Allens

Energy

Focus: Changes to merits review regime recommended

18 October 2012

In brief: The expert panel reviewing the merits review regime for electricity and gas regulatory decisions has recommended major changes that will, if implemented, have significant implications for regulated businesses. Partner Paul Kenny (view CV) and Lawyer Ben Strate report.

How does it affect you?

  • The most important recommendations of the independent expert panel (the Panel) appointed to review the limited merits review regime are:
    • that the review body be given the discretion to examine the overall merits of any decision under review, with the aim of finding a 'materially preferable' decision – to address concerns that the current regime is biased in favour of applicants who 'cherry pick' parts of a decision for review; and
    • that 'adversarial' reviews be abandoned in favour of an 'investigative' process better suited to the issues a merits review deals with – this is expected to increase consumer participation.
  • The Panel noted that Australia's energy regulatory system was designed for privately owned, not publicly owned, firms. The Panel does not recommend any specific action to address this, but highlights the options of privatising NSPs, or adapting the regulatory system so that different approaches apply to publicly owned and privately owned NSPs.
  • Submissions on the Panel's recommendations can be made to the SCER Secretariat by 26 October 2012.

Background

In 2008, a limited merits review regime was introduced into both the National Electricity Law (NEL) and the National Gas Law (NGL).1 The regime allows parties affected by certain decisions (including pricing determinations) to have those decisions reviewed by the Australian Competition Tribunal (ACT). Limits were placed on this review mechanism, with the aim of minimising uncertainty and avoiding duplication of decisions made after extensive consultation.

On 22 March 2012, the Standing Council on Energy Resources (the SCER) appointed an independent expert panel to review the regime in two stages:

  • assessment of the regime's performance (Stage One); and
  • a report on whether any changes to the regime were needed (Stage Two).

The NEL and NGL provide for review of the merits review regime within seven years after their commencement.2 However, the SCER agreed that this review should be brought forward, in light of 'increasing concerns' about the scheme's operation. The SCER specifically sought recommendations about any amendments necessary to ensure that the review process balanced the interests of network operators and consumers.3

The Panel's Stage One report, provided to the SCER on 29 June 2012, concluded that the regime was not working as intended. In particular, it found that:

  • the scope of reviews tended to be unduly narrow – the merits of decisions as to overall allowable revenues/prices were never specifically assessed; and
  • not enough attention was being given to the long-term interests of consumers, as required by the National Electricity Objective (NEO) and National Gas Objective (NGO).4

The Panel's Stage Two report (the Report) was publicly released on 9 October 2012. The key recommendations made in that report are discussed below.

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An overall assessment of the merits

As noted above, the current scope of the ACT's review is limited. Ray Finkelstein QC, a former President of the ACT, stated in his submission to the review that:

On a review the ACT will only reconsider the AER decision to the extent necessary to address the grounds of review... The AER cannot raise new grounds.5

The Panel found that, under the current regime, the focus tends to be on correction of discrete errors, in matters that form only part of the overall picture. Interested parties choose their grounds of appeal, and this frames the scope of the review. In the Report, the Panel stated that, in order to be effective, a merits review must be capable of assessing the overall merits of a decision, and the review body must have the discretion to examine any aspect of the decision that would assist it in this task.6

The Panel recommends replacing the existing grounds for review (errors of fact, incorrect exercise of discretion, and unreasonableness)7 with a single, broad ground of review, namely:

... that there are reasons for believing a relevant decision may be defective in that a materially preferable decision may exist, and hence the primary regulator's decision does not promote efficiency [in ways that best serve]8 the long term interests of consumers...

The Panel does not specify what would be considered 'material', but recommends that the reviewing body be left to determine a proportionate threshold in the context of each case.

The Panel stresses that the review body should not undertake a review from the beginning as if no previous decision had been made (ie it should not be a 'de novo' review). Instead, it recommends an 'auditing' approach, where the reviewing body starts with the original decision maker's work and investigates on an incremental basis, but is not constrained as to where to direct its attention. Still, the Panel recognises that assessment of the central merits of a decision may take more time than is currently allowed, and recommends that the outer time limit for appeals be extended to six months for revenue/price determinations (with the possibility of extension in certain circumstances).9

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Investigative, not adversarial

The Panel recommends that the current 'adversarial' process be replaced with a more 'investigative'-style review. The reasoning behind this is that price/revenue control decisions are not binary, and are therefore poorly suited to an approach where the reviewer chooses between opposing positions argued by the parties. An investigative approach better reflects the reality that in making price determinations, a regulator chooses from an infinite range of possibilities.

Under the Panel's proposal, the review body would adopt the primary decision maker's record as a starting point, supplement that record with its own investigations, and invite all interested parties to give their views before assessing whether a materially preferable decision is available. Applications for review would be open to regulated network businesses, energy ministers, consumer/user representatives, and other parties with a sufficiently material interest in the decision.

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A new, fully administrative review body

The Panel recommends that the ACT's review powers be transferred to a new body (referred to as the 'Australian Energy Appeals Authority' (AEAA)) which is 'more administrative, and less court-like'.10 The Panel's recommendations regarding the AEAA include:

  • that it should be an independent body, but (mainly for reasons of cost and staff recruitment) it should be 'attached' to an existing administrative organisation (preferably the Australian Energy Market Commission);
  • that a standing panel of potential reviewers should be appointed, out of whom five would be chosen to review individual cases; and
  • that its overhead costs should be shared among network service providers in proportion to their annual revenues, and 50 per cent of those costs should be recoverable through revenue determinations.

Under the Panel's proposal, parties involved in an AEAA review would bear their own private costs. The Panel proposes that, regardless of whether a new body such as the AEAA is established, the same body should handle all reviews of AER decisions, and consideration should be given to whether relevant decisions of the National Competition Council and state ministers (eg pipeline coverage decisions) should be subject to the same review process.

The Panel also recommends revisiting the question of whether the AER should be independent from the ACCC and clarifying the role of the AER in the review process.

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Other recommendations

The Report also includes a number of the Panel's wider observations on the regulatory regime.

Of note is the Panel's observation that Australia's energy regulatory system was designed for privately owned, not publicly owned, firms. The Panel does not recommend any specific action to address this, but highlights two options: governments could consider privatising NSPs to sharpen incentives, or they could adapt the regulatory system so that distinct regulatory approaches apply to publicly and privately owned NSPs.

The Panel recommends that the AEMC be required to review the NER and NGR to better harmonise those rules with the NEO and NGO and the Panel's proposals. This is so particularly in relation to the prevailing 'bottom up' interpretation of the pricing/revenue determination process, which the Panel considers inconsistent with best practice.

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Next steps

The Panel's recommendations form part of a package of energy reforms being progressed for consideration by the Council of Australian Governments in December 2012.11

Submissions on the Report should be sent to the SCER Secretariat by 26 October 2012.

Footnotes
  1. See NEL Part 6, Division 3A and NGL Chapter 8, Part 5. The two regimes are structurally similar.
  2. See NEL, s71Z ; NGL, s270(1).
  3. See SCER Meeting Communiqué, 9 December 2011, p2; 'Review of the limited merits review regime in the National Electricity Law and National Gas Law – Terms of Reference', p2.
  4. The NEO is set out in section 7 of the NEL:
    The objective of [the NEL] is to promote efficient investment in, and efficient operation and use of, electricity services for the long term interests of consumers of electricity with respect to–
    (a) price, quality, safety, reliability and security of supply of electricity; and
    (b) the reliability, safety and security of the national electricity system.
    The NGO is set out in similar terms in section 23 of the NGL.
  5. Report, p33.
  6. The Panel states at pages 28-29 of the Report:
    ...a primary regulator can, in a particular factual context, usually satisfy a given set of rules and principles in myriad different ways, not all of which lead to closely similar outcomes in terms of the final, aggregate revenue determination... If, therefore, the purpose of merits review is to help find the most preferable of these myriad, possible decisions, it must be capable of addressing the overall revenue/price determination itself, and the use of the discretion that has led to the actual decision made.
  7. See NEL, s71C; NGL, s246.
  8. The Panel recommends that the current wording of the NEO and NGO, which require efficient investment and operation 'for the long term interests of consumers', be clarified by replacing the word 'for' with the phrase 'in ways that best serve': see Report, p38.
  9. Currently, the ACT must use its best endeavours to make a determination in respect of a merits review application within three months after granting leave (with the possibility of extension where it is unable to make a determination within that time): NEL, s71Q; NGL, s260.
  10. Report, p72. A detailed proposal for possible organisational and administrative arrangements of the AEAA is set out in Annex 3 to the Report.
  11. Media release, Minister for Resources and Energy, 'Limited Merits Review Recommendations Released' (9 October 2012).

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