AUSTRALIAN COMPETITION TRIBUNAL
Application by WA Gas Networks Pty Ltd (No 3)  ACompT 12
Economic Regulation Authority
ACT 3 of 2011
MANSFIELD J (PRESIDENT)
MR R DAVEY (MEMBER)
PROFESSOR D ROUND (MEMBER)
Date of decision:
(a) whether ERA applied NGR rule 87 correctly – whether NGR rule 87(1) requires the ERA to go beyond the figure determined in accordance with NGR rule 87(2)(b) – NGR rules 87(1) informs application of NGR 87(2)(b) – ERA not required to adjust the rate of return determined in accordance with NGR r 87(2)(b);
(b) whether the ERA erred in determining the rate of return on capital – whether components of rate of return incorrect – whether ERA’s determination of the MRP was not supported by evidence having regard to current financial market conditions – whether the ERA erred in determining the value of imputation credits – whether ERA erred in estimating DRP – whether the ERA should have based determination of DRP on evidence of total cost of debt funding submitted by the Applicant – whether the ERA’s bond yield approach was in error – whether the ERA incorrectly rejected inclusion of allowance for pre-financing costs;
(c) whether the ERA, in escalating previous capital expenditure, erred in using a national measure of inflation rather than a local measure of inflation – whether ERA erred in escalating previous capital expenditure only from the end of the year in which it was expended;
(d) whether the ERA erred in failing to allow the inclusion of bridging finance costs as allowable operational expenditure – where costs of bridging finance incurred as a result of unexpected delay in commencement of new regulatory regime – whether bridging finance costs would have been incurred by an efficient service provider acting prudently;
(e) whether the ERA erred in not including any allowance for working capital in allowable operational expenditure;
(f) whether the ERA erred in excluding from the tariff variation mechanism provision for adjustment as a result of unexpected regulatory capital expenditure – whether inclusion of such a provision required to permit Applicant to recover at least its efficient costs of providing the reference services and of complying with a regulatory obligation – whether exclusion of provision for capital expenditure capricious where ERA permits provision for recovery of operational expenditure; and
(g) whether the ERA erred in excluding terms and conditions from the template haulage contract that it determined were purely commercial in nature – whether such exclusion inconsistent with NGR rule 48(1)(d)(ii) – whether any reasoned basis for excluding such terms – whether ERA erred in excluding particular terms.
National Gas (South Australia) Act 2008 (SA)
Gas Pipelines Access (South Australia) Act 1997 (SA)
Australian Competition and Consumer Commission v Australian Competition Tribunal (2006) 152 FCR 33
Australian Competition and Consumer Tribunal v Telstra Corporation (2009) 176 FCR 203
Application by ElectraNet Pty Limited (No 3)  ACompT 3
Application by Energy Australia  ACompT 8
Application by ActewAGL Distribution  ACompT 4
Application by Energex Limited (Gamma) (No 5) (2011) ATPR 42
Application by Jemena Networks (No 5)  ACompT 10
Application by United Energy Distribution Pty Limited  ACompT 1
Application by Envestra Limited (No 2)  ACompT 3
Application by United Energy Distribution Pty Limited (No 2)  ACompT 8
Application by Alinta Sales Pty Ltd (No 2)  ACompT 13
Date of last submissions:
30 May 2012
Number of paragraphs:
Solicitor for WA Gas Networks Pty Ltd now known as ATCO Gas Australia Pty Ltd:
Counsel for the Economic Regulation Authority of Western Australia:
Mr M O’Bryan SC
Solicitor for the Economic Regulation Authority of Western Australia:
Talbot Olivier Lawyers
Counsel for the Intervener Alinta Sales Pty Ltd:
Mr D Jackson
Solicitor for the Intervener Alinta Sales Pty Ltd:
Clifford Chance Lawyers
IN THE AUSTRALIAN COMPETITION TRIBUNAL
Mr R DAVEY (MEMBER)
PROFESSOR D ROUND (MEMBER)
DATE OF ORDER:
THE TRIBUNAL ORDERS THAT:
1. The Decision of the Economic Regulation Authority of Western Australia (the ERA) made on 28 April 2011 and titled the Economic Regulation Authority’s revised access arrangement for the WA Gas Networks Pty Ltd Mid-West and South-West Gas Distribution Systems be set aside and be remitted to the ERA, for the purposes of making the said decision again, limited to giving effect to the reasons for decision of the Tribunal on:
(a) the Gamma Issue (as defined in the Tribunal’s reasons at [26(b)] and ;
(b) the Bridging Finance Issue (as defined in the Tribunal’s reasons at  and ;
(c) the Tariff Variation Mechanism Issue (as defined in the Tribunal’s reasons at  and ;
(d) the Template Haulage Terms Issues (as defined in the Tribunal’s reasons at  and .
(e) the Cost of Debt Issue (as defined in the Tribunal’s reasons at [26(c)] and .
2. The ERA, in making the decision again, do:
(a) determine the amount to be allowed for cost of capital by using as the gamma input into the cost of capital comprising the element: value of imputation credits, the value of 0.25;
(b) reconsider the proper application of the bond yield approach, in deciding upon the debt risk premium to allow, having regard to the Tribunal’s criticisms of the simple averaging process adopted;
(c) allow the amount claimed by the applicant for the costs of bridging finance as an operational expenditure;
(d) in relation to the reference tariff variation mechanism,
(i) vary the reference tariff variation mechanism so as to reinstate Regulatory Capital Expenditure, as defined in clause 5, in clauses 2.2 and 3.1 of Annexure B to the applicant’s October 2010 Amended Access Arrangement;
(ii) consult with the applicant on any necessary consequential amendments;
(iii) in the event that the ERA and the applicant cannot agree on any necessary consequential amendments, each party may apply to the Tribunal for further directions, and
(e) vary clause 8.3(b) of the Approved Contract by deleting therefrom the words “the user acknowledges that it must use reasonable endeavours” and inserting instead the words “the user must use reasonable endeavours”.
3. The said decision is otherwise affirmed.
ACT 3 of 2011
Application UNDER SECTION 245 OF THE NATIONAL GAS LAW FOR A REVIEW OF A FULL ACCESS ARRANGEMENT DECISION MADE BY THE ECONOMIC REGULATION AUTHORITY OF WESTERN AUSTRALIA IN RELATION TO WA GAS NETWORKS PTY LTD PURSUANT TO RULE 65 OF THE NATIONAL GAS RULES
WA GAS NETWORKS PTY LTD NOW KNOWN AS ATCO GAS australia pty ltd
MANSFIELD J (PRESIDENT)
MR R DAVEY (MEMBER)
PROFESSOR D ROUND (MEMBER)
8 JUNE 2012
ADELAIDE (VIA VIDEO LINK TO PERTH)
REASONS FOR DECISION
1 The applicant WA Gas Networks Pty Ltd, now known as ATCO Gas Australia Pty Ltd (ATCO), owns and operates the Mid-West and South-West Gas Distribution Systems (Gas Distribution Systems) in Western Australia. The Gas Distribution Systems comprise various non-interconnected sub-networks covering the Perth metropolitan area and country centres from Geraldton in the north to Busselton in the south, excluding the Kalgoorlie and Albany networks. They constitute the majority of reticulated gas infrastructure in Western Australia.
2 Under Schedule A of the National Third Party Access Code for Natural Gas Pipeline Systems (the Code), the Gas Distribution Systems were specified as a covered pipeline for the purposes of section 1.1 of the Code. Under the Code, the Economic Regulation Authority of Western Australia (the ERA), and its predecessor the Independent Gas Pipelines Access Regulator (IGPAR), were responsible for approving access arrangements for covered pipelines, including the Gas Distribution Systems.
3 On 18 July 2000, IGPAR approved an initial access arrangement for the Gas Distribution Systems under the Code. On 10 August 2005, the ERA approved revisions to the access arrangement for the Gas Distribution Systems under the Code (the 2005 access arrangement). The revisions were specified to apply from 25 August 2005 until the earlier of a date set following a revisions trigger event and 1 January 2010. Under this approval, if there were no revisions trigger event, further revisions to the access arrangement that would apply from 1 January 2010 were to be submitted to the ERA before 31 March 2009.
4 On 12 February 2009, the ERA gave notice that it had, pursuant to s 7.19 of the Code, approved an application for an extension of the time for ATCO to submit proposed revisions to the 2005 access arrangement. The main reason given by ATCO in its request for the extension was to allow ATCO to submit the access arrangement revisions after the proposed new national gas legislation came into effect in Western Australia. The six month extension of time that was approved by the ERA ran from 31 March 2009 to 30 September 2009.
5 On 1 September 2009, the National Gas Access (WA) Act 2009 (NGA WA Act) received Royal Assent. Sections 1 and 2 came into operation on that date with the balance of to the NGA WA Act becoming effective only on 1 January 2010, following gazettal on 31 December 2009: Western Australia, Gazette: Special, No 247, 31 December 2009, 5327.
6 On 24 September 2009, the ERA gave notice that it had, pursuant to s 7.19 of the Code, approved ATCO’s request for a further extension of time to submit proposed revisions to the access arrangement for the Gas Distribution Systems. Again, the main reason given by ATCO in its request for the extension was to allow ATCO to submit the access arrangement revisions after relevant sections of the NGA WA Act came into effect in Western Australia. The 4 month extension of time that was approved by the ERA ran from 30 September 2009 to 31 January 2010.
7 On 1 January 2010, the remainder of the NGA WA Act came into operation. Pursuant to s 7 of that Act, from that date the National Gas Access Law (NGL) applied as a law of Western Australia. The NGL is the National Gas Law which is the Schedule to the National Gas (South Australia) Act 2008 (SA) as modified by Schedule 1 to the NGA WA Act. The modified version of the NGL is set out in full as a Note to the NGA WA Act. Pursuant to ss 26 and 294 of the NGL, the National Gas Rules (NGR) set out in the document National Gas Rules 2008 came into operation on the same date and also have the force of law in Western Australia.
Decision under review
8 On 29 January 2010, ATCO submitted to the ERA its proposed revised access arrangement, revised access arrangement information and supporting submission.
9 On 17 August 2010, pursuant to rule 59 of the NGR, the ERA published its Draft Decision on WA Gas Networks Revisions Proposal for the access arrangement for the Mid-West and South-West Gas Distributions Systems (the Draft Decision). The ERA’s Draft Decision was not to approve ATCO’s proposed revised access arrangement. The ERA set out 74 amendments that it required ATCO to make in order for the proposal to be acceptable to the ERA.
10 On 8 October 2010, pursuant to rule 60 of the NGR, ATCO submitted to the ERA an amended proposed revised access arrangement (the Proposed Access Arrangement Revisions), amended access arrangement information and submission, in response to the Draft Decision.
11 On 28 February 2011, pursuant to rule 62 of the NGR, the ERA published the Final Decision on WA Gas Networks Pty Ltd proposed access arrangement for the Mid-West and South-West Gas Distribution Systems (the Final Decision). This decision was to refuse to approve ATCO’s Proposed Revised Access Arrangement Revisions.
12 On 28 April 2011, pursuant to rule 64(1) of the NGR, the ERA published its proposed revisions to the access arrangement for the Gas Distribution Systems and pursuant to rule 64(4) of the NGR, it also published the Economic Regulation Authority’s revised access arrangement for the WA Gas Networks Pty Ltd Mid-West and South-West Gas Distribution Systems (the Access Arrangement Decision) and requiring amendments to the applicable access arrangement information. In relevant respects the Access Arrangement Decision gave effect to the access arrangements proposed by the ERA, for the reasons given, in the Final Decision.
13 Both ATCO and Alinta Sales Pty Ltd (Alinta) have applied to the Tribunal for review of the Access Arrangement Decision. Alinta’s application is addressed in separate reasons for decision, published at the same time as this decision: Application by Alinta Sales Pty Ltd (No 2)  ACompT 13.
The applicable provisions
14 The power to make the Access Arrangement Decision is governed by rule 64 of the NGR. The ERA must of course follow the consultation process prescribed for the making of the Draft Decision and the Final Decision, and the Access Arrangement Decision must be made within two months of the Final Decision. Relevantly, rule 64(2) provides that the ERA’s proposal for an access arrangement was to be formulated with regard to:
(1) the matters that the NGL requires an access arrangement to include;
(2) the service provider’s access arrangement proposal; and
(3) the ERA’s reasons for refusing to approve that proposal.
15 Rule 64(3) provides that the ERA may, but is not obliged to, consult on its proposal in the Final Decision. In this matter, the ERA did not consult on making the Access Arrangement Decision (having consulted in making the Draft Decision and the Final Decision). That is a matter upon which the Tribunal comments in Application by Alinta Sales Pty Ltd (No 2)  ACompT 13 at - as an issue there arose as to whether material presented to the ERA after the Final Decision but before the Access Arrangement Decision is “review related matter” under s 261 of the NGL so that it may be considered by the Tribunal on this review.
16 The making of the Access Arrangement Decision was an “economic regulatory function or power” under s 2 of the NGL. Accordingly, the ERA was required by s 28(1) of the NGL to make the Access Arrangement Decision in a manner that was likely to contribute to the achievement of the national gas objective. To similar effect, rule 100 of the NGR requires that the provisions of an access arrangement be consistent with the national gas objective.
17 The national gas objective is defined in section 23 of the NGL as follows:
23 – National gas objective
The objective of this Law 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 with respect to price, quality, safety, reliability and security of supply of natural gas.
18 The ERA was also required by s 28(2)(a) of the NGL to take into account the revenue and pricing principles when making those parts of the Access Arrangement Decision that relate to a reference tariff. Under s 28(2)(b) of the NGL, the ERA was permitted to take into account the revenue and pricing principles when exercising any other “… economic regulatory function or power” (for example, determining terms and conditions of the Access Arrangement Decision that did not relate to a reference tariff) if the ERA considered it appropriate to do so.
19 The revenue and pricing principles are defined in s 24 of the NGL.
20 To succeed on an application for review, the NGL provides that:
1. the applicant must demonstrate that the ERA made an error of one of the 4 kinds described in s 246(1) of the NGL;
2. the applicant must not raise any “matter” (by way of evidence or submissions) that was not “raised in submissions in relation to the reviewable regulatory decision before that decision was made”;
3. the Tribunal must not consider any material other than that specified in s 261(1) and (2) of the NGL, which material essentially comprises the material that was before the ERA: see s 261(7) of the NGL, unless a ground of review is made out. In that case, s 261(3) permits the Tribunal to receive new material to assist in determining the appropriate relief under s 259 of the NGL.
21 Section 246(1) limits the grounds of review to the following:
1. the ERA made an error of fact in its findings of facts, and that error of fact was material to the making of the decision;
2. the ERA made more than one error of fact in its findings of facts, and those errors of fact, in combination, were material to the making of the decision;
3. the exercise of the ERA’s discretion was incorrect, having regard to all the circumstances; or
4. the ERA’s decision was unreasonable, having regard to all the circumstances.
22 The Tribunal’s task is not therefore to substitute a decision which the Tribunal may prefer to make on the material before the ERA, but to consider the review-related material as defined in s 261(7) (unless additional material is received for the limited purpose contemplated by s 261(3)), to determine whether reviewable error has been established, and if so to make a determination under s 259(2) of the NGL: see Application by ActewAGL Distribution  ACompT 4 (ActewAGL) at . If no reviewable error under s 246(1) is made out, the decision under review will be affirmed: s 259(2)(a): see generally Application by ElectraNet Pty Limited (No 3)  ACompT 3 at  and  (ElectraNet (No 3)); Application by Energy Australia  ACompT 8 at .
23 There are seven broad issues raised by the application. A summary of them is as follows.
24 First, there is an issue about the general approach taken by the ERA to determine the rate of return on capital (as required by rule 87 of the NGR). The following sub-paragraphs indicate how the issue arises:
(a) the ERA made a calculation using a well accepted approach (a weighted average cost of capital (WACC)) incorporating the cost of equity and the cost of debt. For the purposes of estimating the cost of equity, the ERA used the Capital Asset Pricing Model (CAPM), and for the purposes of estimating the cost of debt the ERA summed the nominal risk free rate, the debt risk premium and debt raising costs. It then adopted the output of those processes for the purposes of its determination – ATCO says that the models (and indeed modelling generally) are based on simplifying assumptions (as to risk and other parameters) and there are a number of limitations as to the utility of their outcome;
(b) ATCO stresses that rule 87(1) requires that the determination which the ERA makes is one which is to be commensurate with prevailing conditions in the market for funds and the risks in providing reference services;
(c) the first error alleged (raised in Grounds 1A to 1C) is that the ERA did not consider the requirement of rule 87(1) so as to determine a rate of return which is truly commensurate with prevailing market conditions and the risks in fact of providing the reference services, but rather has confined its approach to the calculation produced by the modelling it selected, when its calculation should have been but a step in the process;
(d) ATCO then argues that the evidence established that a higher rate of return was necessary in order to be commensurate with prevailing conditions in the market for funds and the risks involved in providing reference services and consequently, it contends that the ERA ought to have made an adjustment (upwards) to the rate produced by the CAPM so as to satisfy the requirements of rule 87(1). This approach is also said to have been required by the revenue and pricing principles, and in particular to afford ATCO a reasonable opportunity to recover at least the efficient costs it incurs of providing the reference services and of complying with a regulatory obligation.
25 The Tribunal will call the first issue the rule 87 Construction Issue.
26 The second issue also relates to the rate of return on capital. ATCO contends that the ERA made a number of specific errors (also raised in Grounds 1A to 1C) in the determination of the components it used in the calculation of the rate of return on capital, namely that:
(a) the ERA’s assessment of the market risk premium (MRP) (at 6%) was not supported by the evidence because it was arrived at by taking a long term historical view of MRP and other regulatory practice, whereas the effects of the global financial crisis (GFC) justified (and indeed required) the selection of a higher MRP (of 6.5%) for the term of the access arrangement period;
(b) in its assessment of the value of gamma, the ERA made errors as to both the distribution ratio and the value of theta leading to a considerable overstatement of the value for gamma (at 0.53 when the evidence did not support a finding greater than 0.25); and
(c) in its assessment of the cost of debt –
(i) the ERA paid no regard to ATCO’s evidence of actual market conditions and the total cost of debt funding as set out in ATCO’s 7 January 2011 submission to it, so the ERA therefore failed to derive an appropriate debt risk premium (DRP) which reflected market conditions and in any event, the ERA did not apply the most relevant data from Bloomberg to obtain a DRP; and
(ii) additionally, the ERA wrongly rejected the inclusion of any specific allowance for “pre-financing costs” representing the costs to ATCO of having its finance facilities in place ahead of the due date for the renewal of finance, without which its credit rating and the costs of debt funding would be adversely affected. Hence, ATCO says it was wrong not to have made such a specific allowance when the evidence established that the current market conditions required the incurring of this expense in order to secure debt funding.
27 The Tribunal will call these issues respectively the Market Risk Premium Issue, the Gamma Issue, and the Cost of Debt Issue.
28 The third issue concerns the ERA’s approach to the escalation of costs to take account of inflation. ATCO says that the ERA erred in two respects (raised in Grounds 2A to 2C), namely:
(a) Understate Capital Base – In determining the opening capital base for the access arrangement period the ERA accepted that it was necessary to escalate the previous opening capital base to take account of inflation, but did so applying the Eight Capital Cities CPI rather than Perth CPI figures, which ATCO argues is more appropriate; and
(b) Understate Further Capital Expenditure – In determining the opening capital base for the access arrangement period, the ERA accepted that it was necessary to take account of capital expenditure incurred during the previous access arrangement period and to escalate that expenditure to take account of inflation. ATCO argues it did so in a way which understated the value of that expenditure in two respects. First (as noted above) because it applied the Eight Capital Cities CPI rather than the more appropriate Perth CPI figures; and second, it only escalated the expenditure from the end of the year in which the money was expended and not, as ATCO says is more appropriate for expenditure incurred periodically throughout any year, from the mid-point of the year.
29 ATCO argues that there is no proper economic, legal or other sound basis for seeking to value the capital base of the enterprise at a cost which does not reflect its cost (value) in the market where those costs have been or would be incurred, so that in both respects the result of the approach taken by the ERA is an understatement of its capital cost base and thus a distortion of the operation of the revenue and pricing principles.
30 The Tribunal will call these issues the CPI Issues.
31 Fourth, ATCO contends (as raised by Grounds 3A to 3C) that the ERA failed to include as an operating expense the cost of establishing bridging finance. ATCO says that (along with other market participants) it was led to expect that the NGL would commence in 2008. As a result of delays to the commencement of the NGL in Western Australia, acting prudently, ATCO arranged bridging finance to carry over its financing arrangements until it was able to secure longer term finance with the benefit of greater certainty as to its revenue over the access arrangement period. It argues, therefore, that the exclusion of these costs is inconsistent with the operation of the revenue and pricing principles, and in particular with affording ATCO a reasonable opportunity to recover at least the efficient costs it incurs of providing the reference services and of complying with a regulatory obligation.
32 The Tribunal will call this the Bridging Finance Issue.
33 The fifth issue raised by ATCO (as raised by Grounds 4A to 4C) is that the ERA refused to include any provision for working capital and thus (to that extent) ATCO is not afforded a reasonable opportunity to recover at least the efficient costs it incurs in providing the reference services. The ERA’s view is that the reference tariff calculation already factored in a benefit to ATCO because it assumed all cash flow in and out takes place at the end of the period. Whilst ATCO accepts that, it says the amount of that benefit has been taken into account by it in reducing the amount of the working capital allowance for which it contends. ATCO submits its reduced allowance was wrongly rejected by the ERA, and (it says) there is no basis for concluding that no such allowance is necessary, or that the need for working capital can be avoided by adoption of different management techniques.
34 The Tribunal will call this the Working Capital Issue.
35 Sixth, (as raised in Grounds 5A to 5C) ATCO argues that the ERA wrongly excluded from the tariff variation mechanism, provisions which would permit an adjustment to the tariff to take account of (and thus permit ATCO a reasonable opportunity to recover) the amount of any unexpected capital expenditure due to government regulatory intervention during the regulatory period. ATCO says that:
(a) unless such a mechanism is included, there is no means by which the service provider is able to recover during the regulatory period a return on, and depreciation of, that capital expenditure, and that the ability to include such capital expense in the opening capital base for the next assessment period is at best only a partial and delayed recompense to it;
(b) it is only by including such a mechanism that rule 92(2) of the NGR can be complied with;
(c) the approach taken by the ERA is inconsistent with its approach to permitting a variation mechanism which permits the recovery of additional operating costs due to government regulatory intervention; and
(d) the exclusion of regulatory capital expenditure from the reference tariff variation mechanism is inconsistent with the operation of the revenue and pricing principles and in particular with affording ATCO a reasonable opportunity to recover at least the efficient costs it incurs in providing the reference services and of complying with a regulatory obligation.
36 The Tribunal will call this the Tariff Variation Mechanism Issue.
37 Finally, ATCO says the ERA has taken an unjustified approach to the approval of the proposed template haulage contract. This has manifested itself in two ways.
(a) Commercial terms (Ground 6A) – the ERA excluded important provisions from the approved terms on the basis that they were, or were concerned with, commercial matters (or like expressions) and accordingly to be left to negotiation between ATCO and a customer, but ATCO argues –
(i) the ERA’s approach is inconsistent with rule 48(1)(d)(ii) of the NGR which mandates that the access arrangement must specify the terms and conditions upon which the reference service will be supplied, without limiting it to a sub-set of the terms and conditions comprising those other than commercial matters;
(ii) in any event the distinction which the ERA has drawn is illusory because all of the terms of the supply of reference services are capable of negotiation, subject to the dispute resolution provisions provided for in the NGL and in any contract all terms will affect the benefits and burdens provided for, so that there is no sensible basis for identifying some only of those terms as concerning commercial matters; and
(iii) further that the selection process adopted by the ERA is capricious, as it has (for example) excluded a provision which would make it clear that the tariff is expressed exclusive of GST, whereas if the tariff is proper for inclusion in the template haulage contract, there is no proper basis for not permitting it to be a cost plus GST tariff; and
(b) Particular Terms (Ground 6B) – additionally there were particular amendments to the October Template Haulage Contract where the approach taken by the ERA was erroneous as it was unsupported by any evidence, or contrary to the revenue and pricing policies or otherwise erroneous.
38 The Tribunal will call these the Template Haulage Terms Issues.
The Rule 87 CONSTRUCTION Issue
39 Under rule 76 of the NGR, total revenue is to be determined for each regulatory year of the access arrangement period using a “building block” approach in which the building blocks are:
(1) a return on the projected capital base for the year;
(2) depreciation on the projected capital base for the year;
(3) if applicable, the estimated cost of corporate income tax for the year;
(4) increments or decrements for the year resulting from the operation of an incentive mechanism to encourage gains in efficiency; and
(5) a forecast of operating expenditure for the year.
40 The return on the projected capital base is calculated as the product of:
(a) the rate of return; and
(b) the projected capital base at the beginning of each year of the Access Arrangement Period.
41 The rate of return to be applied in determining real pre-tax total revenue is a real pre-tax rate of return.
42 A nominal pre-tax rate of return is calculated using a formula, which for present purposes it is not necessary to refer to.
43 The nominal pre-tax rate of return can then be adjusted to a real pre-tax rate of return by removing expected inflation.
44 In its Proposed Access Arrangement, ATCO proposed a real pre-tax rate of return on capital of 11.1%. In the Draft Decision, the ERA adopted a real pre-tax rate of return of 6.89%. In the Amended Proposed Access Arrangement, ATCO proposed a real pre-tax rate of return on capital of 9.6%. In the Final Decision, the ERA proposed to adopt a real pre-tax rate of return of 7.40%.
45 In the Access Arrangement Decision, the ERA gave effect to its decision in the Final Decision to adopt a real pre-tax rate of return of 7.40%.
46 In the process of reaching its decision about the real pre-tax rate of return, the ERA applied rule 87 of the NGR. It provides as follows:
(1) The rate of return on capital is to be commensurate with prevailing conditions in the market for funds and the risks involved in providing reference services.
(2) In determining a rate of return on capital:
(a) it will be assumed that the service provider:
(i) meets benchmark levels of efficiency; and
(ii) uses a financing structure that meets benchmark standards as to gearing and other financial parameters for a going concern and reflects in other respects best practice; and
(b) a well accepted approach that incorporates the cost of equity and debt, such as the Weighted Average Cost of Capital, is to be used; and a well accepted financial model, such as the Capital Asset Pricing Model, is to be used.
47 The respective contentions of ATCO on the one hand and the ERA on the other concerned the interaction of rule 87(1) and (2). Before turning to that construction issue, it is helpful to identify what the ERA in fact did.
48 It is explained in the Draft Decision at - and summarised in the following paragraphs.
49 ATCO had first proposed the use of multiple pricing models to produce a reliable indication of the expected rate of return on equity which is commensurate with prevailing market conditions for the rate of return on equity. ATCO submitted that it did so because each model takes into account only certain aspects of the economic processes through which returns on financial assets are determined, and that pricing models derived by assuming a simple exchange economy cannot provide a complete explanation of the determinants of asset prices, since these models do not take into account the technological, market and regulatory risks to which the owners of physical assets are exposed.
50 The ERA gave detailed consideration to that contention, including to each of the four pricing models proposed by ATCO. It considered other submissions. It referred to advice provided by NERA Economic Consulting (NERA) to ATCO, and in turn submitted to the ERA by ATCO.
51 Its detailed consideration of the four proposed pricing models led it to the view, expressed at , that the Sharpe-Lintner CAPM is the most widely used CAPM model to estimate the cost of equity. It was unaware that any regulators in Australia used any of the other three CAPM models to estimate the cost of equity in their decisions. It had earlier explained why it was cautious about using any of those models.
52 In the Final Decision, the ERA affirmed at  that it would use the Sharpe-Lintner CAPM to determine the cost of equity for ATCO’s access arrangement.
53 It did not adopt the refined proposal of ATCO that, if its averaging of four models method were rejected, then the outcome of the modelling of the CAPM under rule 87(2)(b) should be regarded as a starting point, but that that outcome should then be checked against the standard expressed in rule 87(1). If, on checking, the modelled outcome was not in conformity with the standard expressed in rule 87(1), then – it was argued – it should be adjusted. In this instance, ATCO argued that it could be shown that the modelled outcome was not in conformity with the standard expressed in rule 87(1) by reference to the NERA report of 22 April 2009, and two reports of Strategic Finance Group Consulting (SFG) of 1 September 2010 and 21 April 2011 also commissioned by ATCO and provided to the ERA. The reports of NERA and SFG were proposed by ATCO as providing a more appropriate figure for the rate of return on equity than the outcome arrived at by the ERA (incorporating other inputs as well) from its modelling using the Sharpe-Lintner CAPM.
54 The “context” for the submission is that CAPM modelling applies a mathematical equation based upon inputs which are no more than estimates, and so the outcome depends on the quality of the inputs, the sophistication of the range of inputs and the quality of the modelling equation. Because, it is said, there is “considerable uncertainty” about the values for certain inputs (such as the estimates of the equity beta and market risk premium), the output should be checked to see if it is commensurate with prevailing conditions in the market for funds. The checking would/could be done by comparing the CAPM estimate of the required return on equity with the return on equity which is available to investors in other comparable firms. The summary of the SFG view is expressed in  of its first report as follows:
In summary, our view is that all of the evidence, all of the estimates, all of the checks and tests for economic reasonableness should be considered in a holistic manner. It is inappropriate to mechanically estimate a set of parameters, insert them into a pricing formula, and then to adopt the result without question.
55 In that report, SFG embarked upon estimating the required return on equity for comparable firms at -. In doing so, it looked in steps at broker research reports on a range of six energy infrastructure firms that were engaged in gas and electricity distribution (the comparables), dividend yield forecasts from those reports on those firms, evidence from recent capital raisings from four of those firms, and capital gain forecasts for those firms.
56 SFG concluded then that the CAPM estimates from the Sharpe-Lintner model were not within the range of outcomes which its analysis had produced. Accordingly, it said there should be either:
(1) a revision to one or more input parameters, so that the revised values (selected from within the range that is considered to be reasonable) produce an estimate of the required return on equity that is consistent with current conditions in the market for funds; or
(2) a detailed explanation as to why the proposed estimate of the required return on equity can be, in light of the apparent evidence to the contrary, considered to be already consistent with current conditions in the market for funds.
57 The Tribunal does not attribute to SFG any attempt to say how rule 87 of the NGR should be construed as a matter of law. From SFG’s economic/financial context, however, it is argued by ATCO that it can readily be shown that the adoption of the process of determining a rate of return on capital using only the method specified in rule 87(2)(b) is capable of producing a result which is not consistent with the outcome mandated by rule 87(1). ATCO adds, based on the NERA and SFG reports, that the Sharpe-Lintner model (and indeed any model) necessarily contains simplifying assumptions about the nature of assets, the extent to which they are fixed, the nature of the market in which assets are traded, the status of the putative trading costs (transactions and tax costs), the risk free rate of return, the assumption of homogenous expectations (ATCO’s term), and the adoption by investors of particular return and risk factors.
58 By that process, ATCO contends that rule 87(1) is given proper work to do. It fulfils the national gas objective specified in s 23 of the NGL and the revenue and pricing principles in s 24, especially s 24(2)(a);
A service provider should be provided with a reasonable opportunity to recover at least the efficient costs the service provider incurs in providing reference services.
59 ATCO further contends that primary emphasis being given to s 87(1) would reflect those provisions of the NGL, and better secures a rate of return commensurate with the risks involved in providing the reference services. It says that its contention is consistent with the terms and structure of rule 87, including by the use of the word “determine” rather than “calculate” in rule 87(2). It says that rule 74(2)(b) of the NGR requiring forecasts or estimates to be the best forecast or estimate possible in the circumstances supports its view. It seeks to draw some support for its contention from the decision of the High Court in East Australian Pipeline Pty Ltd v Australian Competition and Consumer Commission (2007) 233 CLR 229 (East Australian Pipelines case) about the construction and application of s 8.10 of the predecessor to the NGL; namely the National Third Party Access Code for Natural Gas Pipeline Systems (the Code) established under the Gas Pipelines Access (South Australia) Act 1997 (SA).
60 The Tribunal does not accept that contention.
61 In the Tribunal’s view subrules 87(1) and (2) operate together in the following way.
62 Rule 87(1) describes the objective when the ERA is determining the rate of return on capital. It is an objective which is of course consistent with the national gas objective and with the revenue and pricing principles. It contains no guidance as to how the objective is to be achieved. In the interests of regulatory consistency, it is desirable that such guidance be provided.
63 Rule 87(2) serves that function. In particular, rule 87(2)(b) describes how the rate of return on capital is to be achieved. It does so by prescribing the use of a “well accepted approach” and a “well accepted financial model”. The implicit (or explicit) criticisms of modelling in the ATCO submissions must be minimised, if not negated, by the requirement that the approach and the model used must be well accepted by those who undertake and use such approaches and models for that purpose. It is almost inherently contradictory then to say that the approach or the model is not likely to produce a reliable output – assuming the inputs are appropriate – if that approach and that model are well accepted.
64 In this matter, ATCO accepts that the WACC approach is well accepted. It also accepts that the Sharpe-Lintner CAPM model is a well accepted model.
65 Of course, the inputs into the model are critical. On that aspect, too, rule 87(1) informs the appropriateness of the inputs. That is one of the two explanations offered by ATCO through SFG for an output which may be counter-intuitive. The inputs, too in this matter have been criticised by ATCO. They form the alternative grounds of review on this application and are addressed below. The selection of the appropriate input parameters is a critical step in ensuring that the well-accepted approach using a well accepted financial model produces an outcome which accords with the objective expressed in rule 87(1).
66 For the purposes of the construction argument, it is valid to assume appropriate input parameters. As noted, some of those used by the ERA are in dispute. But there is no reason to conclude that it was contemplated by the drafters of rule 87(2)(b) that with appropriate input parameters it would not produce an outcome consistent with the objective.
67 That conclusion also reflects the mandatory expressions in rule 87(2)(b): “is to be used”. The words of rule 87(2)(b) are clear. There is nothing which suggests that the outcome generated by the proper application of rule 87(2)(b) is but a starting point, or is somehow provisional. If that were intended, it could clearly have been expressed. It gives appropriate worth to both rule 87(1) and (2). It avoids the suggestion that the rule 87(2)(b) process – as a preliminary or provisional step – has no real utility.
68 At a more general level, it avoids the suggestion that the selection of the rate of return on capital is to be done by the ERA under rule 87(1) without any real guidance. The measure of prevailing conditions in the market for funds, and of the risks involved in providing reference services – without prescribing finally how that is done – would be fraught and vulnerable to an evolutionary and possibly idiosyncratic series of regulatory decisions. It would provide less certainty. It would expose the process of selection of the rate of return on capital to the risk of prolonged debate about the relevant factors, their empirical measurement and their weighting.
69 The East Australian Pipeline case, in the view of the Tribunal, does not assist the constitution of rule 87. It concerned the role of the Tribunal, in reviewing a decision of the Australian Competition and Consumer Commission (ACCC) under the Code. The Tribunal set aside an ACCC prescribed access review because the ACCC had erred by substituting an access arrangement which included the calculation of the capital value of the pipeline assets at variance with the methodology prescribed by the Code. The ACCC had its decision restored on judicial review in the Federal Court because, it was found, there had been no reviewable error in the ACCC decision in terms of s 39(2) of Schedule 1 to the Code, the then equivalent of s 246(1) of the NGL. The High Court (Gleeson CJ, Heydon and Crennan JJ and in a separate concurring judgment Gummow and Hayne JJ) restored the decision of the Tribunal. The High Court concluded that the term “unreasonable having regard to all the circumstances” (see also s 246(1)(d) of the NGL) covered the case where the failure to exercise a discretion properly may be inferred from the character of the result in the sense that it is unreasonable or plainly unjust: see per Gummow and Hayne JJ at ; the plurality agreed at . Although the plurality reasons discuss at some length the role of the ACCC as the regulatory decision-maker having regard to the then (more or less equivalent) Reference Tariffs and Reference Tariff Policy, the Tribunal does not consider that there is anything in those reasons which is of particular assistance in addressing the construction of rule 87(1) and (2) of the NGR. Nor, in the Tribunal’s view, do the reasons of Gummow and Hayne JJ about the meaning of s 8.10 of the Code (set out at  of their Honours’ reasons) assist. The structure and terms of s 8.10 are quite different from rule 87 of the NGR. Indeed, their Honour’s remarks at  suggest the desirability of a reasonably certain process to select a rate of return on investment for regulatory purposes.
70 In the course of submissions, a comparison was made between the terms of rule 87 in the NGL and the relevant terms of the National Electricity Rules (NER). It is clear that the relevant NER terms are more prescriptive: see generally rule 6 of the NER. The differences may reflect simply the different times at which the NGR and the NER were made, or the different submissions which were considered, or different persons drafting the two sets of rules, or other factors. It is sufficient to observe that, having regard to rule 6.5.4(e)(1) of the NER, there is no reason to regard the differences between the NER and the NGR as a constructional aid which supports the contention of ATCO.
71 In view of the conclusion the Tribunal has reached, it is not necessary to comment on the alternative methods suggested in the SFG reports. It is, however, necessary to note that the selection of the brokers, the quality of their reports, the analysis of the so-called comparable ongoing infrastructure firms, the quality of their dividend yield forecasts and capital gain forecasts, and the compatibility of their recent capital raisings are all undeveloped or, if those things were assessed by SFG, it is not transparent how that was done. Such matters would, or may, require very careful analysis on a case-by-case basis before a fair independent assessment acceptable to a regulator could be provided and such analysis would be necessary to satisfy rule 87(1). That reinforces the comments in the preceding paragraph.
THE MARKET RISK PREMIUM ISSUE
72 As noted above, rule 87(1) of the NGR requires that the rate of return on capital is to be commensurate with prevailing conditions in the market for funds and the risk involved in providing reference services. Rule 74(2) provides that a forecast or estimate must be arrived at on a reasonable basis and must represent the best forecast or estimate possible in the circumstances.
73 ATCO and the ERA have each accepted that the CAPM should be used to estimate the cost of equity for the purposes of determining the WACC referred to in rule 87(2).
74 In the context of the CAPM the MRP is the expected return over the risk free rate that investors will require to invest in a well-diversified portfolio of risky assets. The MRP is an input into the calculation of the cost of equity for the purposes of the WACC referred to in Rule 87(2). It is a forward-looking concept and therefore its value has to be predicted. As with any variable whose values have to be forecast, controversy abounds as to how best to calculate the MRP at any given moment.
75 ATCO submits that in the course of using the CAPM and calculating the WACC, the ERA adopted an incorrect value (6%) for the MRP, this being a reviewable error as it did not meet the requirements of rule 87(1) and rule 74(2) and was not consistent with the national gas objective as required by rule 100. ATCO's counsel pointed to two errors, by the ERA. First, a statement in its February 2011 Final Decision that: "The data set from Bloomberg from 26 August 2004 to 20 December 2010 (the longest data set available from Bloomberg) … shows that the level of market risk has returned to around the average level." Second, a failure to consider material advanced by ATCO to the effect that the DRP was elevated and logically the MRP would be elevated at least by a proportionate amount. He also identified what he described as a third error which overlapped the first two, namely, a failure to have regard to two reports that ATCO had provided to the ERA after the Final Decision but prior to the publication of its Revised Access Arrangement.
76 In its October 2010 Submission, ATCO proposed an MRP value of 6.5% as being indicative of the then current conditions in the market for funds. This value was based on a January 2010 report by Value Advisor Associates (the VAA January 2010 report). In this report, VAA derived its assessment from a forward-looking assessment of the volatility implicit in the pricing of options in companies listed in the ASX 200 and from a review of bond yields.
77 The ERA believed that the implied volatility approach used by VAA was not well accepted and was liable to result in an inaccurate estimate of the MRP, thereby failing to meet the requirements of Rule 87. In addition, it did not accept VAA’s argument that the equity market was experiencing an unusual period of high volatility. It concluded in the Final Decision at  that “there is not a convincing argument for a departure from the method which has been widely accepted by Australian regulators”. This was a reference to the practice of estimating the MRP by means of using a long-run historical average of market risk.
78 The ERA's Final Decision plotted a 90-day moving average of the All Ordinaries Accumulation Index from 23 April 1980 to 20 December 2010, derived from Bloomberg data, which, the ERA said at , showed that: “Current volatility in the equity market is currently lower than at the peak of the crisis level, and has almost returned to the pre-crisis level.” Other measures of volatility considered by the ERA led to the same conclusion.
79 In determining the relevant value for the MRP, the ERA submitted that it had considered several sources of information on market risk – estimates of the historical MRP, surveys of market risk practice, qualitative information of the present state of Australian equity markets, and the current practices of other Australian regulators.
80 In its Final Decision at  the ERA stated “… it is of the view that there is now evidence to suggest that market conditions have stabilised” and that this view was supported by reports by the Organisation for Economic Co-operation and Development, the International Monetary Fund and the Reserve Bank of Australia. It noted that: “In all these reports, it is widely agreed that the Australian economy has displayed strong resilience and robustness during and after the 2008 Global Financial Crisis.”
81 In Application by Envestra Limited (No 2)  ACompT 3 (Envestra (No 2)), the Tribunal noted at  in relation to the Australian Energy Regulator (AER) having regard to such reports that
While there is nothing inherently incorrect about the AER having regard to statements from eminent bodies regarding current and forecast economic conditions, the use to which these reports are put must be carefully considered. It is not appropriate for the AER to infer from generally positive economic forecasts conclusions as to the likely MRP. These reports are not intended to provide forecasts of equity returns. Further, the reports do not endeavour to address the extent of correlation between economic performance and equity risk. This correlation would need to be explicitly dealt with, either by the forecasting bodies, the AER or expert evidence, before these reports could be usefully or validly employed to assist in forecasting the MRP.
82 In the matter now before the Tribunal, neither ATCO's submissions nor its counsel challenged the ERA's reference to the reports. The Tribunal is satisfied that the ERA's reference to the reports was but one integer in a number of integers that it relied on in coming to its conclusion. Had it been the sole integer without explicit correlation between economic performance and market risk supported by expert evidence, a challenge to the ERA basing its MRP on them might well have succeeded.
83 In its Final Decision the ERA adopted at  what it termed “a reasonable point estimate” of 6% for the MRP. The Tribunal notes that Alinta had submitted to the ERA that the long-term historic value of 6% for the MRP was now appropriate, given the current outlook for economic conditions and the state of the capital market.
84 This estimate of 6% reflected the ERA’s views that, while evidence about the MRP was imprecise, the best available evidence of pre and post-GFC MRP estimates supported the rate of 6%, this estimate being derived from an historical assessment of MRP values. The ERA noted that Australian regulators had consistently used historical data to estimate the equity market risk premium, and at - it carefully traced the academic research since 1989 which supported this position.
85 The Tribunal rejects the assertion by ATCO that this cross-checking of the ERA’s assessment with decisions by other regulators constituted more than a ‘reasonableness check’ and that the ERA treated an MRP of 6% as a default position. The ERA's cross-checking is what is to be expected of any regulator in such a situation. ATCO also submitted that even if compliance with regulatory precedent was a criterion under the NGL, the ERA failed to consider recent decisions of the AER adopting an MRP of 6.5%. ATCO referred in that regard to South Australia distribution determination (ETSA), 2010–11 to 2014–15, May 2010, and to the Queensland distribution draft determination 2010–11 to 2014–15 (Energex and Ergon Energy), November 2009. It said that while these are electricity decisions, they ought to have been considered (if regulatory precedent is relevant) as the business of electricity distribution is similar to gas distribution.
86 While the ERA might not have referred to those decisions, its failure to do so does not evidence error on its part, because decisions of the AER were based on circumstances closer to the GFC than the matter in hand (as to which see  below).
87 ATCO submitted that the historical approach followed by the ERA does not represent the best forecast or estimate as required under Rule 74(2), and that markets and expectations were still adjusting to the GFC at the time of the Final Decision, and would continue to do so during the access arrangement period. In such circumstances the approach advocated by VAA, and the MRP value that it produced, should be adopted. ATCO argued that volatility over a longer period will be dampened by the effect of time. Also, the approach taken by the ERA necessarily builds in, where present market conditions are atypical, a bias against giving ATCO a reasonable opportunity to recover at least its efficient costs in providing the reference services over the access arrangement period.
88 It was argued by ATCO that when the ERA stated in the Final Decision that the market was trending towards the long-term historical average over the period of the access determination, there should still be some allowance in the MRP for the early part of the period that is still above average. This, ATCO submitted, was not dealt with by the ERA and constituted error. In reply, the ERA submitted that it had expressly considered this issue, and had concluded that, at the time of its assessment, and looking forward, the market was no longer undergoing an unusual period of volatility and had reverted to its pre-GFC level.
89 It is true that the ERA was assessing the situation one year into the access arrangement period and it found that the market had “stabilised significantly” (Final Decision at ), and was “reverting back to its pre-crisis level”. Reading between the lines, it could be inferred that this was an implicit admission that in the first year of the period risk was higher than when the access arrangement was finalised. VAA had offered the opinion that the market would return its long-run average after one year. This justified its estimate of the MRP over the whole period of 8%, a value that sits considerably out of line with any regulatory MRP figure derived in Australia, even at the height of the GFC.
90 This short-term variation in estimates of the MRP demonstrates, in the Tribunal’s mind, the need to assess this parameter on a long-run basis over many years. What is asserted to be the ‘correct’ value will be highly dependent on market conditions and assumptions made at any particular time. It will vary from one assessment date to the next. A process of trying to estimate a different MRP for different parts of an access arrangement period will be fraught with problems, and will not provide for reliability or certainty in deriving an MRP to apply for an access arrangement period.
91 The Tribunal was taken to no materials that indicated whether any other Australian regulator has ever issued a finding on the MRP which assigns a different figure to different parts of the access arrangement period. The Tribunal does not believe that this would be a sensible development, given that the MRP is a forward-looking estimate, and it is not possible objectively to determine in advance when an estimated MRP value might need to be adjusted for a lower or higher risk level.
92 Markets are indeed volatile, but an estimate of the MRP must be produced that is robust in terms of representing market conditions over a future period and that provides some measure of certainty for the whole of an access arrangement period. Were ATCO’s suggested approach to be followed, a whole new exercise in complicated econometric modelling, estimation and inter-period weighting would be called for, the results of which would likely be even more contentious than is currently the case with trying to forecast a single number for the MRP.
93 Turning now to ATCO's submission that claimed that the ERA had paid no regard to the increased cost of debt finance and the link between the cost of debt and the MRP, a link which suggested that the MRP remained above the long-run average. VAA had argued that there were large increases in debt premiums in current market conditions, and that it followed that there was a substantial disconnect between the risk spread on debt and equity when an historical average is used to estimate the MRP. This follows the position taken in a report prepared for ATCO by Officer and Bishop in December 2009 that as there were no impediments in moving across debt and equity markets then the MRP should “behave in a way that mimics the debt market”.
94 The ERA had in fact considered these arguments at length in its Draft Decision at - and at - rejected VAA’s use of a forward-looking implied volatility model as being unreliable. It also rejected VAA’s position that there was an inconsistency between the use of spot rates to estimate the cost of debt and the use of historical data to estimate the MRP, as service providers need to be able to fix their debt premiums at current market rates, whereas the MRP is a longer term concept that is appropriately measured on an historical basis. It held to that view in its Final Decision. The Tribunal agrees with that position. There is no support for a claim that the ERA’s decision lacked reason or was capricious or illogical. It made the decision based on the considerable amount of material before it.
95 Having regard to what is said in - above, the Tribunal is of the opinion that ATCO has failed to demonstrate the first error its counsel identified (as to which see  above). Also, for reasons appearing in  to , the Tribunal is satisfied that ATCO has not made good the second error identified by its counsel in  above. As to the third error identified by ATCO's counsel, the Tribunal notes that rule 64(3) provides that the ERA may (but is not obliged to) consult after the Final Decision but prior to the publication of its Revised Access Arrangement. Thus, there was no error on the part of the ERA in not having regard to the reports as suggested by ATCO's counsel. The Tribunal is satisfied that there was no error on the part of ERA in adopting a value of 6% for the MRP. Accordingly, in terms of s 246 of the NGL, the Tribunal affirms the ERA's decision on the MRP value.
96 The Tribunal recently had cause to consider whether the AER had determined an appropriate value for the MRP in Envestra (No 2), a decision handed down on 11 January 2012.
97 In that matter, Envestra had argued to the AER for a point estimate of the MRP of 6.5%, which was rejected in favour of a figure of 6%. In its Final Decision the AER confirmed its Draft Decision and stated that available evidence for the value of the MRP was imprecise, but that it considered that its conclusion was supported by both pre-GFC and post-GFC evidence taken from a wide range of source material. This material was not dissimilar from that considered by the ERA.
98 In Envestra (No 2) the Tribunal needed to infer the error being alleged by Envestra with respect to the AER having set the MRP at 6%. The Tribunal faces a similar issue of inference in this matter. Envestra appeared to be alleging an error of fact. To succeed on this ground, the Tribunal found at  that Envestra was required to show that not only was there an error of fact, but also that it was, either in isolation or in concert with other errors of fact, material to the decision made, as required under ss 246(1)(a) and (b) of the NGL. It was also necessary to consider whether Envestra has made out reviewable error in terms of s 246(1)(c) or (d).
99 In determining whether an error of fact has been made, it has to be precisely ascertained what the conclusion of fact was. It is clear from the Final Decision that the ERA did not conclude that market risk had returned to pre-GFC levels. It did find that market conditions had substantially improved and that concerns about the impact of the GFC in the market had lessened. When characterised in these terms, the ERA’s findings are clearly open on the evidence before it. The conclusion that market conditions had improved, but had not necessarily returned to pre-GFC levels, was supported by the expert evidence submitted by ATCO in support of its access arrangement proposals.
100 But that evidence is by itself not enough. It has to be determined whether the decline in market risk from its GFC heights was of such magnitude and import as to warrant an MRP of 6%. This is a matter of discretion, not one of fact. It might also be said, against the ERA, that it represented an unreasonable conclusion affecting the reasonableness of the decision.
101 Furthermore, the ERA’s decision to adopt an MRP of 6% relied upon its assessment that market risk conditions had improved from the heights of the GFC. While it is clear that the ERA did take issue with much of the evidence submitted by ATCO and concluded that market conditions had improved, it also considered considerable evidence as to what constituted the best estimate of the MRP, including evidence of historical excess returns and other analyses.
102 The ERA’s decision on MRP was based upon a much broader consideration of models and data than simply on a long-run average estimate of MRP. In these circumstances any error of fact (as asserted by ATCO) that the ERA might have committed in its comparison of market conditions with those during the GFC could not be classed as “material”.
103 Turning to whether the ERA exercised its discretion incorrectly in these circumstances, it is crucial to consider how it is said that the discretion was exercised incorrectly. ATCO alleges that the ERA exercised its discretion incorrectly because it failed to give weight to the evidence provided by VAA. In the absence of anything but a submission to the contrary, the ERA contends that it considered this material carefully. The ERA’s contention should be accepted.
104 It is not sufficient that the Tribunal, using its discretion, might reach a view different from the ERA for it to conclude that the ERA incorrectly applied its discretion: ElectraNet (No 3) at . The bases for an incorrect exercise of discretion, as set out in Australian Competition and Consumer Commission v Australian Competition Tribunal (2006) 152 FCR 33 at  have not been made out; it is the result that is complained of, not the process. The ERA’s discretion was not applied incorrectly. Nor is the Tribunal persuaded that the decision of the ERA on the MRP involved the exercise of a discretion which was not, on the material, reasonably available to it.
105 The critical issue is whether the ERA’s determination of the MRP at 6% was reasonably open to it on the evidence. It made this determination after reviewing considerable material submitted to it by ATCO and material sourced by the ERA. This material was not conclusive as to the best single forward-looking estimate of the MRP. Accordingly, the ERA had to exercise its discretion in deciding on the appropriate MRP.
106 As noted, the MRP is a forward-looking estimate. There is no single accepted econometric, mathematical or financial technique that can, uniquely, be deployed to ascertain an estimate of the MRP that can apply to any future period. Further, there are substantial debates among the experts as to how particular methodologies should be employed and the assumptions that are necessary to drive them effectively. These choices of methodologies and assumptions can significantly alter the resulting estimate.
107 In circumstances such as these ATCO must, if it is to demonstrate a ground of review, explain why the ERA’s choice of methodology was unreasonable in all the circumstances. While it is true that ATCO provided experts' reports that supported its contention that 6.5% would have been a more appropriate value for the MRP, there was also considerable material that supported the ERA’s figure of 6%.
108 It is not enough for ATCO to persuade the Tribunal that 6.5% should be the preferred value of the MRP. It must demonstrate the unreasonableness of the decision made by the ERA. Unless it can do this, the Tribunal would simply be coming to a different conclusion as to the preferable result. The fact that the Tribunal might prefer a different rate does not entitle it to substitute its preferred MRP for that of the ERA unless a ground of review has been made out. In all the circumstances of this matter, it was reasonably open to the ERA to choose an MRP of 6%. The Tribunal is not persuaded that the ERA fell into reviewable error in any of the ways contended for by ATCO.
THE GAMMA ISSUE
109 ATCO sought review of the ERA’s decision on the appropriate value for gamma, submitting that the ERA made “a number of substantive errors” in determining a value of 0.53 under s 246(1) of the NGL.
110 The cost of capital for a company in Australia should be lower if its Australian shareholders can use the franking credits it distributes to them to reduce their taxable incomes. Gamma measures the assumed utilisation of these imputation credits.
111 The cost of corporate income tax is one of the components of the annual revenue requirement that needs to be determined by the ERA. Gamma is therefore an input into the calculation of this revenue requirement.
112 Other things being equal, a higher value of gamma reduces the allowance made for the cost of corporate income tax in the annual revenue requirement, as it is assumed that a high value mean that more of a company’s tax liability will in effect be recovered by investors through the imputation scheme. The higher the value of gamma, therefore, the smaller will be a regulated company’s required revenue. Naturally, a regulated entity will typically argue for a value of gamma that lies at the lower extremity of the range of possible values for this parameter (zero to one).
113 In practice gamma is calculated by multiplying the imputation credit payout ratio, or distribution rate (commonly referred to as F), together with the assumed value to shareholders of the distributed imputation credits (known as theta).
114 As is the case with many of the components involved in calculating the weighted average cost of capital (WACC), the best way in which to measure gamma in theory, and the best way to determine the actual value of gamma, is a matter of some controversy. There is no one value of gamma that may be regarded as universally correct. One has to consider the academic models and empirical research and decide on a case-by-case basis which outcome is most relevant for the matter at hand.
115 In its Final Decision, the ERA determined a value for gamma of 0.53. It obtained this value by first deriving the minimum and maximum values of F (respectively 0.7 and 1.0) suggested by academics’ and consultants’ reports. On a similar basis it determined that the relevant range of values for theta lay between a minimum of 0.37 and a maximum of 0.81.
116 The ERA then multiplied the two minimum values, and likewise multiplied the two maximum values. It then averaged the two resulting figures, thereby determining a value for gamma of 0.53.
117 ATCO submitted that the ERA’s method resulted in an upward bias to the calculation of gamma that was adverse to its interests, as the value given to gamma would not allow it to have a reasonable opportunity to recover at least its efficient costs in providing the reference services. There was, it submitted, no basis for having an F value greater than 0.7. And, it submitted, an F value of 1.0 was merely a remote theoretical possibility. Likewise, there was no justification to adopt any value of theta other than 0.35, a value endorsed by the Tribunal in May 2011 (after the Final Decision) in Application by Energex Limited (Gamma) (No 5) (2011) ATPR 42-356 (Energex (No 5)) at , following detailed consideration of this matter by the Tribunal.
118 Accordingly, ATCO submitted that it was factually erroneous for the ERA to have determined gamma in the way it did, and that it had incorrectly exercised its discretion and had reached an unreasonable decision as a result. Therefore, the appropriate value of gamma should have been 0.7 multiplied by 0.35, giving a figure (rounded up) of 0.25, the figure that was determined by the Tribunal in Energex (No 5).
119 The Tribunal reiterates that there is no single agreed-upon correct value of gamma. Much debate has taken place over the best way to determine this value. While the value of F is relatively settled in Australia, great controversy has surrounded the relevant value of theta. Many papers on this issue were produced for the ERA’s consideration, both from its own as well as ATCO’s experts. The gap between their estimating models, and their ensuing calculations, was wide.
120 The Tribunal has wrestled with this problem in earlier matters, notably in the hearings under the national electricity regulatory regime relating to Energex. In that series of hearings the Tribunal expressed concern as to the values of theta that had been advanced by academic researchers, and asked for a further report to be produced. This March 2011 report produced an estimate of theta of 0.35 based on a dividend drop-off study.
121 As noted at  above, that value was adopted by the Tribunal in Energex (No 5) as being the best available estimate of theta. At , the Tribunal noted that “. . . the estimation of a parameter such as gamma is necessarily, and desirably, an ongoing intellectual and empirical endeavour”, and that its decision was based on the material presently before it. This decision was subsequently followed and applied by the Tribunal in Application by United Energy Distribution Pty Limited (No 2)  ACompT 8 (United Energy (No 2)).
122 The ERA’s Final Decision in the present matter preceded both the SFG report referred to above and the Tribunal’s decision in Energex (No 5). However, after the Final Decision had been handed down, the ERA considered yet another Western Australian pipeline application, in its December 2011 Final Decision on Proposed Revisions to the Access Arrangement for the Dampier to Bunbury Natural Gas Pipeline. Counsel for the ERA acknowledged that in that application it came to a different determination of gamma. It recognised the Tribunal’s decision in Energex (No 5) and acknowledged the desirability of regulatory consistency and that regulated entities should be able to be confident of regulatory certainty in such matters. At  of its December 2011 decision the ERA concluded after a detailed consideration of the F and theta values estimated by various experts:
Based on an estimate of the payout ratio of imputation credits of 70 per cent, together with an estimate of theta of 0.35, the Authority concludes that a reasonable value of gamma, for the purpose of the Authority’s final decision on the DBNGP Access Arrangement, is 0.25 (or 25 per cent). The estimate of gamma of 0.25 is consistent with the Tribunal’s decision on gamma.
123 Thus, it was put to the Tribunal by counsel for the ERA that the effect of the Energex (No 5) decision meant that its decision on gamma in the current matter is inconsistent with that decision and, we note, with the subsequent endorsement of these decisions by the Tribunal in United Energy (No 2). Thus it was conceded that were the Tribunal to maintain its position in Energex (No 5), it would conclude that the ERA erred in its determination of gamma, and accordingly the ERA “[doesn’t] wish to urge the Tribunal to alter the conclusions it reached in the Energex matters”.
124 The ERA has in effect acknowledged that its estimate of gamma in the present proceedings was in error. That may be seen as a complex factual error material to the making of the decision, or an incorrect exercise of discretion in all the circumstances, or an unreasonable decision in all the circumstances. As the ERA has acknowledged that the value of gamma should be changed, there is no real benefit in a refined analysis of the nature of the error. There appears to have been an adoption of a value for gamma which did not reflect the thorough consideration of the determination of an appropriate value for gamma in Energex (No 5). The Tribunal therefore finds reviewable error, and determines that the appropriate value of gamma is 0.25, being the rounded-up product of an F value of 0.7 and a theta value of 0.35.
125 This is not to say, however, that this number provides the only possible value of gamma. It is simply the best estimate currently available for use in this matter. As with the estimation of many economic and financial parameters, finding the ‘right’ value is a process of continual refinement as new models and paradigms emerge and as better data and estimating techniques become available. As observed in Energex (No 5) at  this process is “an ongoing intellectual and empirical endeavour”.
THE COST OF DEBT ISSUE
126 The cost of debt for a company is typically estimated as the sum of the nominal risk free rate of return on debt and the DRP. The DRP is the margin over the risk free rate that a debt investor in a benchmark efficient service provider will likely seek in order to provide debt finance to the business.
127 The spread, or margin, over the nominal risk free rate can be measured empirically in many ways. Neither the NGL nor the NGR specify a particular method: see ActewAGL at . Each of Bloomberg and CBASpectrum (when it was published) provide information from which the DRP might be estimated. Each produce estimates of the “fair value curve” (FVC) for bonds of a specific credit rating and for particular terms to maturity. An FVC plots estimates of bond yields against terms to maturity.
128 ATCO's January Submission proposed a DRP of 4.50% using an extrapolated Bloomberg FVC as the best way to determine the DRP. In its Draft Decision, the ERA assessed the debt rating for ATCO as BBB+ and stated that it considered the DRP should be estimated from the CBASpectrum FVC. The Draft Decision did, however, indicate that the ERA was investigating an alternative approach for inclusion in its final decision to estimate the DRP.
129 Before the ERA publicly outlined, and sought submissions on, its alternative approach in its Discussion Paper Measuring the Debt Risk Premium: A Bond-Yield Approach, 1 December 2010, ATCO made its October Submission in response to the Draft Decision. It was essentially the same as its January Submission but extrapolated the BBB FVC curve using the change in the premium obtained from the two Bloomberg AAA FVCs for 6 years and 10 years to yield an estimated DRP of 4.10%.
130 The ERA’s Discussion Paper invited feedback on a proposed future method of calculating the DRP. The paper noted that:
7. In its previous decisions, the Authority relied on the estimates of 10-year fair yield curves derived by Bloomberg and CBASpectrum. However, Bloomberg has in recent times progressively shortened its estimates of fair yields across credit ratings for Australian corporate bonds. Additionally, in September 2010, CBASpectrum ceased publishing its estimates of the fair yield curves across all credit ratings for Australian corporate bonds. This means that the method of calculating the debt risk premium that was applied in the Authority's August 2010 Draft Decision on WA Gas Network's (WAGN) proposed access arrangement, which used CBASpectrum data, is no longer available.
8. Since the WAGN Draft Decision there have also been developments in the Australian regulatory environment regarding the approach to estimating the debt risk premium.
• The Australian Competition Tribunal's decision in the ActewAGL appeal in September 2010.
• The Australian Energy Regulator's (AER) Final Decision on the Victorian electricity Distribution Network Service Providers (DNSPs) in October 2010.
• The lndependent Pricing and Regulatory Tribunal of New South Wales' (IPART) Discussion Paper on "Developing the approach to estimating the debt margin" in November 2010.
131 The ERA received 13 major submissions in response to its Discussion Paper, from a variety of interested parties (listed in  of its Final Decision) on its proposed bond yield approach to estimating the DRP.
132 ATCO’s submission in response to the Discussion Paper was critical of the ERA’s proposed bond yield approach on the grounds that it had selected an unrepresentative sample of companies, companies quite different from ATCO, and had given weight to the least representative of those companies. ATCO’s submission urged a different approach to how the cost of debt is to be estimated, namely, to adduce evidence from the market of what in fact would be charged for debt finance required by a service provider.
133 The Discussion Paper also prompted ATCO to review its response to the Draft Decision. In a letter, dated 7 January 2011, to the ERA, ATCO expressed the view that the bond yield approach did not satisfy rule 87 of the NGR and advocated substitution of its approach set out in its response to the Discussion Paper. This it said would result in a “… more considered and pragmatic approach, which recognises current conditions in financial markets …”.
134 Based on its “careful consideration” of the ActewAGL decision, the AER’s Final Decision in the Victorian electricity distribution businesses (a decision since varied by the Tribunal in Application by United Energy Distribution Pty Limited  ACompT 1 (United Energy) at -), the IPART discussion paper that canvassed a variety of methods to calculate the DRP and the submissions received in response to its own Discussion Paper, the ERA’s Final Decision adopted a new approach to estimating the DRP. The Tribunal notes that the process adopted by the ERA in deciding on its new approach is consistent with later observations by the Tribunal in Envestra (No 2) at  and commends the ERA for adopting the process.
135 Simply stated, the ERA preferred the use of a bond yield approach, directly observing bond yields from the Australian market. It listed five main reasons for departing from using a FVC approach, related to various changes made by Bloomberg to its curves and to the fact that the CBASpectrum curves were no longer available. It chose not to include bond market data from other countries to inform its analysis, explaining its reasons in its Final Decision, at -, not the least of which was that solely Australian financial data have consistently been used by Australian regulators in the past to estimate the DRP.
136 The ERA concluded at  in its Final Decision that “the market relevance of the estimates of the debt risk premium should carry more weight than the requirement of consistency with other WACC parameters”. It listed two reasons for this. First, there was an inherent instability in extrapolating from Bloomberg’s 7-year BBB to a 10-year BBB FVC. Second, by moving away from a 10-year maturity term a larger sample of bonds could be considered, which should lead to a more accurate estimate of the DRP.
137 The ERA noted at  that this approach was consistent with the Tribunal’s view in ActewAGL at  that the Australian bond market is too thin in terms of bond-issuing companies to determine fair yields and that many Australian bonds are not traded daily, which means that the daily bond prices published by Bloomberg do not necessarily reflect executed trades on any given day.
138 Accordingly, the ERA concluded at  that a corporate bond should ideally satisfy the following three criteria in order to be included in its sample:
• It should have the same Standard & Poor’s credit rating as the regulated entity (BBB+ in the case of ATCO), as a BBB+ rating is generally assumed for regulated firms by Australian regulators;
• It should be in the same industry (in this case, the regulated utility sector);
• It would need to have a maturity of two years or more to ensure that there are sufficient bonds in the sample for the analysis (a criterion which it noted had been adopted by the AER and IPART).
139 However, the then state of the corporate bond market in Australia meant that it needed to use more practical, or less restrictive, criteria in order to select a satisfactorily large enough sample such that confidence could be had in the reliability of the estimates of the DRP derived therefrom.
140 Had it considered only the bonds issued by energy sector firms, its sample would have consisted of only five bonds at best (even then the ERA questioned whether two of these, bonds issued by Santos and Snowy Hydro, could be regarded as properly being classified to the regulated energy sector). Thus, it determined that it should include the bonds of companies that were not in the same industry as ATCO in order to have a statistically viable sample. This is consistent with the practice endorsed by several recent decisions by the Tribunal: see Application by Jemena Networks (No 5)  ACompT 10 at -; United Energy at ; Envestra (No 2) at .
141 Therefore the second criterion listed in  above was replaced with one that stated that bonds should be issued in Australia in Australian dollars by Australian entities, and added two additional criteria – the sample should include both fixed- and floating-rate bonds, as well as both bullet and callable/putable redemptions.
142 Noting that bonds issued by individual companies change over time, as does their credit rating, the ERA observed at  that the sample of the Australian corporate bonds would need to be updated for future regulatory decisions. It also noted that only bonds in the sample which are currently traded in the averaging period were included in the sample of bonds used to derive the DRP.
143 In its Final Decision, the ERA explained its approach to calculating the DRP at  as follows:
Since bonds in the sample exhibit different characteristics, such as different industries and different terms until maturity, consideration needs to be given as to whether weights should be applied to each bond to reflect their relative importance in the sample. The weighting approaches that could be adopted are:
• a simple average (or equally weighted average);
• a ‘number-of-years-until-maturity’ approach (in which bonds with more years to maturity are given greater weight than bonds with fewer years to maturity);
• an ‘amount-issued’ approach (where more weight is given to bonds issued in greater amounts); and
• an approach where the median of a sample is used.
144 Continuing its explanation, the ERA stated at  the mathematical formula used in determining its weighted average DRP. Thus, for example, the weight applied to each bond for the years-until-maturity approach would be the number of years to maturity of the bond in question, divided by the total number of years to maturity of all the bonds in the sample. It went on to list in Table 15 (at p. 80) the 17 BBB-/BBB/BBB+ Australian bonds it could identify as having the desired characteristics as at December 2010. As observed in  above, it dropped the criteria that required that all bonds should be issued by companies operating in the same industry as the regulated business. This, it said, would have left it with a very small and, the Tribunal notes, statistically unacceptable sample.
145 In the Final Decision the ERA spent some time at - discussing the public submissions, and it gave careful consideration to these comments with respect to:
The bonds that should be included in the sample;
The term-to-maturity cut-off term;
The proposed four weighting approaches;
The illiquidity of some of the bonds in the sample and the use of indicative prices from the Bloomberg bond database; and
The inconsistency introduced when the DRP is calculated as the difference between bond yields with less than ten years to maturity (the average term-to- maturity in its final sample was 5.42 years) and the ten-year rate on Commonwealth Government securities used as the risk free rate.
146 By using all of the selection criteria in the bond yield approach and searching all 67 Australian corporate bonds that were found on the Bloomberg data terminal, the ERA found that, only 14 bonds had historical pricing data, and most of these only had pricing data for the period from 29 March 2007 to 13 September 2007. As a result, it believed that the period where data was available for all 14 bonds should be used to perform a retrospective test, a practice that the Tribunal commends.
147 The ERA listed these 14 bonds in Table 18 (at p. 90 of the Final Decision), and revealed the differences between the bond yield approach and the Bloomberg FVC yields in Table 19. It considered at  that these differences provided “further evidence of the robustness of the bond yield approach”, which it used to estimate the DRP for ATCO.
148 Based on the public submissions it had received, the ERA then developed four scenarios (or sample groups) to estimate the DRP:
The full sample of the 17 bonds it had identified (Scenario 1);
A shortened sample excluding all bonds with a BBB- credit rating (Scenario 2);
A shortened sample excluding all bonds with a less than 5-year term to maturity (Scenario 3); and
A shortened sample excluding all bonds with a BBB- credit rating and all bonds with a less than 5-year term to maturity (Scenario 4).
149 For each scenario, the ERA calculated the four averages listed above at , and presented in Table 20 of the Final Decision (at p. 92), reproduced below, four average DRP values for each scenario.
150 The ERA was of the view that for the reasons listed above, the term-to-maturity weighted average provided the most relevant estimate of the DRP for ATCO, citing as support the finance principle that a longer-term investment faces greater risk and therefore should be compensated with a higher return. It then argued that the best reflection of the current conditions in the market would be obtained by taking a simple unweighted average of the term to maturity weighted averages across all four scenarios, giving an estimated DRP of 3.179% for the period 23 November 2010 to 20 December 2010.
Table 20 Debt Risk Premiums under various scenarios and weighted average approach, (per cent)
Weighted Average Method
Simple Average of all 4 scenarios
Term to Maturity Weighted Average
Amount Issued Weighted Average
151 The ERA regarded this figure at  as conservative, that is, one that resulted in a comparatively high DRP estimate for ATCO, because:
the sample contained callable bonds which typically attract a higher yield;
it contained BBB and BBB- bonds which in principle will have higher yields than BBB+ bonds for regulated entities, due to their higher risk levels; and
regulated firms have access to bank finance which, it said: “… currently, is likely to be a lower cost of borrowing in comparison with bond yields.”
152 The ERA believed that its bond yield approach had several advantages over other possible methods for estimating the DRP, including market relevance, simplicity and transparency.
153 In contrast, ATCO submitted that simplicity and transparency are not requirements under either the NGL or the NGR. The market evidence used by the ERA was not relevant. The only basis upon which the ERA could reject the DRP proposed by ATCO was in accordance with rule 40(3).
154 In the words of the ERA’s counsel, it had “broken new ground in terms of the estimation of the debt risk premium” with its new approach. He cited as justification for such an approach comments made by the Tribunal in several earlier cases, including ActewAGL where it was said at  that the AER should “assemble a representative population of observed yields of sufficient number and term to maturity”, although the Tribunal had cautioned that it was difficult “to provide any hard and fast rule for determining whether a population is ‘representative’”.
155 The Tribunal also said at  that once a representative set of bonds had been chosen, the regulator should select the FVC “that most closely corresponds to the relevant set, and, finally, that the regulator should “use any other available information, such as observed yields on other rated bonds, to check that the selected fair value curve remains likely to provide the best estimate”.
156 In coming to its figure of 4.10% ATCO relied on actual evidence of the cost of debt which would have been charged by a major financier if ATCO were to manage its debt facilities on the basis of the regulatory assumption that its debt/equity ratio was 60/40. In other words, it proposed estimating the cost of debt based on market practice and on the likely pricing of debt by a lender. It submitted, such an estimate would have provided a more appropriate estimate for the DRP for ATCO. It submitted that the ERA did not have regard to that evidence and did not call it into question, suggesting that it was either ignored or overlooked.
157 Accordingly, ATCO submitted that the ERA was in error because it did not have regard at all to this “relevant and powerful” evidence. It should have acted on this evidence “particularly because of the difficulties with the methodologies which otherwise are available to it [and] which . . . [it] frankly recognises”.
158 Alternatively, ATCO submitted, use of Bloomberg FVCs would have yielded a DRP estimate of 4.10%, very similar to its own proposed value. At least the use of Bloomberg FVC estimates would mean that the DRP had been derived from considering the debt of companies with similar credit ratings to ATCO, rather than from companies with a wide range of credit ratings.
159 It was significant, ATCO noted, that both of the methods it advanced as being appropriate for the calculation of the DRP yielded similar estimates, and that these were some distance away from the ERA’s estimate. They acted as a cross-check against each other. Of course, it is possible that the financier may well have used the Bloomberg FVC as the basis for deriving its estimated DRP. In the absence of any submission from ATCO as to the details of the brief given to the financier, the Tribunal cannot place any reliance on ATCO’s approach or its submittted DRP.
160 ATCO accepted that the ERA was searching for a model but submitted that in so doing it fell into error because in the course of that search for a “one size fits all methodology” it “sacrificed” the right figure, having regard to the evidence of the provision of the reference service by an efficient provider.
161 In determining whether the ERA erred, the Tribunal was presented with three potential techniques to estimate the DRP. First, the DRP could be estimated through the Bloomberg FVC, about which there appears to be increasing doubt as to its reliability, especially in using it to estimate the DRP for longer-dated bonds. Second, the ERA's new bond yield approach which is market-based and transparent as to its composition and estimation.
162 The third choice is ATCO’s “direct market evidence” approach based on its enquiries of “an experienced capital markets adviser” as to what would be charged to a provider of the relevant reference services for debt finance with no instruction having been given as to term to maturity or credit rating. It conceded this was a “pragmatic” approach that was “not unbiased”, was not stable, did not lead to an estimated cost of debt that had been derived from a large sample of firms, and was not transparent.
163 Nevertheless, ATCO submitted that its approach provided an estimate of the cost of debt which was commensurate with prevailing conditions in the market for funds and the risks involved in providing reference services. In particular, it emphasised that the DRP has a business-specific nature which precludes the properties of unbiasedness and stability in developing other averaging estimating methods.
164 Further, ATCO contended that the:
NGR do not require a cost of debt and a rate of return which are unbiased, stable, practical, replicable and transparent. They require a cost of debt which has been arrived at on a reasonable basis, and which represents the best estimate possible in the circumstances (Rule 74(2)) . . . ATCO’s approach to the cost of debt meets the criteria of Rule 74(2) . . . It leads to the rate of return required by Rule 87.
165 Accordingly, ATCO submitted that the ERA was in error because its bond yield approach paid no regard to prevailing market conditions and because it had paid no regard to the market evidence that ATCO had provided to it. This submission was firmly rebutted by the ERA as it had spent some time in the Final Decision going through its Discussion Paper and the submissions it had received in response to it, including the issues raised by ATCO, albeit that it may not have been considered explicitly as submissions advanced by ATCO.
166 Counsel for the ERA submitted that ATCO’s specific approach was not discussed as such in the Final Decision, but it was received, noted and taken into account. He pointed out that the ERA did not consider that this approach was a method (emphasis added) of estimating the DRP. It was the result of a discussion with an adviser and with lenders, involving no commitment to finance by any of the parties. Even if a commitment to finance had been obtained, it would have provided a single estimate of one debt-financing transaction. It was submitted that the ERA did not regard a single estimate of this kind as providing “an appropriate estimation of a debt risk premium for the market having regard particularly to the requirements of rule 87”. The Tribunal accepts the ERA’s submission.
167 The Tribunal finds no error in the ERA’s decision to depart from the Bloomberg FVC as a basis for estimating the DRP. As indicated above, the ERA proceeded with an inquiry that sought to establish a more reliable estimate of the DRP than could be derived from the Bloomberg FVC. It issued a discussion paper and took all the submitted views into account in determining an approach that meets the requirements of the NGR and the objectives of the NGL. The Tribunal discerns no incorrect exercise of discretion or unreasonableness in all the circumstances of the ERA’s decision making in relation to its development of the bond-yield approach to estimate the DRP.
168 The Tribunal now turns to a consideration of the way in which the ERA used the bond yield approach to determine a DRP that was applicable to ATCO.
169 The four scenarios developed by the ERA and reproduced in Table 20 above are each valid possibilities to consider. The most complete is Scenario 1, using data for all 17 companies. Scenario 2 drops the four companies with a riskier debt profile, and so might be thought to be more representative of the risk faced by ATCO. A sample of 13 is still a respectable number, given the relative paucity of bond-issuing firms in Australia.
170 Short-dated bonds might not be representative of the issues facing ATCO, and so Scenario 3 drops the nine companies with bonds issued for less than five years. Scenario 4 contains only the bonds for companies with a BBB/BBB+ rating and that have five years or more to maturity. While that delineation may be the most preferable in theory, the sample size of six is too small to enable the ERA (or the Tribunal) to have much confidence in the reliability of its estimate.
171 Therefore, the Tribunal believes that Scenarios I and 2 are preferable, in terms of the reliability of their estimates. The Tribunal notes, at this stage, that the estimate of the DRP differs widely between the Scenarios, even just looking at the simple average shown in row one of the Table.
172 It should be noted that the yield on Scenario 2 is always the lowest, regardless of which weighting system is used. Other things being equal, bonds with higher credit ratings should attract a lower DRP, as they would be regarded as less risky, and so the DRP for Scenario 2 conforms to this expectation. However, Scenario 2 and Scenario 4 both exclude bonds with a BBB- rating, but Scenario 4 has longer dated bonds in it. In theory the DRP for Scenario 4 should be lower than for Scenario 2 but this is not the case for any of the averages that have been calculated. The Tribunal cannot discern the reasons for this outcome, which was not commented upon by the ERA in the Final Decision, or in ATCO’s submissions.
173 In coming to it its determination of a DRP for ATCO of 3.18%, the ERA decided that the most relevant average was a term to maturity weighted average (the figures shown in row 2 of the Table), stating that this was consistent with the tenets of finance that suggested that longer term investments face greater uncertainty and therefore should be compensated with a higher return. With this proposition the Tribunal does not cavil.
174 It can be seen that this average always produces the highest average for Scenarios 1 and 2 but is lower in Scenarios 3 and 4, where it is the second highest of the averages, and a low 0.044 points or 1.2% below the simple average in the former scenario and just 0.087 points or 2.6% below the simple average in Scenario 4. It is clearly the average that is most favourable to ATCO, especially if it is the case, as the Tribunal believes, that Scenarios 1 and 2 are preferable on account of their larger sample sizes.
175 However, the ERA then went on to state at , without justification, that it was:
… of the view that a simple average of all four scenarios, when the term to maturity weighted average is used, is likely to reflect the current conditions in the market for funds.
176 While accepting the ERA’s inclination to favour the term to maturity average, the Tribunal might have expected some more detailed discussion of the ‘amount issued’ weighted average as well. Given that both these characteristics might be regarded as important in the market, another option that the ERA could have considered was an average based on weights determined by both these criteria. It is statistically possible to combine weights so that two or more characteristics can be assigned their due importance. While the differences between these two weighted averages that the ERA has calculated are not large, a joint weighting system might have been more reflective of all the relevant conditions including risk in the market for debt.
177 This alternative average may have pulled down the estimated DRP for ATCO by a small amount, but had it been calculated the ERA may not have seen the need to average the estimated DRP across all four scenarios, which in the opinion of the Tribunal has led the ERA into error.
178 In terms of deciding on which scenario to use, the ERA decided to use an average of all four. Its counsel conceded that “[n]o method is perfect”, and stated that the ERA considered that each scenario provided some information about prevailing market conditions, and so it chose to average the four estimates. While the ERA’s counsel admitted that Scenario 1 was the broadest sample, it had the lowest yield and he submitted that this low yield “was a factor that concerned the authority” and that it “wanted to adopt a more conservative approach” and move away from choosing the lowest estimate, which the Tribunal interprets as being an approach that gave ATCO a higher DRP value.
179 However, the uncritical adoption of a simple averaging procedure represents an error. It was a convenient calculation that did not consider the implicit double and quadruple counting that it entailed.
180 The Tribunal emphasises here that in its bond yield approach the ERA departed from the usual regulatory practice of estimating the DRP from FVC curves. The Tribunal accepts that the ERA’s approach is a valid one. However, it chose a simple averaging approach when considering the various estimates for the DRP which the bond yield approach produced, in order to establish a single value for the DRP. It is in that averaging process where the ERA fell into error, and not in its development of the bond yield approach.
181 Thus, bonds classified to Scenario 4 had neither a BBB- rating nor a maturity term of less than five years, that is the six bonds in this group were all BBB or BBB+ bonds with more than five years to maturity. The identity of these bonds can be discovered in Table 17 of the Final Decision. From this Table it is also possible to discern that eight bonds had maturity terms of more than five years.
182 Unfortunately, nowhere in the Final Decision are the precise credit ratings for each of the 17 bonds used by the ERA to be found. A process of simple mathematical logic, however, permits the Tribunal to derive the following Table.
183 Scenario 4 is represented in the upper left hand quadrant of the Table (six firms). Scenario 3 is represented by the first row in the Table (eight firms), while Scenario 2 is the first column (13 firms). All four quadrants together comprise Scenario 1.
184 From this table it is easy to see where the ERA has fallen into error. In averaging across its four scenarios, it has counted fifteen individual firms a multiple number of times (twice or four times). No convincing rationale for was provided by the ERA and it is doubtful that one could be provided.
BBB or BBB+
Five years or more
Less than five years
185 If the identities of the firms classified to each quadrant were known to the Tribunal, it could identify how many times each individual firm was included in the ERA’s final average. But the Tribunal can summarise thus:
The two firms in the lower right hand quadrant were effectively counted once;
The seven firms in the bottom left hand quadrant were each counted twice;
The two firms in the top right quadrant were each counted twice; and
The six firms in the top left hand quadrant were each counted four times.
186 Therefore the seventeen firms in the sample were effectively included a total of 44 times in the ERA’s final averaging process, with some firms getting four times the weight of some others. It would appear that this possibility had not been considered by the ERA. As mentioned, the ERA’s approach to averaging the various samples of bonds was without a convincing rationale. The importance of choosing the most appropriate method of averaging has been emphasised by the Tribunal previously. The averaging method adopted by the ERA has the flaws pointed out, there being no reason expressed as to why some bonds should be given four times the weight of others. The ERA’s choice of a value for the DRP based on such a methodology in the circumstances constitutes an incorrect exercise of its discretion, or alternatively for that reason was unreasonable.
187 On the material before the Tribunal, Scenario 2 appears to offer the best estimate of the DRP, containing all thirteen bonds in the sample with a risk rating of BBB or BBB+. However the Tribunal does have concerns as noted above in  about the relative yields as between the Scenarios and is of the opinion that more work and detailed explanation of the composition of the samples, the averages, and the chosen DRP estimate need more careful attention. The Tribunal, having considered the further submissions received from the parties related to this aspect of the DRP, does not consider that it is in a position itself to form an appropriate view on that question, and regards the ERA in the first place as the appropriate entity to do so, no doubt after further submissions from ATCO.
187A The other contention on the Cost of Debt Issue concerns pre-financing costs, referred to in [26(c)(ii)] above. It is accepted that there should be an allowance for debt raising costs included in the estimate of cost of debt, but ATCO’s further claim for pre-financing costs was not allowed by the ERA.
187B ATCO proposed that, in addition to the allowance of 0.125% for debt facility establishment costs, there should be a further annualised allowance of 0.163% for recovery of pre-financing costs. That further allowance was said to be warranted because the requirements of ratings agencies of businesses requiring periodic refinancing was that the refinancing should be in place three months before the existing facilities came to an end. Consequently, to avoid exposure to an unfavourable credit assessment and then an overall higher cost of debt, it was prudent to secure early refinancing. The quantification of the further claim is said to be supported by ATCO’s consultant Second Opinion Financial Advisory in a report dated 7 January 2010.
187C The ERA both in the Draft Decision at  and in the Final Decision at  and  declined to include that claimed further allowance. It said that allowing that claim would be inconsistent with recognised regulatory practices (including its usual approach). It also said it was not satisfied that ATCO, through its consultant’s report, had established any convincing reason for departing from the approach commonly adopted by regulators, and it adverted to the possibility of some double counting.
187D ATCO’s contentions on the review maintain the arguments it put to the ERA. It also says that, properly understood, the material referred to by the ERA in the Final Decision (apart from reliance on regulatory precedent), in particular a report for the AER by Professor Handley “A Note on the Completion Method”, April 2010-, supports its claim. The completion method involves accessing debt funding in advance of the time it is required; it is one method referred to by ATCO’s consultant. Hence, ATCO argues that ERA’s conclusion does not reflect what a prudent service provider would do and still recover at least its efficient costs of providing the reference services.
187E The Tribunal is not persuaded that the ERA, on this aspect of the Cost of Debt Issue, committed reviewable error. Its decision reflects an overall assessment of the material in the particular circumstances. It did not base its conclusion only on the earlier 2004 Allen Consulting Report as suggested, but had regard to more recent material. The reference to, and ultimately its adherence to, other regulatory decisions does not of itself mean that its discretion was exercised incorrectly or that its decision was unreasonable. It was open to the ERA to canvass the prospect of ATCO’s claim involving some overlap with the undisputed allowance of 0.125% for debt raising costs as that allowance includes some underwriting fees; that is supported by Professor Handley’s report. His report observes that:
Since the completion method and underwriting share a common purpose, it is not clear why there should be allowance for both the costs of the completion method and gross underwriting fees.
The ERA thus decided to adhere to the commonly fixed allowance for debt raising costs in the light of all the material because it was not persuaded that the claimed 0.163% pre-financing cost should properly be allowed.
187F On the material, that conclusion is not shown to involve an incorrect exercise of the ERA’s discretion or a decision which is unreasonable in all the circumstances. It was a decision reasonably open to the ERA The Tribunal therefore does not accept the contentions of ATCO on this aspect.
THE CPI ISSUES
188 These issues concern the calculation of the opening capital base of ATCO.
189 It is common ground that the ERA was required to adjust the previous opening capital base at the commencement of the previous access period, and expenditure incurred by ATCO in each year of the previous access arrangement period, for inflation. It was to do so by indexing on the basis of the CPI. The first issue is whether that indexation should have occurred by reference to the quarterly CPI (All Groups, Perth), or the CPI (All Groups, 8 Capital Cities) published by the Australian Bureau of Statistics. ATCO contends that the CPI (All Groups, Perth) should have been used. Secondly, ATCO contends that the indexation for inflation should have been applied as from the mid-point of each year, rather than the end of each year, as was done by the ERA.
190 As to the appropriate inflation measure, it was accepted by the ERA that the historical capital expenditure, including that incurred over the then current access arrangement period, and the likely capital expenditure forecast doing the proposed access arrangement period from 1 July 2011 would be incurred predominantly in Western Australia.
191 In the Draft Decision, the ERA did not approve the methodology proposed by ATCO. Its discussion indicates that the CPI (All Groups, 8 Capital Cities) measure of inflation had been used to determine the opening capital base at the commencement of the previous access arrangement, and had been used by the ERA for all inflation-related calculations including the WACC and incurred expenditure rolled into the capital base. It noted that this approach was consistent with its long-standing practice for all access arrangements. Although use of either of the CPI measures would have accorded with the requirements of rule 73 of the NGR, the ERA considered it preferable to adopt the CPI (All Groups, 8 Capital Cities) measure of inflation to preserve regulatory consistency, and because it thought that the national gas objective would be best achieved by adopting that index. In the exercise of its discretion under rule 40(3) of the NGR, the ERA therefore selected that inflation measure. ATCO, in its subsequent submission to the ERA in October 2010 contended that there was no reason why its treatment of inflation, including its proposed inflation adjustment, did not better achieve the national gas objective. It contended that it was more reasonable, and therefore more appropriate discretionary judgment by the ERA, to adopt the ATCO proposal. It emphasised that both the majority of its capital and operating expenditure occurred in Western Australia, and that in more recent years there had been higher inflation in Western Australia than in the rest of Australia.
192 The ERA in its Final Decision maintained the view it had previously reached. In particular, it emphasised the desirability of maintaining a consistent approach to the treatment of inflation for its financial calculations, and noted that the use of the CPI (All Groups, Perth) measure of inflation would be inconsistent with the rate of return applied in the calculation of total revenue. The inflation adjustment adopted by the ERA was also consistent with its modelling in the analysis of the WACC and in its analysis of each of the building blocks in total revenue. Consequently, it considered that its approach complied with rule 73(3) of the NGR which required that all financial information must be provided, and all calculations made, consistently on the same basis. Consequently, the ERA considered that as return on capital is calculated in reference to the Australian financial market, the most appropriate escalation rate for all values related to capital is the CPI (All Groups, 8 Capital Cities) measure. It also observed that, while costs in Western Australia were currently inflating at a higher rate than elsewhere throughout Australia, over the long term there would be no significant difference between the two indices. Having regard to the consistency considerations, it did not consider that ATCO had established a strong counter-argument in favour of another escalation index, and the ERA was not persuaded that there was a sufficient reason to adopt the alternative CPI index proposed by ATCO.
193 In the Access Arrangement Decision, the ERA adhered to that view.
194 The submissions, both written and oral, gave a greater focus to the purpose for which the opening capital base and capital expenditure should be converted. To put it bluntly, ATCO contended, in essence, that the reason why the previous opening capital base and capital expenditure should be adjusted to real value at the commencement of the access arrangement period is to provide a reliable estimate of replacement cost of the capital assets as at that date, because that is the means of ensuring that the cost of building and maintaining the covered pipeline service is expressed in appropriate values. That focus, it contended, supported the selection of the inflation rate applicable in Western Australia, rather than a more general one.
195 However, the Tribunal accepts the alternative proposition put by the ERA that the purpose of applying the inflation measure to past capital expenditure to adjust it to real value at the commencement of the new access arrangement period is simply to give it its present day value of that capital expenditure, rather than the present day cost of replacing the asset. Consequently, as the capital is expressed in Australian dollars, the appropriate inflator may be one that reflects the Australian economy generally. In the view of the Tribunal, because the exercise involves putting present day value to past expenditure, it is consistent with the national gas objective and the revenue and pricing principles to account for the opportunity cost of funds invested in the past by expressing those amounts in present day terms, and that it was a discretion reasonably available to the ERA to do that by calculating the present day value of the capital employed adjusted according to the value of money across the Australian economy.
196 In that way, the relevant capital base remains consistently measured, during a range of access arrangement periods, and the ERA is consistently applying an inflator to the various parameters to which it is required to adjust past expenditure or make other estimates in the course of its review. The Tribunal notes that the depreciation rate required by rule 77(1)(b)(iii), for example, would not be altered because the depreciating asset was located in Western Australia rather than in some other part of Australia. It notes that the forecast for future capital expenditure and operating expenditure are based upon a national inflator measure. Accordingly, once the focus is removed from simply determining the replacement cost of the then capital base, the Tribunal is of the view that the ERA’s approach is not shown to have involved any miscarriage in the exercise of its discretion.
197 Accordingly, the Tribunal is not persuaded that the ERA, by adopting the CPI (All Groups, 8 Capital Cities) measure of inflation to calculate the opening capital base for the new access arrangement period, committed any reviewable error.
198 The second contention of ATCO under this heading is that the ERA wrongly applied end of year rather than mid-year indexation, as ATCO had sought. It sought mid-year indexation because the real situation is that it incurs expenditure throughout the course of each year, so should have the benefit of the inflation impact at that point rather than at year end.
199 The ERA sought to give effect to the consistency required by rule 73(3) in adjusting for inflation. In the exercise of its discretion under rule 40(3), it was able within the bounds of consistency to select the adjustment method for inflation provided it complied with the requirements of the NGL. It approached the question also with a view to maintaining its long-standing practice and regulatory consistency: see the Final Decision at .
200 It does not follow that the ERA, seeking to maintain long-standing practice and regulatory consistency, did not pay heed to the national gas objective or the revenue and pricing principles. Nor does the failure expressly to refer to them in this context show that they were overlooked; it is highly unlikely that that was the case, as the Final Decision and the Draft Decision show that the ERA was well aware of them and their relevance to its proper performance of its functions.
201 The question, in the Tribunal’s view, is therefore whether the ERA is shown to have erred. At  of the Final Decision, it said:
The Authority acknowledges Alinta’s submission that it would appear reasonable to convert nominal values to real values at the mid-point of each twelve month period, as proposed by WAGN, rather than at the end-point, as required by the Authority. As set out at paragraph 72 below, the Authority’s modelling assumes that all expenditure is made, and all revenue is received, on the last day of the twelve month period. As a consequence of this, the Authority considers that internal consistency is achieved within the model by applying the escalation rate at the end of the twelve month period.
202 In the Tribunal’s view, the discretion exercised by the ERA in the circumstances as expressed in that paragraph is not shown to be unreasonable or unsupportable. It acknowledges that the alternative approach of ATCO has merit, but for the reason given the ERA has chosen to adopt a different approach. There is no factual error demonstrated as underlying the choice of methodology of the ERA which would justify the Tribunal setting aside that part of the ERA’s decision. Its choice is also consistent with other financial adjustments, such as depreciation, being effected at year end.
203 The Tribunal accordingly also rejects this ground of review.
THE BRIDGING FINANCE ISSUE
204 The Tribunal has referred above at - the fact that ATCO was required under the 2005 access arrangement to submit revisions to that access arrangement by 31 March 2009, to the intent that the new access arrangement would apply from 1 January 2010 (in the absence of a revisions trigger event). ATCO then had in place finance for the period to September 2010; and planned to refinance during 2010 following the anticipated revision of the access arrangement to operate from 1 January 2010.
205 In fact, ATCO submitted its proposed revisions to the then existing access arrangement only on 29 January 2010 and the Access Arrangement Decision was not made until 28 April 2011.
206 It is common ground that the delay was the result of ATCO deciding to await the enactment of the NGA WA Act, so that its new access arrangement would be determined under that new statutory regime, including the NGL and the NGR. One reason was that it was anticipated that, even if there were a new access arrangement effected from 1 January 2010 under the previous statutory regime expressed in the Code, it would be necessary for ATCO promptly to prepare and submit further proposed revisions to meet the requirements of the NGL.
207 The process of the enactment of the NGA WA Act was not as rapid as originally anticipated. The National Gas Access (WA) Bill 2008 was anticipated, including by the OOE, to be introduced and enacted during 2008. That anticipation was shared by the ERA. During 2008, ATCO commenced preparation of its proposed revised access arrangement to meet the requirements of the anticipated NGA WA Act, including the NGL and the NGR. It consulted with the ERA. The Western Australian election in the latter part of 2008 meant that the Bill lapsed. It was re-introduced into the Parliament on 26 November 2008.
208 In that evolving situation, ATCO on 2 February 2009 sought from the ERA a six month extension to lodge its proposed revisions, so they could be dealt with under the anticipated legislation. On 12 February 2009, the ERA granted that extension to 30 September 2009. It was then reasonably anticipated that the ERA’s decision-making process would be completed by 1 July 2010.
209 It became apparent during 2009 both to the OOE and to the ERA that the Bill would be further delayed. The OOE on 3 July 2009 and the ERA on 18 June 2009 alerted ATCO to that.
210 In fact, the NGA WA Act was passed and assented to on 1 September 2009. Relevantly, it came into operation on 1 January 2010. The next step was the regulations under the NGA WA Act; they were being prepared by the OOE. They, too, were completed and came into force on 1 January 2010.
211 Consequently, ATCO on 16 September 2009 sought a further extension of time to lodge its proposed revisions. On 24 September 2009, the ERA approved a further extension to 31 January 2010. As noted above, ATCO then complied with that extended period. The Draft Decision was issued on 17 August 2010, and the Final Decision on 28 February 2011.
212 The elapse of time meant that ATCO needed to consider how to extend its financing beyond September 2010. ATCO had also incurred significant costs in the period up to 31 January 2010 in preparing the proposed revisions. It was advised, and accepted the advice, that it should seek bridging finance until its position was known by the Final Decision and the Access Arrangement Decision.
213 Consequently, ATCO sought to include in its operating expenditure (as defined in rule 69 of the NGR) its bridging finance costs for the period January to June 2010, which it quantified a substantial sum. It claimed that it would not have incurred those costs had there been no delay in the original timing for the commencement of its revised access arrangement, that is from 1 January 2010.
214 In the Draft Decision the ERA did not include those claimed costs in the operating expenditure of ATCO because, it said at  of the Draft Decision, ATCO could have lodged its proposed revised access arrangement on 31 March 2009 under the Code. In terms of rule 91(1) of the NGR, the ERA said that those costs would not have been incurred by a prudent service provider acting efficiently, in accordance with accepted good industry practice, to achieve the lowest sustainable cost of delivering pipeline services.
215 The Final Decision accepted that the bridging finance costs claimed had been incurred, and that they were forecast operating expenditure of ATCO under rule 76(e) of the NGR, but the ERA adhered to its views expressed in the Draft Decision.
216 The Final Decision at  said:
The authority notes WAGN’s submissions but maintains its position that these one-off network costs do not meet the criteria in rule 91(1) of the NGL. Further, the Authority maintains its view that any costs incurred by WAGN as a result of its request for an extension of time are not costs 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 delivering pipeline services, when it was open to WAGN to lodge its proposed revisions at an earlier time.
217 The Access Arrangement Decision also gave effect to that view.
218 The issue on this review is a short one. ATCO contends that the ERA Access Arrangement Decision involved an error of fact, albeit a complex fact – namely whether in the circumstances ATCO’s decision to incur the bridging finance costs would have been made by a prudent service provider acting efficiently, in accordance with good industry practice, to achieve the lowest sustainable cost of delivering the pipeline service. The ERA’s decision in the issue is one involving limited discretion: rule 91(2), so under rule 40(2) the ERA could not withhold its approval to that element of the claim if it was satisfied that (relevantly) it is consistent with rule 91(1).
219 The Tribunal is persuaded that the ERA made a factual error in reaching its conclusion. There was a particular concatenation of circumstances confronting ATCO when it sought the extensions (which the ERA granted) so as to apply for its revised access arrangement under the new statutory regime. The timing for the introduction of that regime was a shifting one, so that there were a series of points at which the decision to seek the extension needed to be considered. There is, in the Tribunal’s view, no point in that process of decisions in which ATCO can be said to have made an imprudent decision having regard to the terms of rule 91(1). In January 2009, it was appropriate to consider the relative costs and benefits for applying for a revised access arrangement under the Code or awaiting the enactment of the new regime. The ERA, in granting the extension at that point, did not then suggest that the reason for extension sought was not a proper one. At that point, it was not anticipated that the delay in the new regime would confront the September 2010 refinancing issue which ATCO subsequently had to confront. Having committed to applying for its revised access arrangement to be assessed under the anticipated new regime (at least, having so committed at that point in time), it was confronted with the further extending period until that regime came into force with the shortening period before its finance needed to be renegotiated. It is at the time when it became apparent that it was unlikely that its new access arrangement would be in place before it needed to refinance that its decision to seek bridging finance should be assessed. At the time it was confronted with that realisation, it sought independent professional advice about the most economic way to proceed. It acted on that advice. In the meantime, it had received a further extension of time from the ERA.
220 ATCO accepts that, in retrospect, it should at an early point have decided to submit its proposed revised access arrangement under the Code. But its decision making is not to be judged with the benefit of hindsight. There is no basis shown to challenge its initial assessment that there were potentially significant efficiency benefits in awaiting the introduction of the new regime. Until the point where it became apparent that there was a prospect that there would be a discordance between its refinancing obligations and the setting of its new access arrangement, the Tribunal is of the view that its decision making satisfies the criteria in rule 91(1). At that point, for the reasons given, the Tribunal is of the view that its decision to incur the bridging finance costs and to proceed to seek a revised access arrangement under the new statutory regime also falls within the criterion of rule 91(1). There is no suggestion by the ERA that, at that point, it would have been a more efficient step to revert to an application under the Code for a revised access arrangement, or that to do so would have avoided the bridging finance costs. Nor is there any suggestion by the ERA that, at that point, it was an imprudent or inefficient decision to incur the bridging finance costs pending its revised access arrangement rather than to arrange longer-term finance at the rates which might then have been available without a new access arrangement in place.
221 For those reasons, as noted above, the Tribunal considers the ERA made a factual error in the Access Arrangement Decision. As it intends to remit to the ERA that decision in relation to another aspect, the Tribunal will also require the ERA to make the necessary alterations to the Access Arrangement terms to allow the operating expenditure of ATCO to be included in the claimed bridging finance costs.
THE WORKING CAPITAL ISSUE
222 ATCO proposed that a component of the building blocks to calculate the revenue to be allowed under its revised access arrangement should include the cost of financing its working capital. Conventionally, it describes the value of its working capital as the value of the current assets less its current liabilities.
223 In the Draft Decision at , the ERA indicated that it did not approve the proposal to include costs in relation to working capital in determining the allowable total revenue. Its view, it said, is consistent with the approach of the Australian Energy Regulator (the AER). The AER approach is based upon the end-of-year annual modelling with cash flows assumed to occur simultaneously on the same (final) day of the year. The ERA adopted that reasoning, and applied it as it also used an end-of-year modelling approach.
224 In the Final Decision, the ERA maintained that view. It remarked at  that, by reason of the assumption of the modelling that cash inflow and cash outflow occur simultaneously on the last day of the financial year, there is no need for a working capital allowance.
225 The ERA then addressed the point made by ATCO in submissions that, in fact, there is a timing difference between incurring expenses and receiving revenue which therefore causes a net shortfall or net surplus in cash flow within a year, so there should be an allowance to finance the net shortfall of cash within a year. The ERA rejected that contention because ATCO is a fixed-asset intensive business rather than an inventory intensive business. It said at :
The Authority does not consider that WAGN has provided sufficient evidence to demonstrate that it has taken steps, such as those suggested in paragraph 616 below to minimise any delay and to improve the efficiency of its working capital.
It then said that, in a fixed-asset intensive business, a business operating efficiently could effectively manage its working capital by a variety of techniques to reduce short-term cash fluctuations. In relation to capital works in progress, as the modelling recognises capital expense as and when incurred and capitalises it at the same time, there is no unaccounted for capital works in progress. In addition, the ERA noted that the Template Haulage Contract approved in the access arrangement firstly allowed for interest on invoices unpaid after 10 business days, and secondly for twice-monthly billing cycles on notice from ATCO (clauses 9.3 and 9.1(a) of the Template Haulage Contract respectively).
226 Hence, it was not satisfied on the evidence that ATCO had made out a case for either working capital or a return on working capital. The Access Arrangement Decision made no provision for those claimed costs.
227 The decision of the ERA marks a departure from what it had previously allowed, at least in principle, in the 2005 access arrangement for ATCO.
228 In the submissions to the ERA, ATCO sought to show that in fact its efficient costs included costs of financing provision of the reference services. Its calculation of working capital expenditure and revenue took account of receivables, inventories, pre-payments, creditors, unbilled gas and capital work in progress. It presented a cash flow cycle in “working capital days” and a detailed table of its working capital requirements in relation to those various elements. In effect, ATCO treated its requirement for working capital as a non-depreciable asset required to provide the reference services, and claimed a return on that working capital.
229 The ERA acknowledged that in March 2002, advice of the Allen Consulting Group apparently demonstrated that end-of-year cash flow modelling implicitly provided an adequate allowance for working capital in the context of monthly billing. However, ATCO submitted, it was necessary to look to its specific circumstances. To support its claim, its submissions of 8 October 2010 presented and commented on a table said to depict the working capital implicit in the annual tariff determination and monthly billing cycle and then to indicate how the difference between revenue and sales supported its claim, contrasting that with the outcome implicit in the Allen Consulting Group modelling assumption. It also referred to the three-month meter reading cycle as supporting its particular claim.
230 There is obviously considerable room for debate about the issue, including about the significance of the factors referred to by the ERA in the Final Decision. Despite the submissions of ATCO, the Tribunal is not persuaded in this matter that the ERA’s factors are without substance.
231 To address particular matters put on behalf of ATCO: the ERA is not shown to have failed to consider ATCO’s particular circumstances; the ERA’s reliance on the modelling assumptions tend to support its conclusion, but it has not relied solely upon them; its reference to the nature of ATCO’s business and to the terms of the Template Haulage Contract are not shown to be erroneous and the giving of weight to those matters is also not shown to be erroneous; there was some scope, in the light of those matters, to question whether ATCO in the past had adopted the most efficient cash flow management policies and techniques (which is of course not a finding that it had not done so).
232 The ERA’s Final Decision recorded that it was not satisfied on all the evidence that the cost of working capital beyond that implicit in modelling cash flows on an end-of-year basis should be allowed. That overall conclusion was, in the view of the Tribunal, reasonably available to the ERA. There is no particular factual finding underlying that conclusion which has been shown to be erroneous. The outcome is not, in the circumstances, shown to have been inconsistent with the national gas objective or the revenue and pricing principles.
233 In the circumstances, in respect of this issue, the Tribunal affirms the decision of the ERA.
THE TARIFF VARIATION MECHANISM ISSUE
234 Ground 5 raises the issue whether, in deciding to exclude regulatory capital expenditure (capex) from being a component of ATCO’s proposed reference tariff variation mechanism and from being a component of a cost pass through event, the ERA made an error or errors of fact, was incorrect or was unreasonable in terms of s 246(1) of the NGL.
235 ATCO’s contentious mechanism proposals appeared in clause 2.2 and 3.1 of Annexure B to its October 2010 Amended Access Arrangement. If allowed, clause 2.2 would enable ATCO to recover a return on, and depreciation of, an unanticipated increase in both conforming regulatory capex and conforming regulatory operating expenses (opex) – regulatory costs being described by it as “… the direct and indirect costs of action by agencies of government”. Only the depreciation and return on capital (not the capital amount) would be recoverable during the life of the access arrangement. At the end of the access arrangement period the capex would be rolled into the capital base for the next period and recovered in the usual way. Likewise, clause 3.1 would enable a tariff variation to recover conforming capex and opex for a cost pass through event listed in the clause. The ERA’s April 2011 Revised Access Arrangement removed from each clause the reference to the capex component and confined each clause to enable a variation in opex only.
236 As the reference tariffs in ATCO’s Proposed Access Arrangement were expressed in real December 2009 dollar values, ATCO proposed a mechanism to vary the tariffs for the effects of inflation from December 2009 to each of the dates the tariffs were or are to come into effect, namely, 1 January 2011, 1 July 2011, 1 July 2012 and 1 July 2013. In addition the mechanism's formulae would have permitted ATCO to recover what it described in its January 2010 submission in support of its Proposed Access Arrangement as “… certain costs which are beyond its control, and which could not be predicted with any great certainty …”.
237 ATCO’s January 2010 submission to the ERA claimed that it extended its proposed tariff variation mechanism to defined cost pass through events that were included in its 2005 Access Arrangement. Specific events were identified by it as giving rise to costs which it proposed might be recovered through the mechanism included conforming capex or opex incurred as a result of such an event.
238 The January 2010 submission also gave some emphasis to a claim that the mechanism did not substantially change the procedures previously followed under the 2005 Access Arrangement by ATCO and the ERA in varying the reference tariffs. ATCO also indicated that it should not change the procedures followed by users and potential users in responding to tariff changes. The submission did, however, note a change to the scheme under the 2005 Access Arrangement, namely, a further step enabling variation of the reference tariffs at the commencement of a new access arrangement period to allow for inflation and for the recovery of additional regulatory costs incurred in the last year of the previous access arrangement period.
239 The ERA’s Draft Decision did not approve ATCO’s proposed tariff variation mechanism. While the ERA considered it appropriate to allow a cost pass through of unanticipated regulatory opex in a manner similar to the variation in the 2005 Access Arrangement, it stated that it did not consider the inclusion of unanticipated regulatory capex to be appropriate on the basis that the inclusion of such costs in a tariff variation mechanism was not consistent with the NGL and NGR. In stating that, the ERA noted that:
(a) any such capex would be rolled into the capital base at the next revision of the access arrangement;
(b) ATCO also has the option of either seeking pre-approval for this expenditure or resubmitting a revised access arrangement at any time during the access arrangement period.
240 The ERA’s Draft Decision also noted that the difference between the Code used to assess the 2005 Access Arrangement and the NGR was such that it was not possible for the ERA to simply approve the proposed mechanism on the basis that it was approved under the Code. It went on to say that a reassessment was required in light of the requirements of the NGR. The ERA concluded that references in the variation mechanism to regulatory capex should be deleted.
241 ATCO’s October 2010 response to the Draft Decision challenged the requirement that references in the variation mechanism to regulatory capex should be deleted on the basis that “No reason of substance was provided for this required amendment”, and that “How, or why, it is not consistent with the NGL and the NGR is not made clear.” The submission also noted that while the variation for differences between actual and forecast regulatory opex was allowed “[t]here is no logical reason why [the variation mechanism] should not also allow for tariff variation for differences in regulatory capital expenditures, provided the tariff variation does no more than recover the unanticipated return and depreciation.” ATCO’s October 2010 response on this point concluded that it was not prepared to delete references to regulatory capex from its proposed variation mechanism.
242 As indicated above, the ERA’s 28 February 2011 Final Decision disagreed with ATCO’s October 2010 proposed variation mechanism and foreshadowed that the ERA’s proposed access arrangement revisions would delete references to regulatory capex from Annexure B.
243 By letter dated 20 April 2011, prior to the ERA publishing its revised access arrangement, ATCO suggested to the ERA some refinements to its variation mechanism to address what it perceived as the ERA's concerns with definitions in the mechanism. Responding to the suggestion by letter dated 3 May 2011 the ERA informed ATCO that while rule 64(3) of the NGR allowed the ERA to consult on its proposed access arrangement revision, it was not obliged to, and that the suggestion was not a matter about which the ERA can, or ought to, consult. The ERA did, however, incorporate the refinements in its approved access arrangement.
244 In its written submissions and orally before the Tribunal ATCO advanced four reasons why the ERA was in error in deleting the references to capex from Annexure B. First, the ERA misconstrued rule 92 of the NGR. Second, the ERA was capricious to allow the opex but exclude the capex. Third, the ERA did not seem to take into account ATCO’s previous access arrangements as required by rule 97(3) of the NGR. Finally, the ERA’s decision was contrary to ss 23 and 24 of the NGL (the national gas objective and the regulatory and pricing principles, respectively).
245 Rule 92 provides:
(1) A full access arrangement must include a mechanism (a reference tariff variation mechanism) for variation of a reference tariff over the course of an access arrangement period.
(2) The reference tariff variation mechanism must be designed to equalise (in terms of present values):
(a) forecast revenue from reference services over the access arrangement period; and
(b) the portion of total revenue allocated to reference services for the access arrangement period.
(3) However, if there is an interval (the interval of delay) between a revision commencement date stated in a full access arrangement and the date on which revisions to the access arrangement actually commence:
(a) reference tariffs, as in force at the end of the previous access arrangement period, continue without variation for the interval of delay; but
(b) the operation of this subrule may be taken into account in fixing reference tariffs for the new access arrangement period.
246 Rule 97 is also relevant. First, it provides that a reference tariff variation mechanism may, as ATCO’s mechanism did, provide for variation of a reference tariff as a result of a cost pass through for a defined event (such as a pass through for a particular tax) – see rule 97(1)(c). Rule 97(3) also provides that:
(3) In deciding whether a particular reference tariff variation mechanism is appropriate to a particular access arrangement, the AER must have regard to:
(a) the need for efficient tariff structures; and
(b) the possible effects of the reference tariff variation mechanism on administrative costs of the AER, the service provider, and users or potential users; and
(c) the regulatory arrangements (if any) applicable to the relevant reference services before the commencement of the proposed reference tariff variation mechanism; and
(d) the desirability of consistency between regulatory arrangements for similar services (both within and beyond the relevant jurisdiction); and
(e) any other relevant factor.
247 ATCO submitted that rule 92(2) mandates that if, as a result of unforeseen regulatory requirements, there is a need for additional unavoidable and necessary capex (eg, to replace slamshut valves on applicable regulator sets and meter sets), it is only by including its proposed reference tariff variation mechanism that the equalisation required by rule 92(2) can be achieved. Observing that the ERA was correct to note that such capex may (after adjustment for depreciation during the period of the access arrangement) be rolled into the capital base at the next revision of the access arrangement, ATCO submitted that procedure is, at best, only a partial and delayed recompense and does not comply with rule 92(2). This, ATCO submitted, was inconsistent with the national gas objective and its revenue and pricing principles in ss 23 and 24 of the NGL.
248 The ERA submitted that in the context of Part 9 of the NGR, rule 92 does not mandate the outcome sought by ATCO – to the extent that unanticipated regulatory capex items are to be taken into account within the regulatory framework, it should be pursued under rule 97, not rule 92. And while rule 97 empowers the ERA to consider allowing unanticipated regulatory capex items, it is a discretionary power to be exercised in accordance with the national gas objective and its revenue and pricing principles. Moreover, the discretion goes to the width of allowable cost pass throughs in terms of rule 97(1)(c) which contemplates a reference tariff variation mechanism which defines events for which pass throughs will be allowed.
249 In the ERA’s submission, while rule 97(l)(c) plainly permits a tariff variation mechanism to vary a tariff as a result of a cost pass through for a defined event, the text and context of rules 92 and 97 indicate that cost pass through events are not the primary purpose of the tariff variation mechanism - the primary purpose is the equalisation of forecast revenue from reference services and the portion of total revenue allocated to the reference services.
250 Neither the ERA’s Draft Decision nor its Final Decision gave a reason why ATCO’s proposed reference tariff variation mechanism was inconsistent with the NGL or the NGR. While the ERA is correct in noting that conforming unanticipated regulatory capex may be rolled into the capital base at the next revision of the access arrangement; that ATCO may seek pre-approval for such capex; or that it may submit a revised access arrangement at any time during the access arrangement period., none of those alternatives are preferred by the Tribunal. First, rolling such capex into the capital base at the next revision would deny ATCO depreciation and return on capital in the interim. Also, the impact of the denial of adopting that course might vary quite significantly depending on when the capex was incurred during the regulatory period (eg, if the capex were incurred six months into the regulatory period compared to six months from the end of the period). Second, while pre-approval may give ATCO some certainty, again, it would deny ATCO depreciation and return on capital. Third, the cost of submitting a revised access arrangement and the delay in having it approved may outweigh the benefits.
251 ATCO’s analysis of rule 92 is to be preferred to the ERA’s. That is, rule 92(2) provides that a reference tariff variation mechanism must be designed to equalize forecast revenue from reference services and the total revenue allocated to reference services. It was common ground that the reference to “total revenue” in rule 92(2)(b) is a reference to “total revenue” in rule 76. That includes a return on projected capex and depreciation on projected capex. Adopting ATCO’s analysis, if additional capex attributable to a new regulatory obligation had been projected, then the total revenue ought to have been greater. Thus, where there is a requirement for new regulatory expenditure imposed during an access arrangement period, rule 97(1)(c) contemplates a cost pass through event, which means that the total revenue should increase. Correspondingly, rule 92(2) provides for a reference tariff variation mechanism which allows forecast revenue to equalize with the total revenue which should be allowed. ATCO’s proposed reference tariff variation mechanism gives effect to this analysis. And, importantly, the analysis is consistent with the national gas objective and revenue and pricing principles. On the other hand, the ERA’s approach to rule 92 is not. The Tribunal accepts ATCO’s primary submission that the ERA’s exercise of its discretion to remove the reference to the capex component and confine each clause to enable a variation in opex only was not in conformity with the requirement of rule 92(2), and was therefore incorrect within the meaning of s 246(1)(c) of the NGL.
252 The ERA denied its decision to refuse the recovery of unanticipated regulatory capex but allow unanticipated regulatory opex was capricious. It based its denial of capriciousness on what it perceived to be the different treatment of capex and opex under the scheme of Part 9 of the NGR. Both, it submitted, are to be forecast and to be included in determining the requirement of total revenue. If unanticipated regulatory opex is incurred during the regulatory period, it is reasonable to allow its recovery because it cannot be recovered in a later regulatory period. Capex, on the other hand, is treated differently. Capex, the ERA submitted, is recovered over time through depreciation and a rate of return.
253 In this regard the ERA accepted ATCO’s submission that if it incurred unanticipated regulatory capex, unless its tariffs were varied it would, on the ERA’s approach, be unable to recover the depreciation and a return on the capex and would only commence earning the revenue from the commencement of the next regulatory period. This, the ERA submitted, was implicit in the regulatory framework because the required revenue is set for the regulatory period based on the forecast capital base. As counsel for the ERA put it, “this cuts both ways.” That is, if during a regulatory period an asset of ATCO were to become redundant, the capital base would not be reduced during the period and there would be no revenue or tariff consequence for ATCO. Indeed, ATCO would receive a benefit of continuing to receive revenue calculated on the forecast capital base. As the ERA’s counsel submitted “So … this framework keeps things constant during the regulatory period, for better or worse.”
254 Thus, the ERA submitted, its decision to exclude unanticipated regulatory capex from the tariff variation mechanism reflects the regulatory framework in which adjustments to the capital base are generally confined to the commencement of each regulatory period. The ERA’s submission in reply on this topic concludes with the statement that: “The ERA was of the view that the tariff variation mechanism in its Final Decision accords with the revenue and pricing principles.”
255 The Tribunal does not accept the ERA’s submission. It agrees with ATCO’s submission, that:
(a) the revenue and pricing principle in s24(5) of the NGL provides that a reference tariff should allow for a return commensurate with the regulatory and commercial risks involved in providing the reference service to which the tariff relates (ATCO’s emphasis); and
(b) a reference tariff mechanism which does not allow a service provider to earn a return on unanticipated regulatory capex, obviously does not provide a reference tariff commensurate with regulatory risks. (ATCO’s emphasis)
256 Nor does the Tribunal accept the ERA’s submission that it is implicit in the regulatory framework that ATCO must accept the risk of a government imposing additional capex requirements during the regulatory period. Such a construction of the regulatory framework is contrary to the national gas objective in s 23 of the NGL to promote efficient investment. As submitted by ATCO, efficient investment does not involve precluding ATCO from recovering depreciation and return on capex occasioned by a government regulation. A fortiori, when the example in rule 97(1)(c) clearly envisages it.
257 While the ERA was correct not to simply approve ATCO’s proposed tariff mechanism on the basis that it was approved under the Code and did have regard to ATCO’s previous access arrangement as required by rule 97(3) of the NGR (at least to some extent), it follows from what is said above that the ERA was wrong in the conclusion it reached when it assessed the mechanism in terms of the NGL and NGR.
258 The Tribunal is persuaded that the ERA’s decision to exclude regulatory capex from clauses 2.2 and 3.1 of Annexure B to ATCO’s October 2010 Amended Access Arrangement is wrong. The reviewable grounds invoked by ATCO included each of paragraphs (a) to (d) of s 246(1) of the NGL. In the view of the Tribunal, the ERA made a decision which was, in terms of s 246(1)(c) an incorrect exercise of its discretion having regard to all the circumstances and which was, in terms of s 246(1)(d), unreasonable having regard to all the circumstances.
259 Thus, ATCO has successfully made out a ground of review: NGL s 246(1)(c) and (d). Accordingly, the Tribunal must decide whether to vary the decision, affirm the decision or remit the matter back to the ERA for further consideration: NGL s 259(2).
260 In those circumstances the Tribunal determines that:
(a) the matter be remitted to the ERA pursuant to s 259(2)(b) of the NGL to:
(i) reinstate conforming capital expenditure in clauses 2.2 and 3.1 of Annexure B to ATCO’s October 2010 Amended Access Arrangement; and
(ii) consult with ATCO on any consequential amendments;
(b) in the event that the ERA and ATCO cannot agree whether to adopt the suggestions in ATCO’s letter, each party have liberty to apply.
THE TEMPLATE HAULAGE TERMS ISSUE
261 Ground 6A raises the issue whether in varying ATCO’s proposed Template Haulage Contract the ERA was incorrect or was unreasonable in terms of s 246(1) of the NGL in finding that certain clauses went to commercial matters.
262 ATCO’s January Submission to the ERA in support of its proposed access arrangement provided the following explanation for the inclusion of a Template Haulage Contract in its proposed Annexure B to the arrangement:
The Code required, and the NGR continue to require, that an access arrangement set out the terms and conditions on which the reference services will be provided. There was no requirement under the Code, and there is no requirement in the NGR, for an access arrangement to include a pro forma access contract.
The absence of a pro forma contract has been seen, by some prospective users of the WAGN GDS, as indicating that the terms and conditions set out in the Access Arrangement are only indicative or, in some way, incomplete, and are the subject of further negotiation in settling an access contract with WAGN. These prospective users have sought to change the risk-reward balance that the Access Arrangement achieves in respect of the provision of the reference services, on the specified terms and conditions, at the reference tariffs.
Negotiations with prospective users risk becoming unnecessarily protracted when those users are advised that, by seeking changes, they are no longer seeking the reference services, and the reference tariffs no longer apply.
To better indicate to prospective users that the reference services are those services which are defined by the terms and conditions of the Access Arrangement, to better inform them that the services defined by the terms and conditions are the services which will be made available at the reference tariffs, and to avoid protracted negotiations, WAGN has incorporated the terms and conditions on which it will provide the reference services in a proposed Template Haulage Contract. WAGN anticipates that prospective users would then apply for access to the services provided using the WAGN GDS on the understanding that WAGN would provide the reference services, at the reference tariffs, on the terms and conditions set out in the Template Haulage Contract, which has been the subject of close scrutiny by the ERA in the process of approving the proposed revisions to the Access Arrangement.
263 In his oral submissions counsel for ATCO focused on the emphasised words in the following passages from the Final Decision:
76. In the draft decision, the Authority found that certain clauses in the Template Haulage Contract went to commercial matters between the contracting parties and not matters relevant to the consistency of the proposed access arrangement provisions with the national gas objective. In these circumstances, the Authority required such clauses in the Template Haulage Contract to be amended or deleted.
… … …
87. The Authority maintains its position as set out in the draft decision that certain clauses in the Template Haulage Contract that relate to commercial matters should be left to the negotiating parties to agree, or failing agreement, to arbitration in accordance with the relevant provisions of the NGA.
… … …
93. In relation to some of the clauses of the Template Haulage Contract which the Authority determined by the draft decision were commercial matters, public submissions were received following the draft decision, which have persuaded the Authority that such provisions do relate to the terms and conditions of reference services rather than being commercial matters. In these instances, the Authority is now satisfied that the inclusion of these terms and conditions in the access arrangement revisions is consistent with the national gas objective. [emphases added]
264 Counsel for ATCO submitted that there were two reasons that the ERA was wrong to draw a distinction between terms that might be described as commercial and other terms. First, it was, he submitted, not a distinction borne out in the NGR. In support of his submission he referred to rule 48(1)(d) and rule 64(2)(b).
265 Rule 48 sets out the requirements for a full access arrangement proposal and relevantly (sub-rule (1), paragraph (d)) provides that it must specify for each reference service:
(i) the reference tariff; and
(ii) the other terms and conditions on which the reference service will be provided.
266 Rule 64 mandates the ERA’s power to make or revise an access arrangement when it has refused to approve an access arrangement and, in particular, provides that its proposal for an access arrangement is to be formulated with regard to ATCO’s Access Arrangement Proposal: rule 64(2)(b).
267 Second, counsel submitted that the “commercial matter” distinction was illusory and questioned the basis upon which a condition might be determined “commercial”, rather than of some other character. While it was plain that the contentious terms and conditions, or many of them, do bear upon the achievement of the national gas objective and the operation of the revenue and pricing principles, the ERA chose not to so identify them but rather chose a different criteria, a criteria, he submitted, of whether they were “commercial”.
268 In his submission, the ERA had not exercised its discretion under rule 40(3) of the NGR. That rule provides that the ERA has a discretion to withhold its approval to an element of an access arrangement proposal if, in its opinion, a preferable alternative exists that complies with the NGL and is consistent with any applicable criteria provided by the NGL. He submitted:
… there is nothing in the final decision which says the that the … [ERA] … had decided that it is consistent with the national gas objective or the revenue and pricing principles to not make a decision to approve a particular clause. Rather, the only thing that the … [ERA] … has done is to say, "Because it's a commercial term … [it] … will leave it to the parties to decide later on". ... that is not a discretion which … is open under rule 48(1)(d) which requires the access proposal to state the terms and conditions upon which the service is to be provided.
… … …
What was exercised was a miscarriage of a purported discretion.
… … …
… if there is a discretion, and if it's to be exercised in accordance with [rule] 43 that needs to be identified. That is not done … .
269 The ERA’s counsel submitted that ATCO’s contention that the ERA decided not to approve the clauses because they related to commercial matters misstates the criterion applied by the ERA in making its decision. To make good his submission he referred the Tribunal to the following paragraphs in the Draft Decision outlining the approach taken by the ERA:
1201. Rule 48(l)(d)(ii) of the NGR provides that a full access arrangement must specify for each reference service the other terms and conditions on which the reference service will be provided.
1202. There are no specific criteria for the assessment of the reference service terms and conditions. The revenue and pricing principles do not have any application (as these terms and conditions, by definition, do not concern revenue or pricing).
1203. The only assessment criteria for terms and conditions of reference services, therefore, are contained in the provision in rule 100 of the NGR which provides that 'all provisions' of an access arrangement must be consistent with the national gas objective in section 23 of the NGL.
1204. Therefore, all provisions of WAGN's proposed revisions concerning reference services, including the terms and conditions, must be consistent with the objective of promoting 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.
270 The ERA’s counsel then illustrated the application of its approach by reference to the following paragraphs in the Draft Decision:
1467. Clause 9.1(a) of the Template Haulage Contract provides that the service provider may claim payment twice a month for each and every haulage charge or other amounts payable under the haulage contract, and clause 9.1(b) obliges the service provider to use reasonable endeavours to make payment claims on the first and sixteenth days of each month.
… … …
1478. The Authority considers that the matters which have been the subject of submissions are matters of detail in relation to the commercial arrangements between contracting parties, and not matters which go to compliance of WAGN's proposed revisions with the national gas objective, which is the matter for the Authority's assessment. In these circumstances, the Authority considers that it should not approve the more detailed provisions regarding the contents of invoices proposed by WAGN in clause 9.1(c) of the Template Haulage Contract and WAGN's proposed revisions should be amended to revert to the provisions regarding the contents of invoices in clause 30(2) of Part C of the current access arrangement. In the event that WAGN and any proposed user wish to agree regarding more specific or detailed invoices then there is provision for bilateral agreement about those matters in clause 30(2)(e) of the Part C of the current access arrangement.
271 Referring to the above-quoted paragraphs from the Draft Decision, counsel for the ERA submitted that ATCO’s counsel’s summation of paragraph 76 of the Final Decision, focusing as it did on “commercial matters”, was not a fair summation of the ERA’s approach. It is, counsel for the ERA submitted, quite clear from the paragraphs quoted above from the Draft Decision that the ERA was of the view that the only criteria by which it was required to assess the clauses was the national gas objective. The Tribunal accepts those submissions.
272 Counsel for the ERA also submitted that having regard to the features of the regulatory scheme, in particular, rules 48(1) and 100 of the NGR and s 322 and Chapter 6 (Access disputes) of the NGL, the ERA is empowered to amend or delete a clause from a proposed access arrangement if it forms the view that the clause is not relevant to the national gas objective in s 23 of the NGL.
273 Expanding on what was said by the ERA in the above quoted paragraphs from the Draft Decision, he noted in support of his submission that:
(a) under s 322 of the NGL a service provider and a user are free to negotiate terms and conditions different from an applicable access arrangement;
(b) if a dispute were to arise in the course of such a negation, it may be determined under Chapter 6 of the NGL;
(c) but if the ERA had approved a clause, that clause would by virtue of Chapter 6 become the default position and must be accepted by the dispute resolution body (s189).
274 Thus, he submitted:
(a) it is incumbent on ATCO to satisfy the ERA that ATCO’s proposed terms and conditions are consistent with the national gas objective; and
(b) should ATCO fail in that regard the ERA has the right to not approve the terms and conditions.
275 The ERA’s approach leaves more matters for negotiation than envisaged by ATCO in the above quoted passages in its January Submission. But, as counsel for the ERA submitted, that is a desirable outcome. He rightly supported his submissions that greater prescription can impede competitive market outcomes and create inefficient outcomes by reference to Australian Competition and Consumer Tribunal v Telstra Corporation (2009) 176 FCR 203 (ACCC v Telstra) at . While, as submitted by ATCO, the provisions upon which ACCC v Telstra was decided may be distinguished from the NGL and NGR, the following enunciation of principle by the Full Court in that matter is apt:
… terms and conditions that are more prescriptive and comprehensive may facilitate quicker access. However, against that consideration, … [must be] … balance[d] the often competing interests of the parties involved and the need not to harm competition or efficient investment by promulgating terms and conditions which can have unforeseen effects. The risk of such effects is heightened by the … [the regulator's] … comparative lack of information, knowledge and experience when measured against the expertise of the actual participants in the … industry.
276 Having regard to the foregoing paragraphs under the heading Ground 6A: Template Haulage Contract “commercial matters”, the Tribunal is satisfied that in assessing ATCO’s proposed terms and conditions on which the reference services were to be provided, the ERA did not limit its consideration to whether they were “commercial matters”. That phrase is but a shorthand description of the conclusion reached after the ERA had properly and correctly considered each clause against the national gas objective as required by rule 100 of the NGL. It follows that ATCO has not made out Ground 6A of its application.
277 Ground 6B raises the issue whether the following decisions by the ERA involve an error or errors of fact, were incorrect or were unreasonable in terms of s 246(1) of the NGL:
(a) not to approve clauses 10.1, 10.2, 17 and 20.1 of ATCO’s proposed Template Haulage Contract;
(b) to remove from clauses 5.10(c)(ii) and 16.4 of ATCO’s proposed Template Haulage Contract references to “Upstream Persons” while retaining reference to “Downstream Persons”; and
(c) to include clauses 8.3(b) and 10(c) in the Template Haulage Contract approved by the ERA.
278 The parties made no oral submissions in respect of Ground 6B, leaving it to be determined by the Tribunal having regard to their written submissions.
279 In considering the individual clauses in dispute, it is useful to bear in mind that there are differences between the template haulage contracts proposed by ATCO in its January Submission (the January Contract) and in its October Submission (the October Contract) and between the latter and the contract ultimately approved by the ERA (the Approved Contract).
280 Clauses 10.1 and 10.2: If approved, clause 10.1 of the ATCO’s October Contract would have required a user to pay all taxes (defined to include any tax, rate, impost, levy duty, fee, compulsory loan, tax-equivalent payment or surcharge withheld, deducted, charged, levied or imposed under any law other than one that is imposed on taxable income) arising in respect of the transfer, delivery, transport or handling gas. As proposed, clause 10.2, which was headed “GST”, went beyond simple liability for payment of the tax and extended to such matters as the liability for the tax on the occasion of an adjustment event and the timing of the payment of the tax.
281 Notwithstanding that the Draft Decision stated that in order to be approved clause 10 required amendment, there was no amendment to the clause in ATCO’s October Contract.
282 Having considered submissions by interested parties and ATCO, the ERA maintained its position as set out in the Draft Decision that:
(a) taxation is the subject of separate and distinct legal and regulatory systems which it considered inappropriate to regulate as it would be going beyond its jurisdiction as an economic regulator; and
(b) the taxation requirements of each party, and any agreement to adjust the incidence of taxation, is best dealt with by commercial negotiation after the parties have considered their respective legal and accounting positions.
283 Contrary to ATCO’s written submission, the Tribunal is satisfied that the ERA did have regard to the national gas objective in its assessment of clause 10. This is clear from the Final Decision at . That paragraph states:
88. The Authority confirms, contrary to WAGN's submissions, that in assessing WAGN's proposed revisions for the purposes of the draft decision and for this final decision, it has considered the competing interests of the service provider and users in the context of the national gas objective. The Authority notes that its position as regulator is to assess the proposed access arrangement as drafted and submitted to the Authority by the service provider, in this case WAGN, against the relevant criteria as set out in the regulatory framework. Contrary to WAGN's submission, the Authority in making its draft decision, did not assess WAGN's proposed revisions as a whole as regards compliance with the national gas objective, but considered each proposed provision's consistency with the national gas objective, as required by rule 100 of the NGR.
284 The Tribunal is satisfied that the ERA was correct in exercising its discretion to delete clauses 10.1 and 10.2 from the Template Haulage Contract.
285 Clause 17 of the approved Template Haulage Contract: If approved, clause 17 of the January Contract would have specified, in some detail, the representations and warranties to be made by a user and by ATCO, and the representations and warranties generally to be made by both parties. The Draft Decision concluded its consideration of clause 17 of the January Contract as follows:
The … [ERA]… does not consider approving representations and warranties of a contractual nature as a matter which goes to …[ATCO’s] …compliance …[with] … the national gas objective. In these circumstances, the … [ERA] … considers that it should not approve the detailed provisions listing the representations and warranties of each party and … [ATCO’s] … proposed revisions should be amended to revert to the provisions in clause 60 of Part C of the current access arrangement to simply state that haulage contract will specify the representations and warranties made by the user to the service provider and vice versa.
286 ATCO’s October Contract did not make the required amendment. In confirming its Draft Decision the ERA required that clause 17 be amended to revert back to more general provisions that state that the contract will specify the representations and warranties to be made by the user and service provider. The ERA Final Decision stated:
1354. The Authority considers that the detailed representations and warranties listed in clause 17 of the Template Haulage Contract go beyond the Authority's consideration of WAGN's compliance with the national gas objective. The Authority refers to rule 100 of the NGR which states that the provisions of an access arrangement must be consistent with the national gas objective. Authority considers that it is not in position to determine whether the representations and warranties contained in clause 17 promote efficient investment and operation in the WAGN GDS as the representations and warranties listed in clause 17 are promises made by contracting parties based on their commercial position at the time of entering into the Template Haulage Contract. The Authority cannot ensure that such representations and warranties are appropriate in every situation involving a user and service provider but rather considers such provisions to be dealt with by negotiation between the parties depending on their circumstances.
1355. The Authority notes Alinta's concern for the potential for WAGN to withhold gas distribution services if a default position is not determined in the access arrangement. The Authority considers that in the event that such a circumstance was to arise, a user or prospective user would be able to have the dispute determined by the WA arbitrator under the NGA .
1356. The Authority considers that under section 193 of the NGA, the WA arbitrator has a wide discretion over the matters in which it can arbitrate. Section 193 enables an access determination to deal with any matter relating to the provision of a pipeline service to a prospective user or user.
1357. Whilst the Authority must ensure the provisions of an access arrangement are consistent with the national gas objective as provided by rule 100, there is no guiding criterion for the WA arbitrator when making an access determination. Instead, section 684 of the NGA only provides that the arbitrator is to be guided by the national gas objective. The Authority consider [sic] that where the national gas objective has no bearing on the outcome of the access determination, the arbitrator is free to determine the dispute based on what is fair and reasonable in the circumstances. The Authority considers that if the arbitrator was to be limited in its access determination to the national gas objective, section 68A would have been expressed in the same was [sic] as rule 100.
1358. Finally, the Authority notes that approval of a Template Haulage Contract is a new concept for the WAGN GDS and also for regulation of gas distribution systems in Western Australia. As clause 60 of Part C of the current access arrangement only provided that the contract will specify the representations and warranties to be made by the user to the service provider and vice versa, the Authority does not consider that a parties [sic] rights and obligations are now more uncertain than what previously existed.
287 As ultimately approved by the ERA, the requirement that agreed user and service provider representations, if any, and agreed representations and warranties generally, if any, are to be inserted by the parties appears in clause 16 of the Approved Contract.
288 ATCO’s written submission contended that the ERA had misdirected itself in  of the Draft Decision – clause 60 of Part C of the 2005 access arrangement expressly identified particular representations and warranties that were terms of, or were required to be terms of, a haulage contract.
289 The ERA’s written submission relied on the terms of clause 60 of Part C of the 2005 access arrangement to rebut ATCO’s contention. That clause provided as follows:
(1) A Haulage Contract is to specify the representations and warranties made by the User to AGN in making the Application which gave rise to the Haulage Contract, and in entering into the Haulage Contract, including that the User has in full force and effect all authorisations, licences, permits, consents, certificates, authorities and approvals necessary under all Laws to receive and supply, Gas at Receipt Points and Delivery Points and to otherwise conduct operations in connection with the Haulage Contract.
(2) A Haulage Contract is to specify the representations and warranties made by AGN to the User in entering into the Haulage Contract.
(3) A Haulage Contract may provide for the representations and warranties referred to in Part C, clauses 60(1) and 60(2) to be repeated anew on each day of the Haulage Contract.
(4) The representation and warranty set out in Part A, clause 65 is a term of the Haulage Contract.
290 Having regard to the actual terms of the above-quoted clause, the ERA submitted that the clause required AGN and a user to negotiate and agree appropriate representations and warranties to be included in a haulage contract and did not prescribe the content of any such representation or warranty, other than by referring:
(a) in a general way to a warranty of legal entitlement to receive and supply gas and conduct operations in connection with the Haulage Contract; and
(b) to clause 65 of Part A, which is not relevant for present purposes.
291 ATCO’s written reply claimed that the ERA’s conclusion in  of the Draft Decision did not encompass the construction in the ERA’s written submission to the Tribunal and misstated the effect of the relevant clause in the 2005 access arrangement.
292 The Tribunal is, however, satisfied that the relevant clause in the 2005 access arrangement does encompass the interpretation placed on it by the ERA and lays a proper foundation for the conclusion reached by the ERA in  of the Draft Decision.
293 Clause 20.1: Notwithstanding the ERA's Draft Decision that clause 20.1 should be deleted, clause 20.1 of the October Contract would have required that all intellectual property provided by a party under the contract remain the property of the party and that all such property created under the contract would be owned by ATCO.
294 ATCO’s October Submission contended, amongst other things, that deletion of the clause would result in uncertainty of the effect of one party providing information to another.
295 In reaching its position in the Final Decision in relation to this clause, the ERA considered the competing interests of a service provider and a user in the context of the national gas objective and considered the clause for consistency with it. It maintained its position in the Draft Decision that intellectual property is a matter relating to the commercial arrangements between a service provider and a user and not a matter that goes to consistency with the national gas objective.
296 Observing that ATCO had not provided substantiated reasoning in its submissions that would support a change in the status quo in terms of the 2005 access arrangement, the ERA was not persuaded by ATCO’s submissions that the licensing system in Western Australia requires clauses in the Template Haulage Contract to regulate the intellectual property rights of a service provider and a user.
297 In deciding that clause 20.1 should be deleted from the Approved Contract, the Final Decision also observed that the AER had not seen it necessary to regulate in relation to intellectual property rights in a number of recently revised GDS access arrangements.
298 ATCO’s written submissions contended that relying on the status quo and the fact that intellectual property is not regulated in the terms and conditions of reference services in other pipelines do not justify excluding terms from the Approved Contract which are plainly relevant (and significant) to the provision of the reference services. ATCO also contended that the ERA had again drawn an irrelevant distinction. The supply of intellectual property is not regulated by the ERA, it submitted, but the services which are facilitated by the use of that intellectual property are, and the terms upon which those services are provided are the subject of the Template Haulage Contract.
299 The Tribunal understands from ATCO’s response to the ERA’s written submission that the reference to “an irrelevant distinction” is a reference to ATCO’s submissions in respect of Ground 6A. The Tribunal has, for reasons stated above, rejected ATCO’s submissions in those regards.
300 The Tribunal is also satisfied that the ERA’s observations that the 2005 access arrangement and reference to the position adopted by another regulator do not impugn its decision to delete the proposed clause 20.1 from the Approved Contract.
301 Clause 5.10(c)(ii) of the Approved Template Contract and clause 16.4 of ATCO’s October 2010 proposed contract: If approved, clause 16.4 of the proposed January Contract would have provided, in effect, that to the extent that ATCO is not liable to a user as a result of indirect damage, the user is to indemnify ATCO against indirect damage to any upstream person or downstream person. This differed from the position under the 2005 access arrangement in that the equivalent clause did not refer to an upstream person. The ERA considered the difference was a significant change, designed to enhance ATCO’s position and was not consistent with the national gas objective. It concluded that in order to be approved, the reference in clause 16.4 to upstream person would have to be deleted.
302 The October Contract included clause 16.4 in the same terms as the January Contract and included a new clause 5.10(c)(ii) which, if approved, would have provided that where a user elects to adopt a certain option, the user must indemnify ATCO against all claims from a downstream person or an upstream person.
303 In support of clause 16.4 and the new clause 5.10(c)(ii) ATCO’s October Submission contended that:
(a) it should be protected from a claim by an upstream person and that a finding to the contrary would be contrary to the national gas objective; and
(b) that the inclusion of an indemnity from upstream persons is reflective of, and appropriate for, the gas market in Western Australia where the owner of the GDS does not have a contractual relationship with the persons most likely to make a claim against it (i.e. both downstream and upstream).
304 In the Final Decision the ERA noted that ATCO’s submissions went no further than to state that there is equivalence between a downstream person and an upstream person for the purposes of a service provider's liability, without providing sufficient justification to support such a proposition. It saw justification for a user to indemnify ATCO for potential claims from downstream persons in the ability of a user to pass liability to consumers who would in turn take out the required insurances. This, it said, would have the effect of spreading liability to numerous consumers, rather than exposing the user to potential unlimited liability and provided justification for a user to indemnify the service provider for a potential claim from a downstream person.
305 The ERA did not, however, consider that ATCO had provided substantiated reasoning to support its proposal that a user's liability should increase with respect to the upstream person, and in particular ATCO had not identified the potential indirect damage claims that the upstream person would have against it that would support an extended operation of the clause. Nor had it provided evidence to show that a user would have the bargaining power with an upstream person to limit liability in such a way as to create the situation whereby the upstream person's only option would be to seek remedies against ATCO and not the user.
306 In this situation the ERA considered that it was required to balance the risk between the parties and to determine who should bear the insurance costs with respect to liability. It concluded that the national gas objective would require the status quo. That is, a service provider has always been liable to an upstream person and the applicant has not provided any evidence or referenced any recent case law to show that there has been a change in law which altered the understanding that the service provider should not be liable to an upstream person. The ERA maintained its position as set out in the Draft Decision that the reference in clause 16.4 to an upstream person should be deleted.
307 ATCO’s written submission contended that the ERA has made an arbitrary distinction in ATCO’s potential liability to third parties who contract with users – if it were not indemnified in respect of any third party claims, it may be liable to pay significant costs or damages and, as a result:
(a) its potential revenue may be significantly affected;
(b) its potential revenue may vary considerably from one year to another;
(c) it may become engaged in lengthy and costly disputes;
(d) it would not, in terms of s 24(2) of the NGL, have an opportunity to recover at least the efficient costs it incurs in providing reference services and complying with its regulatory obligations; and
(e) its return would not, in terms of s 24(5) of the NGL, be commensurate with the regulatory and commercial risks involved in providing the reference service.
308 On that basis, ATCO submitted that the ERA’s approach was inconsistent with ss 23 and 24 of the NGL.
309 Having regard to the reasons stated in the Final Decision and the ERA’s submission as outlined above, the Tribunal accepts that the ERA has not made an arbitrary distinction in ATCO’s potential liability to an upstream and downstream person. The Tribunal is also satisfied that the ERA has correctly applied the national gas objective in its assessment of clause 16.4 and was correct in its decision to include clause 5.10(c)(ii) in the Approved Contract.
310 Clause 8.3 of the October Template Haulage Contract: In its Draft Decision, the ERA considered that the inclusion of a series of specific clauses in Schedules 1 to 5 to the January Contract to the effect that that a user must provide unfettered access to the service provider was superfluous. It was, it said, superfluous because clause 8.3 of that contract provided that the user acknowledge that ATCO’s ability to provide a service is subject to the user ensuring that ATCO has unfettered access to the user’s land. The Draft Decision approved clause 8.3 but required that the specific clauses be deleted.
311 ATCO’s October Submission contended that clause 8.3 did not expressly grant unfettered access and absent the series of specific clauses there would be no express obligation on a user to provide access.
312 The approach adopted by the ERA in its Final Decision was, in the ERA’s view, “more practical”, namely, to express the obligation on the user as an obligation to use reasonable endeavours to secure in a timely manner the unfettered access. To that end, the ERA confirmed the deletion of the specific clauses and addressed its concerns in relation to unfettered access by inserting a new sub-clause 8.3(b). Under the new sub-clause a user acknowledges that it must use reasonable endeavours to provide or procure in a timely manner unfettered access to the relevant land or premises so that ATCO (its officers, agents, employees or contractors) can undertake the activities listed in the schedule to the haulage contract.
313 ATCO submitted to the Tribunal that as the amendment proposed in the Draft Decision simply involved deleting the series of specific clauses, it had no opportunity to make any submission on the ERA’s proposal in the Final Decision to insert a new sub-clause into clause 8.3. The Tribunal notes in this regard that rule 64(3) provides that the ERA may (but is not obliged to) consult. Access, ATCO submitted, is central to the provision of its service and the new sub-clause merely recites an acknowledgement of an obligation to use reasonable endeavours to provide access, and does not impose that obligation at all, or do so even in terms limited to using reasonable endeavours. It went on to submit that absent unfettered access to metering sites there is likely to be:
(a) delays in meter reading and maintaining metering assets;
(b) impacts on invoicing;
(c) requirements for multiple attendances at metering sites, at a cost borne by ATCO, such that:
(i) ATCO would not have an opportunity to recover at least the efficient costs it incurs in providing reference services and complying with regulatory obligations; and
(ii) ATCO’s return would not be commensurate with the regulatory and commercial risks involved in providing the reference service.
314 These results, it submitted, would be:
(a) detrimental to the efficient operation of the Gas Distribution Systems and to the long term interests of consumers; and
(b) inconsistent with ss 23 and 24 of the NGL.
315 The ERA’s written reply to ATCO’s submission contended that:
(a) on a plain reading the new clause 8.3(b) imposes an obligation on a user to use reasonable endeavours to provide or procure access to relevant land or premises; and
(b) the expression “the user acknowledges that it must use reasonable endeavours” is synonymous with the expression “the user must use reasonable endeavours.”
316 ATCO’s reply to the ERA's contention in [326(b)] submitted that if there is no substantive difference between the ERA and ATCO as to the meaning of clause 8.3(b), the wording which more directly reflects that meaning should be adopted.
317 The Tribunal accepts ATCO’s submission. If ATCO were in a dispute with a user involving clause 8.3(b) as drafted by the ERA, sans consultation with ATCO, it would by virtue of s189 of the NGL, become the default position. In those circumstances, the concession inherent in the ERA’s contention in [326(b)] that ATCO’s preferred wording is synonymous with the its wording satisfies the Tribunal that clause 8.3(b) should be expressed as preferred by ATCO.
318 Clause 10(c): Clause 10(c) was inserted in the Approved Contract by the ERA in response to ATCO’s proposal that in the event of a force majeure, a user would still be liable to pay haulage charges. Clause 10(c) provides, in effect, that to the extent that ATCO fails to provide a service and claims the benefit of a force majeure, the user is excused from the obligation to pay the reference tariff (including any standing charge or demand charge).
319 In its Final Decision the ERA observed that “The question is who should bear the risk and associated costs of a force majeure event having regard to the national gas objective.” It noted in this regard that what it described as the “current balance”, as set out in the 2005 access arrangement, had been in place for some considerable time and that ATCO and users had invested and insured against risks of force majeure events based on that balance. Any alteration to the current balance, such as proposed by ATCO, would require it to establish that it was inconsistent with the national gas objective, for example, because, ATCO could not obtain adequate insurance, or could not adequately fund self-insurance arrangements, and thus face an inefficient cost. The ERA noted, however, that ATCO had not advanced any evidence which would justify the disturbance of the status quo.
320 In relation to ATCO’s submission regarding the revenue and pricing principles, the ERA noted that those principles do not apply, as the terms and conditions on which a reference service will be provided, by definition, do not concern revenue or pricing.
321 On the material before it at the time of its Final Decision, the ERA considered that no case had been made that it would be inconsistent with the national gas objective if the provisions in the 2005 access arrangement were to continue. Accordingly, it inserted clause 10(c) in the Approved Contract.
322 ATCO’s written submission contended that the approach taken by the ERA was flawed. Where an event precludes the supply of a reference service (especially where that event is due to the inability of the user to take the services) someone will be at risk. There is, as ATCO put it, no a fortiori reason to adopt (as the ERA had done) the position that the risk is to fall on ATCO. Unless some other compensating adjustment is made to account for that risk (and, it submitted, none was made) to impose it on ATCO is inconsistent with ss 23 and 24 of the NGL. That is because as ATCO operates, it would be required to bear the costs associated with force majeure and would not be able to recover those costs, or at least some part of the costs, through the reference tariffs.
323 The ERA’s written contention was that ATCO’s submission disclosed no error in the exercise of the ERA’s discretion to insert clause l0(c). The inclusion of that clause was, it submitted, consistent with the 2005 access arrangements and ATCO had provided no evidence demonstrating that the pre-existing arrangements were inconsistent with the national gas objective; in particular, that it was unable to obtain adequate insurance (or adequately fund self-insurance arrangements) in respect of the risks covered by the definition of force majeure.
324 The Tribunal does not accept ATCO’s rebuttal that the 2005 access arrangement is not a relevant consideration under the NGL. The ERA’s assessment of ATCO’s January and October Contracts against the national gas objective is consistent with rule 100 and its reasons, outlined above, for maintaining the status quo are consistent with that objective.
Conclusion on Grounds 6A and 6B
325 Having regard to what is said in paragraphs - and - above, the Tribunal is satisfied that the following decisions by the ERA were the result of proper exercises of the ERA’s discretion:
(a) not to approve clauses 10.1, 10.2, 17 and 20.1 of ATCO’s proposed Template Haulage Contract;
(b) to remove from clauses 5.10(c)(ii) and 16.4 of ATCO’s proposed Template Haulage Contract references to “Upstream Persons” while retaining reference to “Downstream Persons”; and
(c) to include clause 10(c) in the Template Haulage Contract approved by the ERA.
326 It follows that, in terms of s 295(2) of the NGL, the Tribunal affirms the decisions reached by the ERA in so exercising its discretion.
327 Having regard to what is said in paragraphs - above, the Tribunal is satisfied that the decision by the ERA to include clause 8.3(b) in the Approved Contract was unreasonable in terms of s 246(1) of the NGL. It follows that, in terms of s 295(2) of the NGL, the Tribunal varies the decision by deleting from clause 8.3(b) of the Approved Contract the words: “the user acknowledges that it must use reasonable endeavours” and inserting in lieu thereof the words: “the user must use reasonable endeavours”.
328 The Tribunal has concluded that in certain respects there are grounds of review which have been made out. In a number of other respects the challenges to the ERA’s decision have not succeeded.
329 It has rejected the challenges identified in the grounds of review in relation to the rule 87 Construction Issue, the Market Risk Premium Issue, the CPI Issues, the Working Capital Issue, and to a large extent the Template Haulage Terms Issues.
330 The Tribunal has found that the ERA erred in relation to the Gamma Issue (a matter the ERA accepted in the course of its submissions), the Cost of Debt Issue, the Bridging Finance Issue, the Tariff Variation Mechanism Issue, and to a limited extent only, the Template Haulage Terms Issues.
331 In those circumstances, it is not of course appropriate simply to affirm the Access Arrangement Decision. The Tribunal considers that the preferable course in this instance is to exercise the power in s 259(2) of the NGL, having regard to the factors referred to in s 259(4), to set aside the Access Arrangement Decision for the purpose of remitting the matter back to the ERA to make the Access Arrangement Decision again only in the limited respects in which the Tribunal has found reviewable error. In that regard, the Tribunal notes the effect of s 259(5) of the NGL.
332 The remitter to the ERA will therefore, where appropriate, include certain directions from the Tribunal to reflect its reasons. In all respects but those concerning the Tariff Variation Mechanism Issue and the Template Haulage Terms Issues, the consequence is that the ERA will have to make detailed calculations to give effect to the changes which will be required by the Tribunal’s determination. The required reconsideration or further consideration relating to the Cost of Debt Issue will not necessarily lead to an alteration to the present outcome in the Access Arrangement Decision; that is a matter for the ERA. The directions given in relation to the Gamma Issue and the Bridging Finance Issue will necessarily require some changes to the terms of the access arrangement which the ERA prescribed in the Access Arrangement Decision. The Tribunal, of course, leaves it to the ERA as the particular changes to the terms of the access arrangement which flow from the present determination of the Tribunal.
333 In the light of these comments, the Tribunal determines that:
(a) the Access Arrangement Decision be set aside and be remitted to the ERA for the purposes of the ERA making the Access Arrangement Decision again, limited to giving effect to the reasons for decision of the Tribunal on the Gamma Issue, the Cost of Debt Issue, the Bridging Finance Issue, the Tariff Variation Mechanism Issue and the Template Haulage Terms Issues;
(b) the ERA, in making the Access Arrangement Decision again, do:
(i) determine the amount to be allowed for the cost of capital by using as the gamma input into the cost of capital comprising the element: value of imputation credits, the value 0.25;
(ii) reconsider the proper application of the bond yield approach, in deciding on the debt risk premium to allow, having regard to the Tribunal’s criticisms of the simple averaging process adopted by the ERA;
(iii) allow the amount claimed by ATCO for the costs of bridging finance as an operating expense;
(iv) (A) vary the reference tariff variation mechanism so as to reinstate Regulatory Capital Expenditure, as defined in clause 5 of Annexure B, conforming capital expenditure in clauses 2.2 and 3.1 of Annexure B to ATCO’s October 2010 Amended Access Arrangement; and
(B) consult with ATCO on any necessary consequential amendments; and
(C) in the event that the ERA and ATCO cannot agree on any necessary consequential amendments, each party may apply to the Tribunal for further directions, and
(v) vary clause 8.3(b) of the Approved Contract by deleting therefrom the words “the user acknowledges that it must use reasonable endeavours” and inserting instead the words “the user must use reasonable endeavours”.
I certify that the preceding three hundred and thirty-three (333) numbered paragraphs are a true copy of the Reasons for Decision herein of Justice Mansfield (President), Mr R Davey & Professor D Round (Members).