(g) Clause 28.7(a).
If the Service Provider has contributed to loss then indemnity should not apply.
AGL’s Proposed Approach and suggested rewording of a specific Clause
AGL requests that clause 28.7(a) be deleted.
63 In its draft decision the AER stated that it had reviewed the liability and indemnity clauses and said that they were similar to the terms in earlier access arrangements approved by IPART. The AER stated that it “considers that most of the specific liability and indemnity provisions identified by EnergyAustralia and the provisions of cl 28 are appropriate when viewed in the context of assigning risk to the party best able to manage that risk”.
64 Nonetheless the AER identified several clauses that removed JGN’s liability in situations where, it believed, JGN had the potential to manage the risk through its own conduct. As to these clauses the AER stated:
[C]lause 15.12 (b) of Schedule 3 of the access arrangement proposal dealing with liability for disconnection and clause 24.3(b) of Schedule 3 of the access arrangement proposal dealing with liability for suspension of a service, remove Jemena’s liability and impose indemnity liability on the user for Jemena’s negligent conduct. This is clearly beyond the users’ control.
65 In its draft decision, the AER required the deletion of these clauses, but it did not require any other relevant amendments to the exclusion of liability and indemnity clauses.
66 In its response to the draft decision, JGN accepted the principle that it should bear liability where it has the potential to manage risk through its own conduct. JGN did not, however, accept that it was in a position to manage the risk arising from a cessation or suspension of gas supply in certain circumstances relating to the user’s requests or acts. JGN asserted that to address the concern, JGN proposed to amend cls 15.12(b) and 24.3(b) by:
(a) Clause 15.12(b) – deleting the words “Service Provider’s action” and replacing them with “cessation of the delivery of Gas at a Delivery Station upon the decommissioning of a Delivery Station or the disconnection of supply”. ;
(b) Clause 24.3(b) – deleting the words “Service Provider’s action” and replacing them with “suspension of the delivery of Gas”.
JGN considered that these amendments would be consistent with the scope of cls 15.12(a) and 24.3(a) in the proposed RSA.
67 Each of EnergyAustralia and AGL made submissions consistent with the proposition that liability should be imposed on the party who has the ability or responsibility to control or manage the particular risk being provided for under the RSA.
68 In its final decision the AER stated (at 426) that:
The AER considers that JGN’s approach is not in the long term interests of consumers of natural gas. Unless liability remains with JGN for its negligent acts, wilful misconduct or failure to meet the standard expected of a reasonable service provider, the efficient operation and use of natural gas services will not be promoted in the long term interests of consumers of natural gas with respect to price, quality, safety, reliability and security of supply of natural gas. Liability should remain with JGN where its negligent acts, wilful misconduct or failure to meet the standard expected of a reasonable service provider results in damage to a user.
69 Therefore the AER included the following qualification in the relevant clauses (other than proposed cl 28.7):
unless and to the extent the Service Provider’s conduct constitutes wilful misconduct or negligence or the Service Provider’s action is inconsistent with that expected of a reasonable service provider.
70 The AER also amended cl 28.7 of the RSA to add the underlined text shown below:
(a) This clause 28.7 does not apply to liabilities unless and to the extent the Service Provider’s conduct constitutes wilful misconduct or negligence or the Service Provider’s action is inconsistent with that expected of a reasonable service provider where the User has provided an indemnity under this Agreement.
(b) The liability of a Party for Damage, howsoever caused (including, but not limited to, by the negligence of that party), suffered by the other Party in connection with this Agreement is reduced to the extent that the negligent or unlawful act of omission of the other party caused that Damage.
71 In respect of the liability and indemnity clauses other than cl 28.7 of the RSA, JGN accepts only the first part of the AER’s qualification (“unless and to the extent the Service Provider’s conduct constitutes wilful misconduct or negligence”).
72 In respect of cl 28.7 of the proposed RSA, JGN submits that the AER should not have made any changes to the clause.
73 JGN contends that in adopting the reasonable service provider standard the AER incorrectly exercised its discretion or made a decision that was unreasonable. It puts this submission on three bases. First, it says that the content of the reasonable service provider standard is uncertain and, accordingly, produces uncertainty in the practical operation of the clauses. Second, it submits that the reasonable service provider standard is unnecessary because the purpose of proposed cl 28.7(a) is to ensure that the limitation of liability contained in proposed cl 28.7(b) does not apply where the user has provided an indemnity under some other clause of the RSA. Third, it says that the reasonable service provider standard, assuming it adds something to the wilful default or negligence exclusion, gives rise to particularly incongruous results because the clauses deal with events over which JGN has no control.
74 AGL and TRUenergy both submit that the AER’s amendments to the liability and indemnity clauses of the RSA (other than cl 28.7) were appropriate.
75 AGL and TRUenergy each propose (different) amendments to cl 28.7 of the RSA.
76 During the hearing the AER conceded that it erred in its amendment of proposed cl 28.7; however, it has left it to the Tribunal to determine how the clause should be reworked.
77 As we see it, the principal issue is this: Does the retention of liability if JGN fails to meet the standard expected of a reasonable service provider add anything to the retention of liability for wilful misconduct and negligence?
78 Negligence is the omission to do something which a reasonable person would do, or doing something which a prudent and reasonable person would not do: Blyth v Birmingham Waterworks Co (1856) 11 Exch 781; 156 ER 1047, 1049. Reasonableness (or lack of reasonableness) is the touchstone of liability: New South Wales v Fahy (2007) 232 CLR 486,  and . In other words, while the duty of care may vary in content and scope, the duty is always discharged by the exercise of reasonable care: Vairy v Wyong Shire Council (2005) 223 CLR 422, 432.
79 The reasonable person concept requires some expansion. Ordinarily he/she is “a [person] of ordinary prudence”: Vaughan v Menlove (1837) 3 Bing NC 468; 132 ER 490, 493. But, more correctly, he/she is understood as “a reasonable [person] in the defendant’s position”: Wyong Shire Council v Shirt (1980) 146 CLR 40, 47-8. Of course the “reasonable [person] in the defendant’s position” is a hypothetical person, not the particular person whose conduct is in question: Glasgow Corp v Muir  AC 448, 457. If the defendant is a skilled person who professes to have particular skills, s/he must act according to the standard of the hypothetical skilled person: Bolam v Friern Hospital Management Committee  1 WLR 582, 586.
80 Applying these principles to the retention of liability for “negligence”, the relevant conduct for which liability is maintained is that of a reasonable person in JGN’s position, ie a reasonable service provider. It is important to note that, to recover certain costs, a service provider must act prudently (eg rr 79 and 91) and follow “good gas industry practice” in accordance with the meaning of that phrase in r 364.
81 What, then, does the additional retention of liability (resulting from a failure to meet the standard expected of a reasonable service provider) add? In the Tribunal’s view, it adds nothing. The retention is just a different way of expressing the retention of liability for negligence. If the AER intended to retain liability for some other conduct, it is not possible to identify what that conduct was. Thus, to maintain the impugned extension is apt to cause confusion. It will cause confusion to whoever may be required to resolve a dispute between a service provider and a user. That person may be required to determine what effect the impugned extension was intended to have. We are satisfied that the answer is likely to be an unintended answer.
82 For the reason that the additional retention of liability is unnecessary to meet the AER’s objectives and is apt to cause confusion, we think its inclusion in the various clauses was unreasonable.
Reference services agreement: Security for payment
83 Clause 30 of the proposed RSA permitted JGN to require a user to provide security in respect of payments due under the RSA. Security was defined as:
Security means, at the User’s option, one or a combination of the following:
(a) a refundable deposit, or bank guarantee;
(b) if the Service Provider agrees (in its sole discretion), a parent company guarantee; or
(c) such other form of security as agreed between the User and the Service Provider,
which must be in a form satisfactory to the Service Provider.
84 The clause permitted JGN to require this security at any time. The amount that could be required was the amount it reasonably determined to be the greater of the sum of the User’s previous two invoices or the average total charges payable by the User over two billing periods: proposed cl 30(a). In addition JGN could review the matter of security and require the amount to be increased or decreased when the value of the two previous invoices or two billing periods had changed: proposed cl 30(b).
85 The interveners complain about this clause. The AGL entities contend that the RSA should be amended to provide an objective standard which regulates the circumstances in which JGN may require a user to provide security, call upon the security and review and release the security. It says the AER’s decision failed to have regard to the users’ submissions, discloses a want of reason and is not consistent with, and does not further the national gas objective.
86 TRUenergy contends the AER erred in exercising its discretion or alternatively that its decision was unreasonable because it did not provide a “measureable trigger” on the basis of which JGN may request security or review the amount of security. It also contends that, as presently worded, cl 30 does not contribute to the achievement of the national gas objectives.
87 The background is this: Clause 30 of the proposed RSA gave JGN the unfettered discretion to call for the provision of security. It also gave JGN the unfettered ability to review the amount of security that had been provided.
88 In its submissions to the AER the AGL entities, while conceding that JGN could require security, suggested that its discretion be removed and that JGN be required to accept a parent company guarantee provided the parent had an acceptable credit rating.
89 AGL also submitted that other forms of security should be listed and that the user should be able to seek a review of credit support, and that the circumstances where JGN can apply credit support should be specified.
90 Origin also objected to proposed cl 30. It referred the AER to the approach adopted in the National Energy Customer Framework (the final major component in the nationalisation of gas and electricity regulation) which suggested a set of criteria to be satisfied before a distributor can require security rather than it being at the distributor’s complete discretion. For example it was suggested that security should be provided if a user has an inadequate credit rating or a record of not paying accounts.
91 In its submission TRUenergy suggested that proposed cl 30 should be redrafted so that security can only be required in specified circumstances.
92 In its draft decision the AER did not propose to amend proposed cl 30. It stated that proposed cl 30 was consistent with the NGR and national gas objective.
93 In response to the draft decision, AGL submitted that “there needs to be non-contentious triggers within this clause describing the circumstances under which Jemena can draw on credit support provided by a User. It should not be at the ‘absolute discretion’ of the Service Provider”.
94 In its final decision, the AER stated that after considering the submission of AGL in response to the AER’s draft decision, it considered that it was appropriate to amend proposed cl 30 by “requiring JGN only to request security from a user where this is reasonably necessary”.
95 To advance its case before the Tribunal, AGL sought to rely on three previous access decisions to show that a number of existing gas access arrangements have objective standards in place to determine whether security support has to be given and when it can be called on. Those arrangements are the SPAusNet, Multinet and Envestra Gas Distribution Arrangements.
96 This raises the question whether the Arrangements are “review related matter” to which the Tribunal can have regard: s 261(1). Relevantly, review related matter includes a “document, proposal or information required or allowed under the Rules to be submitted as part of the process for the making of the decision” (s 261(7)(c)) and “any written submissions made to the original decision maker” (s 261(7)(d)).
97 Origin had made submissions to the AER. In those submissions the Arrangements were referred to in footnotes. The text and the footnotes are as follows:
8. Requiring a security
In section 30 of the RSA, Jemena proposes that it should be allowed to require a security deposit whenever it deems appropriate. Origin thinks this is unacceptable. Generally, security deposits are required from particular network users based on their credit record. The First Exposure Draft of the NECF envisages the distributor requiring credit support in accordance with the Australian Energy Regulator (AER) Credit Support Guidelines. [footnote: “See Envestra Access Arrangement 2006-10, amended version, section 6.4(e)”]
The approach in the NECF implies that a set of criteria will need to be fulfilled before a distributor can require a security, rather than this being at the distributor’s complete discretion. Origin supports some sort of criteria like these. Until the AER Credit Support Guidelines are developed, an arrangement could be adopted as in Victoria, whereby a security can be required in instances where a user has an inadequate credit rating or a record of not paying successive bills. [footnote: “See for example SPAusnet Gas Access Arrangement Revision 2008-12 Terms and Conditions, clause 7.8, Credit Support – Bank Guarantee”]
98 AGL suggests that the Arrangements were also implicitly referred to in a submission by TRUenergy. The relevant passage in the submission reads:
Two relevant sources provide a benchmark for an independently assessed distributor-retailer framework against which the Jemena proposal may be evaluated:
• The first exposure draft of the Retail Support Contract for the National Energy Consumer Framework, developed by the Standing Committee of Officials.
• The terms and conditions of the Victorian Gas Distribution Access Arrangements.
The attached table shows that, compared against these documents, several sections of the Jemena proposal are unreasonably weighted against retailers.
99 The parts of the table which deal with proposed cl 30(a) state that under the Victorian Gas Access Arrangements, the distributor “[m]ay request an undertaking, but only in specified circumstances”.
100 First of all, AGL contends that even if the Arrangements were not before the AER it can rely upon them by reason of s 261(7)(c). The argument is that the Arrangements were relevant to the AER’s consideration of the issues and hence were “allowed” to be submitted to it. If correct, this approach would turn limited merits review on its head. It would convert proceedings before the Tribunal into hearings de novo with all parties free to submit any relevant material. But we think the argument is not correct.
101 It is only documents, proposals and information required or allowed “under the Rules” to be submitted to the AER which form part of the review related matter. To be required or allowed “under the Rules” to be submitted, the document, proposal or information (as the case may be) must be referred to in a rule.
102 Thus we come to the real issue which is whether the Arrangements that were referred to in the footnotes and, perhaps, by implication in a submission, were a part of the submissions made to the AER and therefore review related matter by reason of s 261(7)(d). The first point to make, which is self evidently correct, is that material actually provided to the AER is review related matter. So, if a party wishes the AER to take material into account it should provide the AER with a copy of that material. We wish to make clear that the provision of a mass of material to the AER in the hope that the AER will be able to work its way through the material to discover what is relevant would not, in our view, be sufficient to have the AER take that material into account. Parties are required to identify with some precision what part or parts of the submitted material they regard as relevant. Correspondingly, it would assist the parties were the AER to indicate when it publishes its draft decision what material it took into account, much as it does when a party seeks to review its final determination.
103 The second point is that simply referring to material in a footnote, or by inference in a submission, will not generally put that material before the AER. The exception is the case where it is plain on the face of the material that is actually given to the AER that it (the AER) is expected to obtain, consider and take into account the further material. Put another way, if it is objectively clear that a party wishes to incorporate by reference additional material then it is possible that the additional material should be treated as being before the AER. Not every attempt by a party to incorporate by reference will, however, be regarded as successful. Whether the material is incorporated by reference may depend upon the extent of the material that is sought to be incorporated, the difficulty in locating that material, the precision with which parts of that material are identified and so on.
104 We would not treat the Arrangements as having been put before the AER. It was not necessary for the AER to examine them to consider whether or not the amendments suggested by the parties ought to be adopted because the proposed amendments were expressly stated by the parties. If the parties intended for the AER to read the Arrangements they should have submitted a copy to the AER or made it plain that the AER was expected to obtain, consider and take into account the Arrangements.
105 The Tribunal cannot find fault with the AER’s final decision. First of all we think the AER was correct in deciding that it would not be appropriate for JGN to have the unqualified right to demand security. What the appropriate qualification should be is a matter in respect of which minds can differ. There could be, as the AER would have it, a general restriction based on “reasonableness”.
106 Another approach which is one suggested by the interveners, is to specify precisely the circumstances in which security should be given. Yet another approach is to have the parent company produce a guarantee.
107 Each approach has its advantages and disadvantages. There is no correct approach. More particularly there is no error demonstrated by reason of the choice made by the AER.
108 For the sake of completeness we should indicate that our view would not be any different if regard were to be had to the Arrangements.
Reference services agreement: Minimum billing period intervals
109 Clause 22.1 of the proposed RSA provided:
Service Provider to issue invoice
(a) The Service Provider will issue the User with an invoice at intervals determined at the absolute discretion of the Service Provider.
(b) Each invoice will specify the amounts payable for all Services supplied to the User under this Agreement in the most recently completed Billing Period. Where relevant, such amounts will be calculated using the meter data or estimated meter data from all relevant Delivery Points.
(c) Any adjustments or outstanding amounts in respect of any previous Billing Period must be included in the invoice.
(d) If the User requests, the Service Provider may send a copy of the invoice to the User by electronic mail or facsimile on the date the invoice is generated.
110 In its submission to the AER, Energy Australia stated that billing frequency should be stated as a minimum and maximum. AGL submitted that timing should be by agreement and JGN should provide sufficient time to enable a user to run automated reconciliation processes. It suggested no more than one bill per month. Origin also supported a billing frequency of once per month, with payment due within 10 days.
111 In its draft decision the AER stated that it considered proposed cl 22.1 “to be a continuation of current commercial obligations” and to be “consistent with the NGR and the national gas objective”.
112 AGL, EnergyAustralia and Origin made submissions on the AER’s draft decision. Each reiterated its objection to JGN having absolute discretion over billing periods.
113 In its final decision, the AER dealt with cl 22.1 of JGN’s proposed RSA as follows:
AER’s analysis and considerations
The AER notes that the precise content of clause 22.1 of schedule 3 of the revised access arrangement does not represent a continuation of commercial practices undertaken in the earlier access arrangement. The submissions received indicate that users need JGN to issue invoices on a regular basis. This will give users greater certainty regarding JGN’s billing cycle. As the intervals at which invoices are issued has flow-on commercial and financial consequences for users, the AER considers that there is merit in establishing a predictable pattern of invoicing. This will support the efficient investment in, and efficient operation and use of, natural gas services for the long term interest of consumers of natural gas with respect to price, quality, safety, reliability and security of supply of natural gas. The AER considers it appropriate to revise clause 22.1(a) of schedule 3 of the revised access arrangement proposal by replacing it with the clause that had applied in the earlier access arrangement period. In coming to this decision, the AER has taken JGN’s response to the submissions into consideration but has come to the view that clarity and certainty to the benefit of all parties can be best facilitated by this revision.
The AER does not approve clause 22.1(a) of the schedule of the revised access arrangement proposal as a preferable alternative exists that complies with applicable requirements of the NGL and NGR and is consistent with applicable criteria prescribed by the NGL and NGR.
114 The AER then amended cl 22.1 to replace sub-paragraph (a) with the following:
The service provider will render invoices at regular intervals but not less frequently than monthly.
115 AGL and TRUenergy submit that the AER erred by not specifying a monthly billing cycle, in other words, by not preventing JGN from issuing invoices more frequently than monthly.
116 In addition, the AGL entities submit that the factual premise upon which the decision is based is incorrect. They say that while the earlier access arrangement had a similar billing clause, JGN provided reference services to users on a different basis. The reference services were provided under two forms of contract. One provided for billing as soon as possible after the first day of each calendar month; the other provided for billing as soon as possible after each billing period, which was monthly or quarterly, depending on the customer.
117 The complaints are: (1) There is nothing which prevents JGN issuing invoices more frequently than monthly, for example daily or weekly; and (2) There is a lack of predictability and certainty in the billing cycle.
118 The Tribunal does not accept the premise upon which most of the challenge is based. First, it does not accept that JGN can issue invoices whenever it thinks appropriate. The obligation in cl 22 is to render invoices “at regular intervals”. This requires JGN to establish a billing pattern that is predictable. Second, it does not accept that the billing pattern can be unreasonably short, having regard to the nature of the client and especially the quantity of its purchases. The Tribunal is of the view that there is an implicit obligation on JGN to establish a tailored billing cycle for each client that is objectively reasonable in all the circumstances.