review of the limited merits review regime · the focus of merits review on seeking a "correct...

Final Submission_v20161003

Review of the Limited Merits Review Regime

Submission in Response to COAG Energy Council Consultation Paper dated 6 September 2016

DUET Group

Dampier Bunbury Pipeline

United Energy

Multinet Gas

Date: 3 October 2016

Final Submission_v20161003

Contents

1. The DUET Group and its Asset Companies ....................................................... 3

2. Summary ................................................................................................................ 5

2.1 The objectives of Limited Merits Review ............................................... 5 2.2 Removal of LMR and reliance solely on judicial review is not in the

interests of consumers .......................................................................... 6 2.3 The circumstances in telecommunications do not warrant removal of

LMR under the NGL and NEL ............................................................... 6 2.4 Judicial Review is not the same as the current LMR regime ................ 6 2.5 Scope for amendments the current LMR regime .................................. 7 2.6 Changes to LMR regime should not be considered in isolation ............ 7 2.7 The LMR regime for other reviewable regulatory decisions should

remain unchanged ................................................................................. 8 2.8 Lessons from abroad ............................................................................. 8

3. Review Scope ........................................................................................................ 9

3.1 Policy objectives .................................................................................... 9 3.2 Why we have merits review -- the place and role of the Tribunal in

administrative review ........................................................................... 10 3.3 The conceptual difference between merits and judicial review ........... 11 3.4 The misconception - expansion of judicial review and overlap with

merits review? ...................................................................................... 13 3.5 Reducing timeframes for determining appeals - is judicial review the

answer? ............................................................................................... 14

4. Assessing the performance of the LMR ........................................................... 16

4.1 The amenability of regulator decisions to merits review...................... 16 4.2 The telecommunications sector does not provide a like for like

comparison with the energy sector ...................................................... 19 4.3 Addressing common issues ................................................................. 20 4.4 Materially preferable outcome ............................................................. 21 4.5 Are reviews a routine part of the regulatory process? ......................... 22 4.6 Long term interests of consumers ....................................................... 25 4.7 Consumer participation in judicial review proceedings........................ 26 4.8 Ongoing reform of the underlying regulatory framework and its

uncertainties has driven many of the merits reviews ........................... 28 4.9 Process issues which have caused problems ..................................... 28

5. Options ................................................................................................................. 33

5.1 Retain with some amendments ........................................................... 33 5.2 Amendments to process of primary decision maker ........................... 33

6. Questions posed in Consultation Paper .......................................................... 35

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Final Submission_v20161003 Page 3 of 49

1. The DUET Group and its Asset Companies

This submission is a joint submission made by the DUET Group and its operating companies, Dampier Bunbury Pipeline, United Energy Distribution and Multinet Gas1.

DUET is an ASX-listed owner of energy utility assets in Australia. Its investment objectives are to:

(a) own and operate energy utility assets in OECD countries with strong competitive positions which offer predictable cash flows;

(b) accumulate a portfolio of energy utility assets diversified by geography, operator, energy source and regulatory regime;

(c) seek to acquire significant shareholdings in those assets so as to provide DUET with a level of influence over the key strategic, operating and commercial decisions affecting its investments; and

(d) seek to achieve these investment objectives by targeting energy utility businesses which:

(i) have established historical or contracted volume levels;

(ii) are governed by regulatory regimes or have long term supply agreements; and

(iii) are operated by capable operators able to manage risks and improve operating efficiencies.

In pursuit of these objectives, DUET's existing diversified portfolio of assets comprises:

(a) 66% interest in United Energy (UE), one of five electricity distribution networks in Victoria. UE’s electricity distribution network covers 1,472 km2 of south-east Melbourne and the Mornington Peninsula. The regulated distribution network transports electricity from the high voltage transmission network to residential, commercial and industrial electricity users. UE’s distribution area is largely urban and, although geographically small (about 1% of Victoria's land), serves around 25% of Victoria's population. As at 1 September 2016, UE maintained a stable investment grade credit rating of BBB (S&P);

(b) 100% interest in Multinet Gas (MG), one of three Victorian gas distribution networks. MG’s regulated network covers 1,860 km2 of the eastern and south-eastern suburbs of Melbourne, the Yarra Ranges and South Gippsland. The network includes 9,866km of distribution mains and 164km of high pressure transmission pipelines and facilitates the safe delivery of gas to 692,000 consumers. As at 1 September 2016, MG maintained a stable investment grade credit rating of BBB (S&P);

(c) 100% interest in Dampier Bunbury Pipeline (DBP), the owner of Australia’s largest natural gas transmission pipeline, the Dampier to Bunbury Natural Gas Pipeline, located in Western Australia and one of only six covered gas transmission pipelines in Australia. It is the only pipeline connecting the natural gas reserves of the Carnarvon and Browse basins on Western Australia’s North West with industrial, commercial and residential customers in Perth and the surrounding regions. As at 1 September 2016, DBP maintained a stable investment grade credit rating of BBB (S&P);

(d) 100% interest in the DBP Development Group (DDG), builder, owner and operator of new pipelines and laterals. In 2011, DUET created DDG to leverage the world-class pipeline engineering and operating skills of DBP’s management team to provide opportunities to deploy capital in accretive opportunities that would see DDG build, own and/or operate new pipelines and laterals and related gas infrastructure. The gas transportation requirements in Western Australia have undergone significant change in recent years with a number of new domestic gas production facilities having come on line in the north west of the state and resource

1 In preparing this submission, the DUET Group has had legal input from Clayton Utz

LMR Submission


projects in the Pilbara looking to switch from diesel to lower cost natural gas for their energy needs;

(e) 100% interest in Energy Developments Limited, an international provider of safe, clean, low greenhouse gas emissions energy and remote energy solutions located in Australia, Europe and the United States.

For the financial year ending 30 June 20162:

(a) the value of DUET’s total assets was $11.1 billion;

(b) DUET’s market capitalisation was $6.1 billion; and

(c) those of DUET’s businesses which involve assets regulated under the National Electricity Law (NEL) and the National Gas Law (NGL) contributed 71% towards DUET’s EBITDA3, as shown in the following diagram:

Three out of DUET’s five operating companies own and operate energy infrastructure regulated under the NGL or the NEL. DUET has been involved in the ownership of these assets since 2004. DUET and its operating companies are therefore well credentialed to make submissions in relation to its experiences with the operation and application of the NGL and NEL.

2 2016 DUET Annual Report, dated 26 September 2016 - http://www.duet.net.au/getattachment/ASX-releases/2016/DUET-

Group-2016-Annual-Report/1-asx-2016-09-26-DUET-Group-2016-annual-report/1-asx-2016-09-26-DUET-Group-2016-annual-report.PDF.aspx.

3 DUET Group 2016 Results Presentation, p29, 19 August 2016 - http://www.duet.net.au/getattachment/ASX-

releases/2016/FY2016-Full-Year-Results-Announcements/FY2016-Results-Presentation/FY2016-Results-Presentation.pdf.aspx

http://www.duet.net.au/getattachment/ASX-releases/2016/DUET-Group-2016-Annual-Report/1-asx-2016-09-26-DUET-Group-2016-annual-report/1-asx-2016-09-26-DUET-Group-2016-annual-report.PDF.aspx



http://www.duet.net.au/getattachment/ASX-releases/2016/FY2016-Full-Year-Results-Announcements/FY2016-Results-Presentation/FY2016-Results-Presentation.pdf.aspx

http://www.duet.net.au/getattachment/ASX-releases/2016/FY2016-Full-Year-Results-Announcements/FY2016-Results-Presentation/FY2016-Results-Presentation.pdf.aspx

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2. Executive Summary

2.1 The objectives of Limited Merits Review (LMR) better align with NEO/NGO

The focus of merits review on seeking a "correct and preferable" decision is aligned with the NEO and NGO of ensuring that the long term interests of consumers is met. The raison d'etre of merits review is to provide administrative justice. Unlike merits review, judicial review is not concerned with policy and preferable decision making but legality alone. Such a regime will not advance the policy objects sought to be achieved in the Energy Council’s Statement of Policy Intent or the NEO and NGO.

The LMR regime in each of the NEL and NGL is a significant and valuable review mechanism, in that it:

(a) maintains appropriate investment incentives that are in the long term interests of consumers;

(b) ensures investor certainty and stability. This is facilitated by the NEL and NGL’s:

(i) clear, transparent and stable regulatory objectives and rules;

(ii) role in separating the "rule maker", the AEMC, from the regulator;

(iii) role in ensuring the independence of the AEMC and the regulator from Government; and

(iv) ability to deliver an appropriate risk-adjusted return on capital.

(c) has, despite only being operational for three years, already achieved its objectives in that decisions of the Tribunal have been directed towards a full assessment of the long-term interest of consumers and an awareness and implementation of the Energy Council’s Statement of Policy Intent. It is significant that, as further outlined in Appendix 1, the policy objectives are only relevant within merits review context and will have no operative legal effect or significance in a judicial review setting.

The vindication of rights through a statutorily mandated review process is no vice. The LMR was regime was never intended to stop all challenges against first instance decisions. It was not the intention of the Parliament(s) and the laws they enacted in 2013 that the merits review mechanism be stale and unused.

Given the timeframes of decision making, it is too early to consider making fundamental changes to the LMR regime. Indeed, since the LMR regime was reformed in 2013, not one pricing decision under both the NGL and NEL has completed its process, and only three access arrangement decisions under the NGL have been the subject of reviews by the Tribunal.

The 2013 reforms introduced important changes to the LMR regime and those should be allowed to work through until at least the next round of pricing re-sets have been completed before any amendments are made. This is particularly the case where, as noted in page 5 of the Consultation Paper, and as elsewhere discussed in this submission, the AER instituted judicial review proceedings in the Federal Court of Australia regarding various decisions made by the Tribunal in the context of the current round of regulatory determinations and reviewed under the current LMR regime (AER's JR Application). We note that the AER's JR Application is not expected to be finalised by the Federal Court until, at the earliest, the end of the first quarter 2017 (see below at section 3.5).

It is submitted that there should be a consideration of the necessary legislative refinements under Option 2 of the Consultation Paper, namely that the right of regulated entities and consumers to seek merits review with the Tribunal be retained, but with legislative amendments as necessary to better achieve the policy intent of the 2006 and 2013 policy reforms. Ideally the details of those changes should be undertaken after the Federal Court decision in the AER's JR Application has been delivered. Whichever way the decision falls, the decision will undoubtedly enrich the debate about the necessary legislative amendments. For example, if AER's JR Application succeeds, interested

LMR Submission


parties will be able to analyse and comment specifically on the process failures of the Tribunal and some changes which may currently be thought necessary, will no longer be necessary.

2.2 Removal of LMR and reliance solely on judicial review is not in the interests of consumers

Removing the current LMR regime and substituting it with a judicial review framework is not in the long term interests of consumers for a number of reasons, including that:

(a) it risks undermining investment incentives because of the substantive change it would represent to the current framework;

(b) the scope of matters for review is likely to be very broad under judicial review, as demonstrated by the grounds pleaded by the AER's JR Application;

(c) abolition of the LMR regime is likely to entrench legal formalism;

(d) there will no longer be a requirement for the review body to undertake an overall assessment of the long term interests of consumers, as is the case under the current LMR regime;

(e) consumers will have less certainty of having standing in any judicial review application compared with the current LMR regime;

(f) there will be greater uncertainty about the prices paid by consumers for use of the regulated networks under a judicial review regime, particularly if any judicial review application is successful; and

(g) the specialist knowledge bound up in the kind of determinations that the AER makes (and the Tribunal reviews), together with the regulator's and reviewer's capacity to engage with consumers (through, for example, the community consultation forums that the Tribunal undertakes under the current LMR regime) would be at risk if there were a move to a judicial review regime.

If judicial review were the only review available, a single judge would effectively become substituted for the Tribunal, which would increase formality and legalism, and hamper the potential for consumer consultation. In other words, judicial review exacerbates and entrenches the very things which are currently complained about, and sole reliance upon it would lead to more protracted review processes and cherry picking than may be seen under the current LMR regime.

2.3 The circumstances in telecommunications do not warrant removal of the LMR regime under the NGL and NEL

The circumstances and challenges experienced by the telecommunications sector in Australia prior to the removal of its merits review mechanism are not analogous to the energy sector. The merits review mechanism in telecommunications operated in such a manner that there can be no comparison between the number of review applications in the two industries. In a period of approximately two years there were over 150 telecommunications access disputes notified.

Not only are there factual distinctions, but the nature of the industries does not make for a clean comparison as Telstra itself noted in submissions to Senate inquiries.4. Rapid technological change and the introduction of the national broadband network are two of the key reasons which make a comparison between the telecommunications industry in Australia and the energy industry of limited value.

2.4 Judicial Review is not the same as the current LMR regime

The assumption that seemingly underlies the Consultation Paper, namely that, judicial review and merits review are similar in function, process and remedy is misconceived. To the extent that the Consultation Paper suggests that recent case law has expanded the scope of the grounds of judicial review such that it now permits quasi-merits review by Courts, it is incorrect. The High Court decision

4 see section 4.2

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in Li did not bridge the divide between merits and judicial review. Quite the opposite, the High Court re-affirmed that division. The significant differences between judicial and merits review, as explored in this submission, highlight the appropriateness of the LMR regime to regulation of the energy sector. Were the LMR regime to be removed, there would be no reduction in review process steps, given that Tribunal matters invariably go directly to the Full Court of the Federal Court on review.

Moreover, there is a possibility that there would be increased review process steps under judicial review. If error were to be found in judicial review, it would likely require the AER to start its process all over again. In the case of the NEL, this would mean the repeat of an already lengthy 31 month process by the AER.

2.5 Scope for amendments the current LMR regime

There is scope for improvements to the current LMR regime in a way that does not undermine investor confidence but does address some perceived weaknesses.

DUET and its operating companies have worked with both the Energy Networks Association (ENA) and the Australian Gas & Pipelines Association (APGA) on proposed amendments to the LMR regime. Those proposed amendments are endorsed. In addition, we suggest the following proposals:

(a) requiring an expert to inquire into, investigate and report with respect to any matter relevant to any review application (which report must then be provided to the parties as a matter of procedural fairness);

(b) combining the reviews of two or more applicants where common issues arise;

(c) unless there are, in the opinion of the Tribunal, exceptional circumstances and the consent of the applicant to an enlargement of time is obtained, an application which is not determined within 180 days is taken to result in the decision under review being affirmed;

(d) there should be a detailed consideration of implementing those recommendations made by the Expert Panel in 2012 that were not adopted by the then Energy Council in 2013 when the current LMR regime was implemented. This is warranted given that the reform objectives that the Expert Panel was working towards in 2012 are the same reform objectives that the SCO is presently tasked with achieving;

(e) better engagement and use of the community consultation process such as requiring the Tribunal to prepare a report on key takeaways from consumer consultation;

(f) the appointment of persons with specific consumer expertise as lay members of the Tribunal; and

(g) an enhancement of procedures to allow collaborative expert exchanges, allowing the Tribunal to engage directly with and question qualified experts, and increasing the use of statements of agreed facts to focus on the relevant issues in dispute.

2.6 Changes to LMR regime should not be considered in isolation

It is important to consider the appropriateness of all other aspects of the NGL and NEL, including but not limited to the original decision making process. This is particularly important in the current circumstances given the Energy Council’s announcement on 19 August 2016 to commence in excess of 17 reviews by a variety of review bodies relating to various aspects of the NEL and NGL. Each of these regimes is made up of a variety of inter-related parts. Change in one part of the NEL and NGL will therefore have an impact on the remaining parts of each law. As an example, in the case of the NGL, reviews have been announced into the coverage regime and the pricing and revenue regime. These parts of the NGL are directly related to the LMR regime of the NGL. Furthermore, each of these reviews is being undertaken by different bodies. It is even more important therefore that the inter-relationship between changes recommended by each review body are properly considered before any changes are implemented.

LMR Submission


Even if the above ambitious review program were not on foot, refinements to the LMR regime alone will not deliver effective reforms without also making refinements to the original decision making processes under the NGL and NEL. Accordingly, refinements to that original decision making regime need to be considered in parallel to changes to the LMR regime. In particular, consideration should be given to changes to the following aspects of the original decision making processes in the NEL and NGL:

(a) timeliness of the original decision making process. The present open ended timeline that a regulator has to make its decision should be modified to a set timetable that can only be extended in exceptional circumstances; and

(b) requiring service providers and the regulator to outline more clearly (in their pricing proposals and decisions) how the NGO/NEO is achieved. This could be achieved by specifying clear criteria to achieve the NGO/NEO or requiring stakeholders to demonstrate how the revenue and pricing principles are being addressed under the proposal or decision (as the case may be).

2.7 The LMR regime for non pricing reviewable regulatory decisions should remain unchanged

The proposed refinements to the LMR regime outlined in this submission should only be made to the network revenue or pricing determinations, and access arrangement decisions under the NEL/NGL. The existing LMR regime should be left as is in relation to other reviewable regulatory decisions such as Ministerial coverage/revocation decisions, decisions of the National Competition Council in relation to making or revoking light regulation determinations, and AER ring fencing determinations. There is no evidence nor is there a perception that the current LMR regime is not working in relation to reviews of these types of decisions.

2.8 Lessons from abroad

We have sought the expert opinion of Richard Feasey5 who has extensive international experience in utility regulation, particularly in telecommunications, to opine on issues raised in the Consultation Paper to see if the overseas experience - especially in the United Kingdom and Europe - has relevance to Australia . That opinion forms Appendix IV to this submission.

Key matters raised by Mr Feasey include:

(a) identification of the critical role that review bodies play in the regulation of utility sectors of both the British and Australian economies;

(b) the fact that a new review regime needs to be given sufficient time to mature (at least 5 years) before a balanced judgement about its performance can be made;

(c) the importance of distinguishing between the formal standards of review (full merits, limited merits, judicial review) and the procedures adopted by the reviewing body in applying them. Proposals to change the standard of review often reflect concerns which more properly relate to, and would be much better addressed by revisiting, the procedures and practices applied by the reviewing body itself. Part of the problem is that Government may find it easier to change the standard of review through the statute than to attempt to influence how a judicial body conducts itself. But this is not a good reason for favouring one over the other.

(d) The need for a reviewing body such as the Tribunal to recognise, and be seen to be responsive to, the concerns of external stakeholders, including politicians and consumer groups. This is often difficult territory for such a body to enter, but it is essential that it does so.

5 Among other things, Mr Feasey is a senior international adviser to Wiley Rein, a Washington DC law firm specialising in

telecoms and ICT, an Associate of Frontier Economics, London, an advisory board member of Gigaclear plc. and lecturer at University College London, and Kings College, London,

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3. Review Scope

3.1 Policy objectives

In the SCER Regulation Impact Statement, the then SCER indicated that a review of the Tribunal’s performance under the reformed LMR regime would be undertaken and commence not later than the end of 2016. The purpose of that review would be to establish whether future additional amendments to the structure of the Tribunal or the establishment of a new review body to ensure delivery of the policy intent is warranted.6

The policy intent to which SCER was referring was that set out in the SCER Statement of Policy Intent.

Reduced to its core, the policy intent sought to be realised through the LMR regime is:

(a) making the long-term interests of consumers (with respect to price, quality, safety, reliability and security of supply) paramount in interpreting the NEO and the NGO;

(b) placing the onus on an appellant to make a prima facie case that a review will lead to a materially preferable outcome for consumers in terms of the NEO or NGO;

(c) promoting efficient investment, operation, and use of energy infrastructure in ways that best serve the long-term interests of consumers;

(d) achieving the most preferable decision having regard only to the long-term interests of consumers; and

(e) being transparent around how the review and decision making processes have taken into account the long term interests of consumers.

We consider that the policy intent and gas and electricity objectives are best achieved by: maintaining the current position with some enhancements to streamline processes and address issues which have arisen.

We would also support a whole of industry approach to the determination of the weighted average cost of capital (WACC) and restricting merits reviews of rate of return matters to that determination process (as opposed to for each individual business’ revenue determination or access arrangement determination).

Abolishing the LMR regime would be a retrograde step, one that will negate rather than enhance the attainment of the policy intent and objectives.

The reasons to support our view are set out in tabular form in Appendix I of this submission, wherein the objectives of the Review Framework for the Electricity and Gas Regulatory Decision-Making are analysed and an assessment is made of how and why the current LMR regime has a positive tendency towards supporting the stated objectives. The analysis also outlines what the position would be if the LMR regime was to be abolished, and replaced with a judicial review regime.

The conclusion properly drawn from Appendix I is that, at many levels, the LMR regime serves a function which is different in form, scope and purpose to the alterative, judicial review. That division of functions is not theoretical and ill-defined. Its origins are well rooted in the law and the Australian Constitution and it is upheld rigidly in practice.7 Indeed, that strict divide between policy objectives and outcomes and the law was discussed in a cautionary comment by Lord Diplock in Council of Civil Service Unions v Minister for the Civil Service:8

6 SCER, Regulation Impact Statement Decision Paper: Limited Merits Review of Decision-Making in the Gas and Electricity

Frameworks, 6 June 2013, pp iv (Executive Summary) and 5 (Regulation Impact Statement Decision Paper) 7 The Hon R. Finkelstein, Crossing the Intersection: How Courts are Navigating the 'Public' and 'Private' in Judicial Review (2006)

AIAL Forum No. 48, p 1 8 [1985] AC 374 at 411

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"[Executive] decisions will generally involve the application of government policy. The reasons for the decision-maker taking one course rather than another do not normally involve questions to which, if disputed, the judicial process is adapted to provide the right answer, by which I mean that the kind of evidence that is admissible under judicial procedures and the way in which it has to be adduced tend to exclude from the attention of the court competing policy considerations which, if the executive discretion is to be wisely exercised, need to be weighed against one another — a balancing exercise which judges by their upbringing and experience are ill-qualified to perform." (emphasis added).

Courts do not do what tribunals do. They are not concerned with the merits of case and the attainment of policy objectives. Policy setting and attainment is not the domain of Courts who are entrusted to exercise the judicial power of Commonwealth. The Courts' concern is to declare rights and ensure that the decision under review was made within the legal bounds prescribed by the relevant statute. That bifurcation of functions, and the distinct advantages enjoyed by any merits review body, including the Tribunal, are explored in further detail below.

3.2 Why we have merits review -- the place and role of the Tribunal in administrative review

LMR of a "reviewable regulatory decision"9 was first introduced into the NEL on 1 January 2008 and the NGL on 1 July 2008. The intention, like most Commonwealth statutes which prescribe a merits review regime within them, was to ensure that the person affected is entitled to administrative justice and the proper application of standards or good administration.10 So too it was in 2006 when the then Ministerial Council on Energy (MCE) said LMR would "best facilitate the correction of a range of regulatory errors with significant adverse consequences, encourage the making of the best administrative decisions in all the circumstances, and encourage investment in gas and electricity and across those sectors by promoting confidence in the regulatory process."11 Significantly, the MCE added that judicial review alone was not a sufficient method of achieving the overall policy objective.

To understand the MCE's statements it is necessary to re-affirm the work of the Kerr Committee and its report of 1971.12 That report drew attention to the Constitutional limitations of Courts (Chapter III) and the ever expanding nature of executive decision making (Chapter II). The Kerr Committee considered that the chief plank of any administrative law system, and one that aims to promote a resolution between the affected party and the actions of the executive, was a framework for the review of decisions "on their merits".13 This, the Kerr Committee considered, was a central, if not inviolable, requirement.

The panel tasked with reviewing the LMR regime in 2012 did not recommend the removal of merits review despite it being asked to consider whether there should be reliance on "judicial review only".14 Not only did the panel not recommend that merits review be abolished, it expressly recommended that it be strengthened by giving the Tribunal an investigative function and streamlining the grounds of review into a single ground. In short, the panel in 2012 was faithful to the ideals of the Kerr Committee, the important place of merits review in price determinations and their resolution by the Tribunal.15

As stated above, the Tribunal is empowered to review (on the merits) certain reviewable regulatory decisions. The scheme of review is enshrined in Division 3A of Part 6 to the NEL and Division 2 of Part 5 of Chapter 8 to the NGL. Its functions and powers are prescribed by s 57B and s 91 respectively. Like all merits review bodies, it serves a number of purposes embraced by the notion of the correct or preferable decision.

9 see NEL s 71A, NGL s 244 10 Creyke, R. and McMillan, J., Executive Perceptions of Administrative Law - an Empirical Study (2002) 9(4) Australian Journal of

Administrative Law 163, p 163 11 Professor G Yarrow, The Hon M Egan and Dr J Tamblyn, Review of the Limited Merits Review Regime: Interim Stage One

Report, 30 April 2012, p 1 12 Commonwealth Administrative Review Committee, Parliamentary Paper No 144, 1971 (Kerr Report) 13 Kerr Report at [58] 14 Professor G Yarrow, The Hon M Egan and Dr J Tamblyn, Review of the Limited Merits Review Regime: Stage Two Report, 30

September 2012, p 2 (Stage Two Report) 15 Stage Two Report, pp 3, 41 and 42

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First, it acts to ensure that any discretion reposed in the original decision maker is exercised reasonably, rationally and its decision is evidently justifiable. In this way the original decision maker is motivated to arrive at the correct or preferable decision in the first instance. This is because, if they do not do so, the affected party is free to exercise their merits review right and thus ensure the attainment of the correct or preferable decision in the Tribunal.

Second, inherent in the nature of merits review is that it provides certainty that the facts can be reviewed. That the Tribunal can review and correct material errors of fact is reflected in s 71(1)(a) & (b) of the NEL and s 246(1)(a) & (b) of the NGL, whereas a Court cannot in a judicial review. A Court is forbidden from deciding the facts or correcting them.16

Third, a ground of review such as incorrect exercise of discretion (s 71(1)(c) NEL and s 246(1)(c) NGL) and unreasonableness (s. 71(1)(d) NEL and s. 246(1)(d) NGL) reinforce the central tenet of making the correct or preferable decision. The complexity and highly specialised nature of the issues that are determined by the Tribunal in pricing and access arrangements is reflected in the multifarious and multi-layered considerations and competing integers to which it must have regard. Those competing integers do not admit of easy answers. They require an assessment of matters specified in the code and stated "objectives".17 Not infrequently those matters are not harmonious but conflicting and contradictory. Because of this, the Tribunal is endowed with the review function of determining and correcting a decision that displays an "incorrect exercise of discretion" and one that is "unreasonable", having regard to all of the circumstances.

3.3 The conceptual difference between merits and judicial review

This section explores the difference between merits and judicial review. Whilst complementary, merits and judicial review are fundamentally different in terms of their aims, substance, procedure and remedies.

First, it is important to consider the underlying rationale for the different forms of review. The raison d'etre of merits review is to provide administrative justice. This is evident in that the Kerr Committee's proposals, from which Australia's system of tribunals was born, were "designed to achieve balance between justice to the individual and efficient administration".18 As a matter of principle, the Administrative Review Council takes the position that if an administrative decision is likely to have an effect on the interests of any person, in the absence of good reason, that decision should ordinarily be open to be reviewed on the merits.19 By contrast, the goal of the Courts in conducting judicial review is much more constrained. It is to determine the correct decision as a matter of law, irrespective of administrative justice. Unlike merits review, "results or outcomes of the decision-making process are not the primary concerns of judicial review."20

It is not surprising, then, that judicial review of administrative decisions is regarded as a "remedy of last resort".21 Resort to judicial review should, as a matter of principle, occur only when the administrative decision-making process has failed in some way. No matter how fair or meticulous the system of primary decision-making may be, it will always require supervision, and the availability of a review on the merits. The potential for legitimate differences of opinion between decision-makers and affected parties must be acknowledged, and the potential for missteps or failure addressed. This principle is reflected in the ubiquity of various merits review mechanisms available in the realm of administrative decision-making, from internal review by superior officers, to merits review by a tribunal, to official scrutiny by the Ombudsman. Unofficial mechanisms of check and balance such as access to documents by way of freedom of information and requirements for the provision of reasons for decisions also play a role in ensuring administrative justice. The availability of a review

16 Re Minister for Immigration and Multicultural Affairs: Ex parte Holland (2001) 185 ALR 504 at [23] and [24]; Re Minister for

Immigration and Multicultural Affairs; Ex parte Miah (2001) 75 ALJR 889 at 929 [221] 17 The difficulty of multi-layered objectives in price determination and access matters in the gas and electricity field was discussed

by J Gleeson SC in a paper entitled Administrative Law Meets the Regulatory Agencies (2004) AIAL Forum No. 46, p 28 18 Kerr Report, p 4 [12]. 19 Administrative Review Council, What decisions should be subject to merit review?, 1999, [2.4] (What decisions should be

subject to merit review?) 20 Administrative Review Council, The Scope of Judicial Review: Discussion Paper, 2003, p 11 [1.19] (The Scope of Judicial

Review Discussion Paper) 21 Administrative Review Council, Review of the Administrative Decisions (Judicial Review) Act: The Ambit of the Act, Report No

32, 1989, p 7 [26]

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on the merits being the accepted norm, removal of merits review in favour of sole reliance on judicial review requires substantial justification.

Second, reflecting their differing aims, merits and judicial review are fundamentally different in terms of substance. Whilst merits review enables the review of all aspects of a decision including factual findings and the exercise of any discretions that may subsist in the decision-maker, judicial review is concerned only with the legality of the primary decision. As explained above, the task of the merits reviewer is to ensure the "correct or preferable" decision is made,22 where "preferable" refers to situations where there is more than one lawful decision. Judicial review, on the other hand, is geared towards ensuring that the primary decision was properly made within the legal limits of the relevant power;23 that it engaged the correct legal reasoning and followed the correct legal procedures. The classic statement of the Court's judicial review functions is that of Brennan J in Attorney General (NSW) v Quin:

"The duty and jurisdiction of the court to review administrative action do not go beyond the declaration and enforcing of the law which determines the limits and governs the exercise of the repository's power. If, in so doing, the court avoids administrative injustice or error, so be it; but the court has no jurisdiction simply to cure administrative injustice or error. The merits of administrative action, to the extent that they can be distinguished from legality, are for the repository or the relevant power and, subject to political control, for the repository alone."24 (emphasis added)

The Court is entitled to interrogate only the processes of the primary decision-maker, and not the substance of the challenged primary decision.25 This means that, if an administrative decision is open to judicial but not merits review, there will be situations in which, although a decision is not the correct or preferable one on the facts, it will not be open to judicial review.26 An aggrieved party will have no avenue of appeal.

Third, the procedural aspect of merits and judicial review is fundamentally different. Merits review involves the reviewer "[standing] in the shoes of the primary decision-maker"27 in order to bring about the correct or preferable decision. This aphorism captures statutory provisions that enable the merits reviewer to exercise all of the powers and discretions of the primary decision-maker, and which (when the reviewer varies the primary decision or makes a substitute decision) deem the reviewer's decision to be that of the primary decision-maker.28 Judicial review, by contrast, involves the Court examining the primary decision for legal errors, and invalidating it if legal error is made out.

It would be a mistake, however, to deduce from the "standing in the shoes" aphorism that the merits review process is capricious, indistinct from the function of the primary decision-maker, or entails an undesirable "risk of a decision being substituted on the basis of a 'preferred approach' compared to the original decision maker".29 A merits reviewer does not simply re-exercise the role of the original decision-maker. Rather, the reviewer has the "dual task of negatively deciding whether the decision under review is the correct or preferable one [i.e. considering the primary decision with an eye attuned to factual and legal error] and, if it is not, of positively bringing it about that [is] the correct or preferable decision is made".30

Fourth, merits and judicial review afford very different remedies. A merits reviewer has wide powers to set aside the original decision and substitute a new decision of its own. The Tribunal is empowered to affirm a decision of the regulator, vary it, set aside the decision or remit it to the regulator for

22 Drake v Minister for Immigration and Ethnic Affairs (1979) 2 ALD 60 at 68 (Bowen CJ and Deane J) 23 The Scope of Judicial Review Discussion Paper, p 27 [2.21] 24 Attorney General (NSW) v Quin (1990) 170 CLR 1 at 35-36 25 SZBEL v Minister for Immigration and Multicultural and Indigenous Affairs (2006) 231 ALR 592 at 596 [25] (Gleeson CJ, Kirby,

Hayne, Callinan and Heydon JJ) 26 The Scope of Judicial Review Discussion Paper, p 27 [2.21] 27 Minister for Immigration and Ethnic Affairs v Pochi (1980) 4 ALD 139 at 143 (Smithers J) 28 Cane, P., Judicial Review and Merits Review: Comparing Administrative Adjudication by Courts and Tribunals, Australian

National University College of Law, (downloaded from http://www3.law.ox.ac.uk/denning-archive/news/events_files/Judicial_Review_and_Merits_Review_Full_Version.doc.), 2010, p 12

29 COAG Energy Council, Review of the Limited Merits Review Regime - Consultation Paper, 6 September 2016, p 18 (Consultation Paper)

30 Cane, P., op cit, p 15

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reconsideration: see s 71P NEL; s 259 NGL. By contrast, relief in judicial review proceedings is generally limited to quashing a decision or part of a decision, and remitting the matter to the original decision-maker for reconsideration. Occasionally the Court may make an order declaring the rights of the parties or directing the parties to do, or refrain from doing, an act or thing.31 A Court may not, however, substitute a decision of its own for the original decision-maker's. This difference stems from the fact that Courts are judicial bodies which exercise judicial power, while merits reviewers are non-judicial bodies exercising non-judicial power. The power to make a decision in substitution for that of an executive decision-maker is a non-judicial power, and so cannot, in principle, be conferred on a Court.32

A practical ramification of this difference is that merits review has the benefit of efficiency over judicial review, in that the decision may be immediately "re-made" upon review, where a Court is confined to remitting matters to the primary decision-maker. The objectives of a party successful in merits review are also more likely to be met than those of a party successful in seeking judicial review; the usual order for remittal in judicial review means that the primary decision-maker may well reach the same conclusion again.

Judicial review is likely to have added risks for Western Australia that are not likely to manifest themselves in other jurisdictions for as long as the ERA remains the relevant regulator. This is because WA only has a common law judicial review regime rather than a statutory regime. This has a number of added risks to service providers, investors, customers and even regulators. For example, it would be the case in Western Australia that there will be no ability to legislate to ensure that if there is error by the regulator, that a replacement decision can be made only if it is a “materially preferable NGO decision”. This is not in the long term interest of consumers. This could lead to inconsistent approaches and administrative confusion for the regulator. In addition, it will significantly put at risk one of the fundamental requirements that investors require of a regulatory regime before deciding to invest – predictability and transparency in the application of the regime by regulators.

3.4 The misconception - expansion of judicial review and overlap with merits review?

There appears to be a perception amongst some observers that the deployment of certain grounds of review and developments in the law has expanded the judicial review function of the Court so that it subsumes merits review. The Consultation Paper, for example, lists as a "benefit" of the removal of LMR: "[r]ecent developments in the law have potentially expanded the ability of judicial review to provide further accountability for reasonable decision-making",33 referring to the case of Minister for Immigration and Citizenship v Li (2013) 248 CLR 332 (Li). That view is, with respect, entirely misconceived.

Whilst the High Court in Li did, in considering the judicial review ground of unreasonableness (with respect to the discrete question of whether the Tribunal's procedural decision to refuse to grant an adjournment was unreasonable), depart from the traditional language of the Wednesbury unreasonableness formulation ("a decision…so unreasonable that no reasonable authority could ever have come to it"34), it merely changed the lexicon, rather than the strictness of unreasonableness as a ground of review.35

The High Court's language in Li of "lacks evident and intelligent justification"36 neither expanded the ground of unreasonableness, nor did it open to the Court the right to undertake merits review. That this is so is undoubted and reflected in the judgment itself wherein their Honours Hayne, Kiefel and Bell stated at [66] that:

"…there is an area within which a decision-maker has a genuinely free discretion. That area resides within the bounds of legal reasonableness. The courts are conscious of not exceeding their supervisory role by undertaking a review of the merits of an exercise of discretionary power. Properly applied, a standard of legal reasonableness

31 see eg. Administrative Decisions (Judicial Review) Act 1977 (Cth) s 16 32 Cane, P., op cit, p 13 33 Consultation Paper, p 18 34 Associated Provincial Picture Houses Ltd. v Wednesbury Corporation [1948] 1 KB 223 35 Indeed, the test of unreasonableness had been variously formulated. In Minister for Aboriginal Affairs v Peko-Wallsend Ltd

(1986) 162 CLR 24, Mason J preferred the language of "manifestly unreasonable" 36 Li at [76]

LMR Submission


does not involve substituting a court's view as to how a discretion should be exercised for that of a decision-maker..." (emphasis added).

In short, it is true that the ground of unreasonableness is common to both the LMR regime and judicial review. However, it is wrong to suggest that it is identical in its application in the Tribunal and before a Court.

3.5 Reducing timeframes for determining appeals - is judicial review the answer?

A view is taken in the Consultation Paper (at page 18) that the removal of merits review and a move to judicial review only will reduce the overall time for concluding revenue determinations and access arrangements. The view appears to be based upon the assumption that a perceived narrower standard of appeal in judicial review would exclude some grounds which may otherwise be admitted under the LMR regime, thereby increasing procedural efficiencies.

The latter proposition is problematic and doubtful in the extreme. It ignores the likelihood that, if the LMR regime is removed, parties seeking to remedy what they perceive to be incorrect AER decisions will attempt to fit their applications for review within the various grounds of judicial review.

If judicial review were the only available option to applicants, it is entirely reasonable to expect that the range of time from initiation to resolution of any such judicial review application would be nine to fifteen months, although experience of a judicial review involving the Dampier to Bunbury Natural Gas Pipeline in the early 2000s extended to two years. These timeframes are far greater than the statutory mandated period by which the Tribunal ought to make its decisions, namely three months.

The NEL and NGL prescribe a mandatory target time limit within which the Tribunal must deliver its decision.37 That target time limit is 3 months after the grant of leave. Comparatively speaking, the legislative device of target time limits is a common one. In the customs arena the target time in relation to dumping duty investigation matters is 155 days after an initiation of an investigation.38 Until recently the Refugee Review Tribunal was required to decide a review within 90 days of being provided the file by the Minister.39 A Court on the other hand has no prescribed target date for hearing matters and delivering judgment other than the exhortatory statement that the overarching purpose of the civil practice and procedure provisions is to facilitate the just resolution of disputes (a) according to law; and (b) as quickly, inexpensively and efficiently as possible.40 In short, there are no particular limits to be abided by other than one which is self-imposed by the particular judge and the dictates of the overarching purpose itself. This is not to suggest that the Courts will engage in delay or tolerate parties that seek to stifle the efficient disposition of cases but merely to outline a point of difference which pushes the Tribunal to deliver its decisions within the target (or extended target) time whereas a Court is not constrained in the same way.

To use the AER's JR Application as a template or measure, it is not unreasonable to think that the Federal Court will not deliver its judgment within a period of 12 months since initiation of the case.41 The application was commenced on 24 March 2016 and despite what can only be described as an expedited proceeding having regard to the nature of the orders made, the matter is set for hearing for a period of five to seven days in the Federal Court commencing on 17 October 2016 - a period of 6 months after initiation of the case. Given that the Federal Court appeal sitting period commences on 31 October and concludes on 25 November 2016 and given that the Federal Court sitting period ceases on 16 December 2016,42 it is likely that any decision made by the Court will not be delivered until, at the earliest, February or March 2017 - a period of approximately 1 year. Such a timeframe is not an improvement over the timeframe within which the Tribunal makes its decisions.

The above timing issues of course do not take into account the timing issues that arise if a review of the original decision finds error. This is where there is another difference between the LMR regime

37 NEL s 71Q, NGL s 260 38 Customs Act 1901 (Cth) s 269TC 39 Migration Act 1958 (Cth) s 414A, repealed by the Migration and Maritime Powers Legislation Amendment (Resolving the

Asylum Legacy Caseload) Act 2014 40 Federal Court of Australia Act 1976 (Cth) s 37M 41 Another example is the judicial view application with respect to the Dampier to Bunbury Natural Gas Pipeline Draft Decision for

the first access arrangement in 2001 by the owner at that time Epic Energy by that lasted in excess of two years. 42 http://www.fedcourt.gov.au/court-calendar/court-sitting-dates

LMR Submission


and judicial review. As mentioned in section 3.3 of this submission, under the LMR regime, the Tribunal is empowered to affirm a decision of the regulator, vary it, set aside the decision or remit it to the regulator for reconsideration.. By contrast, relief in judicial review proceedings is generally limited to quashing a decision or part of a decision, and remitting the matter to the original decision-maker for reconsideration. In such circumstances, this may well mean that the regulator would have to recommence its process from the beginning. In the case of the NEL, this would mean the repeat of an already lengthy 31 month process by the AER. This could well mean that the intended 5 year (60 month) regulatory period would have ended before original decision was re-made.

LMR Submission


4. Assessing the performance of the LMR

4.1 The amenability of regulator decisions to merits review

In the Stage Two Report of the "Review of the Limited Merits Review Regime", the Panel concluded that neither de novo review nor reliance on judicial review only were preferable to a properly structured merits review regime in relation to first instance decisions of the AER . It stated:

"We are convinced of the contribution that merits review can make to better regulatory decision making, and, more specifically, we consider it to be an important component of a system of checks and balances that supports the independence of delegated regulation."43

The justification for introducing the LMR regime, as summarised in the terms of reference of the 2012 Review, is that AER decisions "have a substantial impact on the economic viability of network and service providers. In addition, the decision-making power involves the exercise of significant amounts of discretion, so that judicial review is arguably not sufficient and a form of merits review may be justified on policy grounds." 44

The importance of merits review in the context of the regulator exercising "significant discretionary powers" was reiterated in the Stage Two Report.45 The principal objective of merits review is to ensure that those administrative decisions in relation to which review is provided are correct (in the sense that they are made according to law) and preferable (in the sense that, if there is a range of decisions that are correct in law, the decision settled upon is the best that could have been made on the basis of the relevant facts).46 Such rights are generally only removed where the regulator has limited discretion. That is not the case here, given that a key feature of the legislative framework for gas and electricity is that it is a ‘fit for purpose’ framework. The ‘fit for purpose’ framework relates to the different levels of discretion (i.e. 'no discretion', 'limited discretion' and 'full discretion') that the regulator has in making its decisions.47 Where the regulator has full discretion, it can put forward and consider any preferable alternative, if it considers that it complies with the NGL/NEL and relevant criteria. The AER has significant discretion in assessing complex factual matters and weighing up different criteria to come up with on-balance outcomes. It is in relation to these factual and judgement matters that a judicial review model would be unable to provide an adequate level of oversight and accountability to adequately protect legitimate business interests and create a climate for continued investment in the energy sector.48 Given the significant discretionary powers given to the AER and the corresponding risk of regulatory error, the importance of retaining limited merits review is clear.

It cannot be overemphasised that merits review is entirely appropriate where, as in the case of the AER/ERA, "there is high risk of regulatory error occurring in the decision-making process, and the potential for regulatory error to result in considerable financial losses or underinvestment or inefficient use of infrastructure is considerable".49 The level of investments at stake in the decisions on electricity network revenue and gas access arrangements is extremely high, and it is critical that the decisions are correct in order to support ongoing investment decisions. It is important to balance efficient timely decision making with getting the right outcome. As Vertigan has stated in the telecommunications context, "[t]hat is not to dispute the fact that regulatory delay itself carries cost for both industry and end users. However, bad decisions taken quickly are not preferable to ensuring good decisions are taken, especially given the role those decisions play in determining the future of Australian telecommunications."50 This quote is equally applicable for the energy sector.

The focus of merits review on seeking a "correct and preferable" decision is aligned with the NEO and NGO of ensuring that the long term interests of consumers is met. The Consultation Paper

43 Stage Two Report, p 3 44 COAG Energy Council, Limited Merits Review Terms of Reference, 19 August 2016, p 9 (Terms of Reference) 45 Stage Two Report, p 3 46 What decisions should be subject to merit review?, [1.3] 47 Australian Energy Regulator, Access arrangement guideline: Final decision, 25 March 2009, p 43 48 Nicholas, P., Administrative Law in the Energy Sector, Accountability, Complexity and Current Developments, AIAL Forum No.

59, p 85 49 Terms of Reference, p 12 50 Dr M Vertigan AC, Independent cost-benefit analysis of broadband and review of regulation: Statutory review under section

152EOA of the Competition and Consumer Act 2010, June 2014, p 59

LMR Submission


confirms this position.51 Ensuring that natural monopoly infrastructure pricing decisions are properly decided is crucial in the long term interests of end users/consumers. The long term interests of end users requires that there will be efficient service provision in the long term, which necessitates the correct incentives for ongoing investment. Decisions which are not properly decided puts consumers at risk of an unstable cycle of under-investment and then required catch-up investment, which in turn creates price volatility and can result in poor service outcomes.52 Getting decisions right is undoubtedly complex, and experience has shown that the primary decision making body does not always come to the right conclusions. For example:

(a) AER appeal to Full Court from Tribunal decision on NSW electricity distributors

In March 2016, the AER applied to the Federal Court for a judicial review of the Tribunal's decisions to set aside the NSW and ACT electricity and gas distribution network revenue determinations.

The AER was asked to approve price rises that would have allowed $23.5 billion of revenue over four years. However, the AER said in its draft decision that the firms Ausgrid, Transgrid, Endeavour and Essential Energy could only recover $15.6 billion from consumers, 33% less. At the time, the chairman of the AER, Paula Conboy said that she was not worried about the threat of having her decision appealed in the courts, not least because in the four years she did a similar job in Canada, her decisions were frequently challenged but she never lost. The reported quote from Paula Conboy was "I have never lost a case".53

In April and May 2015, the AER determined the maximum revenues that the electricity and gas distribution networks in NSW and the ACT could earn, and as a result what could be recovered through consumer bills. The AER’s determinations allowed less revenue than proposed by the businesses. These lower revenues were driven by AER findings that the NSW and ACT electricity networks were not operating as efficiently as other comparable networks. Additionally, the AER determined a lower rate of return and corporate tax allowance, consistent with recent market trends.

In June 2015 the gas and electricity distribution businesses sought a limited merits review of the AER’s final decisions in the Tribunal. The businesses were seeking greater revenue to be recovered from customers through electricity and gas bills for the period 2014–19.

In ruling on the appeal, the Tri bunal found that the AER was correct in some matters, including how the cost of equity was to be calculated. However, the businesses were successful in some areas of their appeal, and the Tribunal directed the AER to remake its decisions in relation to the electricity networks’ operating expenses, the cost of corporate income tax, and the cost of debt.54

We acknowledge that the timing of the current review was effectively set by SCER in 2013. At the time SCER suggested that:

"[T]o ensure that these new arrangements are delivering against the policy intention and the panel's findings from its review of the limited merits review regime, SCER will undertake a review of the Tribunal's performance under the reformed regime by 2016, to ensure that, if necessary, any substantive changes to the regime or review body can be introduced prior to the round of regulatory determinations commencing in mid-2019."55

51 Consultation Paper, p 10 52 Crawford, G., Debunking the myths about recent regulatory appeals, (http://www.ena.asn.au/news/blog/debunking-myths-about-

recent-regulatory-appeals), 7 March 2016 53 Winestock, G., 'AER's Paula Conboy to NSW: 'I have never lost a case', Australian Financial Review, 26 February 2015 54 Applications by Public Interest Advocacy Service Ltd and Ausgrid Distribution [2016] ACompT 1; Applications by Public Interest

Advocacy Service Ltd and Endeavour Energy [2016] ACompT 2; Applications by Public Interest Advocacy Service Ltd and Essential Energy [2016] ACompT 3; Application by ActewAGL Distribution [2016] ACompT

55 Regulation Impact Statement Decision Paper, p 47

LMR Submission


That is now the subject of a judicial review application by the AER, which, as noted earlier, is due to be heard in October 2016 and a decision is not expected until at least February or March 2017.

(b) The decision of the High Court re East Australian Pipeline Ltd

In 2007, the High Court of Australia held that the Tribunal had been correct in overruling a decision of the ACCC, the relevant decision maker before the AER, concerning charges to be fixed for third-party access to a natural gas pipeline.

The Tribunal found that the ACCC had wrongly exercised its discretion by substituting its own access arrangement. It was incorrect and unreasonable for the ACCC to put aside known valuation methods and devise a method which adjusted the optimised replacement cost in a novel fashion after misconstruing section 8.10 of the Code.

The High Court unanimously allowed the appeal and held that the Tribunal was correct in its construction and in its application of section 8.10.56

(c) Energex, Ergon Energy, and ETSA Utilities 2010−11 to 2014−15 distribution determinations

The Tribunal decided that the AER erred in not revaluing ETSA Utilities’ easements. It also decided that the AER erred in some aspects of the labour escalation rates and non-system capital expenditure allowance provided for Ergon Energy. The Tribunal agreed with the AER in relation to the service standards target and customer services operating expenditure allowance set out in the final decision. The Tribunal also agreed with the AER’s classification of street lighting services as regulated services.57

(d) Multinet gas distribution services in Victoria, 2013-17

The Tribunal heard an application from Multinet to review the AER’s decision on the access arrangement for its gas distribution services in Victoria for 2013–17. In July 2013, the Tribunal determined the AER erred in using the Essential Services Commission’s capital expenditure benchmark for 2012 to determine Multinet’s opening capital base.58

(e) Tribunal review of ACCC decision on GasNet Tariffs

In December 2003, the Tribunal handed down its decision on its review of the ACCC's tariff determination for transportation services on GasNet's Victorian natural gas transmission system. Among other things, the Tribunal stated that:

"The ACCC erred in concluding that it was open to it to apply the CAPM in other than the conventional way to produce an outcome which it believed better achieved the objectives of s 8.1."59

Judicial review, with its focus on procedural legality, rather than the protection of individual interests,60 simply cannot ensure that the best decision on the facts is reached. The specialist knowledge bound up in the kind of determinations that the AER makes (and the Tribunal reviews) also provide an argument in favour of the retention of the LMR regime. The Courts have tended to take a "cautious approach" where the primary decision-maker is using special knowledge to assess a factual situation,61 meaning that the ability and willingness of Courts to

56 Eastern Australian Pipeline Pty Limited v Australian Competition and Consumer Commission and Australian Competition

Tribunal (2007) 233 CLR 229 57 Application by ETSA Utilities [2010] ACompT 5 (13 October 2010); Application by Ergon Energy Corporation Limited (Labour

Cost Escalators) (No 3) [2010] ACompT 11 (24 December 2010); Application by Ergon Energy Corporation 58 Application by Multinet Gas (DB No.1) Pty Ltd (No 2) [2013] ACompT 6 (31 July 2013) 59 Re GasNet Australia (Operations) Pty Ltd [2003] ACompT 6 (23 December 2003) 60 Attorney-General (NSW) v Quin (1990) 170 CLR 1 at 36 61 The Scope of Judicial Review Discussion Paper, p 112 [5.190]

LMR Submission


disturb AER decisions would be curtailed. Tribunals, by contrast, are expected to build up expertise in specialist matters.62

We note also that the AER decisions do not fall within the small category of cases deemed inappropriate for merits review (such as legislation-like decisions, or automatic/mandatory decisions), nor do they exhibit any of the features which the Administrative Review Council considers may justify excluding merits review.63 For example, the Consultation Paper states that "there are additional circumstances where removing access to merits review might be appropriate. Relevant factors to consider include… whether there has been an extensive inquiry process informing the decision".64 The footnote to this statement refers to the Administrative Review Council report "What decisions should be subject to merits review".65 The "decisions involving extensive inquiry processes" that the Administrative Review Council is referring to, are those that are the product of processes that would be:

"Time-consuming and costly to repeat on review. Such processes include public inquiries and consultations that require the participation of many people. If review of the subsequent decisions was undertaken, the nature of the review process would be changed from the normal adjudicative decision-making process (of, say, the AAT), to a greatly expanded and time-consuming one. For example, the Council has advised that decisions made under the Australian Heritage Commission Act 1975 to enter, or not to enter, a place on the Register of the National Estate would be inappropriate for external merits review, if the Act was amended to provide for those decisions to be made by a process involving public hearings."

It is submitted that the revenue and access decisions in the energy sector do not properly fall within this "extensive inquiry process" category. Such energy sector decisions, while involving a public consultation process, are clearly not made by a process involving public hearings, of the type envisaged in the Australian Heritage Commission Act example above.

4.2 The telecommunications sector does not provide a like for like comparison with the energy sector

The Consultation Paper states that "access to merits review was recently removed in the telecommunications sector, for example. In this case, the regime was considered to be inappropriate for regulatory determinations on certain access arrangements by the Australian Competition and Consumer Commission ".66

It is submitted that the circumstances and challenges faced by the telecommunications sector prior to the removal of merits review were very different to that currently applying to the revenue and access decisions in the energy sector. It would be a misconceived analysis to draw a comparison between the two industries in the context of the current review.

By way of example:

(a) While decisions in the energy sector have been the subject of merits review decisions, these do not compare to the sheer number of reviews faced by the telecommunications sector prior to the removal of merits review. From the start of the Part XIC regime in 1997 to October 2009, there were 157 telecommunications access disputes notified, and as at March 2009, the ACCC was considering 51 access disputes, all involving Telstra.67 From these decisions it was clear that the "negotiate-arbitrate" model was not producing effective outcomes for industry or consumers. For example, during the telecommunication reform consultation process, Optus submitted:

62 Minister for Immigration and Ethnic Affairs v Jia (2001) 205 CLR 507 at [180] -[181] 63 see What decisions should be subject to merit review? 64 Consultation Paper, p 7 65 see What decisions should be subject to merit review?, [4.53] - [4.55] 66 Consultation Paper, p 7 67 The Senate, Environment, Communications and the Arts Legislation Committee, Telecommunications Legislation Amendment

(Competition and Consumer Safeguards) Bill 2009 [Provisions], October 2009, p 20

LMR Submission


"Today almost all commercial negotiations end up in a dispute before the ACCC, with these disputes in turn appealed to the Australian Competition Tribunal or the Federal Court… Optus also argued for the removal of the provisions relating to the lodgement of ordinary access undertakings and merits based appeal process, on the basis that each of these arrangements has been largely used to frustrate and delay the regulatory decision making processes".68

It is important to note that at the same time as merits review was removed from Part XIC of the CCA, the process set out in Part XIC was fundamentally reformed;

(b) The unique circumstances and challenges faced by the telecommunications sector prior to the removal of merits review, and the reason for the high number of disputes in the telecommunications sector has been explained by Telstra in the following way:

"All access pricing exercises are complex; however, Part XIC has been particularly contentious because, unlike other industries, the cost of the underlying asset base is re-estimated every few years (whereas in gas and electricity the regulatory asset base was resolved at the outset, with subsequent disputes confined to a relatively small number of issues). It is this fact, plus the lack of agreement on the most appropriate method of assessing the asset base, that has unsurprisingly led to a high level of disputes."69

(c) Decisions in respect of electricity and gas networks do not experience rapid technological advances and changing market conditions and merits review processes in the energy sector therefore do not pose the same challenges as those faced by the telecommunications sector. 70 The removal of the right of appeal to the Tribunal against certain decisions of the ACCC under Part XIC71 was explained in the following way by the explanatory memorandum:

"Merits review of ACCC decisions under the [Trade Practices Act] can contribute to delays and regulatory uncertainty. This is problematic in the telecommunications sector which is characterised by rapid technological advances and changing market conditions72" (emphasis added)

4.3 Addressing common issues

There is further scope to combine common issues in limited merits review hearings before the Tribunal. Tribunal proceedings reviewing the AER's decisions are already sometimes conducted in tandem, with common hearings for common issues and break-out hearings for issues peculiar to particular service providers. The efficiencies of conducting the regulatory and review processes in this manner are clear,73 particularly when applications for different parties overlap almost exactly in terms of principle. As an example, in February 2016, the Tribunal delivered its reasons in relation to the applications brought by Ausgrid, Endeavour, Essential, ActewAGL, JGN and PIAC. There were seven applications made to review decisions of the AER made under the NEL, and a further application in relation to a decision of the AER made under the NGL. These applications were heard together by the Tribunal because it was common ground that the substantial commonality of issues raised in the eight applications made it preferable for them to be heard together. The PIAC-Ausgrid Decision74 served as the “lead” reasons insofar as the Tribunal’s general considerations, on the

68 Ibid, p 25 (quoting Optus, Submission 47, p 8) 69 Telstra Corporation, Submission to the Senate Standing Committee on Environment, Communications and the Arts’ Inquiry into

the Telecommunications Legislation Amendment (Competition and Consumer Safeguards) Bill 2009, p 10 70 Uthmeyer, S., and Cook, N., A paper for the 2009 ACCC Regulatory Conference: Economic Experts: How necessary are they?,

July 2009, p 5 71 The following rights were repealed: the right of review by the Competition Tribunal of the ACCC's decision in relation to an

application for exemption from standard access obligations; and the right of review by the Competition Tribunal of the ACCC's decision in relation to accepting or varying an access undertaking

72 Parliament of the Commonwealth of Australia, House of Representatives, Telecommunications Legislation Amendment (Competition and Consumer Safeguards) Bill 2009: Explanatory Memorandum, 2010, p 172

73 Gray, P., Recent developments and current issues in Australian Competition Tribunal Practice and Procedure, A paper for the twelfth ACCC Regulatory Conference, 29 July 2011

74 Applications by Public Interest Advocacy Centre Ltd and Ausgrid [2016] ACompT 1 (Applications 1 and 4 of 2015) (PIAC-

Ausgrid Decision)

LMR Submission


significant matters of common concern, and its consideration of aspects of particular topics did not need to be repeated in full by the Tribunal in its consideration of the other applications.

Even where there is no common hearing between different parties, there is scope for there to be an overlap of hearing dates on particular issues, for the purposes of ensuring efficiency and avoiding duplication. For example, the timing of DBP's Tribunal hearing, in 2012, in relation to its Access Arrangement for the DBNGP Access Arrangement Period 2011-2015, overlapped to some extent with the timing of the hearings of reviews commenced by both ATCO and Alinta Energy in connection with the ERA’s decision on the WA gas distribution system Access Arrangement. The Tribunal suggested that although Alinta and ATCO wished to be heard separately from DBP, that there could be an overlap in the hearing dates for particular issues, and that the submissions in the Alinta/ATCO reviews could be treated as part of the submissions on the DBP review, so that there was no need to repeat them for the purpose of the record, and that DBP's counsel could then, to the extent that they wanted to, adopt what has been said in the Alinta/ATCO reviews, or raise additional points.

While the Tribunal has worked to hear matters with common issues together where feasible, there is current concern around delay because some decisions are held over pending others. The majority of merits review matters have, since the implementation of the current LMR regime in 2013, involved a WACC ground, and there has been some frustration associated with a rolling series of reviews raising the same issues. It is submitted that there could be further improvements to the initial decision-making process that would avoid such WACC concerns. For example, one major improvement would come from moving to a New Zealand input style whole of industry approach to the WACC. In New Zealand, the input methodologies require the Commerce Commission to publish estimates of the cost of capital at regular intervals for each type of service. Estimates of the cost of capital for information disclosure purposes are determined annually. Estimates of the cost of capital for price-quality regulation are used in setting prices so they are determined before each new regulatory period. For example, on 29 July 2016, the New Zealand Commerce commission published its "Cost of capital determination for information disclosure year 2016 for Transpower, gas pipeline businesses and suppliers of specified airport services (with a June year-end)".75

We support the models proposed by the ENA and APGA, that draw upon the New Zealand WACC experience with "input methodologies". One of the key features of these proposed models is that the SA Minister would, through necessary amendments to energy legislation and rule changes, change the method by which WACC is considered during the price review cycle. The AER would set a WACC methodology applicable to all networks as part of the rate of return guidelines process, and that methodology decision would be subject to limited merits review. The methodology set by the AER (or as amended by the Tribunal) would bind all parties in revenue determinations during that period. The methodology would need to be accompanied by a worked example that generates a WACC point estimate, based on prevailing conditions in the market for funds.

4.4 Materially preferable outcome

Materially preferable outcome is best way to approach review objectives

A major legal modification to the LMR regime effected by the 2013 statutory amendments was the necessity for a review applicant to not only establish one or more of the grounds of review but satisfy the Tribunal that an alternate materially preferable decision better promotes the NEL or NGL objective. In effect, the Tribunal is prevented from varying, setting aside and remitting regulatory decision on the basis that a ground would, or would be likely to, result in a materially preferable decision unless the applicant (who bears the onus) proves why the decision under review should not be affirmed. In doing so, the review applicant will not be able to point to the fact of it having established a review ground; the impact on its revenue necessarily being a determinative fact or that it has met a minimum revenue threshold prescribed by legislation. That is a significantly heightened threshold and a difficult test to meet. Classical administrative law theory commands that upon legal error being established, and subject only to the court's power to withhold relief for discretionary

75 Commerce Commission New Zealand, Cost of capital determination for information disclosure year 2016 for Transpower, gas

pipeline businesses and suppliers of specified airport services (with a June year-end) [2016] NZCC 15 (29 July 2016)

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reasons, the decision under review is declared void and the matter remitted "as of right". The stark difference between the approaches is clear. It requires no further explanation.

What remains to be explored however is the reason for the amendment and the effect it has had on Tribunal decisions.

An antidote to cherry picking

One of the issues that occupied much discussion by the Panel tasked with reviewing the LMR regime in 2012 was the issue of cherry picking. SCER, in its decision paper, noted that the "focus on error correction without any consideration of the implications of any outcomes for the decision as a whole, being limited to only the matter raised by the applicant for review …. has the potential to embed cherry picking of decisions and gaming of the regime for future determinations." The problem of cherry picking was addressed through the materially preferable decision test. That reflects the third recommendation of the Panel.

The purpose of the test is well understood. The intended effect of the test is also well understood and review applicants who instituted reviews in the Tribunal since 2013 have had to engage with it intellectually and legally both as part of obtaining leave and at final hearing.

It would be unwise to think that the materially preferable test has had no effect on review applicants and the network service businesses. In fact the former counsel to the AER, Sophie Li, in her recent article, praised the post 2013 LMR regime and said that cherry picking and the establishment of a single ground of review is "only half the equation" that would effectively be ameliorated by the materially preferable decision test and its focus on a "holistic" approach and focus on "all the constituent elements of the primary decision".

What has happened in practice

A useful measure of the success or otherwise of the materially preferable decision test can be gauged from the six decided cases dealt with by the Tribunal since the 2013 reforms. In the leading case, namely the PIAC-Ausgrid Decision, no mention or complaint was made by the AER that Ausgrid (or any other applicant) had cherry picked their grounds of review so as to offend the NEO. Additionally, the Tribunal (the presiding judicial member being his Honour Justice Mansfield) devoted 21 paragraphs to the issue. His Honour explored the pre and post 2013 position and traced the legislative relationships between the materially preferable test as prescribed and other provisions which impact it. The Tribunal being satisfied that three legal errors had been established (Opex (STPIS); return on debt and gamma), then devoted 41 paragraphs to applying the test. In this way, as a substantive matter, the policy and regulatory intent is more than adequately being met.

4.5 Are reviews a routine part of the regulatory process?

Risks considered by boards for undertaking LMR

One question posed by the Consultation Paper is whether reviews were generally considered a routine part of the determination process. The adjective routine seems to be associated with the observation, also made in the Consultation Paper, that over 50% of regulatory decisions made since the 2013 reforms were implemented have been the subject of review.

The question carries with it the unstated assumption that Boards choose to embark upon reviews with little thought or consideration. This negative connotation ignores and is contrary to the corporate governance obligations attached to the decision making process of management.

The decision by a Board whether to lodge an application for the review of a regulatory decision is the subject of careful and thorough evaluation in accordance with the statutory and fiduciary duties that those directors have. The analysis involves a detailed assessment of a range of factors including the merits of the regulator's decisions, the existence of any errors (together with the commercial significance of those errors) and the consequential costs and benefits associated with the review process and the potential outcomes. The need for cautious deliberation is ultimately due to the complexity associated with both the decisions and appeal process and the potential downside risks which are attached to any decision to seek a review.

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The vindication of rights is no vice

A real issue arises as to whether reviews were generally considered a routine part of the determination process is meaningful and proper. Any sensible answer to the question requires a series of anterior questions to be asked and addressed. Those questions, without being exhaustive, include: what was the quality of the first instance decision; why did the applicants feel so aggrieved that they instituted a review; are the rules (NEL and NGR) of such complexity that they offer scope for different interpretations and genuine debate and; what is at stake for the applicant. They are far more valid questions and, even if it is assumed (as the question posed seems to suggest) that reviews are routine, does that create a justification of any kind adverse to the LMR regime? We submit that the vindication of rights through a statutorily mandated review process is no vice. The LMR regime was never intended to stop all challenges against first instance decisions. It was not the intention of the Parliament(s) and the laws they enacted in 2013 that the merits review mechanism be stale and unused.

There is no doubt that the task given to the regulator is difficult, scientific and lends itself to decisions which call for fine judgments. But so too applicants advance cases that are difficult, scientific and require fine judgment. If there was only one right answer (like the certainty of some mathematical principles) there would be no need for review mechanism. But that is not the reality. The AER does not always get it right. The decisions made by the AER are not always the materially preferable ones. That is not a criticism of the AER but perhaps a function of the complexity of the rules which leaves much open to interpretation, emphasis of certain facts and the exercise of discretion. The end product is that the AER does not always agree with the applicants' approach or methodology - and vice versa. Sometimes the AER's disagreement is justified - sometimes not. But in all such cases of disagreement an applicant has the certainty that the initial decision can be reviewed - even if only on a limited basis and where the alternative result must be the materially preferable one. That is no small comfort. No initial decision made by an executive body should necessarily be immune from merits review, particularly in instances where the decision maker has significant levels of discretion. Many decisions of the Federal Commissioner for Tax, the Minister for Finance, the Minister for Immigration (and many others) are merits reviewed by the Administrative Appeals Tribunal (AAT). There is no suggestion by any of those bodies that because the review rate is high (and possibly routine) that AAT merits review should be curtailed or abolished. There is nothing especially significant from a process or merits review perspective about the energy sector such that the AER should be sheltered or afforded immunity from merits review.

In light of the comments above and returning to the anterior questions above, some interesting answers and conclusions emerge from the actual cases determined by the Tribunal since 2013.

Despite the small base of cases determined since 2013, it is evident that one half of the network service providers that were the subject of a regulatory decision did not seek review. It may be inferred as a matter of deductive reasoning that the reasons for this were:

(a) there was no dispute that the initial regulatory decision was the correct and preferable one;

(b) there was a material error of fact or facts, the decision was otherwise unreasonable and the discretion miscarried but the financial threshold for leave to apply for review was not met; or

(c) there was a material error of fact or facts, the decision was otherwise unreasonable and the discretion miscarried but overall the alternative remedy would not satisfy the materially preferable decision test.

In this way, the 50% review rate is telling. It speaks of the success of the current system and disproves the notion of routineness. It could hardly be said that review is routine if half of the affected class, upon proper consideration (including one assumes having taken legal and other expert advice) decide not to challenge the first instance decision.

The rights vindicated

As to the balance of the first instance decisions that were reviewed and that have been decided by the Tribunal to date, there is and was justifiable cause for disagreement with the first instance decision of the AER or ERA. That much has been determined. Having been granted leave (signifying

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that there was a prima facie case), all applicants were able to establish to the satisfaction of the Tribunal that a ground of review had been made out, the decision should be set aside and a materially preferable decision exists. A compilation of the decided cases is set out below.

Matter No. of Successful Review Grounds

Successful grounds of Review

Ausgrid [2016] ACompT 1

3 out of 776 1. OPEX - paragraph [495]; 2. Return on debt - paragraph [937]; 3. Gamma - paragraph [1110].

Endeavour Energy [2016] ACompT 2

3 out of 6 1. OPEX - paragraph [32]; 2. Return on debt - paragraph [71]; 3. Gamma - paragraph [72].

Essential Energy [2016] ACompT 3

3 out of 6 1. OPEX - [28]; 2. Return on debt - [51]; 3. Gamma - paragraph [52].

ActewAGL Distribution [2016] ACompT 4

4 out of 777

1. OPEX - paragraph [30], [37]; 2. Service target performance incentive

scheme - paragraph [54]; 3. Return on debt - paragraph [80]; 4. Gamma - paragraph [80].

Jemena Gas Networks (NSW) Ltd [2016] ACompT 5

2 out of 4 1. Return on debt - paragraph [78]; 2. Gamma - paragraph [96].

ATCO Gas Australia Pty Ltd [2016] ACompT 10

1 out of 6 1. Gamma - paragraph [687].

The eminent and senior justices of the Federal Court, Justices Mansfield and Middleton, assisted by highly credentialed members constituting the Tribunal, did not make a single utterance that any of the grounds of review propounded by any of the applicants were unarguable, contrived or an abuse of process - not even those grounds that were unsuccessful. One would have thought that the eminent Justices, who are highly attuned to vexatious claims given their background and knowledge of the Federal Court Rules which contain provisions to curtail such conduct, would not have hesitated to make findings to that effect if the applicants had engaged in such an abuse. Moreover, the proof that the claims were not an abuse and properly brought is reflected in the successful outcome in each of the matters.

There are some additional points that ought to be made about the complexity of the rules and their recentness which may also explain why 50% of first instance decisions were challenged. Although it is well beyond the scope of these submissions to address the complexity of the rules in any detail (including the transitional and newly modified rules), they were the subject of discussion in the Ausgrid case. The modified rules obviously left various parties in doubt as to the breadth and proper application of the new tests (e.g. ATCO decision vis the SL CAPM and FFM Approach). Such testing of the law in an attempt to seek clarity about the breadth and limits of those rules is justified. Indeed this is one of the aims of SCER's Statement of Policy, that is, the provision of "regulatory certainty by providing a robust review mechanism that encourages increased stakeholder confidence in the regulatory framework". Reviews (routine or not) should not be discouraged as the certainty that is desired works to the advantage of the regulators and applicants - both now and going forward. That certainty is required because what is involved is a very valuable economic resource and what is at stake is a very significant future investment. Decisions (often in the billions) must be made in time periods which affect the foreseeable future. It is important that decisions made today are the best

76 One ground (X-factor) was not decided. 77 Two grounds were not decided - the Tribunal found it unnecessary to resolve the question of whether a ground of review was

made out in respect of metering services opex or classification of metering services.

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for the future in terms of the long term interest of consumers taking balanced against the property rights - which is again entirely in tune with the SCER's Statement of Policy.

In this way, the question posed about routineness of review, which carries with it many unstated assumptions and unnecessary negative connotations, is neither a fair question nor one that is probative of any real issue.

4.6 Long term interests of consumers

The Consultation Paper highlights the importance of the long term interests of consumers in the decisions by both energy regulators and the Tribunal, and states that "[t]he overarching objective of the 2013 reforms was to clearly prioritise the long term interests of consumers through a series of changes to the NEL and NGL which modify the test for initiation, processes, and roles of participants in a review process".78

The long term interests of consumers are paramount to decision makers. Read literally however, there is a risk of a view that the concept is only achieved by means which benefit consumers on face value. The most obvious example is lower tariffs. It is important to emphasise that the concept is much broader than this, and in any event, there does not appear to be robust evidence to support the notion that higher energy prices necessarily or always operate against the long term consumer interest.

Rather, the relationship between short term price benefits and long term dynamic benefits which consumers obtain from investment and innovation is uncertain.79 As an example, the European Commission has directed national regulators to increase prices in some Member States in order to promote longer term investment objectives.80 A key deficiency in the COAG Consultation Paper (and in the SCER paper), is that both papers seem to regard it as axiomatic that decisions which result in higher consumer prices over the review period (relative to those originally proposed by the AER/ERA) cannot be in the long term interests of consumers.81

It is submitted that in the context of electricity and gas, the long term interests of consumers includes the promotion of efficient investment in, and efficient operation of, electricity and gas services.82 The necessary legislative premise is that the long term interests of consumers will only be served by regulation that advances economic efficiency. In the UK and the rest of Europe, there is a growing realisation that the existing regulatory framework may contain a bias towards short term, static benefits, invariably in the form of lower retail prices, which are achieved at the expense of longer term dynamic benefits associated with investment and technology innovation. As the Feasey Report states:

"… The ‘consumer interest’ in communications markets has also been rendered more opaque in both the UK and the rest of Europe by the growing realisation that the existing regulatory framework may contain a bias towards short term, static benefits, invariably in the form of lower retail prices, which are achieved at the expense of longer term dynamic benefits associated with investment and technology innovation.. This is said to be revealed by the comparatively low prices for telecoms services that prevail in Europe, and by the comparatively lower levels of network investment and new infrastructure deployment in both fixed and wireless broadband markets compared to both Asia or the US. These concerns lie at the heart of reviews of communications regulation which are

78 Consultation Paper, p 10 79 Feasey, R., Making regulatory review regimes work better for everyone: lessons for the COAG LMR review from the British and

European communications sector, 1 October2016, at [47] – [50] (Feasey Report) 80 Feasey Report at [48]; see also eg. Charles River Associates, Costing methodologies and incentives to invest in fibre, July

2012. The European Commission's latest proposal suggests that "In determining whether or not price control obligations would be appropriate, national regulatory authorities shall take into account long-term end-user interests related to the deployment and take-up of next-generation networks…": European Commission, Proposal for a Directive of the European Parliament and of the Council establishing the European Electronic Communications Code (Recast), 14 September 2016, p 211

81 Feasey Report, at [49] and [79] 82 Application by ATCO Gas Australia Pty Ltd [2016] ACompT 10 at [29]

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currently being undertaken by both Ofcom and the European Commission, both of which aim, amongst other things, to better promote long term investment."83

Economic efficiency is realised by ensuring that monopoly infrastructure providers are permitted to recover at least the efficient costs of providing those services.84 If tariffs are set below a network's "efficient costs" there is a danger that the pricing will adversely affect the interests of consumers in the long term in two ways:

(a) first, by ultimately impairing the provision and operation of safe, secure, efficient and reliable energy for consumers;85 and

(b) second, as the safety, security, efficiency and reliability of the energy service declines, so do the number of consumers willing to pay for that service. As the consumers diminish there is greater upward pressure on prices for the remaining consumers through reduced utilisation of the shared network.86

The long term interests of consumers is not a concept which is unique to the gas and electricity sector. It also a relevant factor with respect to access determinations in the telecommunications industry.87 Indeed, in the leading decision of Seven Network Limited (No 4) [2004] ACompT 11 the Tribunal echoed the same theme seen in the gas and electricity cases:

"In considering how these elements may combine, it may be the case, for example, that very low prices are in the short term interests of end users. Over the long term, however, sustainably low prices (which may be higher than the “very low prices” referred to above) are more likely to enhance their interests, as the long term interests of end-users are likely to suffer in an environment characterised by short lived operators who fall over soon after the customer signs with them, as distinct from one in which reliable service providers offer competitive, but sustainable, services. Moves that enhance the quality and diversity of service may be subject to a similar analysis."

4.7 Consumer participation in judicial review proceedings

An application for intervention by a person who is not named in the litigation but who alleges they have an interest in the outcome of the matter only succeeds in discrete (usually Constitutional) matters and otherwise the rarest of cases. This is because a direct affectation or direct interest in the proceeding must be shown. The intervener must show that they have a particular statutory right, power or immunity which they seek to maintain.88 Additionally, even a party who wishes to act amicus must "… show that the parties whose cause [they] would support are unable or unwilling adequately to protect their own interests or assist the court in arriving at the correct determination of the case."89

In the Federal Court, rule 9.12 imposes a burdensome test relating to intervention by non-parties. The Court must be satisfied that: the non-party's contribution will be useful and different from the contribution of the parties to the proceedings; the intervention would not unreasonably interfere with the parties’ ability to conduct the proceedings as the parties wish (effectively the adversarial model); and any other matter the Court considers relevant. The fraught nature of intervention applications is exemplified by PIAC's interlocutory intervention application in the AER's judicial review proceedings in the Federal Court. PIAC's application of 25 May 2016 was stood over until 17 October 2016 to be heard and determined by the Full Court (i.e. the day before the commencement of the part-hearings on the substantive application).

83 Feasey Report, at [47] 84 Applications by Public Interest Advocacy Centre Ltd and Ausgrid [2016] ACompT 1 at [787] 85 Application by Jemena Gas Networks (NSW) Ltd [2016] ACompT 5 at [194] - [196] 86 Application by Jemena Gas Networks (NSW) Ltd [2016] ACompT 5 at [198] 87 s 152AB of the Competition and Consumer Act 2010 (Cth) broadly requires the decision maker to consider the long term

interests of "end users" in the context of "competition and efficiency". This is of course distinct from the gas and electricity laws where the consideration focuses on "economic efficiency"

88 Australian Railways v Victoria Railways Commission (1930) 44 CLR 319 at 331 (Dickson J); Levy v Victoria (1997) 189 CLR 579

89 Kruger v Commonwealth (1996) 3 Leg Rep 14

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In short, the agitation of issues by an intervener which are foreign to those which are put in dispute by the parties themselves are unlikely to be given leave. If the parties themselves are capable of asserting and protecting their own interests there is little to be gained by a Court - whose task is to adjudicate the rights (and only the rights) of the particular parties before them - entertaining issues that the parties do not put in issue.

At this point it is necessary to make an observation - the participation by consumer advocates and those who would champion the public interest in the Tribunal, is neither as formalistic nor an insuperable barrier which must be overcome as it would be in curial proceedings. In fact the NEL and NGO contain much less onerous rules about consumer intervention90 and impose a requirement that, even absent intervention, reasonable steps be undertaken to consult and involve them in process.91 It is not surprising therefore that the Consultation Paper records that "consumer and user views have now been sought in all relevant LMR review" and stakeholders have acknowledged "that there is now greater involvement in the review process".92

In the face of the above differences between the onerous and strict intervention rules in the Federal Court and State Supreme Courts in jurisdictions which rely on a common law judicial review framework and the fact that it is constitutionally prohibited from consulting any consumer and public interest advocate as part of its judicial decisions, it must be the position that the role and contribution of consumers and public interest advocates will not be enhanced by the removal of the LMR regime. Given that the principle object of utility regulation is to advance the long term consumer interest in the efficient investment in infrastructure by regulating the revenue that utility operators can recover from tariffs charged to consumers and enhance the efficient operation and use of infrastructure services for the long term interest of consumers, that objective is best met by a Tribunal which is required to consult and hear from them.

As to the quality of stakeholder participation, there is no doubt that merits review is far more amenable to engaging the views of the individual and unrepresented participant than is judicial review, which is an inherently adversarial process. Given that the question in merits review is the correct and preferable decision, the concept of onus of proof is not applicable, 93 and the merits reviewer may engage in a process of inquiry. In this way, even beyond the critical question of standing to participate, the LMR regime is better suited to engaging all stakeholders than is judicial review.

It is of note that a different approach has developed in the United Kingdom, which has not adopted "consumer consultation", at least in relation to the communications sector. Providing support for that position, the Feasey Report states:

"I have a number of difficulties with the consumer representation debate in Australia. First, I have not seen any robust evidence to suggest that higher utility transportation prices (relative to those set by the regulator) necessarily or always operate against the long term consumer interest (or that the ACT is the body that should bear the greatest responsibility even if they do). In communications, we are very uncertain about the relationship between short term benefits of lower prices and longer term benefits which consumers obtain from investment and innovation. Furthermore, my experience from the UK is that effective consumer representation, particularly in complex wholesale market matters, is very difficult to achieve. The UK has not adopted the Australian model of requiring the industry to fund consumer groups outside of the sector regulator itself, whilst we also lack the resources and tradition of the powerful non-profit US advocacy groups. The result is that most British consumer groups focus on populist retail market campaigns, and not wholesale issues, as they compete for funds. I also think it is a mistake to imply that the consumer interest and the interests of regulated firms are opposed to each other. When talking about ‘consumer representation’, what is often meant is that the ACT should hear the contrary view on an issue or that the panel needs to embrace a broader range of perspectives. There needs to be room for a devil’s advocate. I have sympathy with this view, but the role need not be performed by a

90 NEL s 71L, NGL s 255 91 NEL s 71R(1)(b)(ii), NGL s 261(1)(b)(ii) 92 Consultation Paper, p 11 93 McDonald v Director-General of Social Security (1984) 1 FCR 354.

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‘consumer representative’. It could be undertaken by another firm (as is often the case in the UK), by members of the ACT or their expert advisers, or by the AER/ERA."94

4.8 Ongoing reform of the underlying regulatory framework and its uncertainties has driven many of the merits reviews

Politicians and sector regulators are often tempted to introduce regulatory changes before a new review regime has had an opportunity to establish itself properly. The gas and electricity sector is no different and has not escaped the consequences of these temptations (with the NGRs and the NGRs now reaching their 29th95 and 82rd versions96 respectively).

Routine changes to regulatory frameworks can be problematic, for both industry participants and end users. They add uncertainty and can prevent the framework from defining its boundaries, its procedures and modus operandi - a point made in the Feasey Report:

"…the [Consultation Paper] notes that lengthy reviews and complex conclusions create uncertainty for consumers whilst they are being undertaken. I see no way to avoid these features of the regime, which arise in every review regime I have encountered. I would be far more concerned about the uncertainty that arises from almost continual review of the regime, which has adverse consequences for consumers, firms, regulators and investors."97 (emphasis added)

In the current context, the consequence of uncertainty is its propensity to drive merits review applications, as interested parties seek to affirm or obtain a better understanding of what may otherwise be an ambiguous regulatory position. For example, on 29 November 2012, the AEMC published its Rule Determination National Electricity Amendment (Economic Regulation of Network Service Providers) Rule 2012 and National Gas Amendment (Price and Revenue Regulation of Gas Services) Rule 2012 (2012 Rule Amendments). This included significant amendments to r 6.5.2 (return on capital) and r 6.5.6 (forecast operating expenditure) of the NER and corresponding changes to Rule 87 and 87A of the NER. Soon after, the 2012 Rule Amendments became the subject of a complex debate in the course of PIAC-Ausgrid's hearing, and the related network service provider hearings, with the AER and parties adopted a differing interpretation of the scope and implications of the 2012 Rule Amendments.98 While the PIAC-Ausgrid Decision has now provided interested parties with much needed guidance with respect to r 6.5.2 and r 6.5.6, the relevance of that direction exists only as long as the rule remains in its current form. Any change to the rule is likely to make the precedent redundant.

4.9 Process issues which have caused problems

The Tribunal's approach

Under separate headings in page 10 and 11 of the Consultation Paper, entitled 'Basis of Tribunal's Decision' and 'Material Considered by the Tribunal' respectively, policy questions are raised as to whether:

(a) the LMR regime is delivering materially preferable decisions in circumstances where the Tribunal did not clearly express why its decision is in the long term interests of consumers and, in those cases in which it found there was a materially preferable NEO/NGO decision, it provided "few details … on how the Tribunal considered the particular arguments put forward by the applicants";

94 Feasey Report, at [2g] 95 http://www.aemc.gov.au/Energy-Rules/National-gas-rules/Current-rules 96 http://www.aemc.gov.au/Energy-Rules/National-electricity-rules/Current-Rules 97 Feasey Report, p 36, [88] 98 As to return on capital, Ausgrid contended that the AER's decision was based on an incorrect construction and application of the

NER, in that AER did not have regard to the materials required by r 6.5.2 (pursuant to the 2012 Rule Amendments, the AER is required to consider a range of relevant evidence in determining the return on equity, rather than simply the SL CAPM pricing model). As to forecast operating expenditure, the parties' submissions focused on "whether the AER's substitution of forecast opex was in accordance with the requirements of r 6.5.6 which, as a result of the 2012 Rule Amendments, is in a form different from that previously applied by the AER in determining a DNSP's opex allowance": PIAC-Ausgrid at [141].

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(b) the volume of the "review related material" (which extended to more to than a million pages) has created a regulatory impost on the Tribunal in reviewing such material and the AER in maintaining a record.

At the outset, the process issues identified must be set against what is sought to be achieved and the importance of the outcome for affected stakeholders. It is trite that many tribunals have an exhortatory statutory duty of acting in a manner that is fair, just, economical, informal and quick. 99 Some tribunals re-inforce those objectives within their service standard or charter. But even the premier Commonwealth tribunal, the AAT, who is subject to the exhortatory statutory duty specified above, recognises that those ideals must be counterbalanced. For the AAT, being fair and just may mean that the other objects, being economical, informal and quick, will have to yield. This counterbalancing mechanism is enshrined within its empowering statute which recognises that it must adapt its mechanism of review so that it is "proportionate to the importance and complexity of the matter".100 One must also not lose sight of the fact that, like the AAT, the Tribunal must ensure that it engenders or promotes public trust and confidence in its own decision-making. This two way stretching of objects is necessary because not all cases are alike. The ones dealt with by the Tribunal are complex and the procedures must be adapted to suit.

Having attempted to set a framework for the ideal review process, we turn to the two process issues identified in greater detail.

Basis of Tribunal's Decision

It is unclear what particular process issue truly underpins the concern raised in the Consultation Paper. It is also unclear why there is any causative relationship with the policy question raised. The example cited in the Consultation Paper refers to transcription errors and the correction of minor details of record. These could be hardly be said to be weighty matters. The correction of the record is common in all proceedings. Experienced judicial and non-judicial members of the Tribunal have the capacity to control the conduct of the proceeding. Nothing more needs to be said concerning that matter other than the observation that the Consultation Paper is justified in its assessment that such corrections of the record do not result in a materially preferable decision. That being the case, it is difficult to discern why it featured at all as some sort of signal that the LMR regime is deficient and requires overhaul.

Read more generously however, the Consultation Paper could be making a point that the published written reasons of the Tribunal need to have an "educative effect" as well as clearly address the linkage between its finding that a review ground is made out and how it assessed and arrived at its materially preferable decision, taking into account the long term interests of consumers. If that is a correct understanding of the point sought to be raised then that begs one question and an observation. The question is: what is required of the Tribunal as a matter of law concerning what it must record in its published written reasons? And the observation is that, even if it is accepted at face value that the Tribunal could do more to explicate how it arrived at its conclusion(s) so as to make its decisions transparent and accessible, that it is not an attack on the correctness of the Tribunal decision but the manner in which its written reasons are manifested. It does not betray a failing of the architecture of the LMR regime.

In the preceding paragraph the question and observation were separated. The observation was premised on an acceptance that the Tribunal could do more. However, at this point it is convenient to deal with the question posed and test the observation made.

The law requires a decision maker to record their decision and explicate their reasons by setting out the findings on any material questions of fact and refer to the evidence on which those findings are based.101 As to the content of that requirement, Justice McHugh issued the classic statement in Durijaisingham:102

99 Section 2A of the AAT Act. 100 Section 2A(c) of the AAT Act 101 Section 25D Acts Interpretation Act (Cth) (1901) 102 Re Minister for Immigration; Ex parte Durairajasingham (2000) 168 ALR 407.

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"It is not necessary, in order to comply with s 430(1), for the Tribunal to give reasons for rejecting, or attaching no weight to, evidence or other material which would tend to undermine any finding which it made."

In my opinion, this passage correctly sets out the effect of s 430(1)(c) and (d). However, the obligation to set out "the reasons for the decision" (s 430(1)(b)) will often require the Tribunal to state whether it has rejected or failed to accept evidence going to a material issue in the proceedings. Whenever rejection of evidence is one of the reasons for the decision, the Tribunal must set that out as one of its reasons. But that said, it is not necessary for the Tribunal to give a line-by-line refutation of the evidence for the claimant either generally or in those respects where there is evidence that is contrary to findings of material fact made by the Tribunal. Indeed, to do so would be contrary to the direction in s 420 of the Act that:

"(1) The Tribunal, in carrying out its functions under this Act, is to pursue the objective of providing a mechanism of review that is fair, just, economical, informal and quick." (emphasis added)

Further, the law does not require a Tribunal to deal with particular arguments put forward by any party if those arguments are "subsumed by findings of greater generality" which are recorded in the decision or become "unnecessary" as a result of material findings.103 In this way, it is not and has never been necessary for any Tribunal (or indeed Court) to address each and every factual argument or piece of evidence put forward by a party. That does not diminish the validity of the overall finding made by the Tribunal as to the material and preferable decision. Indeed logic would dictate that some things not be said as the finding is self-contained and all encompassing.

In the face of the above, the basis for any decision must be assessed against what is legally required. In part 4.4 this submission, we addressed the devotion, care and attention given by the Tribunal to the question of material preferable decision and its relationship with the long term interests of consumers. Whilst they are not repeated here, it is clear that the Tribunal addressed the material questions of fact and referred to the evidence on which its findings were based in its 324 page lead judgment in the PIAC-Ausgrid Decision.

If what is truly encouraged by the Consultation Paper is that the Tribunal devote a specific part of its reasons towards clearly expressing why the Tribunal's decision is in the long term of interests of consumers then that is an easily solvable matter that requires nothing more than recognition by the Tribunal itself.

Material considered by the Tribunal

The volume of the material with which the Tribunal had to contend and its significance to the architecture of the LMR regime is a multifaceted one. The thrust of the argument appears to be however that it affects efficiency, both time and resources.

As to the multifaceted aspect of the issue it is important not to lose sight of the fact that the review related material was the accumulation of six separate applications before the Tribunal for what is effectively a regulatory cycle that would bind them for 5 years. Further, although the one million pages is said to include extensive expert reports it would not be unreasonable to think that much of that material was appendices and excel spreadsheets. It would also not be unreasonable to think that a significant portion of that material was the AER's file or material produced by, on behalf of, or at the behest of the AER. Thirdly, it is in the nature of the inquiry that the Tribunal has to undertake that the material would be presented in a form and format conducive to volume. Fourthly, it is antithetical to administrative justice to limit any party from relying on material which supports its case - at least before the first instance decision maker. Clearly, the Tribunal is already benefitted by the LMR regime because of the limitation on the admission of new evidence on review. In that way the record is relatively stable. All of these matters lend further weight to the truism that complex matters such as the ones dealt with by the Tribunal are likely to be heavily laden with documents. As the AAT has recognised in its empowering statute, the achievement of its objects must be proportionate to

103 Applicant A169 of 2003 v MIAC [2005] FCAFC 8 at [24]; WAEE v MIAC (2003) 75 ALD 630 at [47]; Paul v MIAC (2001) 113

FCR 396 at [79].

LMR Submission


the importance and complexity of the matter". Any balanced opinion about the volume of documents would recognise the exceptionally significant issues at stake for applicants (including planned future investments made and to be made by parties in the future which may be jeopardised by the outcome) and the complexity of Tribunal proceedings. To focus on the absolute number of pages says little about the success (or otherwise) of the LMR regime, the importance of the issues to be addressed by the Tribunal and the significant economic outcomes for applicants.

Technicality of Judicial Review - are there any net procedural benefits over LMR?

One of the themes that emerged from the Consultation Paper and which was said to act as a limitation on the effectiveness of the Tribunal was its "inherently legalistic process".104 As a matter of process, it was also said that review applicants engage in "cherry picking of issues" such that the focus is on correcting individual errors rather than whether a different decision would lead to a materially preferable decision.105

First, the general observation may be made that, while there is no doubt that the LMR regime like any system, could be improved, the procedural differences between merits and judicial review means that removing the LMR regime in favour of sole reliance on judicial review would simply exacerbate the perceived issues of legalism, timeliness and other procedural excesses. This is evident from the statutory provisions of the CCA which, typically of tribunal merits review, provide that Tribunal proceedings "shall be conducted with as little formality and technicality, and with as much expedition, as the requirements of this Act and a proper consideration of the matters before the Tribunal permit": s 103. This section also provides that the Tribunal is "not bound by the rules of evidence". Conducting judicial review proceedings in a Court is undoubtedly more formal, technical (the rules regarding the admissibility of material as evidence being a key example), lengthy and expensive to engage in.

A useful case study into whether the perceived limitations can be ameliorated or eliminated by resort to judicial review alone is the originating application for AER's JR Application.

An analysis of AER's JR Application, which invokes the Administrative Decisions (Judicial Review) Act 1977 (Cth) (ADJR), should dispel any doubt about the formalism, legalism, technicality and complexity of judicial review if a Court were to adjudicate and consider the polycentric issues considered by the Tribunal. We believe that the abolition of merits review would only likely lead to a replication of the formalism, legalism, technicality and complexity reflected in AER's JR Application. In demonstration of that, it is worthwhile pointing out some features of that application. First, it is notable that the AER has pleaded 16 grounds of review spanning some 21 pages. Each of the grounds contains a detailed series of particulars (and sub-particulars) some of which stretch to 11 alleged legal errors in support of a single ground. Second, the topics and findings sought to be put in issue concern the Tribunal's findings relating to operating expenditure, return on debt, cost of corporate income tax and an alleged failure to apply a 'holistic' analysis. Despite the limited number of topics sought to be put into issue, the range of legal errors asserted include the following:

(a) the Tribunal did not have jurisdiction to make the decision (s 5(1)(c) ADJR Act);

(b) the decision of the Tribunal was not authorised by the enactment to make the decision that it purported to make (s 5(1)(d) ADJR Act);

(c) the decision of the Tribunal was an improper exercise of power (s. 5(1)(e) ADJR Act) because the Tribunal took account of irrelevant considerations (s 5(2)(a)), exercised its discretionary power in accordance with a rule or policy without regard to the merits of the case (s 5(2)(f)) and otherwise abused its power (s 5(2)(j));

(d) the decision of the Tribunal involved an error of law (s 5(1)(f) ADJR Act); and

(e) the decision of the Tribunal was otherwise contrary to law (s 5(1)(j) ADJR Act).

Without question the AER (and all government agencies) must act as a model litigant, and must not take technical points. No question is raised about that in this submission but, if the AER can,

104 Consultation Paper, p 14 105 Ibid, p 4

LMR Submission


conformably with its duty, allege the number of errors that it has in the AER JR Application then, by parity of reasoning, it must follow that if merits review were abolished the AER would be the respondent to an application for judicial review that shares and reflects the same legal formalism, complexity and technicality found in its own pleading. Indeed the issue of cherry picking will not be eradicated but will become entrenched because the initiating party is legally entitled to put (pick) whatever issues before the Court as they may choose - as the AER has done. In this way, the inescapable conclusion is that cherry picking and legal formalism will not be reduced, but will become entrenched. That is not an improvement.

It is also worth noting that both the Tribunal and the Court may make orders to facilitate the simplification and streamlining of merits and judicial review proceedings respectively. This includes orders that limit the length of written submissions that parties may file, set deadlines for when submissions and other material may be filed, and set dates by which applications for intervention or (in the case of merits review) consumer advocates' submissions may be made. The Federal Court Orders of 2 June 2016 in respect of the AER's JR Application provide an example of this (for example, the Court ordered that the AER's written submissions were not to exceed 80 pages in length). The Tribunal is similarly empowered to implement orders that facilitate the timely and efficient processing of merits review applications. How such strategies are being utilised may be worth exploring in considering how to improve the LMR regime (by means already at hand).

Judicial review options are always available to Network Businesses even absent merits review

Before leaving this topic it was observed above that the AER's JR Application invoked the jurisdiction of the Federal Court's jurisdiction by reliance on the ADJR Act. A review applicant is not limited to the ADJR Act. Indeed a review applicant can seek judicial review of a first instance decision of the AER without seeking any merits review by the Tribunal of a regulatory review decision.106 This is because s.39B of the Judiciary Act 1903 (Cth) and s. 75(v) of the Constitution provide original jurisdiction to seek a writ of mandamus or prohibition or an injunction against an officer of the Commonwealth. The AER is such an officer of the Commonwealth. The fact that no review has been commenced directly relying on the constitutional merits is a testament to the strength and confidence of the merits regime (including LMR) as implemented by the Tribunal. This fact also dispels the claim in the Consultation Paper that a restriction of review opportunities will prevent participants seeking outcomes in multiple forms.107

106 Bodruddaza v Minister for Immigration and Multicultural Affairs (2007) 81 ALJR 905 107 See fifth dot point of Consultation Paper

LMR Submission


5. Options

5.1 Retain with some amendments

We have reviewed and support the options for refinement that have been considered by the ENA and APGA in their respective submissions. There is further scope for some refinements to the current LMR regime in a way that does not undermine investor confidence, but seeks to address some of its perceived weaknesses, particularly in the following areas:

(a) requiring the AER to inquire into, investigate and report with respect to any matter relevant to the Tribunal's decision (which report must then be provided to the parties as matter of procedural fairness);

(b) combining the reviews of 2 or more applicants where common issues arise;

(c) unless there are, in the opinion of the Tribunal, exceptional circumstances and the consent of the applicant to an enlargement of time is obtained, an application which is not resolved within 180 days is taken to result in the decision under review being affirmed;

(d) there should be a detailed consideration of implementing those recommendations made by the Expert Panel in 2012 that were not adopted by SCER in 2013 when the current LMR regime was implemented. This is warranted given that the reform objectives that the Expert Panel was working to in 2012 are the same reform objectives that the SCO is presently tasked with achieving;

(e) better engagement and use of the community consultation process such as requiring Tribunal to prepare a report on key take outs from consumer consultation;

(f) the appointment of people with specific consumer expertise as lay members of the Tribunal;

(g) movement to a single binding rate of return guideline determination with network sector-wide implications, which is subject to a single, efficient review of the guideline determination;

(h) provision for an automatic right of standing for consumer representation in appeals, and ensuring that consumer representation is well-resourced. There could also potentially be an explicit requirement to address consumer submissions in the primary and review process;

(i) an enhanced inquisitorial operation model for the review body (e.g. potentially expanding the role for collaborative expert exchanges, potentially allowing the review body to directly engage and question qualified economic experts, and increasing the use of statements of agreed facts to focus on the relevant issues in dispute).

5.2 Amendments to process of primary decision maker

There is also scope to improve the processes that the primary decision maker currently operates under. The provisions governing the procedure for dealing with a full access arrangement proposal are set out in Division 8, Part 8 of the NGR and in the NGL.

Under Rule 60(2), in responding to a draft decision, the service provider is "limited to those [amendments] necessary to address matters raised in the access arrangement draft decision unless the AER approves further amendments". However, the matters that the primary decision maker may take into account in its final decision are not limited to those matters raised in its draft decision and addressed by the service provider. Rule 62(1) merely states that "after considering the submissions made in response to the access arrangement draft decision within the time allowed in the notice, and any other matters the AER considers relevant, the AER must make an access arrangement final decision" (emphasis added). A difficulty may arise when the decision maker materially changes its approach between the draft decision and the final decision, to include new positions or approaches not previously put to the service provider. Such an outcome is surely unintended by the rule makers.

LMR Submission


One such example is the way the 'allowed rate of return' was dealt with in the ERA's 'Final Decision on Proposed Revisions to the Access Arrangement for the Dampier to Bunbury Natural Gas Pipeline 2016-2020' dated 30 June 2016, and is one of the grounds currently the subject of an application to the Tribunal.

In its access arrangement proposals (and supporting submissions), DBP's proposed approach to the estimation of the return on equity (a key components of the allowed rate of return) principally differed from that proposed by the ERA, both in its Rate of Return Guidelines and Draft Decision, in that DBP sought to test for, and then estimate, the bias present in the outcomes generated from the application of relevant models and then to make an adjustment accordingly. By contrast, in the Rate of Return Guidelines and Draft Decision, the ERA primarily relied on regulatory judgment to adjust for the potential downward bias of the model. Both the ERA and DBP made that adjustment by increasing the value of one parameter within the applicable model for estimating the return on equity (the beta parameter within the Sharpe-Lintner CAPM) although their method for making and implementing that increase differed.

In essence, the fundamental difference in approach between DBP and the ERA was not concerned with whether to account for that downward bias, but how to account for it and the precise magnitude of the adjustment required.

However, in the Reviewable Decision and Final Decision, the ERA relied on a different approach for the determination of the return on equity. That approach differed from the one it adopted in its Draft Decision and its own Rate of Return Guidelines, because its revised approach took no account of and made no adjustment for the actual or potential bias in the SL-CAPM. Instead, the ERA derived a return on equity by an application of the SL-CAPM in its standard, theoretical form - without any adjustment for actual or potential bias or underestimation.

In this respect, the ERA's conclusion on the return on equity in the Final Decision represented a significant departure from the approach previously adopted by the ERA itself, which also diverges materially from the approach of the AER, which was considered by the Tribunal in the PIAC-Ausgrid decision. In making its Final Decision and changing its previous approach, the ERA appears to have relied on expert reports. DBP did not have the opportunity to respond to the revised approach or the material apparently relied on by the regulator to support its shift in position.

The absence of consultation with DBP and other stakeholders on the ERA’s change in approach on rate of return adopted in the Final Decision, demonstrates a shortcoming in the relevant provisions of the NGR. If the processes that the primary decision maker currently operates under are improved, this may assist in reducing recourse to the current LMR regime.

Two final suggested changes to the original decision making process include:

(a) requiring (or otherwise setting a target time) for the original decision maker to complete the original decision making process within a prescribed period that can only be extended in exceptional circumstances; and

(b) in order to assist the original decision maker (and ultimately the Tribunal if necessary) in deciding what is a materially preferable NGO or NEO decision:

(i) providing a criteria or guidelines in the NGR and NER with respect to how the NGO and NEO are achieved, whether by express reference to the revenue and pricing principles or to other criteria; and

(ii) requiring both the network business and the regulator to expressly set out how their proposal or decision (as the case may be) achieves the NGO and NEO.

LMR Submission


6. Questions posed in Consultation Paper

The Consultation Paper posed 26 questions relevant to the current review. The subject matter of a selection of these questions has been addressed in our submissions above. A consolidated response has also been prepared and appears in tabular form at Appendix III.

LMR Submission


Appendix I

Objective Current position Judicial Review

Review Framework for the Electricity and Gas Regulatory Decision-Making

Making the long-term interests of consumers (with respect to price, quality, safety, reliability and security of supply) paramount in interpreting the Objectives

Enshrined within SCER Statement of Policy Intent

As policy, it is capable of being taken into account and applied by the Tribunal - see PIAC-Ausgrid decision at [74]; [75] and [79].

Policy generally supported by the Objectives in s 7 NEL and s 23 NGL

Rules regarding consumer participation in the Tribunal are more likely to promote the Objectives. Tribunal is capable of consulting consumer groups: s 71L NEL, s 255 NGL. Consumer interveners may raise new grounds for review: s 71M NEL, s 256 NGL. Even absent intervention, reasonable steps must be undertaken to consult and involve consumers in the review process: s 71R(1)(b)(ii) NEL, s 261(1)(b)(ii) NGL.

Tribunal is not bound by evidence law, so is better suited to taking evidence or views from parties including consumers related to long-term consumer interests.

SCER Statement of Policy Intent will not be enhanced by abolition of the LMR regime:

a. policy is irrelevant to the interpretation and adjudication of legal rights;

b. a legal issue will arise as to whether the policy is within power given that the terms of the policy are not framed in like terms to s7 NEL and s 23 NGL: Lobo v Minister [2003] FCAFC 168;

c. a court is concerned with the interpretation of statutes and not policy documents unless the policy document guided the decision and is found to be ultra-vires and challenged on that basis;

d. a court will not receive evidence from consumer groups. Engagement of consumers in judicial review process will be reduced to nil given that an intervener must show that they have a particular statutory right, power or immunity which they seek to maintain: Australian Railways v Victoria Railways Commission

(1930) 44 CLR 319 at p 331; see part 4.7 of these submissions;

e. judicial review proceedings do not traditionally permit the reception of fresh evidence. Consequently, expert reports not considered by the initial decision-maker may not be considered. This may create an unfairness to litigants and an inadequate resolution to proceedings.

Promote efficient investment, operation, and use of energy infrastructure, and be consistent with the revenue and pricing principles of the NEL and NGL, in ways that best serve the long-term interests of consumers.

Enshrined within SCER Statement of Policy Intent

Policy reflective of the Objectives in s 7 NEL and s 23 NGL

Tribunal not only cognisant of but has adhered strictly to the statutory directive and relevant legal test: see PIAC-

The abolition of LMR will not enhance the position:

a. a court in judicial review proceedings will seek to interpret the Objectives using standard statutory construction techniques and determine whether the decision under review was in breach of an inviolable

LMR Submission



Ausgrid decision at [35]; [74]; [75]; [77] to [79]; [81]; [89] to [90] and [95].

Tribunal has the benefit of all relevant documents in aid of its assessment of the Objectives and has the benefit of hearing first hand from the witnesses.

Tribunal is entitled to find the facts and ascribe weight to certain evidence.

Tribunal required to take into account the pricing principles: s 71P(2b)(b) NEL; s 249(4b)(b) NGL.

legal rule eg taking into account an irrelevant fact; not taking into account a relevant fact; misconstruction of a relevant provision and the general administrative law errors so commonly litigated in the Federal Court.

b. a court is unable to decide whether the decision in fact promoted efficient investment …in the interests of consumers as that factual assessment is reserved to the decision maker: see 3.3 of these submissions.

c. a court does not necessarily have the complete record. The relevant documents are referrable to the grounds put in issue by the parties. Those documents may only be a subset of the full suite of documents relied on by the Tribunal.

d. a court in judicial review is bound by the facts found by the decision-maker and is fettered to question the weight given to any piece of evidence: see 3.3 of these submissions.

Consistent with the Australian Administrative Law Policy Guide,108 achieving the most preferable decision in the pursuit of this objective should be the aim of both regulator and review body alike.

Focus of merits review on achieving the "correct and preferable" decision: Drake v MIEA (1979) 2 ALD 60, 68.

LMR is appropriate for reviewing AER decisions which involve significant amounts of discretion: see 3.3 of these submissions.

Statutory requirement to specify manner in which Tribunal decision on the basis of 1 or more grounds of application would or would be likely to result in a "materially preferable" decision: s 71C(1a) NEL, s 246(1a) NGL. Tribunal must not grant leave to hear the application unless satisfied of the same: s 71E NEL, s 248 NGL.

See PIAC-Ausgrid decision at [100].

Judicial review will not promote the objective of achieving the "preferred decision". Judicial review examines whether

the decision maker exceeded their lawful jurisdiction and not the merits of the case.

An original decision may be legally correct but not the most preferable decision; this will not constitute jurisdictional error. A court conducting judicial review is not entitled to set aside a decision on the ground of 'unreasonableness' if reasonable minds may differ about the preferable outcome: Li at [28]. See 3.4 of these submissions.

Principles espoused by the Australian Administrative Law Policy Guide will be diminished: see 3.2 and 3.3 of these submissions.

The long-term interests of consumers should be the sole criterion for determining the preferable decision, both at the initial decision-making stage and at merits review

Position of the (former) SCER Energy Ministers that the interests of consumers should be 'the sole criterion' for determining the preferable decision explained in the Second Reading Speech to the 2013 amendment bill.

A Court conducting judicial review cannot adjudicate on what is the materially preferable decision, or examine the factors which parties would contend promote or undermine the long-term interests of consumers.

108 Australian Government, Attorney-General's Department, Australian Administrative Law Policy Guide, 2011.

LMR Submission



Tribunal is well-versed in considering the concept of the long-term interest of consumers: see section 3.5 of submissions, PIAC-Ausgrid decision at [63], [94].

Judicial review examines only whether the decision maker exceeded their lawful jurisdiction, not the merits of the case.

The review process should promote an accountable and high performing regulator such that material error is minimised, noting that the focus on the correction of selected errors is not equivalent to – and may not in itself lead to – the achievement of the most preferable overall decision in the long term interests of consumers.

Two bodies (each with specialist expertise) considering a factual scenario with an eye to the 'correct and preferable' decision in the long-term interests of consumers enhances the likelihood of reaching the most preferable overall decision.

Threshold requirement that Tribunal must not grant leave to hear the application unless satisfied that the applicant has established a prima facie case that a determination made the Tribunal on the basis of 1 or more grounds of application would or would be likely to result in a "materially preferable" decision (s 248 NGL, s 71E NEL), minimises potential for 'cherry-picking'. The Tribunal must make a holistic assessment before proceeding to consider the selected errors.

Tribunal may only make a determination to vary or set aside the original decision if satisfied that doing so will, or is likely to, result in a decision that is materially preferable in making a contribution to the achievement of the Objectives: s 71P(2a)(c) NEL, s 259(4a)(c) NGL. Tribunal must state in its reasons for decision how the 'constituent components of the reviewable regulatory decision interrelate with each other and with the matters raised as a ground for review': s 71P(2c) NEL, s 259(4c) NGL.

See PIAC-Ausgrid decision at [66] - [70], [91]

The availability of judicial review, like any form of oversight or review, tends to encourage accountability and more precise decision-making. However, because the Court is concerned only with whether the original-decision maker exceeded their lawful jurisdiction and not with the preferable decision on the facts, judicial review does not promote the minimisation of 'material error' by the original decision-maker.

Attempts to fit grievances about the substance of the original decision within the grounds of judicial review (which is likely to occur in the absence of any form of merits review) will enhance 'cherry-picking' and scrutiny for potential legal errors rather than the preferable outcome in the consumers' interest.

Courts not required or empowered to make holistic assessment of overall decision. Judicial review involves a unilateral, selected error-correcting approach.

Judicial review results in curial remedies which have the effect of setting aside the decision under review and remittal to the original decision making body for reconsideration according to law. The original decision-maker may well reach the same decision (no 'second set of eyes' considering the merits).

Courts tend to take a deferential or "cautious approach" where the original decision-maker is using specialist knowledge to assess a factual situation.

A well designed limited merits review process can achieve the policy objectives outlined above

SCER Statement of Policy Intent is generally supported by the Objectives in s 7 NEL and s 23 NGL.

As policy, it is capable of being taken into account and applied by the Tribunal - see PIAC-Ausgrid decision at [74]; [75] and [79].

Policy is the domain of the executive, so it outside the scope of the Courts' constitutionally-endowed judicial power.

Policy is irrelevant to the interpretation and adjudication of legal rights.

LMR Submission



Limited Merits Review of Decision-Making in the Gas and Electricity Regulatory Frameworks

Remain a limited merits review process consistent with the MCE’s original policy intent;

None of the Framework objectives are consonant with a Court that exercises judicial power

Have clear and demonstrable links to the NEO and NGO and the revenue and pricing principles;

s 7, 71P(2b)(b) NEL; s 23, 249(4b)(b) NGL

Be transparent around how the review and decision-making processes have taken into account the long term interests of consumers;

s 71P(2c) NEL; s 259(4c) NGL

Place the onus on an appellant to make a prima facie case that a review will lead to a materially preferable outcome for consumers in terms of the NEO or NGO;

s 71E(b) NEL; s 248(b) NGL

Consider the matters raised before the review body, and linkages with other aspects of the decision under review, in the context of the whole of the reviewable decision and not as individual component(s) in isolation;

s 71P(2b)(a) NEL; s 259(4b)(a) NGL

Ensure that the review body has access to sufficient evidence and information, including, but not limited to, the record of the original decision-maker, in order to deliver an outcome that promotes the NEO and NGO;

s 71R NEL; s 261 NGL

Enable the review body to review the decision using information that was available at the time of the original decision, using the original decision-maker’s record as the starting point, or was not unreasonably withheld from the original decision-maker;

s 71R NEL; s 261 NGL

Be as informal and inclusive as practicable; Tribunal proceedings "shall be conducted with as little formality and technicality, and with as much expedition, as the requirements of this Act and a proper consideration of the matters before the Tribunal permit" and Tribunal not bound by rules of evidence: CCA s 103.

Judicial review proceedings in a Court are undoubtedly more formal, technical (the rules regarding the admissibility of material as evidence being a key example), lengthy and expensive to engage in.

Courts cannot inquire; they are by nature adversarial forums.

LMR Submission



Scope for improving transparency and user-friendliness of Tribunal decision records, regularly inviting consumer and user participation, adopting an even more inquisitorial approach, and evaluating timeframes for appeals.

Require the review body to use appropriate expertise around the economic regulation of the energy sector to assist in its decision-making;

Enabled by s 71R(5a) NEL, s 261(3b) NGL. Tribunal may make inquiries and seek evidence.

See PIAC-Ausgrid decision at [485].

Scope for improvement in regularising consultation of experts.

Strict rules regarding calling expert witnesses and reports. Onus on parties to make available expert evidence.

Require the review body to remit more complex matters to the original decision-maker where it considers major revisions are required; and

s 71P(2a)(d) NEL, s 259(4a)(d) NGL Courts tend to take a deferential or "cautious approach" where the original decision-maker is using specialist knowledge to assess a factual situation, lessening the likelihood of error being found in the first instance (let alone a decision being remitted).

Ensure relevant user and consumer representative views are sought as a routine and relevant part of the process.

Tribunal must take reasonable steps to consult consumer and users: s 71R(1)(b)(ii) NEL, s 261(1)(b)(ii) NGL.

Tribunal must not make a costs order against a small/,medium user or consumer intervener unless the user or intervener engaged in trivial or vexatious conduct: s 71X NEL, s 268 NGL.

Scope for regularising the seeking of consumer and user representative views throughout the review process, and reducing financial or cultural barriers to consumer and user participation.

A court will not receive evidence from consumer groups.

Interveners face much steeper procedural and financial barriers to participation.

LMR Submission


Appendix II: Completed List of Questions

Question Answer Reference in Submissions

(where applicable)

1. Are there any specific factors which prevent issues being resolved through the determination process?

No. LMR "best facilitate[s] the correction of a range of regulatory errors." There are broadly three reasons for

this: first, LMR acts to ensure that any discretion reposed in the original decision maker is exercised reasonably, rationally and its decision is evidently justifiable, second; inherent in the nature of merits review is that it provides certainty that the facts can be reviewed, and third; a ground of review such as incorrect exercise of discretion (s 71(1)(c) NEL and s. 246(1)(c) NGL) and unreasonableness (s 71(1)(d) NEL and s. 246(1)(d) NGL) reinforce the central tenet of making the correct or preferable decision. It is not to say though that refinement could not be made to the LMR process or the original decision making process. These are discussed in sections 2.5, 5.1 and 5.2.

Sections 2.1, 3.2, 5.1 and 5.2

2. Are reviews generally considered a routine part of the determination process?

No.

The adjective routine seems to be associated with the observation, also made in the Consultation Paper, that over 50% of regulatory decisions made since the 2013 reforms were implemented have been the subject of review. In this way, the 50% review rate is telling. It speaks of the success of the current system and disproves the notion of routineness. It could hardly be said that review is routine if half of the affected class, upon proper consideration (including one assumes having taken legal and other expert advice) decide not to challenge the first instance decision. The idea that reviews area routine part of the determination process also ignores and is contrary to the corporate government obligations attached to the decision making process of the management of network businesses.

Section 4.5

3. Does the framework enable reviews to focus primarily on the long term interests of consumers?

Yes. A major legal modification effected by the 2013 statutory amendments was the necessity for a review applicant to not only establish one or more of the grounds of review but to satisfy the Tribunal that an alternative materially preferable decision better promotes the NEO and NGO (ie that the long term interests of consumers are met).

Also, the 2013 reforms introduced a number of reforms aimed at consumer participation and consumer interests. We have suggested some changes to these aspects of the LMR regime and the original decision making process to make them more effective

Sections 4.4, 4.6, 5.1 & 5.2

4. To what extent does the current LMR process support materially preferable decisions being made for the long term interests of consumers?

The LMR process supports materially preferable decisions being made for the long term interests of consumers in two key ways:

the Tribunal is prevented from granting leave to hear a review application unless satisfied that the applicant has established a prima facie case that a determination would result in a materially preferable decision (s 248 NGL, s 71E NEL); and

Section 4.4, 4.6 and Appendix I

LMR Submission



(where applicable)

the Tribunal may only make a determination to vary or set aside the original decision is satisfied that doing so will, or is likely to, result in a decision that is materially preferable (NGL s 259(4a)(c), s 71P(2a)(c) NEL)

5. Are there any other issues which impact on the delivery of regulatory decisions that serve the long term interests of consumers?

No. The Consultation Paper has inaccurately raised two process issues (page 11) with respect to how the Tribunal decides whether there is a materially preferable decision. It does so by broadly explaining that "few details were provided on how it considered that particular arguments put forward by the applicants." This is not a structural flaw in LMR, but rather a complaint about how the Tribunal writes up its decisions.

Section 4.9

6. Are the current grounds for review sufficiently robust to avoid undue weight being placed on minor matters in merits reviews?

Yes. A major modification effected by the 2013 statutory amendments was the necessity for a review applicant to not only establish one or more of the grounds of review but to satisfy the Tribunal that an alternate materially preferable decision better promotes the NEL or NGL objective. The amendment demands a "holistic" focus to review, and in doing so, prevents weight being placed solely on minor matters.

Section 4.4 and 4.5

7. Are there any issues with the scale and scope of material that can be brought forward in relation to reviews?

No. The NGL and NEL (ss 261(1)(a) and 71R(1)(a) respectively) broadly prevent the Tribunal from considering any material other than that which was before the original decision marker. This is an appropriate limitation when one considers that the key rationale of LMR is to safeguard against unreasonable and irrational first instance decisions and / or errors of fact (to determine whether a decision is unreasonable and irrational and / or a result of an error of fact it is necessary to first have regard to the material which lead to the decision).

Section 4.9

8. Is there a way to minimise the regulatory impost of maintaining a record of decision making as part of any future reforms?

No response.

9. Are there any barriers to the Tribunal seeking additional expert advice? If so, how could these barriers be addressed?

No.

If the Tribunal forms a view that a ground of review has been made out, the Tribunal may:

on application by a party, allow new information or material to be submitted, if the new information or material would assist on any aspect of the determination to be made and it was not unreasonably withheld from the original decision maker: s 261(3)-(3a) of the NGL and s 71R(3) of the NEL;take its own steps to obtain information or material if it forms a view that that a ground of review has been made out and the information or material is necessary in order to determine whether a materially preferable decision exists (NGL, s 261(5a) and s 71R(5a) NEL).

Obtaining additional expert evidence is also something the Tribunal has done in other contexts. By way of example, In the matter of Fortescue Metals Group

Section 5.1

LMR Submission



(where applicable)

Limited [2010] ACompT 2, the Tribunal required the National Competition Council, pursuant to s 44K(6) of the CCA, to prepare a mining expert report.

10. Is participation without legal representation possible? Are there barriers hindering full consumer participation in the review process?

Yes. There are mechanisms available which permit the Tribunal to manage its own process, thereby allowing it to better facilitate participation without legal representation. For example, the Tribunal may impose a ban on traditional witness style cross-examination or may permit expert conclaves where consumers are able to ask questions of experts. If judicial review were the only review mechanism available, a single judge effectively becomes substituted for the Tribunal but with more formality and mechanisms less suited to both consumer consultation and involvement without legal representation.

Section 4.7

11. How costly has your participation in the appeal process been and what are the implications of this participation for you?

No response.

12. What are/were your expectations of how the Tribunal would consider the input from consumers?

In our experience there has been both limited interest and participation from consumers.

13. How can parties provide the Tribunal with sufficient evidence to inform its decision making, while still supporting the Tribunal in its aim to conclude decisions within three months?

Focus could be directed to the manner and / or form in which information and material, whether it be evidence or submissions, is made available to the Tribunal. One means of doing so could be to adopt the approach taken by the US Courts to substitute written reports with PowerPoint presentations. This is likely to have the effect of reducing the volume of information before the decision maker - in turn reducing the time necessary to digest and consider any pertinent points raised. Another approach may to be rely on expert conclaves, with a view of requiring parties to provide joint expert reports. This too is likely to have the effect of narrowing the information before the decision maker.

14. What has been the impact of the extended timeframe of review processes? How could these impacts be addressed?

No response.

15. What would be the impact of maintaining the current regime?

The regime introduced important changes and those should be allowed to work through until at least the next round of pricing re-sets have been completed. This is particularly the case where as noted in page 5 of the Consultation Paper, and as elsewhere discussed in this submission, the AER instituted judicial review proceedings in the Federal Court of Australia regarding various decisions made by the Tribunal in context of the current round of regulatory determinations and reviewed under the current LMR regime.

Section 2.1.

LMR Submission



(where applicable)

16. What amendments, if any, would you propose to achieve the policy intent of the 2006 and 2013 LMR reforms?

We support the model proposed by Jemena, that draws upon the New Zealand WACC experience with "input methodologies". One of the key features of this proposed model is that the SA Minister would, through necessary amendments to energy legislation and rule changes, change the method by which WACC is considered during the price review cycle. Every five years, the AER would set a WACC methodology applicable to all networks, and that methodology decision would be subject to limited merits review. The methodology set by the AER (or as amended by the Tribunal) would bind all parties in revenue determinations during that period. The methodology would need to be accompanied by a worked example that generates a WACC point estimate, based on prevailing conditions in the market for funds.

Section 4.3

17. Should the existing Tribunal review process be made more investigatory in nature? If so, how could this be achieved?

While there is no impediment to this occurring currently (see question 9), it would be necessary to consider the (limited) financial resources available to the Tribunal if one had intentions of increasing the Tribunal's investigatory functions.

It may be that the Tribunal's financial resources would be better utilized - potentially allowing for an increased investigatory function - if it was open for parties to deal with matters through a streamlined regime similar to the Federal Court's Fast Track list.

18. What are the risks of establishing a new review body? Are there any challenges associated with implementing this option?

The creation of a new investigative body should not be pursued. It would involve unnecessary expenditure, a high degree of uncertainty, complexity in decision making and the loss of a body of precedent. The risks associated with a new body are unjustifiably high and do not warrant a move away from a regime which has achieved some objectives and which otherwise remains in its infancy stage.

19. Would it be possible to increase the clarity of grounds for review, and their relevance to the long term interests of consumers, by establishing a new body?

No response.

20. Could a new review body provide an appropriate balance between access to reviews where necessary and ensuring the long term interests of consumers are delivered? How would a new investigatory body help achieve this balance?

No response.

21. What role and structure could a new review body have? Are there any

No response.

LMR Submission



(where applicable)

examples of a sector specific review body that could be applied to energy?

22. Do you have any suggestions for how a new investigatory body could be appropriately resourced?

No response

23. What are the likely consequences of removing access to merits review of revenue determinations and access arrangements? If access to LMR was removed, are there any complementary changes to the wider regulatory frameworks, or other legislative changes, that might be considered to provide accountability for regulatory decisions and deliver the long term interests of consumers?

Abolishing LMR will not remove a layer of review. Currently matters where review from Tribunal occurs, usually go direct to the Full Court (an example being current NSW electricity distribution review). If judicial review were the only review available, a single judge effectively becomes substituted for the Tribunal but with more formality and mechanisms less suited to consumer consultation. Judicial review exacerbates and entrenches the very things which are complained about and is likely to lead to more delay and cherry picking than the reverse position.

Sections 2.1 and 2.2

See also section 3.

24. In circumstances where redress is sought through judicial review processes, what mechanisms could be put in place to better support consumer and user participation?

The Administrative Review Council takes the position that if an administrative decision is likely to have an effect on the interests of any person, in the absence of good reason, that decision should ordinarily be open to be reviewed on the merits. Inherent in this in the need for mechanisms which better support consumer and user participation. Conversely, the goal of the Courts in conducting judicial review is much more constrained. It is to determine the correct decision as a matter of law, irrespective of administrative justice. Thus, because judicial review is fundamentally about process it is not able to accommodate consumer and user participation.

Section 3.3

25. Should all access to merits review be removed or only for electricity revenue determinations and gas access arrangement decisions?

We do not support the removal of merits review in any capacity. The Policy Objectives are best achieved through improvement in process, not through abolition.

26. Are there other areas of reform to the broader regulatory framework that would assist in achieving the policy intent of the 2013 reforms to LMR and deliver outcomes in the long term interests of consumers?

There is scope for some refinements to the current LMR regime, particularly in the following areas:

providing the review body with resources to undertake detailed investigation, particularly in areas of rate of return;

there should be a detailed consideration of implementing those recommendations made by the Expert Panel in 2012 that were not adopted by the Energy Council in 2013 when the current LMR regime was implemented;

Sections 2.5 and 5.1

LMR Submission



(where applicable)

Better engagement and use of the community consultation process such as requiring Tribunal to prepare a report on key take outs from consumer consultation; and

appointment of people with specific consumer expertise as lay members of the Tribunal

Also see question 16 above.

LMR Submission


Appendix III: Glossary/Acronyms

ADJR Administrative Decisions (Judicial Review) Act 1977 (Cth).

AEMC Australian Energy Market Commission.

AER Australian Energy Regulator. Established by section 44AE of the Competition and Consumer Act 2010 (Cth), pursuant to the Australian Energy Market Agreement entered into on 30 June 2004 (last amended 9 December 2013).

We note that the National Gas Access (Western Australia) Amendment Bill 2016 was tabled in Parliament in WA and is now at the second reading speech stage. The Bill will effectively transfer the responsibility of regulating gas pipelines to the AER from the Western Australian ERA.

Given this, we have simply referred to the AER as the regulator, unless the context refers solely to an ERA decision (e.g. the ERA's 'Final Decision on Proposed Revisions to the Access Arrangement for the Dampier to Bunbury Natural Gas Pipeline 2016-2020' dated 30 June 2016).

AER's JR Application

Application by the AER filed on 24 March 2016 in the Federal Court of Australia (proceeding no.: NSD 415/2016) for judicial review of the Australian Competition Tribunal decisions to set aside the NSW and Act electricity and gas distribution network revenue determinations.

PIAC-Ausgrid Decision

Applications by Public Interest Advocacy Centre Ltd and Ausgrid [2016] ACompT 1

CCA Competition and Consumer Act 2010 (Cth).

Tribunal Australian Competition Tribunal. Operates under the Competition and Consumer Act 2010 (Cth).

Consultation Paper COAG Energy Council, 'Review of the Limited Merits Review Regime - Consultation Paper', 6 September 2016

DBP Dampier Bunbury Pipeline. Owner and operator of the Dampier to Bunbury Natural Gas Pipeline.

DDG DBP Development Group.

Energy Council Council of Australian Governments (COAG) Energy Council. Previously, the Ministerial Council on Energy (see "MCE"), and then the Standing Council on Energy and Resources (see "SCER").

ERA Western Australian Economic Regulation Authority. Established by section 4 of the Economic Regulation Authority Act 2003 (WA).

LMR Limited Merits Review. Regime introduced into the NEL and NGL in 2008, and amended in 2013.

MCE Ministerial Council on Energy. The body established on 8 June 2001, being the Council of Ministers with primary carriage of energy matters at national level comprising Ministers representing the Commonwealth and each of the States and Territories.

MG Multinet Gas

LMR Submission


NGL National Gas Law. The law set out in the Schedule to the National Gas (South Australia) Act 2008 (SA) and applied in each of the participating jurisdictions.

NEL National Electricity Law. The law set out in the Schedule to the National Electricity (South Australia) Act 1996 (SA) and applied in each of the participating jurisdictions.

NEO National Electricity Objective. Stated in section 7 of the NEL.

NER National Electricity Rules. The Rules made under the NEL.

NGO National Gas Objective. Stated in section 23 of the NGL.

NGR National Gas Rules. The Rules made under the NGL.

Objectives NEO and NGO.

SCER Standing Council on Energy and Resources. Established in 2011, replacing the previous MCE. Now known as the COAG Energy Council (see "Energy Council").

SCER Statement of Policy Intent

SCER Statement of Policy Intent: Review Framework for the Electricity and Gas Regulatory Decision Making, December 2012. (https://scer.govspace.gov.au/files/2012/12/LMR-Statement-of-Policy-Intent-December-2012.pdf).

SCER Regulation Impact Statement

SCER Regulation Impact Statement Decision Paper: Limited Merits Review of Decision-Making in the Gas and Electricity Frameworks, June 2013. (http://www.scer.gov.au/publications/limited-merits-review-regulation-impact-statement-decision-paper-june-2013)

SCO Senior Committee of Officials of the COAG Energy Council.

Stage Two Report Review of the Limited Merits Review Regime: Stage Two Report, undertaken by Professor G Yarrow (Chair), The Hon M Egan and Dr J Tamblyn, 30 September 2012.

UE United Energy.

https://scer.govspace.gov.au/files/2012/12/LMR-Statement-of-Policy-Intent-December-2012.pdf

https://scer.govspace.gov.au/files/2012/12/LMR-Statement-of-Policy-Intent-December-2012.pdf

http://www.scer.gov.au/publications/limited-merits-review-regulation-impact-statement-decision-paper-june-2013

http://www.scer.gov.au/publications/limited-merits-review-regulation-impact-statement-decision-paper-june-2013

LMR Submission


Appendix IV: Feasey Report

1

Making regulatory review regimes work better for everyone:

lessons for the COAG LMR review from the British

and European communications sector

Introduction and summary

1. There is much in common between the British and Australian approaches to utility regulation,

with one aspect being that policymakers are rarely content with the way in which the review

regime works. Governments and regulators in one jurisdiction have drawn lessons from the

experiences of the other, whilst experts such as Professor Yarrow appear in both. The current

review by the Energy Panel of the Council of Australian Governments (COAG) of the limited

merits review regime for energy regulation is the latest contribution to a long running debate

about how the Australian Competition Tribunal (ACT) reviews decisions of the Australian energy

regulators. In the United Kingdom, a similar debate about the appropriate review regime for the

utility industries, and for the communications sector in particular, has been running for many

years.

2. In this note I discuss the application of the merits review regime to the communications sector in

the UK, highlighting those aspects which seem most relevant to the review now being undertaken

by COAG in Australia. I then comment directly on the COAG paper. My principal conclusions

are:

a. Review bodies play a critical role in the regulation of key sectors of both the British and

Australian economies. A high volume of reviews is evidence that the sector regulator has

not been subject to ‘regulatory capture’ by the firms it oversees, whilst the detachment of

the review body itself provides a further safeguard against such risks. Reviews should

generally be seen as evidence that the regulatory regime is in robust health, not as

evidence of a problem.

b. Politicians and sector regulators are often tempted to propose further changes before a

regime has had time to adjust to previous changes and establish itself properly (both in

terms of defining its boundaries and in developing its procedures and modus operandi).

Such temptations need to be recognised and contained. A new review regime needs to be

given sufficient time to mature (at least 5 years) before a balanced judgement about its

performance can be made. Constant debate about reform, as we have seen in both the UK

and Australia, adds to regulatory uncertainty and is likely to do more harm than good.

2

c. British policymakers have long been concerned about the ‘excessive’ volume of reviews

in the communications sector, and proposals for reform have generally been intended to

reduce the costs associated with this. But these costs are actually rather small and the

evidence to support the Government’s case has been rather weak. The Government has

been hesitant to act and has changed its mind on several occasions. Its latest proposals do

not claim to produce any economic benefit for British consumers.

d. The sector regulator, Ofcom, has ‘won’ the majority of its reviews. But it has still argued

that the review standard adversely affects its capacity to fulfil its duties in other ways,

particularly in terms of being able to act in a timely manner, and that the regime

undermines its reputation as a regulator. Again, there is little solid evidence to support

such claims. In my experience, many other factors have a far greater influence how a

sector regulator conducts itself or is regarded.

e. British policymakers and other participants in the process do not worry and have not

worried about bias in the outcomes of the review process, the representation of the

consumer interest or the capabilities of the review bodies themselves, at least in relation

to the communications sector. The fact that the UK review bodies, the Competition

Appeals Tribunal (CAT) and the Competition and Markets Authority (CMA), are seen as

fair and competent is a significant strength of the UK regime and the source of much of

its legitimacy. It arises in large measure from the way in which the CAT and CMA

conduct themselves, the diversity of participants, and the fact that sometimes the

arguments of one side prevail, sometimes the other.

f. In contrast, Australian policymakers have been far more concerned with the outcomes of

the review process than their British counterparts and appear to have less confidence in

the ACT. They claim that higher energy prices have been the result of a lack of proper

consumer representation in the review process and a tendency on the part of the ACT to

correct isolated errors rather than consider matters in the round. In the latter case,

Australian attempts to ensure that the ACT takes a broader perspective are sharply at odds

with British attempts to save costs by limiting the scope of the merits review. It is too

early to conclude whether the changes in 2013 that require the ACT to consider whether

their proposed adjustments will result in ‘materially preferable outcomes’ will achieve

their stated objectives.

g. I have a number of difficulties with the consumer representation debate in Australia. First,

I have not seen any robust evidence to suggest that higher utility transportation prices

3

(relative to those set by the regulator) necessarily or always operate against the long term

consumer interest (or that the ACT is the body that should bear the greatest responsibility

even if they do). In communications, we are very uncertain about the relationship

between short term benefits of lower prices and longer term benefits which consumers

obtain from investment and innovation. Furthermore, my experience from the UK is that

effective consumer representation, particularly in complex wholesale market matters, is

very difficult to achieve. The UK has not adopted the Australian model of requiring the

industry to fund consumer groups outside of the sector regulator itself, whilst we also lack

the resources and tradition of the powerful non-profit US advocacy groups. The result is

that most British consumer groups focus on populist retail market campaigns, and not

wholesale issues, as they compete for funds. I also think it is a mistake to imply that the

consumer interest and the interests of regulated firms are opposed to each other. When

talking about ‘consumer representation’, what is often meant is that the ACT should hear

the contrary view on an issue or that the panel needs to embrace a broader range of

perspectives. There needs to be room for a devil’s advocate. I have sympathy with this

view, but the role need not be performed by a ‘consumer representative’. It could be

undertaken by another firm (as is often the case in the UK), by members of the ACT or

their expert advisers, or by the AER/ERA.

h. It is very important to distinguish between the formal standards of review (full merits,

limited merits, judicial review) and the procedures adopted by the reviewing body in

applying them. Proposals to change the standard of review often reflect concerns which

more properly relate to, and would be much better addressed by revisiting, the procedures

and practices applied by the reviewing body itself. Part of the problem is that Government

may find it easier to change the standard of review through the statute than to attempt to

influence how a review body conducts itself. But this is not a good reason for favouring

one over the other.

i. It follows from this that a reviewing body such as the ACT, CAT or CMA needs to

recognise, and must itself be seen to be responsive to, the concerns of external

stakeholders, including politicians and consumer groups. This is the case even if it is only

to correct misconceptions about its performance or how it undertakes its work. This is

often difficult territory for a judicial body to enter, but it is essential that it does so. The

ACT and the CAT will both need to constantly seek ways to simplify and streamline their

processes and, in particular, to guard against the risk of being overwhelmed by external

experts who have their own incentives to add complexity and cost to the process. An

effective reviewing body ought to be able to withstand these pressures and be able to

4

adapt without the need for statutory guidance. This needs to demonstrated. If statutory

changes are required to remove obstacles to reform, then the reviewing bodies ought to be

quick to identify them.

5

The UK review regime for communications

1984-2003: The Monopolies and Mergers Commission

3. Telecommunications was the first ‘utility’ sector to be privatised in the UK, whilst the UK was

one of the first European countries to privatise and liberalise its telecommunications markets. As

a result, the regulatory regime that was established for the supervision of the UK communications

sector in the 1980s provided a model for subsequent arrangements in other UK utility sectors

including gas, water and electricity, as well as for arrangements in other European (and non-

European) countries.

4. The early years of the UK telecoms market involved the making of regulatory decisions by an

independent and specialist regulator, Oftel, and their implementation through the modification of

operating licence conditions. Oftel could not proceed without the consent of the licensee. If the

licensee rejected Oftel’s proposals, Oftel could make a reference to an appellant body, then the

Monopolies and Mergers Commission (MMC)1, a specialist competition body which, as its name

suggested, had been established in 1948 to investigate monopolistic practices in the UK economy

and to assess proposals for mergers.

5. The MMC was required to consider whether there were matters operating ‘against the public

interest’ and, if so, whether the remedies proposed by Oftel were sufficient to remedy or prevent

them so operating in future. In so doing, the MMC would undertake a full review of the merits of

the decision and the terms of the reference from Oftel were invariably drawn very widely indeed.

If the MMC agreed, then Oftel could proceed to implement the licence modifications. If the

Commission disagreed it could substitute its own views.

6. Most of the key decisions in telecoms during the period were reviewed by the MMC or its

successors, including decisions to adjust price caps applying to BT in 1987 and 1989, to reduce

switching costs by introducing number portability, and to impose price caps on wholesale services

supplied by mobile operators in 1997 and 2002 (most of which I was personally involved to a

greater or lesser degree). As might be expected with a body that had been established to

investigate different parts of the UK economy when directed to do so by Ministers, the MMC’s

1 Subsequently the MMC was replaced by the Competition Commission (CC) in 2009, and the CC by the

Competition and Markets Authority (CMA) in 2014. The essential features of the MMC (and the culture of the

organisation) remain clearly discernible in the work of the CMA today.

6

approach was ‘inquisitorial rather than adversarial’2. The MMC would establish an enquiry panel

consisting of a Chairman drawn from the permanent staff (more often an economist than a

lawyer) and members drawn from a pool of 30-35 part-time, often semi-retired, professionals

drawn from a wide range of backgrounds who would represent ‘the public interest’. They were

assisted by a large staff of professional economists, accountants, lawyers and other advisers3. The

MMC considered representations from the parties’ expert advisers - principally economists - but

was generally more interested in hearing the views of the industry representatives4. There was no

cross-examination of witnesses by parties other than the panel itself5. The MMC could, and often

did, undertake market research or otherwise call for evidence in undertaking a full review of the

merits. The resulting MMC reports would be several hundred pages in length and would be

regarded as providing an exhaustive review of the issues, even parties disagreed about the

conclusions drawn6.

7. The MMC had only a few years to develop and mature before it began to attract criticism from

various quarters. The primary concern did not relate to the volume of appeals or to the costs such

appeals imposed on the taxpayer or upon the firms involved. On the contrary, my recollection of

the time is that a refusal by BT to accept licence modifications (and the consequent reference by

Oftel to the MMC) was generally regarded by consumer groups and by BT’s competitors as

evidence that Oftel was working to introduce greater competition into the UK market and that it

had avoided ‘regulatory capture’. Many people feared that a comparatively small and

inexperienced regulator like Oftel would be vulnerable to ‘capture’ by firms with large

government affairs and regulatory departments with whom its staff engaged on a daily basis7. In

contrast, the MMC was widely seen to operate at one step removed from industrial interests, with

whom it engaged on a less frequent and slightly more formal basis. Although Ministers disliked

2 Department of Business, Innovation and Science ‘Streamlining Regulatory and Competition Appeals:

consultation on Options for Reform’, July 2013 (BIS 2013), p.14 at

https://www.gov.uk/government/consultations/regulatory-and-competition-appeals-options-for-reform 3 The CC still had 125 employees in March 2011 and likely substantially more in the years prior to 2007; see

http://webarchive.nationalarchives.gov.uk/20140402141250/http://www.competition-

commission.org.uk/assets/competitioncommission/docs/pdf/non-

inquiry/rep_pub/annual_rev_archive/pdf/hc_1098.pdf 4 This remains the case today, see the CMA’s 2013 guidance to telecoms price cap appellants: ‘Whilst a party is

likely to be accompanied by its legal or other professional advisers, the CC is likely to wish to discuss the case

and evidence with the business and technical specialists from the parties themselves.’ at

https://www.gov.uk/government/publications/price-control-appeals-for-participants 5 In more recent years, the CMA has organised ‘multi party’ remedy hearings in which experts are asked to

identify issues on which there is agreement and issues on which there is not. 6 Other decisions made by Oftel, such as those involving the enforcement or application of existing licence

conditions or decision relating to prospective spectrum licensing or spectrum auctions, were subject to judicial

review. 7 Many of them ex civil servants and former colleagues of the staff in Oftel. I worked in the UK for rivals to BT

from 1991 and saw this process at close quarters.

7

regulatory disputes and worried about the impact on the value of shares that had been acquired by

retail investors in the earlier BT privatisation, I think it was generally accepted that reviews by the

MMC were an integral and important part of the process of market reform.

8. The greater concern at the time was that regulatory decisions which might affect a wide range of

parties in the market, remained the subject of bi-lateral negotiations between Oftel and BT from

which other parties were effectively excluded. BT’s rivals or consumer groups had little or no

influence since nobody other than Oftel (and BT through refusal to consent to the proposed

licence modifications) could trigger a reference to the MMC. This led to suspicions that Oftel

(and in particular the civil servants advising the Director General) had a tendency to soften

decisions in order to obtain consent from BT and avoid the risk of a review at the MMC. Thus,

whilst references to the MMC were generally regarded as evidence of Oftel’s effectiveness and

determination, concerns remained when modifications were accepted by BT and never referred.

The European Framework and Competition Appeals Tribunal

9. The UK review regime changed in 2003, although not directly in response to the concerns

outlined above. The changes were instead required to ensure that the UK implemented the 2002

European Telecommunications Framework Directive. That measure (and the other associated

Directives) had itself been influenced by the UK approach to regulation in which independent,

technocratic bodies like Oftel occupied a central role. In much of the rest of Europe, these bodies

had only recently been established, or were yet to be so, and few other than Oftel had any kind of

track record. The number of people with relevant experience of the telecommunications sector

was limited in many Member States, and was often confined to those working the former (or still)

state owned incumbent telecommunications operator. Experience of economic regulation

generally, and the availability of those with the skills to undertake it, was limited. As in the UK a

decade or so earlier, a key concern of the European Commission, which had spent the previous

decade battling with Member States to push through measures to liberalise telecommunications

markets, was to avoid ‘regulatory capture’ of the new independent regulatory bodies. Many of the

incumbent operators still had significant Government ownership. Moreover, the Commission was

(privately) concerned that the courts and judicial system in some Member States would accord

great deference to the new ‘specialist’ regulators, even when this was patently unwarranted.

10. The Commission envisaged a system in which regulatory competence in communications markets

would develop over time, with the review regime itself performing an important role in the

process. Aside from the UK, there were few precedents about how telecoms regulation should

develop and many continental European regulators found themselves learning by doing for the

8

first time. One important mechanism was for the European Commission itself to act as a

reviewing body8. The Commission obtained powers to perform this role in 2002 in relation to

matters such as defining the relevant economic markets to which ex ante regulation should apply

and the grounds for then finding particular firms as having ‘Significant Market Power’ (SMP), a

position analogous to dominance under European competition law. Article 7 of the Framework

Directive established a procedure under which all proposals had to be notified by the national

regulator to the Commission for a full merits review. The Commission could quash decisions

relating to findings on market definition and the designation of particular firms as having SMP,

but could not do so in relation to the application of particular remedies, such as price caps. In

subsequent revisions of the Directive (in 2009 and now in 2016), the Commission has sought to

expand its powers so as to be able to comment and then quash proposals for remedies.9.

11. In addition to the Commission powers of review, Article 4(1) of the Framework Directive

required Member States to implement their own arrangements allowing a national right of review:

Member States shall ensure that effective mechanisms exist at national level under which any

user or undertaking providing electronic communications networks and/or services who is

affected by a decision of a national regulatory authority has the right of appeal against the

decision to an appeal body that is independent of the parties involved. This body, which may

be a court, shall have the appropriate expertise available to it to enable it to carry out its

functions. Member States shall ensure that the merits of the case are duly taken into account

and that there is an effective appeal mechanism10

.

12. The UK duly implemented this provision in Section 195(2) of the Communications Act 2003,

which required the Competition Appeals Tribunal (CAT) to:

decide the appeal on the merits and by reference to the grounds of appeal set out in the notice

of appeal11

13. Article 4(2) of the Framework Directive required that if the review body was not ‘judicial in

character’ then its decisions must be capable of further review by a court. The CAT fulfilled the

8 Others included the ability of national regulators to seek technical assistance from peers, and the role of the

European Regulators Group (subsequently the Board of European Regulators for Electronic Communications or

‘BEREC’) in developing guidance and sharing information. 9 https://ec.europa.eu/digital-single-market/en/news/proposed-directive-establishing-european-electronic-

communications-code 10

http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32002L0021&from=EN 11

http://www.legislation.gov.uk/ukpga/2003/21/section/195

9

‘judicial’ requirement and also ensured close alignment between sector regulation and UK

competition law (another important feature of the 2002 European Framework), so appeals in the

communications sector were henceforth directed to the CAT rather than to the MMC. However,

price cap reviews would continue to be referred by the CAT to the MMC for consideration (albeit

now with a panel of no more than three members), recognising the MMC’s long standing

experience and expertise in this area, with the MMC then reporting back to the CAT for adoption

as its own. This resulted in a rather cumbersome back and forth process which both the CAT and

Government have subsequently been in favour of reforming.

14. The CAT had been established by the Enterprise Act 2002, primarily to hear appeals under the

Competition Act 1998. It drew upon a much narrower pool of panel members (around 12 part-

time members, albeit with similar backgrounds to those at the MMC and its successors), with only

two sitting alongside the chair in each case. The review is chaired by a senior lawyer and the

President of the CAT is appointed by the Lord Chancellor. Unlike the MMC, the CAT conducts

its proceedings in a judicial manner, with the parties invariably being represented in oral

proceedings by external legal counsel and with the CAT frequently opining on matters of law as

well as economics.

15. The most significant changes to the UK review process in 2003 arose not from Article 4 but from

other features of the new European regime. In particular, the individual licences through which

Oftel had regulated the market were dismantled and replaced by general authorisations in order to

reduce barriers to entry. This meant that regulation through licence modification was no longer

feasible. Instead, the Directives aligned European telecoms regulation closely to the ‘market

review’ approach adopted by competition authorities, with the result that regulatory decisions and

sanctions were applied to whichever parties were judged to wield SMP. This had the important

effect of allowing any decision of Ofcom (the successor body to Oftel) to be appealed by any

affected party with a legitimate interest. This in turn removed one of the key criticisms of the

previous MMC regime. Henceforth, any affected party could seek review of a decision by Ofcom

at the CAT. This significant expansion of the number of parties who may initiate an appeal has, in

turn, produced other criticisms and concerns for which further reforms are now being sought.

16. In particular, since 2003 Ofcom has been subject to a large number of appeals to the CAT, some

initiated by BT and some by BT’s rivals. None have been initiated by consumer groups. The

Government, prompted by Ofcom, has become increasingly vexed by the growing volume of

appeals, prompting it to consult on proposals to modify the 2003 regime in both 2011 and 2013,

before finally introducing legislative proposals in the Digital Economy Bill in July 2016.

10

17. In its various consultations, the Government noted that Ofcom had 12% of its decisions appealed

between 2008 and 2012, whereas the other sector regulators such as Ofgem and Ofwat had less

than 5%12

. Seven out of nine price control decisions had been reviewed by the MMC and Ofcom

had spent 11,578 hours on litigation in 2009/1013

.

18. These are interesting numbers but it is difficult to know what to make of them. Comparisons

between sectors failed to take into account the fact that the higher incidence of appeals in the

communications sector may be largely explained by there being many more affected parties,

particularly rival firms, than in other utility sectors. In this sense, a higher proportion of appeals

might be regarded as evidence of success in promoting market entry and competition in the UK

communications market (and a lower volume of appeals evidence of failure). Others argued that

the comparatively high volume of reviews in the early years of a new review regime was evidence

of the affected parties testing the boundaries of the regime, and that volumes would reduce once

these have been established through a series of decisions by the CAT or the courts. To the extent

that the review regime for communications introduced novel features in 2003 which were not

present in other utility sectors (as was the case in the UK), then this could account for differences.

19. Cross-country comparisons ought to have yielded some insights, since the review regime shared a

common European parentage14

. A study for the European Commission in 2013 found that just

under 5% of all decisions taken by telecoms regulators were subject to review, although about a

third of these related to universal service obligations (an area of habitual litigation in telecoms

generally, but not particularly problematic in the UK)15

. That suggested that Ofcom was higher

than the European average for communications reviews. But there was also enormous variation.

Both Germany and France had appeals to administrative courts, but the proportion of decisions

that are reviewed in Germany far exceeds that in France16

. In some Member States, almost every

decision of the regulator is routinely appealed to the court whilst in others virtually no appeals are

made.

12

BIS 2013, p. 19 13

Department for Culture Media and Sport, ‘Implementing the Revised EU Electronic Communications

Framework -Appeals’, August 2011 (DCMS 2011) p.15 at

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/72909/Electroninc_Communicati

ons_Sector_August2011_Appeals_condoc2.pdf 14

See, for example, the CERRE study of some European telecoms review regimes at

http://www.cerre.eu/sites/cerre/files/110421_CERRE_Study_EnforcementAndJudicialReview_0.pdf (CERRE

2011) 15

Inventory of Case Law in Electronic Communications (EC 2015) athttp://bookshop.europa.eu/en/inventory-

of-case-law-in-electronic-communications-pbKK0415663/;pgid=GSPefJMEtXBSR0dT6jbGakZD0000Nkh4ob-

s;sid=WoO6ne7MffC6n7kSiE4kOozpXVC8TkwPJtM=?CatalogCategoryID=CXoKABst5TsAAAEjepEY4e5L,

p. 13 16

Ibid p. 51

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/72909/Electroninc_Communications_Sector_August2011_Appeals_condoc2.pdf

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/72909/Electroninc_Communications_Sector_August2011_Appeals_condoc2.pdf

http://www.cerre.eu/sites/cerre/files/110421_CERRE_Study_EnforcementAndJudicialReview_0.pdf

http://bookshop.europa.eu/en/inventory-of-case-law-in-electronic-communications-pbKK0415663/;pgid=GSPefJMEtXBSR0dT6jbGakZD0000Nkh4ob-s;sid=WoO6ne7MffC6n7kSiE4kOozpXVC8TkwPJtM=?CatalogCategoryID=CXoKABst5TsAAAEjepEY4e5L



11

20. Although Ofcom is often reviewed, the majority of Ofcom’s decisions are upheld in full. Again,

there are various statistics: between 2008 and 2013, the Government claimed that 66% of all cases

before the CAT and CMA were upheld in full, and 10% were fully vacated. The rest were rejected

in part only or remained ongoing17

. Some cases are also withdrawn. It is clear that a significant

number of Ofcom’s decisions are found to be erroneous in part, or in full, but that the majority are

not. Ofcom has been more successful than other UK regulators in defending and implementing its

decisions (Ofgem lost 50% of its reviews during the same period), but much less successful than

the German telecoms regulator, which has yet to lose a single review in relation to the application

of price controls18

. The Government has also complained that in only 5 out of 30 cases has the

CAT awarded costs to the winning party, with the result that Ofcom invariably had to meet its

own costs, even when its decisions have been upheld by the CAT19

. Again, it is difficult to know

what conclusions to draw from these or other statistics. There is no evidence to suggest that the

CAT entertains appeals which have little prospect of success or which are otherwise immaterial.

On the contrary, the Government has sought to claim that the effects of delay arising from what it

considers to be overly long reviews deprive UK consumers of significant economic benefits.

21. Why is the British Government so concerned about the volume of appeals in the communications

sector? It is curious. There is no suggestion that the volume of reviews should be reduced because

the CAT makes decisions which systematically favour one party or set of interests over another –

for example that consumers are being systematically disadvantaged or particular firms favoured as

a result. Nor is there any suggestion that the CAT is incapable or ill-suited to grasping the issues

or of providing appropriate scrutiny to whatever standard is required. Indeed, the Government has

invariably praised the UK’s regulatory model and bodies such as the CAT and CMA (before

going on to outline its proposals for reform!). Nor is there any suggestion that the UK

communications sector is performing poorly as a result of the volume of appeals before the CAT.

22. The Government’s primary concern seems not to have been with the quality of outputs from the

review regime but simply with its costs. It is no coincidence that concerns about the volume of

17

BIS 2013 p. 86. In 2016 the Government had a slightly different view of the position for 2011-2016, in which

9 out of 24 cases were upheld in full, see Department of Culture, Media and Sport ‘Ofcom appeals Impact

Assessment’, May 2016, (DCMS 2016) p. 9 at

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/535648/2016-05-24_Appeals_-

_impact_assessment.pdf. A consulting firm, Towerhouse LLP, produce slightly different statistics again,

suggesting Ofcom has lost a higher proportion (8 out of 31), see

http://www.towerhouse.co.uk/docs_2010/TOWERHOUSE_CONSULTING_APPEALS%20REPORT_FINAL.

pdf p.12. I have not attempted my own analysis of the data. 18

See CERRE 2011 19

BIS 2013, p. 23

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/535648/2016-05-24_Appeals_-_impact_assessment.pdf

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/535648/2016-05-24_Appeals_-_impact_assessment.pdf

http://www.towerhouse.co.uk/docs_2010/TOWERHOUSE_CONSULTING_APPEALS%20REPORT_FINAL.pdf

http://www.towerhouse.co.uk/docs_2010/TOWERHOUSE_CONSULTING_APPEALS%20REPORT_FINAL.pdf

12

appeals began to emerge when Ofcom faced substantial cuts in its budget20

. The Government’s

consultation on the appeals process in 2011 noted that for the then current year, 2010/11, Ofcom

was facing budget cuts of 28%.21

. Oxera, a UK consulting firm, has calculated that the costs of

regulatory reviews at the CAT across all sectors, being costs incurred by both firms and

regulators, is only about £22 million a year. Of this, about £4 million represents costs incurred by

the sector regulators, of which a significant proportion can be attributed to Ofcom. The

Government’s 2016 impact assessment suggests Ofcom spent £4 million defending appeals

between 2011 and 201522

. Such sums represent about 1% of the annual budgets of the regulators

and a tiny fraction of the revenues and profits generated by the regulated firms that might be

profoundly affected by the regulation23

. In 2013, the Government calculated that a change in the

appeal standard to judicial review would save Ofcom less than £2 million a year24

.

23. Perhaps recognising the weakness of these arguments, the Government (and, more particularly,

Ofcom) have also argued that the volume or prospect of review inhibits Ofcom’s capacity to

undertake its duties effectively, and thereby undermines Ofcom’s reputation with the firms it

oversees, with consumers or amongst investors in the sector. This claim takes several forms. One

is that the need for Ofcom to undertake numerous internal reviews and produce decisions which

typically run to hundreds of pages delays the production of decisions and/or results in the

regulator adopting a very defensive mindset and being unable or unwilling to make bold

decisions25

. Note that this argument is the opposite of the view that prevailed in the 1990s, when

regular appeals to the MMC were regarded as evidence of Oftel’s courage and determination to

resist regulatory capture.

24. Appeals were also said to divert resources from other, potentially more productive, activities

which Ofcom might otherwise undertake. Added to this were concerns that Ofcom might simply

choose to delay or defer decisions in order to avoid the risk (and costs) of review, or that

subsequent reviews will be delayed whilst Ofcom awaits the outcome of earlier appeals (the

outcome of which it would be required to take into account in its subsequent decisions)26

. There

20

DCMS 2011, p.15 21

DCMS 2011, p. 15 22

BIS 2016, p.14 23

http://www.oxera.com/Latest-Thinking/Agenda/2013/What-are-the-merits-of-appeals-on-the-merits.aspx 24

BIS Impact Assessment: Streamlining Regulatory and Competition Appeals, 2013,

p.17https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/207702/bis-13-924-

regulatory-and-competition-appeals-impact_assessment.pdf 25

Whether a move to judicial review would remove this concern remains unclear. 26

This arises for price caps which, under European law, must currently be revisited every 3 years. However, the

European Commission is currently proposing to extend the review period to 5 years, which would largely

remove this problem. The issue can be seen to have arisen not because appeals took too long, but because

reviews were undertaken too often.

13

are also concerns about Ofcom’s reputation when it loses reviews, of if it loses too many (which,

as noted above, it does not appear to do). It is claimed that investors may regard the regulatory

system as being unable to defend the interests of firms who rely upon the regulator, or may be

deterred by the uncertainty which arises whilst reviews are being undertaken or if the CAT or

CMA, and not Ofcom, are viewed as being the de facto regulators.

25. Although there is likely to be something to each of these claims, I do not think they add up to

much. There are clearly some costs involved in the application of a robust review regime (which

most commentators agree the CAT provides), but there are also differing views as to the reasons

behind the delays that have arisen in specific cases27

. I am wary of drawing generalised

conclusions from a few anecdotes. I have known Director Generals and Chief Executives of Oftel

and Ofcom who could be criticised for being risk averse and overly cautious, but I have known

others who were certainly not. All of them were subject to the same standard of review. Ofcom

appears no more ponderous to me than telecoms regulators in other jurisdictions such as the

United States where decisions by the Federal Communications Commission are often subject to

dissenting views from the Commissioners themselves. Even if Ofcom’s management does feel

hemmed in by the threat of appeals, it is not clear to me that changing the review regime - rather

than Ofcom revisiting its internal processes, appointing different leaders, or increasing Ofcom’s

budget – is the appropriate or best response. Nor am I convinced that the reputation of the UK

regulatory system is cast into doubt if Ofcom loses a review. I know of some countries where

there is little confidence amongst investors in the regulatory and judicial systems, but the UK is

not one of them. Just as consumers and rivals saw appeals to the MMC as being evidence of the

strength and confidence of the UK system, so I think investors see appeals, at least in the UK, in

much the same light.

Conduct of the CAT

26. The Government’s concerns about the volume of appeals also led it to examine whether the

procedures adopted by the CAT have encouraged parties to seek reviews when they might not

otherwise do so under alternative arrangements28

. The Government was more interested in

27

As the CAT notes: In the example quoted of British Telecommunications Plc v OFCOM (Partial Private

Circuits),25 the delays arose from other factors, including the hearing and disposal of two “gateway”

preliminary issues, the availability of the parties, and an appeal to the Court of Appeal. , Competition and

Appeals Tribunal response to Government Consultation, 2013, at

http://www.catribunal.org.uk/files/Streamlining_Regulatory_and_Competition_Appeals_Response_220813.pdf 28

The CAT rather than the CC/CMA has been the focus of Government criticism for, I think, two reasons. First,

all appeals are directed at the CAT, which hears the majority of cases, with a small (but not insignificant)

minority of price cap cases being referred to the CC/CMA. Second, the CAT has generally missed its targets for

14

procedural reforms by 2013 than it had been in 2011, when it appeared to regard a change to the

standard of review and alterations to procedures at the CAT as being in some sense mutually

exclusive options. By 2013 it proposed to change both.

27. The Government was particularly concerned that reviews appeared to represent a ‘one way bet’

for firms who had little to lose by appealing. This was for several reasons. First, Ofcom was rarely

able to recover its costs from other parties, even if its decisions were upheld by the CAT29

.

Second, the facility for the firms to draft their own notice of appeal and thereby ‘cherry pick’ the

issues to be considered allowed firms to frame the review in a way which minimised the risk of an

adverse finding (although it also reduced the scope of issues to be considered by the CAT or

CMA, which the Government thought should reduce costs once the notice was served). This

capacity for firms themselves to frame the notice of appeal was also an important change to price

cap reviews undertaken by the MMC/CC after 2003.

28. The UK Government was also concerned that parties would introduce new evidence into the

CAT, being evidence that had not been available to Ofcom at the time it had made its original

decision. There were obvious concerns that this might encourage parties to withhold information

until the review, or that they would be encouraged to appeal because they felt able to introduce

new evidence which would improve their prospects. The CAT had accepted new evidence under

certain conditions (and had the discretion under its Rules of Procedure to do so), but in 2013 the

Government proposed to restrict this in statute30

. The Government was also considering in 2013

(having been more sceptical in 2011) whether to allow the sector regulators to have powers to use

and enforce ‘confidentiality rings’ (a power that is currently not available to Ofcom) so as to

ensure that confidential information could be shared amongst interested parties (represented by

external advisers), rather than firms using the review as a mechanism to extract and challenge

such evidence at a later stage.

29. The Government was also concerned about the time taken by the CAT to conclude reviews,

although it has sometimes appeared confused about the reasons why31

. Again, international

processing cases within 4 months whereas the CC/CMA has been better at meeting targets (which it generally

negotiates with the CAT in advance!) 29

The Government did not consider whether allowing Ofcom to recover costs would deter smaller firms or

consumer groups from participating in reviews. 30

Under judicial review, new evidence is not generally admissible. I assume this will now be the case if the

Government’s proposal to change the standard of review in the Digital Economy Bill is accepted by Parliament. 31

Under European and UK communications law, appeals do not typically have a suspensive effect and so

Ofcom’s proposals will be implemented and their consequences enjoyed consumers, both wholesale and retail.

The Government’s various impact assessments have not sought to engage with the difficult question of how the

benefits of any subsequent review determination, to the extent it differs from Ofcom’s decision, would then be

15

comparisons were interesting but not particularly instructive. The EC study cited earlier found

that each review averaged less than 3 months in Hungary, but 42 months in Portugal. The UK

averaged about 12 months and so did not appear particularly atypical in this respect32

. In its 2013

document the Government’s proposals included the introduction of a 12 month ‘non statutory

target timescale’ for the CAT for all cases, and 6 months for the CMA in the case of price caps.

The Government also proposed to minimise oral hearings and give the CAT powers to restrict the

volume of evidence, particularly from expert witnesses, where it considered there should be a

presumption of hearing no more than two experts from each side33

.

30. During the 2013 consultation (and no doubt in private too), the CAT challenged much of the

Government’s evidential base and refuted most of their claims in unusually robust terms for a

British judicial body. It argued that Ministers were in danger of infringing judicial independence

by seeking to dictate how the CAT went about it business34

. The vast majority (although not all35

)

of respondents to both the 2011 and 2013 Government consultations also opposed the changes

being proposed36

. It is therefore unsurprising to find that, with the exception of the question of the

standard of review to be applied and to which I now turn, the British Government has thus far

failed to make much headway with its efforts to reform the regime or to alter the conduct of the

CAT.

distributed (i.e. the extent to which any subsequent reductions or increases in prices would be reflected

retrospectively, or even prospectively, in the prices paid by consumers). In its 2016 impact assessment (DCMS

2016), the Government ignores any benefits to retail consumers and argues that any changes in wholesale prices

simply represent a redistribution of rents amongst firms, with a net benefit of zero. This is more honest than

claiming large but speculative consumer benefits, but still patently unsatisfactory. 32

EC 2015, p. 40 33

BIS 2013, p.66 34

Perhaps recognising the need to avoid direct confrontation with the CAT, the Government appointed Sir John

Mummery to undertake a review of the CAT’s rules of procedure during 2014 and consulted on his proposals in

2015. Sir John watered down most of the proposals that had appeared in the 2013 consultation document,

although some modest (non-statutory) adjustments were made (for example to clarify the circumstances under

which new evidence would be admitted, see

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/460442/BIS-15-357-competition-

appeal-tribunal-rules-of-procedure-government-response.pdf 35

Hutchison and latterly Talk Talk, two smaller telecoms operators, have supported proposals to change the

standard of review, as have most consumer groups (such as uSwitch and Which) 36

An example of the commentary from legal experts is: As the CAT pointed out, the present appeals are not in

fact that lengthy or costly, given the complexity of the issues at stake. Indeed, having practised both in the CAT

and other areas of the judicial system, we regard the CAT as a paragon of case management and rigid control

of the appeal process. Perhaps the government would have done better to concentrate its attention on other

parts of the legal system more obviously in need of improvement. See

http://www.devereuxchambers.co.uk/assets/docs/publications/comms_law_19_2_2_-_gsr_qc__jwt.pdf

16

The standard of review

31. The UK Government has long believed that the standard of review which the UK adopted in 2003

was inappropriate. Again, it seems that the primary motivation of the Government in making this

argument is that it considered that the existing ‘on the merits’ review standard contributes to the

high volume of appeals and high level of costs incurred by Ofcom, as well as to the length of

proceedings at the CAT.

32. The Government had concluded in 2011 that it had been guilty of ‘gold plating’ European

legislation in 2003, a claim that was (and is) popular amongst British Ministers in relation to areas

where the application of UK law is a source of political frustration. It decided that judicial review

was sufficiently flexible to meet the European requirement to take the merits into account, citing

Lord Justice Jacob’s views in support:

Accordingly, I think there can be no doubt that just as JR was adapted because the Human

Rights Act so required, so it can and must be adapted to comply with EU law and in

particular Article 4 of the Directive.37

The Government hoped that a move to a judicial review standard would discourage appeals and

so reduce their volume. This was based upon the assumption that a narrower standard of appeal

would exclude some grounds which would otherwise be admitted under a full merits standard,

thereby introducing a ‘limited’ form of merits review.

33. Although the Government assumed that the narrower scope of judicial review would result in

fewer appeals being advanced in the communications sector, evidence to support this was

decidedly mixed. The Government itself noted that there were in fact far fewer appeals to the

CMA by water and rail industries, which remained subject to a both merits review and broad

‘public interest’ terms, than appeals by the communications industry, where parties were allowed

to winnow down the points for consideration38

. At the same time, there is also a risk in assuming

that allowing the parties to ‘cherry pick’ the matters in their notice of review is what accounts for

the increase in the volume of reviews of Ofcom after 2003. In my view, it is much more likely

that allowing parties other than licensee to seek a review explains most of the growth in the

volume of appeals in the UK communications sector after 2003.

37

DCMS 2011, p.18 38

The CMA have noted that almost half of the price cap reviews it has considered since 2007 have come from

the communications sector, see https://www.gov.uk/government/speeches/andrea-coscelli-on-recent-cma-

activity-in-the-telecoms-media-and-technology-space

17

34. The Government conceded that the volume of reviews would be likely to increase in the near term

as firms again sought to test the boundaries of the new regime. But they also claimed that

narrowing the grounds for review would shorten the review process for each case. This claim

ignored concerns that when a judicial review resulted in the quashing of the decision and

remittance to Ofcom, Ofcom would then take months to remedy the defects and implement new

remedies (whereas decisions by the CAT and CMA generally provide the remedies for Ofcom to

implement). The Government argued that, in practice, Ofcom tended to revisit the decision in full

even when it was simply giving effect to directions by the review bodies, and so its changes

would make little difference39

.

35. Although the Government had initially proposed to move to ‘judicial review with merits’ or what

might, for our purposes, be considered a ‘limited merits’ standard in 2011, the Minister seems to

have been persuaded that the existing regime was still settling down and that a lower volume of

appeals might still result once it had done so. He may also have concluded, or been told, that a

direct confrontation with the judiciary about the performance of the CAT was unwise. The

Government retreated, but retained the threat to legislate in the future if the CAT did not

‘improve’, with the Minister writing to respondents in the following terms:

There is no doubt that a more streamlined process would benefit everyone but having

considered the responses and the issues raised therein I am not yet convinced that changing

the standard of appeal (to ‘Judicial Review with merits’) will, on its own, achieve the desired

aims of faster decision-making at Ofcom and a reduction in the time and cost spent on

appeals.

I should stress that this does not mean that legislative change is ruled out. If practical

changes to process and ways of working cannot achieve the desired objectives then

legislation will be required40

36. The issues were duly revisited in 2013, when the Government again consulted on changes to the

regime for communications but this time in the context of a broader consultation about whether

the diverse arrangements for the review of other utility sector regulators and for the competition

authorities should not all be more closely aligned. This time the Government proposed to amend

the standard of appeal to what it referred to as ‘focussed specified grounds’ review (including

material errors of law, fact and procedural irregularity alongside unreasonable exercise of

39

The better question for the Government to ask itself was whether it was in fact necessary and appropriate for

Ofcom to do this, but they did not do so 40

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/72917/FWAPP2011-

EV_Letter.pdf

18

discretion and judgement)41

rather than adopt a ‘judicial review with merits’ standard. The

Government’s reasoning for doing one rather than the other seems rather thin, but appears

founded on the belief that specifying the grounds in statute would provide greater legal certainty

(and thereby reduce the initial ‘spike’ in appeals that might otherwise be expected as parties tested

the application of the new standard). The Government’s consultation document also recognised

that there might a case for retaining a traditional ‘merits based’ or ‘public interest’ test for price

cap reviews being undertaken at the CMA, even if ‘specified grounds’ standard was applied to

other types of regulatory decisions42

. In the event the Government concluded that the same

standard should apply to all reviews irrespective of their nature on the grounds of consistency,

which was a key objective of the various proposals being made in 2013, noting also that Article 4

of the Framework Directive itself makes no distinction between different standards of review for

different cases.

37. The views of respondents to the consultation remained much as in 2011, although with a much

wider range of respondents being involved given the wider range of sectors and regimes now

under consideration. There is little point in repeating the arguments again, save to note that this

time the CAT submitted a lengthy public response to which I have already referred. The CAT

supported Government proposals to streamline the process by allowing appeals on price caps to

be lodged directly with the CC rather than being referred there by the CAT, but opposed almost

all other proposals. Its main claim was that most of the procedural reforms were already applied

by the CAT when it was appropriate to do - but not when it was not. In relation to the standard of

appeal, the CAT stressed that this was not a ‘silver bullet’ and that the Government’s assumption

that the CAT would conduct its affairs in a substantively different way as a result of a change in

the statute (given that the European requirement to take the merits into account must still apply)

was misplaced. The CAT took the view, with which I broadly agree, that the standard of appeal is

not determinative of the way in which any review body undertakes its role, particularly since

‘judicial review’ in the British context would still amount to a ‘merits’ review. Experience of the

application of a similar standard by different European review bodies in the communications

sector confirms this.

41

BIS 2013 p.30 42

Ibid p. 41: There may be a stronger argument for retaining a standard of review for price control decisions

which allows for greater scrutiny than the traditional judicial review. Price control decisions are central to the

way regulated businesses are operated – they will affect the rate of return on a firm’s assets, which in turn

affect investors’ decisions. In addition, the economic analysis required for a price cap determination is not only

complex, but also involves a substantial degree of judgment on the part of the regulator. There is an argument

that providing a merits-based appeal rather than judicial review for price control decisions will create greater

regulatory certainty by providing a higher level of scrutiny and accountability for these decisions.

19

38. It is also worth noting that the 2013 consultation involved some discussion of the Australian

Limited Merits Review (LMR) regime for energy. The British Government had noted that a

change in the review standard (to LMR) in 2008 had had the unintended consequence of

increasing, rather than reducing, the volume of appeals43

. The Government suggested that this had

arisen because the consumer interest had not been sufficiently taken into account in the review

process, assuring readers that the British Government’s reforms would not make the same error:

One of the Government’s objectives for the appeal system is to ensure access to justice is

available to all firms and affected parties, and this includes ensuring the consumer interest is

fully reflected. Any changes to the standard of review would not change the ability of the

appeal body to consider whether the regulator in achieving its duties had acted reasonably in

exercising its discretion

39. The Government did not explain how or why a lack of regard for the consumer interest should

influence the volume of appeals in Australia (as opposed, for example, to improving the

outcome), nor why a regulator ‘acting reasonably in exercising its discretion’ would necessarily

safeguard the consumer interest. The authors of the Expert Panel Report were suitably provoked

into submitting a response to the UK Government’s consultation44

. They noted that their primary

concern had been that a narrow review standard (such as LMR) discouraged the review body (in

this case the ACT) from considering the merits of the decision or the ‘output’ ‘in the round’, as

opposed to seeking to correct a series of discrete errors in the various ‘inputs’45

. They had

considered, but rejected, making a recommendation to change the LMR standard to judicial

review, since they thought that the former suffered from precisely the same ‘error correction’

problem. They warned that allowing applicants to determine the issues to be reviewed (‘cherry

picking’) allowed for a cumulative bias to develop, since points favourable to the applicants

would always be included, but points in the other direction would not. As a result, they challenged

the British Government’s assumption, to which I referred to earlier, that narrowing the matters to

be considered in the appeal would reduce the volume of appeals. In their view the opposite was

more likely to be the case. It was the inability or reluctance of the ACT to consider the review in a

43

BIS 2013, p.28 44

The submission was signed by all three Expert Panel members but submitted by the Regulatory Policy

Institute, of which Professor Yarrow is Chairman,

http://www.rpi.org.uk/Publications/2013/RPI_Response_to_BIS_consult_on_regulatory_appeals_Sept_2013.pdf

(RPI) 45

This terminology seems to me particularly apt when considering reviews of WACC calculations or where

regulators use models to derive ‘bottom up’ computations. Most reviews under the LMR process related to

matters of this kind.

http://www.rpi.org.uk/Publications/2013/RPI_Response_to_BIS_consult_on_regulatory_appeals_Sept_2013.pdf

20

broader context that was, in their view, why its decisions tended to disadvantage consumers and

why change was required46

:

Merits review is intended to avoid this problem by focusing on what actually matters, the

quality of the overall/top-level regulatory decision. We concluded that, in Australia, the

problem had not been avoided because the constraints placed on the review process, with the

intention of streamlining it or reducing the resources (including time) allocated to appeals,

had in effect, subverted review on the merits, by redirecting assessment away from the merits

of regulatory decisions themselves and toward assessment of possible errors in the many

inputs to those decisions. As indicated above, the result was a bias toward excessive appeal

activity on the part of regulated energy network businesses, since the limitations placed on

reviewers meant that these expert and well resourced appellants could exert some degree of

control over the matters that would be considered

40. In the event, the British Government took no further action one way or the other until 2016

when, without any further consultation, it changed its mind again and reverted to the ‘judicial

review with merits’ or ‘limited merits review’ standard which it had initially proposed in 2011.

The Government currently hopes to implement its proposal through the Digital Economy Bill,

which was introduced into the House of Commons in July 2016 and given a second reading on 13

September (and is now under consideration in Committee).47

41. In the impact assessment accompanying the latest Bill, the Government anticipates that the

change in the standard of review would deter some appeals and reduce the time taken for those

that remain. However, the Government found that the change would have produced substantively

different outcomes in only four out of 24 of the most recent cases, all of them price cap matters

that had been heard by the CMA48

. In the two cases it then analysed, it found that BT’s wholesale

prices and revenues would have been (£50 million) higher if Ofcom’s original decision had been

allowed to stand. The Government makes no attempt to claim that these higher wholesale prices

would have benefited British consumers. Rather astonishingly, it concludes that the net present

value of its proposals for the UK is ‘£0m’. It remains to be seen whether the proposal in this or

any other form can withstand the parliamentary scrutiny to which it will be subjected in the

coming months.

46

RPI, p.6 47

http://www.publications.parliament.uk/pa/bills/cbill/2016-2017/0045/cbill_2016-20170045_en_9.htm#pt6-

pb3-l1g74, para 74 48

BIS 2016 p.10

http://www.publications.parliament.uk/pa/bills/cbill/2016-2017/0045/cbill_2016-20170045_en_9.htm#pt6-pb3-l1g74

http://www.publications.parliament.uk/pa/bills/cbill/2016-2017/0045/cbill_2016-20170045_en_9.htm#pt6-pb3-l1g74

21

Consumer interests in the UK

42. Thus far, I have made only passing reference in this note to concerns about the representation of

the consumer interest which have been such a central feature of the debate in Australia. Nobody,

so far as I am aware, has suggested that consumers are poorly represented in the UK review

regime. In the 2013 consultation, the Government did indicate that it wanted to ensure that

appeals were not simply the prerogative of large, well-resourced companies49

. But it made no

proposals to achieve this, perhaps recognising that any such proposals would also be likely to

frustrate its efforts to reduce costs. Of the more than 1200 pages of evidence submitted to the

Government (the majority written by lawyers) in 2013, I have counted only 9 pages that were

submitted by consumers’ organisations or representatives50

. Those representatives lamented the

delays in the implementation of decisions which they considered to arise from flaws in the

existing regime and supported the Government’s proposal to adopt a judicial review standard. But

none sought greater opportunities to participate in the review process for themselves and my

understanding is that no consumer group has submitted a notice of appeal against any Ofcom

decision in the communications sector since 2003, nor has any sought to intervene in proceedings

initiated by others.

43. I think it is reasonable to say that the participants in the UK debates have generally assumed that

the consumer interest is represented by regulatory bodies themselves (all of whom have statutory

duties requiring them to do so)51

. Both Oftel and Ofcom have, over the years, developed various

ways of soliciting the views of consumers when taking decisions, including significant research

programmes, public meetings on significant proposals, regular contact with consumer advocacy

groups such as the Consumers Association, and the establishment of regional consultative

committees who provided comments on most aspects of Ofcom’s work. The Communications Act

2003 required Ofcom to establish a Consumer Panel, composed of independent experts, which

undertakes various activities which are detailed in an annual report52

and is intended to serve as a

‘critical friend’. The Panel has a significant research budget, publishes its reports and comments

49

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/229758/bis-13-876-regulatory-

and-competition-appeals-revised.pdf p.5 50

These being Which and uSwitch at

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/252842/regulatory-and-

competition-appeals-consultation-responses-i-z.pdf and Consumer Futures at 51

I note that Dr Gill Owen’s report for the AER, which discussed the role of consumer representation in the UK

energy sector, comes to similar conclusions to me, see https://www.AER/ERA.gov.au/system/files/CCP%20-

%20Dr%20Gill%20Owen%20-

%20The%20potential%20role%20of%20Consumer%20Challenge%20%20in%20energy%20network%20regula

tion%20in%20Aust.pdf 52

The terms of reference are described at http://www.ofcom.org.uk/content/about/how-ofcom-is-

run/committees/communication-consumer-panel/Communications_Consumer_Panel_Terms_of_Reference.pdf

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/229758/bis-13-876-regulatory-and-competition-appeals-revised.pdf

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/229758/bis-13-876-regulatory-and-competition-appeals-revised.pdf

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/252842/regulatory-and-competition-appeals-consultation-responses-i-z.pdf

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/252842/regulatory-and-competition-appeals-consultation-responses-i-z.pdf

22

on some (although not all) Ofcom proposals.53

It has not, so far as I am aware, ever involved itself

directly in reviews at the CAT or the CMA.

44. I think there are several reasons for this. The first, noted earlier, is that there has been no

suggestion of systematic bias on the part of either Ofcom or, in particular, the CAT or CMA, in

terms of the interests that might have been favoured by their decisions. Many of Ofcom’s

decisions have been upheld, but some have not. Some of their decisions have been appealed by

parties seeking lower wholesale prices, others by parties (generally BT or mobile operators)

seeking higher prices. Often both sets of parties are engaged in the same proceeding, with one

arguing that Ofcom has erred too far in one direction and another arguing that they have erred too

far in the other. Sometimes one side ‘wins’, sometimes the other. To the extent that BT’s rivals

may be assumed to represent the ‘consumer interest’ (which requires an assumption that any

reductions in wholesale prices would be passed onto consumers, at least in part), then the

consumer interest might be said to be represented in most UK reviews. This is, I understand,

rather different from the situation in some Australian energy cases, where the regulator is often

left to defend its decision against a single adversary (and also rather different from the UK

position prior to 2003 when third parties found it much harder to intervene)54

.

45. My experience of consumer representation in the communications sector elsewhere in the world

leads me to think there are significant cultural and institutional factors at play. British consumer

advocacy bodies like the Consumers Association are funded through private donations, legacies

and subscriptions to various product comparison and testing services. The rise of advertising

sponsored online product comparison services has imposed significant financial pressures on

these groups, all of whom operate in a crowded marketplace for charitable donations. As noted

earlier, the UK Government has also created groups of experts to represent the consumer interest

in the regulated sectors (through the Ofcom Consumer Panel or the Ofgem Consumer Challenge

Group55

), which may have had the effect of ‘crowding out’ other, less specialist, advocacy groups

who are seeking high profile campaign topics on which to build their profile (and their finances).

Complex regulatory reviews of wholesale charges, however important, are unlikely to stimulate

much popular interest. Occasionally, industry players themselves will generate petitions for

consumers to sign as part of their campaign for policy changes. Hutchison 3G, for example,

53

Details can be found on its website at http://www.communicationsconsumerpanel.org.uk/ 54

Although I understand that the Public Interest Advocacy Centre has sought to intervene in some cases in

Australia and I note that the Expert Panel’s 1st Report refers to the intervention of the Energy Action Group in

one case, Review of the Limited Merits Review Regime Stage One Report (Expert Panel 1st Report), p.14 at

http://www.scer.gov.au/files/2012/06/Stage-One-Report-to-SCER-29-June.doc 55

https://www.ofgem.gov.uk/network-regulation-riio-model/riio-forums-seminars-and-working-

groups/consumer-challenge-group

23

launched a ‘terminate the rate’ in 2009, gathering 135,000 signatures and support from MPs and

other groups in support of lower wholesale charges for terminating calls to mobile networks56

.

Similar campaigns have been developed by advocacy groups in relation to issues such as ‘net

neutrality’ in recent years, although these campaigns have tended to be organised by global (but

mostly US-funded) advocacy groups such as Free Press, the Electronic Frontier Foundation and

Public Knowledge, all of whom – in my experience - play a much more active role in the

proceedings of the FCC in the US than their British counterparts would expect to play in the UK.

46. I do not know why US advocacy groups are so much more vocal but it is clear that they are better

funded, partly as a result of greater scale, partly as a result of the willingness of the Silicon Valley

companies to finance such entities, and partly, I suspect, due to a greater willingness on the part of

US households to support private bodies to represent their interests, rather than relying upon

public bodies or regulators to do so on their behalf. They are also often more partisan and issue

focussed. The model in Australia seems different again, with a history of consumer groups, such

as the Australian Communications Consumer Action Network (ACCAN) being funded through

(mandatory) levies that are applied to the industry they oversee. Reflecting this, I note that

proposals were made to the Expert Panel (by Professor Fels amongst others) that more public

funds should be allocated to such bodies in order to allow them to participate in the review

process57

. In my experience, consumer groups in Australia have certainly tended to have a higher

profile and greater resources than their British counterparts in the communications field, but I do

not know how such funding arrangements might influence their approach to issues nor how they

perform more generally.

47. The ‘consumer interest’ in communications markets has also been rendered more opaque in both

the UK and the rest of Europe by the growing realisation that the existing regulatory framework

may contain a bias towards short term, static benefits, invariably in the form of lower retail prices,

which are achieved at the expense of longer term dynamic benefits associated with investment

and technology innovation. This is said to be revealed by the comparatively low prices for

telecoms services that prevail in Europe, and by the comparatively lower levels of network

investment and new infrastructure deployment in both fixed and wireless broadband markets

compared to both Asia or the US. These concerns lie at the heart of reviews of communications

regulation which are currently being undertaken by both Ofcom and the European Commission,

both of which aim, amongst other things, to better promote long term investment.

56

http://www.johnleech.org.uk/terminate_the_rate_campaign 57

Expert Panel 1st Report, p. 45

24

48. There are two points to make here. First, it is obvious but important to note that what constitutes

the ‘consumer interest’ is capable of many interpretations (leaving aside the challenges of

determining which policy instruments might best achieve whatever view is taken). In the case of

telecoms wholesale access regulation, for example, the European Commission has recently

directed national regulators to increase prices in some Member States in order to better promote

longer term investment. I note that a similar tension between short term, static benefits and long

term, dynamic gains was recognised by the Expert Panel:

Specifically, judged in terms of implications for the interests of consumers, the economic

effect of the LMR regime has likely been adverse to consumer interests in the short-run, via

higher network charges and, ultimately, higher energy prices. For reasons given earlier, the

implications of the regime for the long-term interests of consumers are uncertain; but the

Panel has not seen convincing evidence and substantiated reasoning to the effect that the

outcomes will lead to countervailing consumer benefits in the longer term, and considers that

lacuna to be a significant deficiency in performance in its own right.58

(my underlining)

49. In my view, it is unfortunate but unsurprising that the debate in Australia has tended to assume

that, in making decisions which lead to higher prices, the ACT has acted against the long term

interests of consumers. The Panel itself criticised the ACT for failing to properly assess whether

this was or was not the case. Judging such trade-offs, particularly on an ex ante basis, is a

genuinely difficult task for regulators and review bodies in any jurisdiction and one which, in my

experience, few have done particularly well.

50. But concerns have also arisen in Europe because it is felt that sector regulators like Ofcom have

had a bias in favour of short term price cuts in order to respond to political pressures or populist

demands. Ofcom, for example, is required to appear before a UK Parliamentary Select Committee

on a regular basis and its decisions are frequently discussed in the press. The Chair of Ofcom is

appointed on a limited term contract by the Minister and there is regular interaction between the

regulator and Government. Many industry players and investors complain that Ofcom has pursued

a short term ‘consumerist’ agenda as a result. In contrast, I am not aware that anybody has

suggested that the CAT or the CMA is vulnerable to the same bias. The Chair of the CAT is not

subject to Ministerial appointment, has little or no interaction with Parliament or the media. As

noted earlier, the CAT has been robust (and successful) in defending its judicial independence and

rebuffing incursions from Ministers when it has felt it necessary to do so. A right of review to the

58

Expert Panel 1st Report, p.57

25

CAT is therefore regarded by many industry participants and investors as providing an important

means of ensuring that proper consideration is given to balancing short and long term interests.

Lessons from the UK

51. In this section I consider what lessons might be drawn from the UK experience described above,

particularly insofar as they might be relevant to the consultation being undertaken by the COAG.

Having noted that the regulatory regime that was adopted for the communications sector in the

1980s provided a model for the rest of the world, I am afraid that much of the subsequent debate

and conduct of the British Government since 2011 has been rather less impressive.

52. The UK did manage to undertake a serious debate about the respective merits of different appeal

standards and about procedural reforms which might, taken together, improve the efficiency of

the review regime. This has happened despite the Government’s underlying motivations, which

have been a desire to reduce public expenditure, placate senior officials at Ofcom and to be seen

to resist ‘gold plating’ European legislation.

53. Sadly, that debate has not produced a holistic or coherent set of proposals for reform. I think this

is in part because the Government still lacks confidence – with good reason – as to the

fundamental merits of its case for reform. The Government proposed a change to judicial review

in 2011, only to abandon it in the hope that veiled threats to legislate would suffice. It then

adopted a ‘specified grounds’ test in 2013, with additional procedural reforms, only to abandon

that too. Finally, in July of this year, it has decided to revert to proposing a ‘judicial review with

merits’ standard, although whether this will survive parliamentary scrutiny is unclear.

54. The Government’s difficulties have also arisen in part because the existing UK review regime is

widely respected and supported by most of those who participate in it. There is no evidence of

systematic bias on the part of either Ofcom or the review bodies, and none is seriously claimed.

Nor is it clear whether the changes which the Government has considered would actually improve

matters, in the sense of reducing the volume of appeals, the time taken to resolve them or the costs

incurred by the Exchequer. In this respect, the Australian experience of LMR provides the UK

with a cautionary tale. I also suspect that the Government remains reluctant to confront the

judiciary, despite its evident frustration with some aspects of the CAT’s work. Politicians will

invariably be frustrated with the way judicial bodies approach some aspects of their work, but that

is, in a sense, the point.

55. I also think it is difficult to draw firm conclusions in this field from comparative data from other

jurisdictions or from statistics in general. The European communications sector is supposed to be

26

subject to a similar legal standard of review, but you would not realise this from the evidence we

have today. Differences in the rules of procedure, personnel and institutional and political culture

are all equally, if not more, important in understanding how a particular review system functions.

In the present case, differences between the communications sector and energy or other markets

are clearly important.

56. Many of these considerations appear relevant to the current COAG consultation document, to

which I now turn.

The COAG review and debate in Australia

57. My understanding is that Ministerial Council for Energy proposed that what is known as the

‘Limited Merits Review’ (LMR) regime be applied to regulatory decisions taken in the gas and

electricity sectors, and that this was duly implemented in 2008. Under these arrangements,

decisions taken by the sector regulator, the Australian Energy Regulator or the Economic

Regulation Authority of Western Australia (AER/ERA), can be appealed by the incumbent

provider or by any other interested party (including rival providers or customers of the provider)

on grounds of ‘material errors of fact, discretion or unreasonableness’. These appear similar,

although not identical, to the ‘focussed specified grounds’ which the UK Government had

contemplated in its 2013 proposals, but which it later abandoned. What the UK calls ‘focussed’

the Australians describe as ‘limited’.

58. As in the UK, the matters to be considered in the review are determined by the applicant but,

unlike the UK, only evidence that was available to the regulator at the time of the decision can be

considered. The reviewing body, the Australian Competition Commission (ACT), appears to

function in a manner similar to the CAT, with proceedings being overseen by a judge of the

Federal Court and with the parties relying heavily upon external legal representation and other

external experts. Both institutions use a panel consisting of three members, with the ACT drawing

on a pool of members who appear similar in number and qualification to those at the CAT. An

important difference, however, is that the ACT has generally performed price cap reviews of a

kind which are conducted by the CMA in the UK. The ACT therefore appears to undertake tasks

similar to those required of the CMA in the UK, but do adopt a procedural approach which is

more reminiscent of the CAT.

59. I also understand that there was a requirement to review the LMR regime within seven years, but

that concerns about its operation prompted the Standing Council on Energy and Resources

27

(SCER), the successor body to the MCE, to appoint an Expert Panel in 2012 to review the

operation of the regime. The Panel, to which I referred earlier, published two reports, concluding

that the regime was costlier and more unwieldly to operate than anticipated, that consumer

interests were not well represented during the review process, and that the ACT took an overly

narrow and legalistic approach which did not consider the merits of the decision in the round

(which resulted in a detriment to consumers). The Panel noted that provisions which allowed the

sector regulator (or other interveners) to raise issues not raised by the applicant (and thereby

expand the scope of the review) had not been exercised in practice59

. My understanding is that

industry respondents to the Panel’s consultation generally supported the existing arrangements (as

has generally been the experience in the UK), the AER/ERA, ACCC and ENA supported some

changes, and that consumer representatives supported the Panel’s proposals to establish a new

review body. The ACT (unlike the CAT in 2013), does not appear to have made its views public.

60. In December 2012 the SCER published a consultation document in which it proposed three

options for reform which largely followed the Panel’s recommendations60

. The first was retention

of the status quo. The second was to allow only a single ground of appeal (that a ‘materially

preferable decision exists’), giving a much wider scope to the reviewing body, which would

remain as the ACT. This was intended to address the ‘cherry picking’ problem which was thought

to contribute both to the greater volume of appeals and to decisions which subsequently

disregarded the consumer interest. The third option was to adopt these changes but also to remove

the responsibilities from the ACT and transfer them to a new, specialist review body, which

would adopt a more investigatory or inquisitorial approach, perhaps akin to that employed by the

CMA in the UK. Proposed changes would include the capacity to gather new evidence or

undertake its own research (something which neither the ACT nor CAT currently do), for a longer

review period (6 instead of 3 months presumed), more expert staff than the ACT and a larger

panel (5 members, similar to the CMA, rather than 3) The SCER also proposed that the new body

would publish a large number of guidelines to assist parties in the early years of its existence,

something which the CMA has done for communications providers. A further interesting

innovation, at least to a British reader, was the proposal to extend participation in the review

process not only to the AER/ERA and the commercial parties and consumers who might be

affected, but also to ‘a Minister of the participating jurisdiction’ who, I assume, might be expected

59

See Review of the Limited Merits Regime, Stage Two Report (Expert Panel 2nd

Report), at

https://scer.govspace.gov.au/files/2012/10/Review-of-the-Limited-Merits-Review-Stage-Two-Report.pdf. 60

Standing Council on Energy and Resources, Regulatory Impact Assessment, Limited Merits Review of

Decision-making in the Electricity and Gas Regulatory Framework, 2012, (SCER 2012) p.4 at

http://www.scer.gov.au/sites/prod.energycouncil/files/publications/documents/Limited%20Merits%20Review%

20-%20Consultation%20RIS%20-%20December%202012.pdf

https://scer.govspace.gov.au/files/2012/10/Review-of-the-Limited-Merits-Review-Stage-Two-Report.pdf

28

to hold their own view as to where the long term interests of consumers might lie. This is a

proposal that I would expect to be universally resisted were it to be made in the UK.

61. The SCER described the key differences between its second and third proposals in the following

terms:

The difference in approach between options 2 and 3 relates mainly to the scope of the

reviewing body to go beyond the specific matter being appealed. Under Option 3, the Panel

considered that the process would be more akin to an audit, where the Review Body would

have the capacity to look at how the entire determination fits together, in the context of

whether it serves the long term interests of consumers. In contrast, in Option 2 the Tribunal

would continue to operate in accordance with all the different types of legislation it is bound

by and, therefore, would be more limited in only focusing on the specific matter being

appealed and may only seek information about other factors that have a bearing on whether

revising the matter being appealed would lead to a more preferable decision overall61

62. Again, this has similarities to the difference in approach adopted by the MMC in relation to price

control matters in the communications sector after 2003 (option 2) and that adopted before that

date (option 3).

63. The SCER noted that it had considered a fourth option, namely a change in the standard of appeal

to judicial review. The SCER concluded62

:

SCO considers that judicial review without a complementary merits review scheme in place is

not sufficient to achieve the MCE’s policy objectives. This is consistent with the MCE’s

position in its 2006 Decision Paper and the advice from the Panel in its Final Report.

In particular, the Panel emphasised that merits review has an important role to play in the

economic regulation of energy network businesses. Currently, the regulator can exercise

significant discretionary powers, which need to be balanced by adequate recourse to appeal.

This is unlike regimes where the primary regulator simply follows prescriptive processes,

where errors in law can be readily proven. Accordingly, judicial review alone would be

unable to provide sufficient accountability for affected parties, that is assessing the merits of

the initial decision.

61

SCER 2012, p.27 62

SCER 2012, p.19

29

64. We should recall that the application of the ‘judicial review’ standard now being proposed by the

UK Government, even if adopted, will remain subject to the requirements of Article 4 of the

Framework Directive, at least so long as the United Kingdom remains a member of the European

Union. The UK’s judicial review standard will therefore remain subject to the requirement that

the merits of the decision are duly taken into account and which would align it more closely to a

‘limited merits’ standard than to ‘judicial review’ in Australia. In the event, no change was

proposed by the Expert Panel or by the SCER to the ‘limited merits’ standard of review.

65. I understand that, in addition to these proposals, the SCER had established a consumer panel (the

Consumer Challenge Panel, which appears closely modelled on Ofgem’s Consumer Challenge

Group) to represent consumer interests to the sector regulator, performing a function similar to

that of the Ofcom consumer panel which I have described previously. The Expert Panel also

wanted the AER/ERA to take into account the efforts that operators had themselves made in

trying to discern the interests and wishes of consumers both before and during the regulatory

process63

.

66. A key part of the Australian debate concerned the implications of the ACT’s decisions for

consumers. The SCER consultation document reports that between 2008 and 2011 the ACT

handed down decisions which increased allowable network revenues by almost $3 billion, using

data that was submitted to the Expert Panel64

. Local politicians were clearly concerned about

these developments, with the result that in some cases, where the State Government controlled the

network business in question (as in Queensland), they have intervened to prevent the business

from implementing the pricing adjustments which the ACT had determined. Although the Expert

Panel themselves were careful to say that they were unable to draw any conclusions about the

effects of the ACT’s decisions on the long term interests of consumers (criticising the ACT for

failing to provide the reasoning in their decisions which would allow them to do so)65

, the

subsequent debate has been conducted on the basis that the outcomes arising from the review

regime were in some sense ‘wrong’ and at odds with the intent of the statute, even if the decisions

being taken by on particular points were ‘correct’ and even if the AER/ERA had erred in some

instances. There was, as far as I know, no suggestion that the ACT had been ‘captured’ by the

industry (as had been a concern in the UK) or that the panel was otherwise guilty of some kind of

bias. Rather, in the view of the Expert Panel, they arose from the ability of the appellants to limit

63

Expert Panel 2nd

Report, p.62 64

SCER 2012, p.11 65

Expert Panel 2nd

Report, p.18

30

the scope of the review to points which, cumulatively, would then be likely to produce a higher

allowable network revenue (generally as a result of adjustments to the WACC, which represented

a majority of the allowable costs for energy networks), and the reluctance of other parties to

intervene in order to raise points which might lead to a contrary outcome.

67. The concerns expressed by the Panel (and adopted, at least in part, by the SCER) are starkly

different from those which have preoccupied the British Government as presented earlier in this

note. Whilst the UK Government has been concerned that the ‘merits’ standard applied by the

CAT was too broad, the Australian debate produced the opposite concern, namely that the ACT

was taking too narrow a view of its role and applying a standard of review more akin to judicial

review when it ought, more properly, to be taking a more expansive or less pixilated view. It is

implied that the ACT may limit itself in this way partly because of the way in which it is

constituted and operates more generally, but also partly because it is seeking to reduce its

workload, reduce costs and avoid delay66

. In contrast, concerns in the UK about the standard of

appeal have been driven largely by concerns to impose cost reductions on the existing regime

which otherwise appears indifferent to them. High volumes of appeals in the UK have been a

concern because they drive high costs, not because they are necessarily felt to produce poor

outcomes.

68. Most of the options for reform proposed by the SCER would, I think, be likely to increase costs.

High volumes of appeals do not appear to have been worrisome because they drove high costs at

the ACT, but because they produced decisions which resulted in rising energy prices for

consumers67

. The implication is that if the review regime were to produce a similar volume of

appeals, but that the result of a substantial proportion of those appeals were to be lower allowable

network revenues or that revenues remained unchanged (as has often been the case for price cap

appeals before the CMA in the UK communications sector since 2003), then these concerns

would be substantially allayed. In other words, the Australian debate proceeds from the

assumption that the outputs of the current review regime are unsatisfactory and then proceeds to

investigate why that might be the case. The UK debate has largely avoided assessing the merits of

the outputs of the review regime - which in many cases have involved no alteration to the original

decision of the regulator – but has instead simply focussed on those processes which are thought

to drive costs and complexity.

66

Although others, including the Acting Solicitor General, argued that the conduct of the ACT was consistent

with the law and that the Expert Panel had misunderstood what it could do, see Expert Panel 2nd

Report. 67

Although I note the Panel thought that requiring a broader scope of review would reduce the volume of

appeals and hence the costs, see SCER 2012 p.31

31

69. The concern about outputs and the implications for consumers has also meant that consumer

representation and engagement has featured strongly in the Australian debate. This appears to

have several facets. First, there is an implication that more effective consumer participation in the

review process might lead the ACT or successor body to take a wider view of the matters under

consideration and, in doing so, come to a different conclusion. Second, it is suggested that even if

the resulting determination were unaffected, greater consumer participation along the way would

lend the review regime greater legitimacy and ensure that the outcomes were better understood by

those whom they affect. As I have explained earlier, consumer participation and the consumer

interest has been given only cursory attention, if that, in the UK debate.

70. My understanding is that the SCER adopted, in mid-2103, what I have described as option 2 and

that amendments to this effect were introduced into South Australia’s Parliament later that year68

.

Since 2013, therefore, applicants (who continue to seek review at the ACT) have been required to

demonstrate that any errors claimed in their notice of appeal would, if corrected, result in a

‘materially preferable outcome for the long term interests of consumers’. This was expected to

reduce the volume of appeals.

71. In addition, the ACT was required to correct errors only when doing so would produce a

‘materially preferable outcome for the long term interests of consumers’ and, when considering a

particular error, was required to consider its effect on ‘interlinked matters’. This is akin to a

requirement to consider points in the round and to pay greater attention to the regulatory duties of

the AER/ERA when doing so. Provision was also made for the SCER to undertake a further

review of the regime in 2016, presumably to assess whether option 2 went far enough and

whether option 3 (or some other option) might in fact be required. This has interesting parallels

with the approach adopted by the British Government in 2012, where the Government similarly

declined to implement the changes it had originally envisaged after encountering strong

opposition during the consultation process, but retained the threat to go further at a later date if the

review bodies (in that case the CAT) did not improve their performance in the meantime. It seems

to me a similar message was sent to the ACT by the SCER in 2013.

72. The current review by the COAG (the successor body to the SCER) fulfils the commitment that

was made in 2013. I therefore now turn to consider various points that are made by the COAG in

their consultation paper.

73. The first point to note is that the COAG indicate that the AER/ERA has recently (March 2016)

sought judicial review of the ACT’s decision to set aside network revenue determinations in two

68

https://scer.govspace.gov.au/files/2013/09/SCER-Bulletin-LMR-amendments-accessible.pdf

32

recent cases. This appeal, which is due to be heard next month (October), will consider whether

the ACT has correctly applied the new regime in both accepting the application for review and in

then coming to a decision. The case is therefore very similar to a number of appeals to the High

Court that served to clarify the role of the CAT under the 2003 Act. In the UK case, most

informed commentators felt that the regime required at least 10 years to ‘bed down’, in part

because of the time required to conclude judicial appeals in the UK (I do not know whether

Australian courts require less or more) and in part because of the need to entertain appeals on

quite a broad range of diverse matters before the boundaries of the regime can properly be

discerned. Moreover, the COAG paper notes that the first cycle of electricity network revenue and

gas access arrangement determinations have yet to even be completed. One obvious conclusion to

draw from all of this is that any attempt to review the effect of substantive changes to the LMR

regime within only 2 years of its adoption is likely to be hopelessly premature.

74. The challenge here is the same in both the UK and Australia – politicians and other interested

parties are invariably frustrated by the apparent inability or unwillingness of the judiciary and the

judicial system to behave in a manner which they consider might better serve the public interest.

In both countries, this has resulted in periods in which the review regime has been threatened with

almost perpetual review. Most of these threats have proved empty, but they have still been

damaging. The position of the UK review regime for communications has been uncertain since at

least 2011, and is likely to remain so until 2020 (by which time we may know what judicial

review means in the context of communications reviews – at least until the UK exits the European

Union and it changes again). In Australia, the original intention had been to allow the LMR

regime seven years to establish itself, but political and popular frustration seems to have curtailed

that opportunity. I do not know how we can insulate the review regime from such concerns, but it

is difficult to see how regulatory certainty and investor confidence is improved by such a feverish

climate.

75. The paper then goes on to consider the performance of the regime since 2013. The expectation

from the changes that were made in 2013 was that the proportion of decisions made by the

AER/ERA that were appealed would reduce, since the grounds for the ACT to admit the appeal

(and the prospects for their then making a decision judged favourable to the incumbent operator)

were intended to be reduced. In practice, the COAG have found that over 50 per cent of the

relevant decisions (on electricity network revenues and gas access arrangements) have been

appealed to the ACT.

76. As the Panel itself noted previously, this is a higher proportion of appeals than are made to the

CMA in the UK by most utility sectors. However, Ofcom has had the majority of its price cap

33

decisions reviewed. I am not sure I would draw any firm conclusions from this, just as I would not

draw any conclusions about the efficacy or otherwise of the UK review regime from the various

statistics that have been presented by the UK Government over the years. I have noted previously

that the UK Government had anticipated that if it changed the review standard it would see a

higher, not lower, volume of appeals as interested parties tested the boundaries of the new regime.

In the Australian case, the Government introduced a ‘materially preferable outcome’ test in 2013

which, I understand, is not otherwise defined and which seems to me would be likely also to

require clarification in the courts. I have also noted that what might be deemed to constitute the

‘long term interests of consumers’ is not at all clear, at least for those of us involved in European

communications policy. Appeals are the only way in which interested parties can obtain legal

clarity on such points.

77. Moreover, it is of course open to the AER/ERA to seek clarification for itself if it feels that the

ACT has incorrectly applied the new standard, either in relation to admissibility of appeals or in

relation to the adjudication of them. The AER appears to be doing precisely this in relation to the

two recent cases cited above. Again, I do not consider that this is evidence of any deficiency in

the regime. On the contrary, it is the judicial system doing precisely what it is intended and

required to do.

78. Any assessment of whether any particular volume of appeals is ‘appropriate’ requires

consideration of whether fewer appeals would achieve the same statutory objectives. This might

be the case if the AER/ERA had never lost an appeal, although even then past performance may

be no guide to future performance. In any event, as far as I am aware, that is not the case here. A

view can only be formed by considering whether the decisions that have been made by the ACT

since 2013 have manifestly failed to produce ‘materially preferable outcomes’ for consumers.

This, it seems to me, brings us to a key deficiency in the COAG paper (and in the SCER paper),

both of which seem to regard it as axiomatic that decisions which result in higher consumer prices

over the review period (relative to those originally proposed by the AER/ERA) cannot be in the

long term interests of consumers.

79. I see no reason to make this assumption, but also a danger in circularity. The circularity arises if

higher consumer prices are assumed to provide evidence of consumer detriment which is assumed

to reveal deficiencies in the existing review processes, whilst perceived deficiencies in the regime

are assumed to produce consumer detriments, which are in turn assumed to take the form of

higher prices. What is required to break the cycle is, I think, to demonstrate that higher prices

represent a consumer detriment in the cases in question. This is something which the Expert Panel

was clear it had been unable to do. So far as I am aware, no attempt has been made by SCER or

34

the COAG to do so either. Instead, the link between higher prices and a deficiency in the review

regime is simply assumed.

80. In the communications sector, a proper assessment of the efficacy of a price cap regime can only

be undertaken ex post. Price controls embody forward looking efficiency assumptions (and

incentives) in relation to both operating and capital expenditure, as well assumptions about what

might constitute a reasonable rate of return on capital employed under prevailing financial

conditions. Whether these assumptions turn out to be right, and whether the long term interests of

consumers have been appropriately served thereby, cannot be determined until we assess the

returns that have been actually earned over the control period as a whole. Even then, we would

need to understand why variances between outturn performance and the expectations of the

regulator or review body had arisen. A debate of this kind has occurred recently in the UK, where

a number of parties argued that Ofcom has allowed BT to earn ‘excessive’ returns as a result of

the application of inappropriate price caps on certain wholesale business services. Earlier debates

in the UK about the imposition of ‘windfall taxes’ in some utility sectors – introduced by the new

Labour Government in 1997 - also involved similar ex post assessments of outturn results.

81. The application of price caps in energy markets, and in Australia, differs in many respects from

those applied in communications and I make no attempt to comment on the merits of what the

AER/ERA has done. The point is that, as far as I am aware, no ex post assessment of the decisions

taken by the AER/ERA and ACT has been undertaken to support any of the proposals which the

COAG is now advancing. The Productivity Commission undertook a study into electricity market

regulation in 2013. Amongst its many interesting conclusions was that high consumer prices were

in part attributable to misplaced political expectations about the reliability of supply (which were

not shared by consumers themselves), in part due to the lack of consumer incentives to manage

their own behaviour, and in part to the public ownership and control of some firms, echoing

points which the Expert Panel itself had made69

. It is difficult to see how COAG or the ACT,

even if it conducted itself in the way some policymakers would like, could be expected to do

anything much to address these deficiencies.

82. The paper then raises a number of other concerns which can be dealt with more succinctly. The

first relates to the volume of material, and particularly expert reports from the parties, that the

ACT has been required to consider. This echoes concerns in the UK – particularly from the

British Government in its 2013 consultation - that the CAT has become overwhelmed by experts

69

http://www.pc.gov.au/inquiries/completed/electricity/report/electricity-overview.pdf. See also, Expert Panel

2nd

Report p.8

http://www.pc.gov.au/inquiries/completed/electricity/report/electricity-overview.pdf

35

on occasions and that, in adversarial proceedings, experts simply breed more experts. I have

sympathy with this point, but the ACT ought to be capable of addressing it.

83. The paper also suggests that whilst the ACT has engaged with consumers during the review70

, it is

not always clear how their views are reflected in the decision. I have already explained that the

UK authorities have made no attempt to ensure, and appear to have no expectation, that

consumers or consumer advocates will play a meaningful role in review proceedings.

84. Finally, the paper notes that lengthy reviews and complex conclusions create uncertainty for

consumers whilst they are being undertaken. I see no way to avoid these features of the regime,

which arise in every review regime I have encountered. I would be far more concerned about the

uncertainty that arises from almost continual review of the regime, which has adverse

consequences for consumers, firms, regulators and investors.

85. The paper then proceeds to outline four options for reform71

.

86. The first involves making no changes at this stage, and allowing the regime to ‘bed in’ further

before coming to any firm conclusions. For the reasons already outlined at length in this note, I

consider that this option has much to be said for it. At the least, it is important to recognise that

evidence drawn from the past two years provides COAG with a very weak basis from which to

derive bold conclusions about reform.

87. The second option proposes to ‘improve’ the functioning of the ACT so as to better fulfil the

expectations of the 2006 and 2013 reforms. I confess to finding the precise nature of the COAG’s

proposals, particularly what might change in terms of the scope and nature of the review

undertaken, difficult to follow. The authors appear concerned that it will be difficult for an

existing institution to change it spots and, in this case, for the ACT to turn itself into an

inquisitorial body and to reduce the role of lawyers and expert advisers in the process.

88. It might be argued that the UK Government’s decision to separate the review functions of the

CAT and the CC/CMA, with the latter continuing to have responsibility for price cap reviews

(and adopting a much less judicial approach when discharging those responsibilities), lends

support to the view that different types of institution are required to perform different functions

and that the ACT, which is more akin to the CAT, might not be best suited to price cap reviews.

70

I note the ACT undertakes a ‘community consultation’, which is not something either the CAT or the CMA

generally does but appears similar to the public hearings undertaken by Oftel in the past 71

COAG 2016, p. 12 et seq

36

89. I am not sure that this conclusion is necessarily warranted. One of the important reasons for

keeping the price cap function at the MMC and its successor bodies was that the MMC considered

price cap appeals across the whole range of UK utility sectors. Issues relating to WACC involve a

series of methodological questions about the cost of funds, the treatment of tax and so on, all of

which are common to the financial markets which service all types of firms in the UK economy.

There is, in the UK Government’s view (and in mine), a strong case for consolidating all price cap

reviews within a single institution. I understand the position is very different in Australia, with

responsibility for price cap matters being much more dispersed between Federal and State bodies.

In that case, the considerations in favour of the CMA in the UK may have less weight in

Australia. But I do see merit in considering whether the ACT currently has the membership and

resources to address price control matters in the manner envisaged by the legislators. It may be

that a larger number of panel members, or a wider range of backgrounds is required, as is the case

for the CMA in the UK, or that those members may require access to more specialist advisers.

These are matters which I think the ACT ought itself to be considering proactively.

90. In this, I do not share the Expert Panel’s concern that the ACT would find itself drawn into

debates about policy into which it should not, nor would wish to, venture. This concern led the

Panel to then propose that a new review body (the ‘Australian Energy Appeals Authority’) be

created:

In this, we find ourselves repeating the conclusions of the Administrative Review Council

(ARC) in its 1999 publication ‘What decisions should be subject to merits review?’, which,

among other things, indicated that (tribunal-based) merits review is unlikely to be

appropriate for major decisions that are made over an extended time period, involve an

extensive inquiry and consultation process, have implications for a wide range of different

interest groups and involve a significant degree of policymaking. We note that the

entanglement with policy making creates severe difficulties for judge-led organisations, since

it requires judges not only to become policymakers, but also to explain

and be accountable for decisions in the way that a primary regulator is. The Panel has

detected no great enthusiasm for this kind of ‘politicisation’ of the judiciary72

91. In the UK both the CAT and the CMA have shown themselves capable to reviewing the merits of

policy decisions that have been taken by Ofcom without any suggestion that they are being

‘politicised’ in the process. I have already noted that the CAT and CMA add legitimacy to the

overall regulatory process by being (and being seen to be) more detached from the political

72

Expert Panel 1st Report, p.7

37

process and from public attention than Ofcom. I do not see why the need to explain decisions, or

even to, as I suggest, actively participate in the debate with Government about how the review

regime operates and how it might operate better, should lead to a ‘politicisation’ of the judiciary.

We have seen that, thus far at least, the CAT and CMA have shown themselves to be quite

capable of resisting the efforts of British Ministers to dictate how they might discharge their

duties. I do not see any reason why the ACT should be any different.

92. I also have sympathy with the politician’s (and regulator’s) lament that the review process has

become choked with external advisers and lawyers (whilst recognising that I fall into the former

category). Reducing the participation of external advisers (perhaps by limiting their number, the

length of their written evidence, or the matters in which they are able to intervene and/or their

participation in oral proceedings) might also have an influence on the volume of applications that

are made to the ACT (as well as to the length of time and resources required to resolve them). The

ACT might also require that advisers first identify points that are not dispute amongst themselves,

so that these can be put aside. Regard must still be had to the rights and freedoms of the

AER/ERA and the incumbent firms to defend their interests, but the ACT could seek to

discourage behaviour which escalates costs and adds pointless complexity. The primary intent

here would not be to make the process more accessible to consumer interests (although it might

also have that effect), but simply to make it more efficient.

93. In a similar vein, I have seen suggestions that certain aspects of the WACC decision, which are

generic to all decisions, might be adjudicated by the ACT only once and then deemed to apply to

subsequent decisions by the AER/ERA. As I understand it, this would effectively mean that firms

and their advisers would know, in advance, how the ACT would determine a similar matter in any

subsequent review, with the result that applications on these grounds would be rejected unless it

was demonstrated that other evidence was available and/or that the matter involved material

differences in fact that ought to be taken into account. I also see merit in this proposal, to the

extent that it would clear away a lot of repetitive pleadings, although I would also want to ensure

that the Expert Panel’s concern – that corrections of individual errors without regard to the overall

effect on the resulting determination – was protected by the requirement to adopt changes only

when they produce a materially preferable outcome in relation to the long term interests of

consumers

94. It has also been argued that focussing the WACC review in this way might also allow the ACT to

apply more expert or specialist resources to the issues, and perhaps also allow consumer interests

to engage their own experts to better represent their interests in the proceedings. Although the

CMA has yet to do so, it is also possible to imagine that the ACT might go further and publish

38

guidance for potential applicants on how it might approach various technical aspects of the

WACC. One possible model, albeit developed under rather different circumstances, is the

European Commission’s publication of guidelines which seek to develop a common methodology

for the calculation of WACC in the communications sector73

. As explained earlier, the

Commission does perform a review function (under Article 7 of the Framework Directive) in

relation to some aspects of regulatory decisions, although does not, at present, have powers to set

aside remedies which might involve computation of the WACC.

95. The concern for policymakers ought to be to ensure that no obstacles exist to prevent the judicial

body from improving the way in which it undertakes its work. These might include recognising

that if the ACT is to adopt a more inquisitive approach, it may take more time (not less) to

conclude its work, and that it may incur more costs (not less) in doing so.

96. The third option is to replace to ACT with a new review body that would be specifically

constituted so as to adopt an inquisitorial (‘investigatory’) approach. The benefits appear to be

similar to those claimed if the ACT itself were to adopt such an approach, although the paper

suggests that the grounds for and the subsequent basis of the review would be more prescribed

(which may or may not mean more ‘limited’) than the current LMR standard applied by the ACT.

It is not entirely clear to me how this option would differ from the second, other than the fact that

a new body would clearly involve additional costs and uncertainty whilst it was being established.

97. My reservations about the case being made for the second option apply with equal force to the

third. It seems to me both unwise and unfair to remove the new review responsibilities from the

ACT only 2 years after it has been accorded them. I would be particularly concerned about the

conclusions which investors would draw from such an act, and by any perception that Australian

politicians were ‘forum shopping’ or otherwise seeking to bypass established judicial procedures

in order to obtain a review regime which better suited their aims. It may be that such a move is

required if the ACT proves itself incapable of addressing, or unwilling to address, some of the

concerns outlined in the COAG paper (and by SECR and the Expert Panel). The Government is

entitled to change a body if it proves incapable of meeting the challenges it is presented with. But

I also think the COAG would require a much stronger evidence base, derived over a much longer

period, before it was legitimately in a position to recommend that course of action in this case.

73

Produced for the European Commission by the Brattle Group, see http://bookshop.europa.eu/en/review-of-

approaches-to-estimate-a-reasonable-rate-of-return-for-investments-in-telecoms-networks-in-regulatory-

proceedings-and-options-for-eu-harmonization-

pbKK0416408/?CatalogCategoryID=CXoKABst5TsAAAEjepEY4e5L

39

98. Finally, the fourth option proposes to change the standard to judicial review in the courts (rather

than the ACT). As in the UK, the COAG notes that the judicial review standard has become more

elastic than in the past. However, there would remain important differences between the COAG

proposal and that of the UK Government. First, as noted previously, the Australian courts would

not be required to duly take into account the merits of the case, as the CAT will still be required to

do, at least so long as the UK remains a member of the European Union. Second, most reviews in

the UK would still be undertaken by the CAT rather than by the courts. I have explained that the

CAT operates as a court in many respects, but there are aspects of its conduct (such as the

admission of experts and expert reports and the presence of panel members who may not be

lawyers) which are quite different from the British courts, and likely the Federal Court in

Australia as well. Third, price cap reviews in the UK will continue to be undertaken by the CMA,

which would remain an inquisitorial rather than judicial body (although how the change in the

standard of review will affect the CMA’s procedures is also, as yet, uncertain). Finally, I have

already noted that the UK Government accepted that a much stronger case could be made for

retaining the existing merits review arrangements for price cap matters than for other matters on

which the CAT was required to opine. It seems to me a similar distinction might be drawn in the

present case, where the fact that certain decisions taken by the ACCC in the communications

sector have recently become subject to judicial review does not, in itself, provide a particularly

strong argument in favour of applying the same standard of review to quite different types of

decisions in the energy sector.

99. These differences aside, it is difficult to see why COAG should propose a move to judicial review

as being a solution to the problems it identifies in its paper as arising from the current

implementation of the LMR regime. Neither the Expert Panel nor the SECR thought that judicial

review was an appropriate response. As already noted, many of their concerns arose from

concerns that the conduct and procedures of the ACT alienate and exclude consumers and

consumer representatives. It is hard to see why or how a move to judicial review in the Federal

Court would do anything other than exacerbate that concern.

100. Similarly, SECR thought that judicial review was a lengthier, more cumbersome process than

LMR. The British Government assumed the opposite. It seems to me that the Expert Panel’s

assumption that it could expand the scope of review undertaken by the ACT (or a successor

body), require it to adopt a more inquisitorial approach and expect participation by much wider

range of interested parties, whilst at the same time completing its task in less time than the courts

require for judicial review matters, is implausible. The better conclusion, I think, is that a more

expansive review process will almost certainly cost more in terms of time and money. This may

be no bad thing in itself. The only circumstances in which this would not be the case were if the

40

new regime also had the effect of deterring appeals (because parties are no longer able to ‘cherry

pick’ points) and so reduce their volume.

101. The UK Government thinks it can also save time and money by assuming that changes to the

review regime will have the effect of deterring appeals. But in their case they assume that the

narrower scope of judicial review will have this effect. This is a point on which British and

Australians are unlikely to both be right. In practice, nobody knows and my own view is that

other changes to procedures are likely to be as important in determining costs and time taken as

any change to the standard of review. In any event, as we have seen from the UK debate, the costs

are comparatively inconsequential given the importance of the issues at stake.

102. Overall, I find that the COAG paper makes an unconvincing case for change in the LMR

regime. In part this is due to the timing of the review, which follows too soon after the 2013

amendments were made to the regime (but I accept is not something over which the COAG has

any control). This means there is insufficient evidence to be able to form firm views about how

the regime might function once it has bedded in and once the courts and interested parties have

had an opportunity to establish its boundaries.

103. But the COAG paper, like its predecessors, also fails to persuade me that the long term

interests of the Australian consumer are being harmed by existing arrangements or that the ACT

is failing to properly discharge its new duties. This is not only because there is insufficient

evidence to do so yet, but also because no attempt has been made to engage with what evidence

there is, for example by undertaking a serious ex post assessment of the performance of the sector

as a whole or attempting the kind of ex ante cost benefit assessments which the Expert Panel

criticised the ACT for failing to do.

104. Even if the COAG had demonstrated that such a detriment arose, I would take some

persuading that statutory changes were the answer at this stage. I share the CAT’s concern (which

is also recognised in the COAG paper) that politicians should not stray too far in dictating terms

to the judiciary. As I have explained, an important element of the original regulatory model in the

UK was that it was resistant to capture by either the incumbent operators it was intended to

oversee or by politicians who might favour short populist goals over longer term considerations,

which is one reason why I would be very reluctant to allow Ministers to intervene directly in the

proceedings of the review body. Regulators, including review bodies, have largely succeeded in

treading this difficult path since the 1980s, although not without friction from time to time (such

as when the CAT resisted the Government’s proposals to ‘clarify’ its procedures in the 2013

consultation). I think such friction is a necessary and inevitable part of the system, but it does not

41

mean that the politicians ought always (or even generally) to prevail. Nor does it mean that the

courts or review bodies are always right either. The current COAG paper will give the ACT a

clear indication of the nature of the Government’s concerns. It would be helpful (and may be

imperative) for the ACT were to explain how it proposes to address them (to the extent it felt they

had merit).

105. I would also take persuading that greater consumer representation was the answer. I have

already explained that this has not been a concern for the UK Government and that it has not

relied upon greater representation to improve decision-making, nor has it sought to alter the

review regime so as to better accommodate such representations. This noted, I think the concern

about consumer representation may disguise another point which, to my mind, does bear

consideration. I do think it is important in review proceedings for the assessor to be exposed to a

wide range of contrary views. In the UK, these are invariably provided by BT and by its rivals

arguing from positions on either side, with the regulator left in the middle. In the Australian

energy context, it may be that contrarian views are more difficult to find. The AER/ERA must

presumably defend the decision that it has made (although there was some doubt about how the

AER/ERA ought to behave in the Expert Panel report74

), whilst the network provider is likely to

argue in one direction. There may then be nobody to take another, contrary, view75

.

106. Whilst I recognise that this may be a deficiency in the ACT process, there are various ways to

address it. The AER/ERA might itself be required to develop a ‘contrary’ position on some

points. Or the ACT might itself engage experts to do so if it feels the parties in a particular

proceeding are such that it would not otherwise be done. Or it might ensure that the composition

of the panel reflects sufficient diversity of opinion and experience. Whatever the answer, it is not

obvious to me that existing consumer advocacy organisations will be best placed (or necessarily

willing) to perform this function or that simply giving them more money will resolve the issue.

Conclusion

107. I am afraid it is difficult therefore to avoid the conclusion that, whilst there may be a case for

reforming the review regime in both the UK communications and the Australian energy sectors,

Governments in both countries have spent many years failing to make it convincingly. The British

74

Expert Panel 2nd

Report, p.46 75

In some organisations I have worked in, the CEO has established two teams before making an important

strategic decision. One team is required to make the best case in favour of one course of action. The other is

required to make the best case for the opposite. The point was to ensure that the contrary case is always properly

aired before the decision was made.

42

Government does not even try to claim that any consumer benefits will arise from its latest

proposals to move to a limited merits review regime.

108. Nonetheless, the review regime is bound to generate a degree of frustration amongst

regulators, politicians and others who believe that current arrangements work against the long

term interests of consumers. The review bodies themselves - the ACT, CAT and CMA - would be

unwise to dismiss or disregard these concerns, even if they are misinformed or unsubstantiated.

The review bodies need to put aside concerns about ‘politicisation’ and engage directly in the

debate with policymakers, as the CAT did in the UK in 2013. They will need to defend their

current practices and demonstrate that they are open to change where it is needed. This is

particularly the case on issues such as ensuring that expert advisers are not seen to be capturing

the review process, that the panel has access to and has considered the contrary arguments on any

given point, that there is adequate support from expert staff, and that the panels are drawn from a

sufficiently large and diverse group to ensure that a wide range of views and interests are

represented. This should then assist the review bodies in the difficult but necessary task of

explaining to Governments that an effective regulatory review regime should be given whatever

modest funding it requires and allowed whatever time is reasonably necessary to get on with the

job.

Richard Feasey

1 October 2016

review of the limited merits review regime · the focus of merits review on seeking a "correct...

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