Federal Court decision on NSW/ACT electricity appeals

May 2017

The Full Federal Court has handed down its decision on the application brought by the Australian Energy Regulator for judicial review of the Australian Competition Tribunal’s review of the AER’s allowed revenue determinations in respect of Ausgrid, Endeavour Energy, Essential Energy and ActewAGL. The court rejected the AER’s appeal in respect of the operating costs and return on debt elements, but upheld its appeal in relation to the Tribunal’s finding on the value of imputation credits.

Operating expenditure – Tribunal decision upheld

The court found that the Tribunal did not err in reaching a conclusion that the data relied upon by the AER for its economic benchmarking was not suitable for the purpose of determining operating expenditure and that there were limitations with the use of overseas data. It also did not accept the AER’s contention that the Tribunal’s directions left the AER with a lack of certainty on how to proceed – finding that a ‘bottom-up’ approach to setting operating expenditure could be justified both in law and by evidence.

A clear implication of the court’s decision is that the AER will need to reduce its reliance on benchmarking in a re-made decision as well as in future decisions, at least until the quality of its data improves. Given that the business’ actual operating expenditures have declined significantly since the AER’s original 2015 decision and their ‘revealed costs’ at the time, the means by which the AER re-makes its decision for the current period will also have important implications for its consideration of operating expenditures in subsequent regulatory periods. The decision that the AER makes on whether to re-instate the efficiency benefits sharing scheme for the current period (which it had set aside for some entities, on the basis of its benchmarking results) will be critical to these future arrangements.

Return on debt – Tribunal decision upheld and further guidance given

 The court stated that the benchmark efficient entity cannot be characterised as either regulated or unregulated, and so the Tribunal did not err in stating that it was not a regulated entity. Further, the court ruled that the Tribunal did not err in finding that the AER’s approach to the transition to a different method for determining the return on debt allowance was unreasonable.

Significantly, the court noted that that the NSW businesses already raised debt with effect similar to that of a trailing average, and that adoption of the trailing average would therefore impose no impacts on the service provider of the type that the AER needed to consider under the NER. The court stated that:

[572] Given that there were no such impacts, there was no need for the AER to take a step which, in the circumstances, r 6.5.2(k)(4) did not require for those service providers, namely a transition to the trailing approach of estimating the return on debt by adopting a mechanism to unwind hedging contracts…

These directions point strongly towards the immediate adoption of the trailing average for the NSW businesses and ActewAGL. However, it remains unclear exactly how they may be reflected in a re-made decision by the AER.

Value of imputation credits (gamma) – AER application for review successful

 The court upheld the AER’s contention that the Tribunal erred in its construction of the expression ‘the value of imputation credits’, which led the Tribunal to reject the AER’s preferred estimation methods. The court stated that:

[752] …it was not therefore a reviewable error for the AER to prefer one theoretical approach to considering the determination of gamma over another. This means that it is not an error of construction for the AER to focus on utilisation rather than on implied market value.

 The court’s observations and decision affirm the AER’s approach to placing substantial weight on the ‘equity ownership’ and ‘tax statistics’ approaches to estimating the value of distributed imputation credits. 

Where to from here?

It is now over two years since the AER made its decision on allowed revenues for these network services providers, while the charging period covered by the decision extends back to 2014. Notwithstanding the lengthy process to date, it will most likely take many months or longer for the guidance provided by the court to be turned into adjusted revenue allowances, and to be reflected in network charges. In the meantime, the AER has a 60 day window in which to decide whether any aspects of the full court decision warrant an application for special leave and so review by the High Court.  

Posted on May 25, 2017 and filed under Announcements.