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Access Regulation in Australia

Thomson Reuters (Professional) Australia Limited 19 Harris Street Pyrmont NSW 2009 Tel: (02) 8587 7000 Fax: (02) 8587 7100 [email protected] legal.thomsonreuters.com.au For all customer inquiries please ring 1300 304 195 (for calls within Australia only)

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NORTH AMERICA Thomson Reuters Eagan United States of America

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EUROPE Thomson Reuters London United Kingdom

Access Regulation in Australia

GEOFF PETERSEN LLB (Hons), BEc (Hons) (Syd)

MORELLE BULL LLB (Hons), BCom (Econ) (Hons) (Melb)

CATHERINE DERMODY LLB (Hons), BA (ANU), LLM (Melb), PG Dip EU Competition Law (KCL)

LAWBOOK CO. 2016

Published in Sydney by Thomson Reuters (Professional) Australia Limited ABN 64 058 914 668 19 Harris Street, Pyrmont, NSW National Library of Australia Cataloguing-in-Publication entry Creator: Petersen, Geoff, author Access regulation in Australia/Geoff Petersen, Morelle Bull, Catherine Dermody. ISBN: 978 0 455 231242 (paperback) Notes: Includes index. Subjects: National Access Regime. Infrastructure (Economics)—Australia—Management. Competition—Government policy—Australia. Infrastructure (Economics)—Australia. Competition, Unfair—Australia. Other Creators/Contributors: Bull, Morelle, author. Dermody, Catherine, author. 338.0994 © 2016 Thomson Reuters (Professional) Australia Limited This publication is copyright. Other than for the purposes of and subject to the conditions prescribed under the Copyright Act 1968, no part of it may in any form or by any means (electronic, mechanical, microcopying, photocopying, recording or otherwise) be reproduced, stored in a retrieval system or transmitted without prior written permission. Inquiries should be addressed to the publishers. Copyright of Cth legislative material: All Commonwealth legislative material is reproduced by permission but does not purport to be the official or authorised version. It is subject to Commonwealth of Australia copyright. For reproduction or publication beyond that permitted by the Copyright Act 1968 (Cth), permission should be sought in writing from the current Commonwealth Government agency with the relevant policy responsibility Editors: Lara Weeks, Melanie Eslick Product Developer: Paul Gye Publisher: Anne Murphy Printed by Ligare Pty Ltd, Riverwood, NSW

The paper this book is printed on is in accordance with the rules of the Forest Stewardship Council®. The FSC® promotes environmentally responsible, socially beneficial and economically viable management of the world’s forests.

Foreword Frederick G Hilmer My first impression on reading this book was surprise at the extent to which the field had developed. The Committee of Inquiry into National Competition Policy1 that I chaired in the early 1990s recommended an access regime, setting out why it was needed, as well as some core principles that should underpin such a regime. In the 20-plus years since then, access regulation has been applied in many areas of infrastructure, including telecommunications, rail, gas and electricity. While there have been relatively few declarations of access, the impact of the regime is magnified as declarations are a “credible threat” if a facility owner fails to provide access on reasonable terms. The result of having access regimes in place is generally seen as a positive. Both recent reviews of the access regimes, one conducted by the Competition Policy Review Panel chaired by Professor Ian Harper2 (“Harper Review”) and one by the Productivity Commission,3 recommended the continuation of access in accordance with current principles though with refinement of tests that must be met for access to be applied. However, as this book illustrates, access is a difficult and complex field. For example, while the two recent inquiries agreed on continuing the regime, they came to different conclusions about the appropriate test that would trigger an access declaration. The complexity of the field was highlighted by the work of Nobel Laureate, Jean Tirole. Tirole received the Nobel Prize for work on the regulation of imperfectly competitive markets. He showed how difficult it was to develop and apply regulation with respect to access for two reasons. First, the regulator has less information and understanding of the particular area being regulated than the manager of the facility, for example, with respect to investment needs, efficiency, improvement opportunities and the nature and likelihood of risks. Second, the intricacies of each regulatory issue and market are different. As a result, there is a real possibility of “unintended consequences” of regulation, such as blackouts from underinvestment, or higher-than-necessary prices and capital spending from inappropriate rate of return targets or other pricing mechanisms, or failure to encourage service providers to make possible savings.

1 Frederick Hilmer (Chair), Mark Rayner and Geoff Taperell, National Competition Policy – Report by the Independent Committee of Inquiry, 25 August 1993 (Australian Government Publishing Service, Canberra) (“Committee of Inquiry”). 2 Ian Harper (Chair), Peter Anderson, Su McCluskey and Michael O’Bryan, Competition Policy Review: Final Report, March 2015. 3 Productivity Commission, National Access Regime, Inquiry Report No 66, 2013, Canberra.

vi

Foreword

This book demonstrates these points, with a significant part devoted to how regulators handle access pricing in different contexts and industries. Yet the authors recognise that even such a book cannot cover the field in detail. They point out, for example, that the National Electricity Rules alone run to 1400 pages and that there have been 70 versions of the rules over the last decade. When the Committee of Inquiry recommended an access regime, it did so because, in its view, access was one component of an approach to improving consumer welfare via competition, or via regulation where competition is unlikely, particularly in the case of natural monopolies. A major goal of the Committee’s work was to open what were then largely government monopolies to competition. Where this was not feasible, regulation to prevent the abuse of market power and to provide incentives for improving productivity were recommended. What emerged was a policy framework with six components. First, competition law was to be more widely applied. This was particularly the case with state governmentowned utilities where there was uncertainty as to whether the shield of the Crown protected them from application of the then Trade Practices Act 1974 (Cth). Second, regulation review was established, with regulation that entrenched monopolies a clear target, for example, rules that reserved exclusive transport of some commodities to rail. The third component was to restructure public monopolies to separate the natural monopoly from potentially contestable areas. Markets could then be encouraged to form in the potentially contestable areas. Access, the fourth component, is critical where this separation cannot or will not be achieved, or where the natural monopoly has been separated but has the ability and incentive to overcharge or under-deliver. In these cases, price surveillance, the fifth policy component, which is closely linked to access, becomes important. The sixth and final policy component, competitive neutrality, applies where a government seeks to operate and compete in a market, such as electricity generation. Of these six components of policy, access was the most controversial. I recall being accused of being a communist because the recommended access regime was seen to arbitrarily take away property rights that had been lawfully acquired. We pointed out that there were access regimes in other market economies, including the United States and New Zealand, mainly under the umbrella of general competition law on abuse of market power. No jurisdiction stands out as having what is recognised as clearly the best access regime. However, a United States academic review of the field concluded: “If the goal is to have a thoughtful regime of open access that will be beneficial to society – Australia with its statutory national access regime, supplemented by industry specific rules as needed and the general competition law as a backstop – comes closest to being a potential model.”4 Another key issue is the nature and structure of the regulators charged with applying access principles. The Australian Competition and Consumer Commission 4 Spencer Weber Waller and William Tasch, “Harmonizing Essential Facilities” (2010) 76 Antitrust Law Journal 741, 741.

Foreword vii

(“ACCC”) is currently involved in applying the general access framework and in industry-specific situations. However, a range of Commonwealth and state bodies also have important roles, as set out in Ch 6. The Committee’s report preferred a single national regulator. We were concerned with “regulator capture” in the case of industry regulators. And we were concerned with complexity and inconsistency once a number of regulators operated in the access space. The Harper Review recommended moving access and pricing functions from the ACCC to a new body, the Access and Pricing Regulator (“APR”). Where national frameworks were in place, state functions could also be transferred to the APR. The Harper Committee’s reasons were to recognise the different approaches needed as the competition policeman – the ACCC’s main role – compared with working hand-in-hand with industry on access and pricing. Key tests of institutional arrangements are whether they are likely to resolve access issues far more quickly than is the case today, where contentious cases run for years, and whether the regulator is sufficiently expert to deal with the information asymmetries highlighted by Tirole. While the book’s focus is on well-established natural monopolies – utilities and infrastructure – it leaves open the question of how an access pricing regime might apply to newly emerging digital businesses, particularly those that have built software platforms from scratch, such as Uber, Facebook, Google, Apple and Microsoft. These platforms quickly become the industry standard, with market shares often above 80%. The platform owner has no incentive to restrict access. On the contrary, the value of the firm depends on its platform being the standard of choice. But there is always the temptation to use the pricing power that these situations make possible. In regulating these areas, a balance must be struck between encouraging the innovation that built the new business and preventing abuses of market power. These situations are rarely local, as most digital businesses are global. How smaller jurisdictions such as Australia handle this, compared to the European-wide approach to competition regulation or the United States approach, is quite unclear. In light of the complexity of access and pricing regulation and the continued fine-tuning of approaches, this book plays an important role. It outlines key principles, laws and processes as they have evolved. And it poses questions at the end of each chapter which encourage the reader to question current law and practice. It provides a solid platform for understanding and applying the Australian access regimes and, for this reason, will be useful to both students and practitioners. Sydney, 2016

Preface You might not think about it, or you might not even know about it, but every day you use essential services that, at some point along the supply chain to you, have been the subject of access regulation. Think about when you wake up in the morning and you turn on your gas stove to fry up some eggs for breakfast. When you hang up your mobile phone after speaking with a friend and log on to watch Netflix through your laptop. When you get home late at night and turn on the lights and sit down to watch some television. Access regulation has had a significant impact on the price that you pay for those services and has given you the power to choose who provides these essential services – gas, telecommunications and electricity, respectively – to you. Despite having such a pervasive impact on individuals and businesses across Australia, access regulation is not well understood by many people. This book has been written as a primer on access regulation in Australia. While there is a wealth of academic literature and a raft of information in regulatory guidelines, there is currently no single repository of information covering the following types of issues: • why access to services provided by certain infrastructure is regulated; • forms of access regulation; • alternatives to access regulation; • regulatory models used in Australia; • regulators and review bodies involved in regulating access; and • the access regimes that apply in the electricity, gas, telecommunications, and port and rail sectors in Australia. The aim of this book is to equip readers with the necessary background and tools to understand and critically analyse the complexities and curiosities of the access regimes that are currently used in Australia. When considering a particular regulatory issue arising in one industry, there is much to be learnt from looking at the history and development of regulatory frameworks and how issues have been addressed in other industries – successfully or otherwise. While this book is limited to Australia, it will be a useful starting point for students, economists, legal practitioners, regulators and policy makers. Geoff Petersen, Morelle Bull and Catherine Dermody April 2016

About the Authors Geoff Petersen, Morelle Bull and Catherine Dermody have a range of economic, policy and legal experience in the area of access regulation. Geoff Petersen is a senior lawyer in Gilbert + Tobin’s Competition and Regulation team. Prior to joining Gilbert + Tobin, Geoff worked at a leading Australian economic consultancy. Geoff has industry-leading expertise in both economic and legal issues in regulated industries, particularly telecommunications and energy. He advises electricity and gas distribution businesses on the revenue and price control regimes under the National Electricity Law and the National Gas Law and has experience in merits reviews of regulatory decisions affecting those businesses. Geoff also advises a leading Australian telecommunications carrier on regulatory obligations arising under Pt XIC of the Competition and Consumer Act 2010 (Cth), and has previously worked for carriers elsewhere in the Asia-Pacific region. Morelle Bull is a senior lawyer in Gilbert + Tobin’s Competition and Regulation team. Before she joined Gilbert + Tobin, Morelle worked at the Australian Competition and Consumer Commission in the Mergers and Communications Groups and at the Productivity Commission as a research economist. Morelle is experienced in advising clients on regulatory issues, particularly those in the energy and telecommunications sectors. She has acted for leading energy companies in merits review proceedings before the Australian Competition Tribunal and the Western Australian Electricity Review Board. Morelle has advised a leading telecommunications carrier on a number of fixed line telecommunications inquiries and determinations, and other telecommunications carriers in the Asia-Pacific region. Catherine Dermody is a barrister at the Victorian Bar. Prior to moving to the bar, Catherine was a partner in Gilbert + Tobin’s Competition and Regulation team. Catherine commenced her career at the Australian Competition and Consumer Commission, and also worked as a legal advisor at the Office of Gas and Electricity Markets in the United Kingdom. Catherine has acted for both regulators and regulated entities in revenue and pricing matters, as well as in judicial and merits reviews of regulatory decisions before appeals bodies, including the Australian Competition Tribunal. She also has domestic and international experience in designing and advising on the implementation of competition and regulatory frameworks. Catherine’s international experience has been gained in jurisdictions including Hong Kong, Singapore, Thailand, the United Kingdom, and Vanuatu.

Acknowledgements We have been incredibly fortunate during the course of our careers to learn from, and work alongside, leading practitioners involved in access regulation – practitioners spanning the disciplines of public policy, economics, finance, and the law. Many of these people will readily identify in this book where we have drawn from our shared experiences in variously developing, interpreting, and applying access reguation to a cross-section of industries in Australia – and the issues and challenges we have grappled with along the way. We owe a significant dept to all of those from whom we have learnt so much. In particular, we would like to thank Fred Hilmer for agreeing to write the foreword, which sets the bigger picture against which this book can be read. His deep understanding of the subject matter has made an invaluable contribution to this work. From the inception of this book through to finished product, Katherine Lowe has generously provided us with support during the drafting of this work and her sage advice on many of the chapters. We would also like to thank Peter Waters for reviewing and providing insightful comments on the telecommunications chapter, and Simon Muys on the port and rail chapter. Of course, any errors are our own. Paul Gye, our product developer at Thomson Reuters, together with Mel Eslick and Lara Weeks, our editors, provided us with counsel and guidance, for which, as first time authors, we are extremely grateful. Finally, we acknowledge our colleagues, friends, and family, who are a constant source of encouragement in everything that we do.

Table of Contents Foreword ................................................................................................................................. v Preface ................................................................................................................................... ix About the Authors .................................................................................................................. xi Acknowledgements ............................................................................................................... xiii Table of Cases ..................................................................................................................... xvii Table of Statutes ................................................................................................................... xxi Glossary

....................................................................................................................... xxxiii

1: Introduction to Access Regulation ................................................................................. 1 2: Economic Concepts .......................................................................................................... 9 3: Why Regulate Access? ................................................................................................... 27 4: Key Forms of Access Regulation .................................................................................. 49 5: The Building Block Model ............................................................................................ 69 6: Role of Regulatory Bodies ........................................................................................... 101 7: The National Access Regime ....................................................................................... 123 8: Electricity ...................................................................................................................... 171 9: Gas .................................................................................................................................. 229 10: Telecommunications ................................................................................................... 273 11: Port and Rail ............................................................................................................... 339 12: Review of Regulatory Decisions ............................................................................... 377 Appendix A: Merits Reviews of Revenue and Pricing Determinations under the National Electricity Law and National Gas Law ................................................. 431

Index .................................................................................................................................... 437

Table of Cases A APT Allgas Energy Limited (No 2), Application by [2012] ACompT 5 ..................................................................................................... 5.160, 12.220 ActewAGL Distribution v The Australian Energy Regulator (2011) 195 FCR 142 ................................................................................................ 12.500 ActewAGL Distribution, Application by [2010] ACompT 4 ............................ 5.160, 12.220 ActewAGL Distribution, Application by [2016] ACompT 6 .................. 8.350, 8.380, 8.470 Australian Broadcasting Corporation v Lenah Game Meats Pty Ltd (2001) 208 CLR 199 ......................................................................................... 12.130 Australian Broadcasting Corporation v O’Neill (2006) 227 CLR 57 ............................................................................................................................... 12.130 Australian Competition and Consumer Commission v Australian Competition Tribunal (2006) 152 FCR 33 .............................................................. 12.220 Australian Competition and Consumer Commission v Australian Safeway Stores Pty Ltd (2003) 129 FCR 339 ............................................................ 3.30 Australian Competition and Consumer Commission v Telstra Corporation Limited (2010) 188 FCR 238 .............................................................. 10.140

B Boral Besser Masonry Ltd v Australian Competition and Consumer Commission (2003) 215 CLR 374 ........................................................... 2.200

C Castlemaine Tooheys Ltd v South Australia (1986) 161 CLR 148 ............................................................................................................................. 12.130 Chime Communications Pty Ltd (No 2), Application by [2009] ACompT 2 .................................................................................................................. 2.170

D Dowling v Dalgety Australia Limited (1992) 34 FCR 109 ............................................. 3.30 Dr Ken Michael AM, Re; Ex parte Epic Energy (WA) Nominees Pty Ltd [2002] WASCA 231 ............................................................... 2.170, 3.180, 6.280 Duke Eastern Gas Pipeline Pty Ltd, Re (2001) 162 FLR 1 ............................... 7.190, 9.130

E East Australian Pipeline Limited, Re [2004] ACompT 8 ................................................. 5.80 East Australian Pipeline Pty Ltd v Australian Competition and Consumer Commission (2007) 233 CLR 229 ............... 3.170, 5.60, 5.80, 6.300, 12.410 Eastern Express Pty Ltd v General Newspapers Pty Ltd (1992) 32 FCR 43 .................................................................................................................... 3.30

xviii Table of Cases

ElectraNet Pty Ltd, Re, Application by [2008] ACompT 1 ......................................... 12.130 ElectraNet Pty Limited (No 2), Re, Application by [2008] ACompT 2 ................................................................................................... 12.210, 12.220 ElectraNet Pty Limited (No 3), Re, Application by [2008] ACompT 3 ..................................................................................................... 12.90, 12.220 Energex Limited, In the matter of [2010] ACompT 3 ................................................. 12.290 Energex Limited (No 2), Application by [2010] ACompT 7 ........................... 5.210, 12.230 Energex Limited (No 4), Application by [2011] ACompT 4 ......................... 12.130, 12.150 EnergyAustralia, Application by [2009] ACompT 8 ........................... 5.160, 12.220, 12.230 Envestra Limited, Application by [2011] ACompT 13 ................................................ 12.130 Ergon Energy Corporation Ltd v Australian Energy Regulator (2012) 213 FCR 576 ....................................................................................... 8.10, 12.400

F Fortescue Metals Group Limited, Application by [2006] ACompT 6 ................................................................................................................ 12.260 Fortescue Metals Group Limited, In the matter of [2010] ACompT 2 ........................................................................................ 7.180, 11.460, 11.470

G Glencore Coal Pty Ltd, Application by [2016] ACompT 6 ................................ 7.180, 9.130

J Jemena Gas Networks (NSW) Ltd, Application by [2010] ACompT 8 ................................................................................................................ 12.290 Jemena Gas Networks (NSW) Ltd (No 2), Application by [2011] ACompT 5 ................................................................................................................ 12.150 Jemena Gas Networks (NSW) Ltd (No 5), Application by [2011] ACompT 10 ................................................................................................................ 5.160

K Khan v Minister for Immigration and Ethnic Affairs [1987] FCA 457 ............................................................................................................................... 6.280

N NT Power Generation v Power and Water Authority (2004) 219 CLR 90 .............................................................................................................. 2.210, 3.60

O Orica IC Assets Ltd re Moomba to Sydney Gas Pipeline System, Application by [2004] ACompT 2 ............................................................. 12.420 Origin Energy Electricity Ltd v Queensland Competition Authority [2012] QSC 414 ......................................................................................... 6.280

Table of Cases xix

P Pilbara Infrastructure Pty Ltd v Australian Competition Tribunal [2010] FCA 1118 ...................................................................................................... 12.480 Pilbara Infrastructure Pty Ltd v Australian Competition Tribunal (2011) 193 FCR 57 ......................................................................................... 7.180, 9.130 Pilbara Infrastructure Pty Ltd v Australian Competition Tribunal, The (2012) 246 CLR 379 ........... 3.190, 7.80, 7.100, 7.140, 7.190, 7.220, 9.130, 12.310 Public Interest Advocacy Centre Ltd, Ausgrid, Endeavour Energy and Essential Energy, Applications by [2015] ACompT 2 ................................................................................................... 12.140, 12.230 Public Interest Advocacy Centre Ltd and Ausgrid, Applications by [2016] ACompT 1 ...................................... 3.170, 8.350, 5.210, 8.380, 8.470, 12.350 Public Interest Advocacy Centre Ltd and Endeavour Energy, Applications by [2016] ACompT 2 ................................................................ 8.350, 8.380 Public Interest Advocacy Centre Ltd and Essential Energy, Applications by [2016] ACompT 3 ..................................................... 8.350, 8.380, 8.470

Q Queensland Cooperative Milling Association Limited and Defiance Holdings Limited, Re (1976) 25 FLR 169; [1976] ATPR 40-012 ..................................................................................................... 3.30, 7.180 Queensland Wire Industries Pty Ltd v The Broken Hill Proprietary Company Limited (1987) 17 FCR 211 .................................................... 3.60 Queensland Wire Industries Pty Ltd v Broken Hill Pty Co Ltd (1989) 167 CLR 177 ............................................................................... 2.200, 3.30, 3.60

R Refugee Review Tribunal, Re; Ex parte Aala (2000) 204 CLR 82 ............................................................................................................................... 12.410 Robe River Mining Co Pty Ltd and Hamersley Iron Pty Ltd, Applications by [2013] ACompT 2 ......................................................................... 11.470

S SPI Electricity Pty Ltd v Australian Energy Regulator [2014] FCA 1012 .................................................................................................................. 12.500 Services Sydney Pty Limited, Re [2005] ACompT 7 ....................................... 7.200, 12.310 Seven Network Limited (No 3), Re [2004] ACompT 10 ............................................ 12.240 Seven Network Limited (No 4), Re [2004] ACompT 11 ................................................ 4.70 Spark New Zealand Trading Limited and Craig Wireless New Zealand Spectrum Operations Limited and Woosh Wireless Holdings Limited [2016] NZCC 7 ............................................................................. 2.190 Sydney Airport Corporation Limited v Australian Competition Tribunal (2006) 155 FCR 124 ........................................................................ 7.180, 9.130 Sydney International Airport, Re (2000) 156 FLR 10 ................................................... 7.180

xx Table of Cases

T Telstra Corporation Limited, Application by [2009] ACompT 1 ................................... 3.180 Telstra Corporation Ltd v Australian Competition and Consumer Commission (2008) 176 FCR 153 ............................................................................... 4.40 Telstra Corporation Ltd v Australian Competition and Consumer Commission (2008) 171 FCR 174 ............................................................................. 6.280

U United Energy Distribution Pty Limited, Application by [2012] ACompT 1 ....................................................................................................... 5.160, 5.210 United States Tobacco Company v Minister for Consumer Affairs (1988) 20 FCR 520 ...................................................................................... 12.480

V Virgin Blue Airlines Pty Limited, Re [2005] ACompT 5 .............................................. 7.200

Table of Statutes Commonwealth Administrative Decisions (Judicial Review) Act 1977: 8.480, 9.230, 12.390 s 3: 12.400 s 3(4)(a): 12.420 s 5: 12.440, 12.450 s 5(1): 12.420 ss 5(1)(a) to (j): 12.440 s 5(1)(e): 12.5 s 5(2): 12.440 s 6: 12.450 s 6(1)(e): 12.5 s 7: 12.460 s 7(1): 12.460 s 7(2): 12.460 s 8(2): 12.420 s 10(1)(a): 12.500 s 10(2)(b): 12.500 s 10(2)(b)(ii): 12.5 s 11(1): 7.140, 7.260, 12.470 s 11(3): 7.140, 7.260, 12.470 s 12(1): 12.480 s 12(2): 12.480 s 15(1): 12.490 s 15(1)(a): 12.490 s 15(1)(b): 12.490 s 15(2): 12.490 s 15A(1): 12.490 s 15A(1)(a): 12.490 s 15A(1)(b): 12.490 s 15A(2): 12.490 s 16: 12.400, 12.510 ss 16(1)(a) to (d): 12.510 s 16(2)(a): 12.510 s 16(2)(b): 12.510 ss 16(3)(a) to (c): 12.510 Sch 3, cl 2(d) to (da): 12.400

Commonwealth of Australia Constitution Act 1901: 10.10 s 75(v): 12.410

Competition Policy Reform Act 1995: 3.100, 7.80, 12.60 Competition and Consumer Act 2010: 9.60 s s s s

1(a): 7.290 1(b): 7.290 1(c): 7.290 1(d): 7.290

s 1(e): 7.290 s 1(f): 7.290 s 1(g): 7.290 s 1(h): 7.290 s 1(aa): 7.290 s 1(ea): 7.290 s 2: 3.170, 7.290 s 4E: 7.180 s 6(2): 7.240 s 6(3): 7.240 ss 6(4)(a) to (c): 7.240 s 6(4)(d): 7.240 s 6(4)(e): 7.240 ss 6(4)(e) to (i): 7.240 s 6(4)(f): 7.240 ss 6(4)(g) to (i): 7.240 ss 6(4)(g) to (l): 7.240 s 6(4)(i): 7.240 s 6(4)(k): 7.240 ss 6(4)(m) to (o): 7.240 s 6(4)(n): 7.240 ss 6(4)(o): 7.240 s 6(4)(p): 7.240 s 6(5): 7.240 s 6(5)(c): 7.240 s 29B: 6.50 s 30(2): 6.60 s 31(1): 6.60 s 31(2): 6.60 s 37: 6.60 s 41: 6.60 s 42(1): 6.60 s 42(2): 6.60 s 44H(9): 7.30 s 44NB(3A)(a): 7.30 s 44ZZCA: 2.80, 7.270, 7.290 s 44ZZAA: 7.30 s 44ZZAAA: 7.260 s 44ZZBC: 7.260 s 44ZZBF: 12.50, 12.170 s 44ZZBA: 12.180 s 44ZZOAA: 12.260 s 44ZZBC(1): 7.260 s 44ZZBF(1): 12.250 s 44ZZOA(1): 12.360 s 44ZZOA(2): 7.140, 7.260, 12.360 s 44ZZBF(3): 12.200, 12.310 s 44ZZOAAA(3)(a): 12.310

xxii Table of Statutes Competition and Consumer Act 2010 — cont s 44ZZOAAA(3)(b): 12.310 ss 44ZZOA(3) to (5): 12.360 s 44ZZOAAA(4): 12.310 s 44ZZOAAA(4)(c): 12.310 s 44ZZOAAA(5): 12.310 s 44ZZBF(6): 7.260, 12.340 s 44ZZOA(7): 7.140, 12.360 s 44ZZBF(7): 7.260, 12.340 s 44ZZAAA(10): 7.260 s 44ZZOAA(a)(i): 12.310 s 44ZZOAA(a)(ii): 12.310 s 44ZZOAA(a)(iv): 12.310 s 44ZZOAA(a)(iii): 12.310 s 44A: 3.130 s 44B: 7.140 s 44F: 7.140 s 44F(1): 7.40, 8.80 s 44G(1): 8.80 s 44G(2): 7.40, 7.140, 7.170, 7.190, 9.130 s 44G(2)(a): 7.320, 7.330, 9.130 s 44G(2)(b): 7.190, 7.320, 7.330, 9.130 s 44G(2)(d): 7.100 s 44G(2)(e): 7.100, 7.320 s 44G(2)(f): 7.320, 7.330 s 44H(1): 12.2 s 44H(2)(a): 7.320, 7.330 s 44H(2)(b): 7.320, 7.330 s 44H(2)(e): 7.320 s 44H(2)(f): 7.320, 7.330 s 44H(4): 7.40, 7.170 s 44H(4)(a): 9.130 s 44H(4)(d): 7.100 s 44H(4)(e): 7.100 s 44H(9): 7.140 s 44K: 7.140, 12.50, 12.250, 12.260, 12.2 s 44K(6A): 7.80 s 44K(1): 12.250 s 44K(2): 7.180, 12.250 s 44K(3): 7.140, 12.170 s 44K(4): 12.260, 12.310 s 44K(5): 12.260 s 44K(6): 7.80 s 44K(7): 12.340 s 44K(8): 12.340 s 44L: 12.50, 12.250, 12.260 s 44L(2): 12.170, 12.250 s 44L(6): 12.340 s 44M: 7.240 s 44M(4)(a): 7.230 s 44M(4)(b): 7.230 s 44M(4)(aa): 7.230 s 44N: 7.100, 7.240, 7.340, 12.50 s 44N(2): 7.230 s 44O: 12.50, 12.170 s 44O(1)(a): 12.250

s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s

44O(1)(b): 12.250 44O(3): 12.200 44O(6): 12.340 44S: 6.180, 7.280 44S(1): 7.280 44V: 6.180, 7.290 44V(2): 7.290 44W: 7.290 44W(1): 7.290 44W(1)(a): 7.290 44W(1)(c): 7.290 44W(1)(d): 7.290 44W(1)(e): 7.290 44W(3): 7.290 44X(1): 7.290 44X(3): 7.290 44AI: 6.30 44DA: 7.230 44FA(1): 7.150 44GA(2): 7.140 44GA(3): 7.150 44GA(7): 7.140, 7.150 44HA: 7.140 44KA(1): 12.180 44KA(2): 12.180 44LB: 7.100 44LI(9): 12.180 44LJ: 12.50 44LJ(1): 12.250 44LJ(2): 12.170 44LJ(3): 12.200 44LJ(8): 12.340 44LJ(9): 12.340 44LK: 12.50 44LK(1): 12.250 44LK(2): 12.170 44LK(3): 12.200 44LK(8): 12.340 44LK(9): 12.340 44NB: 7.340 44PG: 12.50 44PG(1): 12.250 44PG(2): 12.170 44PG(3): 12.200 44PG(6): 12.340 44PG(8): 12.340 44PH: 12.50, 12.170 44PH(1)(a): 12.250 44PH(1)(b): 12.250 44PH(3): 12.200 44PH(6): 12.340 44XA: 7.290 44ZF: 7.300 44ZG(2): 7.300 44ZO(2): 12.180 44ZP: 7.300, 12.50, 12.170, 12.260

Table of Statutes xxiii Competition and Consumer Act 2010 — cont s 44ZP(1): 12.250 s 44ZP(3): 12.200 s 44ZP(6): 12.340 s 44ZR: 7.300 s 44ZX: 12.50, 12.250, 12.260 s 44ZX(1): 12.250 s 44ZX(2): 12.170 s 44ZX(6): 12.340 s 44ZZA: 6.210, 7.260 s 44ZZA(3): 6.70, 6.270, 7.30, 7.270, 7.290, 7.360 s 44ZZA(3)(a): 7.270 s 44ZZA(3)(b): 7.270 s 44ZZA(3)(c): 7.270 s 44ZZA(3)(e): 7.270 s 44ZZA(3)(aa): 7.270 s 44ZZA(3)(ab): 7.270 s 44ZZA(3)(da): 7.270 s 44ZZB: 7.120 s 46: 1.40, 2.200, 3.10, 3.60, 3.100, 3.200, 9.80 s 46(1): 3.60 s 51(1): 10.210 s 95H(1): 9.310 s 109: 12.260 s 109(2): 12.2 s 151BU: 10.150 s 152CBIA: 10.340, 10.510 s 152CBIC: 10.510 s 152CBIB: 10.510 s 152CBAA(1): 10.340 s 152BEBA(1): 10.380 s 152BDAA(1): 10.500 ss 152BDAA(1)(a) to (g): 10.500 s 152BDAA(2): 10.500 s 152BDAA(3): 10.500 s 152CBDA(4): 10.350 s 152BDAA(4): 10.500 s 152CBAA(5): 10.340 s 152AB: 3.160 s 152AB(7A): 10.320 s 152AB(1): 10.320 s 152AB(2): 3.160, 10.320 s 152AB(4): 10.320 s 152AB(6): 10.320 s 152AB(8): 10.320 s 152AL: 10.430 s 152AL(3C): 10.220 s 152AL(8A)(a): 10.320 s 152AL(8A)(b): 10.320 s 152AL(8D): 10.380 s 152AL(8E): 10.370 s 152AL(1): 10.260 s 152AL(3)(a): 10.320 s 152AL(3)(b): 10.320

s 152AL(7): 10.340 s 152AR: 6.240 s 152AR(3)(a): 10.270 s 152AR(3)(b): 10.270 s 152AR(3)(c): 10.270 s 152AR(4A): 10.270 s 152AR(4): 10.140 s 152AR(4)(a): 10.280 s 152AR(4)(b): 10.280 s 152AR(4)(e): 10.280 s 152AR(4)(f): 10.280 s 152AR(5)(c): 10.270 s 152AR(5)(d): 10.270 s 152AR(5)(e): 10.270 s 152AR(6): 10.270 s 152AR(7): 10.270 s 152AR(8): 10.270 s 152AR(9)(a): 10.280 s 152AR(9)(b): 10.280 s 152AR(10): 10.280 s 152AS: 10.290 s 152AT: 10.290 s 152AV: 12.110, 12.240 s 152BC: 6.240 s 152BC(3): 6.240, 10.400 s 152BC(4B): 10.400 s 152BC(5): 10.400 s 152BC(8): 10.400 s 152BD(4A): 10.500 s 152BD(4B): 10.500 s 152BD(1): 10.500 s 152BD(3): 10.500 s 152BD(4): 10.500 s 152BD(6): 10.500 s 152BE(1A): 10.480 s 152BE(1B): 10.480 ss 152BE(1)(a) to (d): 10.480 s 152BE(1)(e)(i): 10.480 s 152BE(1)(e)(x): 10.480 s 152BE(1)(e)(ii): 10.480 s 152BE(1)(e)(iv): 10.480 s 152BE(1)(e)(ix): 10.480 s 152BE(1)(e)(iii): 10.480 s 152CE: 12.110, 12.240 s 152CH(1): 10.490 s 152CI: 10.510 s 152ARA(1): 10.270 s 152ARA(7): 10.270 s 152ARB(2): 10.270 s 152ASA(1A): 10.290 s 152ASA(1): 10.290 s 152ASA(2): 10.290 s 152ASA(4): 10.290 s 152ATA(3A): 10.290 s 152ATA(1): 10.290 s 152ATA(4): 10.290

xxiv Table of Statutes Competition and Consumer Act 2010 — cont s 152ATA(6): 10.290 s 152AXB(2): 10.300 s 152AXB(4): 10.300 s 152AXB(5): 10.300 s 152AXB(6): 10.310 s 152AXC: 10.520 s 152AXC(1): 10.300 s 152AXC(2): 10.300 s 152AXC(3): 10.300 s 152AXC(7): 10.300 s 152AXD: 10.520 s 152AXD(1): 10.300 s 152BCA: 6.240 s 152BCA(1): 6.70 ss 152BCA(1)(a) to (g): 10.410 s 152BCA(2): 10.410 s 152BCA(3): 6.290, 10.410 ss 152BCB(1)(a) to (g): 10.420 s 152BCB(3): 10.420 s 152BCB(3A): 10.420 s 152BCB(4A): 10.420 s 152BCB(4B): 10.420 s 152BCB(4C): 10.420 s 152BCD(1): 10.420 s 152BCD(2): 10.420 s 152BCD(3): 10.420 s 152BCF(1): 10.430 s 152BCF(2): 10.430 s 152BCF(4): 10.430 s 152BCF(5): 10.430 s 152BCF(10): 10.430 s 152BCG(1): 10.440 s 152BCG(1)(d)(ii): 10.440 s 152BCG(4): 10.440 s 152BCG(d)(i): 10.440 s 152BCI(1): 10.180, 10.340 s 152BCI(2): 10.180 s 152BCK: 10.340 s 152BCK(1): 10.180 s 152BDA: 10.500 s 152BDC(3): 10.500 s 152BEA(1): 10.480 s 152BEA(2): 10.480 s 152BEB(1): 10.480 s 152CBA(3C): 10.370 s 152CBA(1)(a): 10.340 s 152CBA(1)(b): 10.370 s 152CBA(3)(a): 10.340 s 152CBA(3)(b): 10.340 s 152CBA(5): 10.340 s 152CBA(6): 10.340 s 152CBA(7): 10.340 s 152CBA(9): 10.340 s 152CBC(2): 10.350 s 152CBC(5): 10.360

s 152CBC(6): 10.360 s 152CBD(2)(a): 10.350 s 152CBD(2)(c): 10.350 s 152CBD(2)(d): 10.350 s 152CBG: 10.360 s 152CBI: 10.360 s 152CJA(1): 10.260 s 152CJA(2): 10.380 s 152EOA: 10.230, 10.520 s 152EOA(1)(a): 10.230 s 163A: 12.390 Pt II: 6.20 Pt IIA: 6.50 Pt III: 6.60 Pt IIIA: 1.60, 2.80, 3.60, 3.100, 3.110, 3.130, 3.160, 3.170, 3.190, 6.20, 6.50, 6.60, 6.150, 6.180, 7.10, 7.30, 7.80, 7.90, 7.100, 7.110, 7.120, 7.190, 7.210, 7.230, 7.250, 7.260, 7.270, 7.290, 7.310, 7.330, 7.350, 7.360, 9.60, 9.70, 9.100, 9.130, 9.290, 9.300, 9.310, 10.170, 10.550, 11.20, 11.50, 11.70, 11.90, 11.150, 11.180, 11.290, 11.300, 11.320, 11.340, 11.350, 11.400, 11.410, 11.420, 11.430, 11.450, 11.460, 11.480, 12.10, 12.50, 12.60, 12.70, 12.120, 12.170, 12.180, 12.200, 12.240, 12.250, 12.260, 12.300, 12.310, 12.320, 12.340, 12.360, 12.390, 12.400, 12.520 Pt IIIAA: 6.30 Pt IV: 10.210, 11.300 Pt IVB: 6.20 Pt VIIA: 6.20, 11.70, 11.110 Pt V: 11.300 Pt VI: 11.300 Pt IX: 12.260 Pt XIB: 10.150, 10.540, 10.550 Pt XIC: 1.70, 3.110, 3.160, 3.170, 3.180, 6.20, 6.40, 6.150, 6.190, 7.110, 10.10, 10.100, 10.130, 10.140, 10.160, 10.170, 10.180, 10.200, 10.220, 10.230, 10.240, 10.260, 10.270, 10.290, 10.400, 10.440, 10.520, 10.550, 10.560, 12.50, 12.110, 12.240, 12.390, 12.520

Competition and Consumer Regulations 2010: 12.260 reg reg reg reg reg reg reg reg

6A: 7.140 22B(1): 12.250 22B(2): 12.250 22B(3): 12.250 22B(4): 12.250 28E: 12.250 28E(2): 12.250 28E(3): 12.250

Table of Statutes xxv

Corporations Act 2001 Pt 1.2, Div 2: 8.530

Federal Circuit Court Rules 2001 Ch 1, Pt 4: 12.470 Ch 6, Pt 42: 12.470

Federal Court Rules 2011 Ch 3: 12.470

Gas Pipeline Access (Commonwealth) Act 1998: 9.10 s 8: 9.80

Industry Commission Act 1989 s 6: 8.50

Judiciary Act 1903 s 39B: 8.480, 8.520, 9.230, 12.390, 12.410

National Broadband Network Companies Act 2011: 10.190 s 3(1): 10.190 s 3(2): 10.190

Prices Surveillance Act 1983: 3.80 Productivity Commission (Repeals, Transitional and Consequential Amendments) Act 1998 s 3: 8.50

Telecommunications Act 1997 s 7: 10.240, 10.250, 10.260, 10.280 s 28: 10.250 s 29: 10.250 s 31: 10.250 s 42: 10.240 s 45: 10.240 s 46: 10.240 s 51: 10.240 s 61: 10.130 s 77: 10.240 s 81A: 10.240 s 87: 10.240 s 141: 10.210 s 141(10): 10.120 s 498: 10.320 s 499: 10.320 s 500: 10.320 s 501: 10.320 s 505: 10.320 s 577A: 10.200, 10.210, 10.280 s 577C: 10.280 s 577E: 10.280 s 577BA: 10.210 s 577BC(2): 10.200 Pt 7: 10.220, 10.540, 10.550 Pt 8: 10.220, 10.540, 10.550 Pt 25: 10.320 Pt 33: 10.200 Sch 1: 6.190, 10.130, 10.140 Sch 1, Pt 1: 3.160

Sch Sch Sch Sch Sch Sch Sch Sch Sch

1, 1, 1, 1, 1, 1, 1, 1, 1,

Pt Pt Pt Pt Pt Pt Pt Pt Pt

3: 3, 3, 3, 5: 5, 5, 5, 5,

10.130, 10.140 cl 17: 10.130 cl 18(1): 10.130 cl 19: 10.130 10.130, 10.150 cl 33: 10.130 cl 34: 10.130 cl 35: 10.130 cl 37: 10.150

Telecommunications Competition Act 2002: 10.170 s 3: 12.110 Sch 2: 12.110 Sch 2, item 2: 10.170 Sch 2, item 8: 10.170 Sch 2, item 60: 10.170 Sch 2, item 62: 10.170 Sch 2, Pt 12: 10.170

Telecommunications Legislation Amendment (Competition and Consumer Safeguards) Act 2010: 10.200, 12.110 s 3: 10.290 s 152: 12.110 s 177: 12.110 Sch 1: 10.290 Sch 1, item 152: 12.240 Sch 1, item 160: 10.180 Sch 1, item 177: 12.240

Telecommunications Legislation Amendment (National Broadband Network Measures – Access Arrangements) Act 2011: 10.220 Sch 1, items 86 to 88: 10.220 Sch 1, item 94: 10.220 Trade Practices Act 1974: 3.60, 3.100, 3.160, 7.20, 8.50, 9.60, 10.160 s 44G(2): 7.80 s 44H(4): 7.80 s 44N: 11.310, 11.490 s 44ZZA: 7.310 s 44ZZA(1): 8.80 Pt IIIA: 9.80, 12.60, 12.70 Pt XIC: 10.170

Trade Practices Amendment (Infrastructure Access) Act 2010: 7.100, 7.140 s 3: Sch Sch Sch Sch Sch Sch Sch Sch

7.100 1, item 70: 12.60, 12.260 1, item 71: 12.60 1, Pt 1: 7.100 2: 7.100 5, Pt 1, item 5: 7.100 5, Pt 1, item 6: 7.100 5, Pt 1, item 8: 7.100 5, Pt 1, item 9: 7.100

xxvi Table of Statutes

Trade Practices Amendment (National Access Regime) Act 2006: 7.90 Sch 1, item 108: 12.60 Sch 1, item 112: 12.60

Trade Practices Amendment (Telecommunications) Act 1997: 10.160 Trade Practices Amendment (Telecommunications) Act 2001: 10.160, 10.170 Sch 1, item Sch 1, item Sch 1, item Sch 1, item

1: 10.160 7: 10.160 14: 10.160 15: 10.160 Water Act 2007: 6.20, 6.150

Wheat Export Marketing Act 2008: 7.250, 11.90 s 24: 11.90

Australian Capital Territory Electricity (National Scheme) Act 1997 s 5: 8.40, 8.70

Gas Pipelines Access Act (Australian Capital Territory) 1998: 9.10 s 6: 9.80

Independent Competition and Regulatory Commission Act 1997: 6.140 National Gas (ACT) Act 2008 s 8: 9.10, 9.30, 9.110

New South Wales Gas Pipelines Access (New South Wales) Act 1998: 9.10 s 7: 9.80 s 9: 12.80

Gas Supply Act 1996: 6.80 Independent Pricing and Regulatory Tribunal Act 1992: 6.80 Pt 4A: 11.350

National Electricity (New South Wales) Act 1997 s 6: 8.40, 8.70

National Gas (New South Wales) Act 2008 s 7: 9.10, 9.30, 9.110

Passenger Transport Act 1990: 6.80 Ports and Maritime Administration Act 1995: 11.160 s s s s

79: 80: 81: 82:

11.170 11.170 11.170 11.170

Pt 6: 11.160

Transport Administration Act 1988: 6.80 Sch 6AA: 11.350

Water Industry Competition Act 2006: 6.80

Northern Territory Darwin Port Corporation Act 1983: 11.280 s 17A: 11.280

Gas Pipelines Access (Northern Territory) Act: 9.10 s 7: 9.80

National Electricity (Northern Territory) (National Uniform Legislation) Act 2015 s 6: 8.40

National Gas (Northern Territory) Act s 7: 9.10, 9.30, 9.110

Port Management Regulations: 11.280 reg 12: 11.280 reg 16: 11.280

Port of Darwin Act 2015: 11.280 Ports Management Act 2015: 11.280 s 3: 11.280 s 6: 11.280 s 132: 11.280 s 133: 11.280 s 134: 11.280 Pt 11: 11.280 Pt 11, Div 2: 11.280

Utilities Commission Act 2000: 6.130

Queensland Electricity Act 1994: 6.70 Electricity–National Scheme (Queensland) Act 1997 s 6: 8.40, 8.70

Gas Pipelines Access (Queensland) Act 1998: 9.10, 12.80 National Gas (Queensland) Act 2008 s 7: 9.10, 9.30, 9.80, 9.110

Queensland Competition Authority Act 1997: 6.70 s 76: 11.200 s 77: 11.200 s 99: 11.200 s 250: 6.70, 11.320 Pt 3: 11.210 Pt 5: 6.70, 11.50, 11.190, 11.200, 11.320

Queensland Competition Authority Amendment Act 2008: 6.70

Table of Statutes xxvii

South Australia AustralAsia Railway (Third Party Access) Act 1999: 6.110 Australian Energy Market Commission Act 2004: 6.40 Essential Services Commission Establishment Act 2002: 6.110, 11.130 s 3: 6.110 s 6(a): 6.110 s 25: 11.140 Pt 3: 11.140

Gas Pipelines Access (South Australia) Act 1997: 12.80 Sch Sch Sch Sch

1: 1, 1, 2:

9.10 s 39(2): 12.210 s 39(5): 12.330 9.90

Maritime Services (Access) Act 2000: 6.110, 11.120 s s s s s s s s s

4: 11.130 5: 11.120 6: 11.130 10: 11.120 11: 11.150 14: 11.150 15: 11.150 16: 11.150 18: 11.150

National Electricity Law (Sch 1 to the National Electricity (South Australia) Act 1996) s 2: 8.150, 8.160, 8.170, 8.180, 8.220 s 2F: 8.240 s 7: 3.140, 8.110, 8.190, 12.130 s 7A: 2.80, 3.140, 8.190 s 9: 8.110 s 13: 8.530 s 11(1): 8.140 s 11(2): 8.140 s 11(4): 8.140 s 13(1): 8.140 s 14A: 8.150, 8.160 ss 14A to 14B: 9.210 s 14B: 8.150, 8.170 s 15: 8.110 s 15(1)(a)(ii): 8.180 s 15(1)(b): 8.180 s 15(1)(e): 8.180 s 15(1)(f): 8.180 s 15(1)(ea): 8.180 s 16: 8.110 s 16(1)(a): 8.190 s 16(1)(b): 8.200

s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s

16(1)(c): 8.200 16(1)(d): 8.200 16(2): 8.530 16(2)(a)(i): 8.190 16(2)(b): 8.200 16(3): 8.200 17: 8.530 28(1): 8.210 28(2): 8.210 28(6): 8.210 28(7): 8.210 28(8): 8.210 28A: 8.220 28B(1): 8.220 28D: 8.220 28F(1): 8.220 28N: 8.220 28O: 8.220 28Q: 8.220 28S: 8.220 28T: 8.220 28U: 8.220 28ZJ: 12.330 29: 8.110 34: 8.110, 8.230 34(1)(a)(i): 8.230 34(1)(iii): 8.230 35: 8.110 50C: 8.180 71A: 8.200, 12.50, 12.270, 12.280 71B: 8.480, 12.270 71B(1): 8.520, 12.50, 12.130 71C: 12.210 71D: 12.170 71E(a): 12.130 71E(b): 12.140 71F(1)(a): 12.130 71F(1)(b): 12.150 71F(2): 12.150 71H: 12.160 71I: 12.190 71J: 12.280 71K: 12.280, 12.290 71L: 12.280 71L(3): 12.280 71L(4)(a): 12.280 71N: 12.270 71P(2a)(c): 12.140, 12.350 71P(2a)(d): 12.350 71P(2b)(d): 12.350 71P(2): 12.350 71Q(1): 12.370 71Q(4): 12.370 71R(5a): 12.330 71R(3)(a): 12.330 71R(3)(b): 12.330

xxviii

Table of Statutes

National Electricity Law — cont s 71R(4): 12.330 s 71R(6): 12.330 s 71Z: 12.90 ss 87 to 108: 8.110 s 88: 8.230 s 88A: 8.240 s 90: 8.120 s 90A(1)(a): 8.110 s 125(1): 8.530 s 125(3)(a): 8.530 s 125(3)(b): 8.530 s 127(a): 8.530 s 127(b): 8.530 s 127(c): 8.530 s 127(d): 8.530 s 128(1): 8.530 s 129(1): 8.530 s 130: 8.530 s 131(1)(a): 8.530 s 131(1)(b): 8.530 s 131(1)(c): 8.530 s 131(2): 8.530 s 132: 8.530 s 136: 8.530 s 137(1): 8.530 s 137(2): 8.530 Sch 1: 8.230 Sch 1, item 1: 8.230 Sch 1, item 15: 8.230 Sch 1, items 15 to 24: 8.240 Sch 1, item 16(1): 8.230 Sch 1, item 17: 8.230 Sch 1, item 20: 8.230 Sch 1, item 23: 8.230 Sch 1, item 25: 8.230 Sch 1, items 25 to 26H: 8.240 Sch 1, item 26: 8.230 Sch 1, item 26A: 8.230 Sch 1, item 26D: 8.230 Sch 1, item 26G: 8.230 Sch 1, item 26I: 8.240 Sch 1, item 26J: 8.240

National Electricity (South Australia) Act 1996: 3.110, 3.140, 7.110, 8.70, 12.130 s 6: 8.40 Sch 1: 8.20, A.10

National Electricity (South Australia) (National Electricity Law – Miscellaneous Amendments) Amendment Act 2007: 8.130 National Electricity (South Australia) Regulations r 9: 12.50

National Electricity Rules

Ch Ch Ch Ch Ch Ch Ch Ch Ch Ch Ch Ch Ch Ch Ch Ch Ch Ch Ch Ch Ch Ch Ch Ch Ch Ch Ch Ch Ch Ch Ch Ch Ch Ch Ch Ch Ch Ch Ch Ch Ch Ch Ch Ch Ch Ch Ch Ch Ch Ch Ch Ch Ch Ch Ch Ch

6: 6, 6, 6, 6, 6, 6, 6, 6, 6, 6, 6, 6, 6, 6, 6, 6, 6, 6, 6, 6, 6, 6, 6, 6, 6, 6, 6, 6, 6, 6, 6, 6, 6, 6, 6, 6, 6, 6, 6, 6, 6, 6, 6, 6, 6, 6, 6, 6, 6, 6, 6, 6, 6, 6, 6,

8.250 cl 6.2.1(a): 8.250 cl 6.2.2(c)(1): 8.250 cl 6.2.3: 8.250 cl 6.2.4(a): 8.250 cl 6.2.5(a): 8.250 cl 6.2.5(b)(1): 8.250 cl 6.2.5(b)(2): 8.250 cl 6.2.5(b)(3): 8.250 cl 6.2.5(d)(1): 8.250 cl 6.2.6(a): 8.250 cl 6.3.1(c): 8.500 cl 6.4.2: 5.220 cl 6.4.3: 4.100 cl 6.4.3(a): 8.270 cl 6.4.3(a)(5): 5.280 cl 6.4.3(b)(1)(ii): 8.320 cl 6.4A(a): 8.300 cl 6.4A(b)(2): 8.300 cl 6.4A(b)(4): 8.300 cl 6.4A(b)(5): 8.300 cl 6.5.1(a): 8.280 cl 6.5.1(b): 8.280 cl 6.5.1(e): 8.280 cl 6.5.1(e)(3): 8.280 cl 6.5.2: 5.140, 5.170, 6.270 cl 6.5.2(a): 8.330 cl 6.5.2(c): 8.330 cl 6.5.2(d)(1): 8.330 cl 6.5.2(d)(2): 8.320, 8.330 cl 6.5.2(e): 8.330 cl 6.5.2(f): 8.330 cl 6.5.2(g): 8.330 cl 6.5.2(h): 8.330 cl 6.5.2(i): 8.340 cl 6.5.2(j): 8.340 cl 6.5.2(m): 8.340 cl 6.5.2(n): 8.340 cl 6.5.2(p): 8.340 cl 6.5.3: 8.370 cl 6.5.5(a)(1): 8.360 cl 6.5.5(a)(2): 8.360 cl 6.5.5(a)(2)(i): 8.360 cl 6.5.5(a)(2)(ii): 8.360 cl 6.5.5(b): 8.360 cl 6.5.6: 8.450, 8.470 cl 6.5.6(a)(1): 8.450 cl 6.5.6(a)(2): 8.450 cl 6.5.6(a)(4): 8.450 cl 6.5.6(c): 6.260, 8.450 cl 6.5.6(d): 8.450 cl 6.5.6(e): 8.460 cl 6.5.7: 8.310 cl 6.5.7(a): 8.310 cl 6.5.7(a)(1): 8.310 cl 6.5.7(a)(4): 8.310

Table of Statutes xxix National Electricity Rules — cont Ch 6, cl 6.5.7(c): 6.260, 8.310 Ch 6, cl 6.5.7(d): 8.310 Ch 6, cl 6.5.7(e): 8.310 Ch 6, cl 6.5.8(a): 8.400 Ch 6, cl 6.5.8A(a): 8.410 Ch 6, cl 6.5.8A(b): 8.410 Ch 6, cl 6.6A: 5.240 Ch 6, cl 6.6.1: 5.240 Ch 6, cl 6.6.2(a): 8.420 Ch 6, cl 6.6.3: 8.430 Ch 6, cl 6.6.3(a): 8.430 Ch 6, cl 6.6.3A: 8.430 Ch 6, cl 6.6.4(a): 8.440 Ch 6, cl 6.8.1(a): 8.490 Ch 6, cl 6.8.1(b): 8.490 Ch 6, cl 6.8.1(b)(2): 8.490 Ch 6, cl 6.8.1(c)(1): 8.480 Ch 6, cl 6.8.1(c)(2): 8.480 Ch 6, cl 6.8.1(c)(3): 8.480 Ch 6, cl 6.8.1(e): 8.480 Ch 6, cl 6.8.1A: 8.480 Ch 6, cl 6.8.2(b): 6.220, 8.480 Ch 6, cl 6.8.2(c): 8.500 Ch 6, cl 6.9.1: 8.480 Ch 6, cl 6.9.2(a): 8.480 Ch 6, cl 6.9.3(a): 8.480 Ch 6, cl 6.9.3(b): 8.480 Ch 6, cl 6.9.3(c): 8.480 Ch 6, cl 6.10.1(a): 8.480 Ch 6, cl 6.10.2(a): 8.480 Ch 6, cl 6.10.2(c): 8.480 Ch 6, cl 6.10.3(a): 8.480 Ch 6, cl 6.10.3(b): 8.510 Ch 6, cl 6.10.3(e): 8.480 Ch 6, cl 6.10.4: 8.480 Ch 6, cl 6.11.1: 6.220, 8.480 Ch 6, cl 6.11.1(c): 8.480 Ch 6, cl 6.11.2: 8.480 Ch 6, cl 6.12.1: 6.220 Ch 6, cl 6.12.1(3)(ii): 8.310 Ch 6, cl 6.12.1(4)(ii): 8.450 Ch 6, cl 6.12.1(9): 8.390 Ch 6, cl 6A.8: 5.240 Ch 6, Pt C: 5.30, 8.270 Ch 6, cl S6.1: 8.500 Ch 6, cl S6.2.1(e): 5.90 Ch 6, cl S6.2.1(e)(1): 8.280 Ch 6, cl S6.2.1(e)(1)(i): 8.280 Ch 6, cl S6.2.1(e)(3): 5.250 Ch 6, cl S6.2.1(e)(5): 8.280 Ch 6, cl S6.2.1(e)(6): 8.280 Ch 6, cl S6.2.1(g): 8.280 Ch 6, cl S6.2.2A: 4.120, 8.280 Ch 6, cl S6.2.2A(a): 8.300 Ch 6, cl S6.2.2A(b): 8.290, 8.300

Ch Ch Ch Ch Ch Ch Ch Ch Ch Ch Ch Ch Ch Ch Ch Ch Ch Ch Ch Ch Ch Ch Ch Ch Ch Ch Ch Ch Ch Ch Ch Ch Ch Ch Ch Ch Ch Ch Ch Ch Ch Ch Ch Ch Ch Ch Ch Ch Ch Ch Ch Ch Ch Ch Ch Ch

6, cl S6.2.2A(c): 8.290 6, cl S6.2.2A(d): 8.300 6, cl S6.2.2A(e): 8.300 6, cl S6.2.2A(f): 8.290 6, cl S6.2.2A(g): 8.290 6, cl S6.2.2A(h): 8.290 6, cl S6.2.2A(h)(2): 8.290 6, cl S6.2.3(c)(4): 8.320 6, Pt E: 4.150 6A: 8.260 6A, Pt C: 5.30, 8.260, 8.270 6A, Pt E: 4.150 6A, cll 6A.6.7(c)(1) to (3): 8.310 6A, cl 6.5.7(a)(2): 8.310 6A, cl 6A.2.1: 8.260 6A, cl 6A.2.2: 8.260 6A, cl 6A.4.1(b): 8.500 6A, cl 6A.5.4: 4.100, 8.260 6A, cl 6A.5.4(a): 8.270 6A, cl 6A.5.4(a)(5): 5.280 6A, cl 6A.5.4(b)(1): 8.320 6A, cl 6A.5.4(b)(1)(ii): 5.220, 8.320 6A, cl 6A.5A(a): 8.300 6, cl 6A.6.1(a): 8.280 6A, cl 6A.6.1(b): 8.280 6A, cl 6A.6.1(e): 8.280 6A, cl 6A.6.1(e)(3): 8.280 6A, cl 6A.6.2: 5.140, 5.170, 6.270 6A, cl 6A.6.2(a): 8.330 6A, cl 6A.6.2(c): 8.330 6A, cl 6A.6.2(d)(1): 8.330 6A, cl 6A.6.2(d)(2): 8.320, 8.330 6A, cl 6A.6.2(e): 8.330 6A, cl 6A.6.2(f): 8.330 6A, cl 6A.6.2(g): 8.330 6A, cl 6A.6.2(h): 8.330 6A, cl 6A.6.2(i): 8.340 6A, cl 6A.6.2(j): 8.340 6A, cl 6A.6.2(m): 8.340 6A, cl 6A.6.2(n): 8.340 6A, cl 6A.6.2(p): 8.340 6A, cl 6A.6.3(a)(1): 8.360 6A, cl 6A.6.3(a)(2): 8.360 6A, cl 6A.6.3(a)(2)(i): 8.360 6A, cl 6A.6.3(a)(2)(ii): 8.360 6A, cl 6A.6.3(b): 8.360 6A, cl 6A.6.4: 8.370 6A, cl 6A.6.5(a): 8.400 6A, cl 6A.6.5A(a): 8.410 6A, cl 6A.6.5A(b): 8.410 6A, cl 6A.6.6(a)(1): 8.450 6A, cl 6A.6.6(a)(2): 8.450 6A, cl 6A.6.6(a)(4): 8.450 6A, cl 6A.6.6(c): 6.260, 8.450 6A, cl 6A.6.6(d): 8.450 6A, cl 6A.6.7: 8.310

xxx Table of Statutes National Electricity Rules — cont Ch 6A, cl 6A.6.7(3): 8.460 Ch 6A, cl 6A.6.7(a): 8.310 Ch 6A, cl 6A.6.7(a)(1): 8.310 Ch 6A, cl 6A.6.7(a)(2): 8.310 Ch 6A, cl 6A.6.7(a)(4): 8.310 Ch 6A, cl 6A.6.7(c): 6.260, 8.310 Ch 6A, cl 6A.6.7(d): 8.310 Ch 6A, cl 6A.6.7(e): 8.310 Ch 6A, cl 6A.7.3: 5.240 Ch 6A, cl 6A.7.4: 8.420 Ch 6A, cl 6A.7.5: 8.440 Ch 6A, cl 6A.9.4(a)(1): 8.260 Ch 6A, cl 6A.9.5(a): 8.260 Ch 6A, cl 6A.10.1(a): 6.220, 8.480 Ch 6A, cl 6A.10.1A(a): 8.490 Ch 6A, cl 6A.10.1A(b): 8.490 Ch 6A, cl 6A.10.1A(c)(1): 8.480 Ch 6A, cl 6A.10.1A(c)(2): 8.480 Ch 6A, cl 6A.10.1A(c)(3): 8.480 Ch 6A, cl 6A.10.1A(e): 8.480 Ch 6A, cl 6A.10.1B: 8.480 Ch 6A, cl 6A.11.1: 8.480 Ch 6A, cl 6A.11.2: 8.480 Ch 6A, cl 6A.11.3(a): 8.480 Ch 6A, cl 6A.11.3(b): 8.480 Ch 6A, cl 6A.11.3(c): 8.480 Ch 6A, cl 6A.12.1(a): 8.480 Ch 6A, cl 6A.12.2(a): 8.480 Ch 6A, cl 6A.12.2(c): 8.480 Ch 6A, cl 6A.12.3(a): 8.480 Ch 6A, cl 6A.12.3(b): 8.510 Ch 6A, cl 6A.12.3(g): 8.480 Ch 6A, cl 6A.12.4: 8.480 Ch 6A, cl 6A.13.1: 6.220, 8.480 Ch 6A, cl 6A.13.1(a2): 8.480 Ch 6A, cl 6A.13.2A: 8.480 Ch 6A, cl 6A.14.1: 6.220 Ch 6A, cl 6A.14.1(1): 8.390 Ch 6A, cl 6A.14.1(2)(ii): 8.310 Ch 6A, cl 6A.14.1(3)(ii): 8.450 Ch 6A, cl S6A.1: 8.500 Ch 6A, cl S6A.2.1(f)(1): 8.280 Ch 6A, cl S6A.2.1(f)(1)(i): 8.280 Ch 6A, S6A.2.1(f)(3): 5.250 Ch 6A, cl S6A.2.1(f)(5): 8.280 Ch 6A, cl S6A.2.1(f)(6): 8.280 Ch 6A, cl S6A.2.1(g): 8.280 Ch 6A, cl S6A.2.2A: 4.120 Ch 6A, cl S6A.2.2A(a): 8.300 Ch 6A, cl S6A.2.2A(b): 8.290, 8.300 Ch 6A, cl S6A.2.2A(c): 8.290 Ch 6A, cl S6A.2.2A(d): 8.300 Ch 6A, cl S6A.2.2A(e): 8.300 Ch 6A, cl S6A.2.2A(f): 8.290 Ch 6A, cl S6A.2.2A(g): 8.290

Ch Ch Ch Ch Ch Ch Ch Ch

6A, cl S6A.2.2A(h): 8.290 6A, cl S6A.2.2A(h)(2): 8.290 6A, cl S6A.2.4(c)(4): 8.320 6A, cl S6A.5A(b)(2): 8.300 6A, cl S6A.5A(b)(4): 8.300 6A, cl S6A.5A(b)(5): 8.300 10: 8.30 11, cl 11.82.2: 8.430

National Gas Law (Sch 1 to the National Gas (South Australia) Act 2008 s 2: 9.20, 9.150, 9.220 s 15: 9.130 s 16: 9.250 s 23: 3.150, 7.350, 9.110, 9.250, 12.130 s 24: 3.150, 9.110, 9.150 s 24(2): 2.80, 4.10, 9.150 s 27(1): 9.150 s 27(1)(e): 9.150 s 28(1)(a): 9.150 s 28(1)(b)(ii): 9.150 s 28(1)(b)(iii): 9.150 s 42: 4.140 s 44: A.10 s 48: 4.140 s 92: 9.110, 9.120 ss 102 to 108: 9.110, 9.270 s 116: 9.260 s 122: 9.250 s 126: 9.120 s 127: 9.120 s 127(3): 9.120 s 132: 9.140 s 133: 9.110, 9.260 s 136: 9.110, 9.260 ss 137 to 148: 9.110, 9.260 s 151: 7.100, 9.110 s 156: 9.270 s 184: 9.260 s 223: 9.270 s 244: 12.270, 12.280 s 245: 9.230, 12.270 s 245(1): 12.50, 12.130 s 246: 12.210 s 247: 12.170 s 248(a): 12.130 s 248(b): 12.130, 12.140 s 249(1)(a): 12.130 s 249(1)(b): 12.150 s 249(2): 12.150 s 251: 12.160 s 252: 12.190 s 252(a)(i): 12.190 s 252(a)(ii): 12.190 s 252(b): 12.190 s 253: 12.280 s 254: 12.280, 12.290

Table of Statutes xxxi National Gas Law — cont s 255: 12.280 s 255(3): 12.280 s 255(4): 12.280 s 257: 12.270 s 259(2): 12.350 s 259(4a)(c): 12.140, 12.350 s 259(4a)(d): 12.350 s 260(1): 12.370 s 260(4): 12.370 s 261(3a)(a): 12.330 s 261(3a)(b): 12.330 s 261(3b): 12.330 s 261(4): 12.330 s 261(7): 12.330 s 270: 12.90 s 322: 9.210 Ch 6: 9.260 Sch 3, Pt 3, cll 6 to 7: 9.110, 9.120

National Gas Rules r r r r r r r r r r r r r r r r r r r r r r r r r r r r r r r r r r r r

5: 4.80 36: 9.260 37: 9.260 40(2): 6.260 40(3): 6.260 48: 9.140, 9.220 57(1): 9.230 58: 9.230 58(1): 9.230 59(1): 9.230 59(2): 9.230 59(5): 9.230 59(c)(iii): 9.230 62(3): 9.230 62(4): 9.230 62(6): 9.230 64(4): 9.230 76: 4.100, 9.160 77: 9.170 77(2): 5.90 78: 9.170 79: 4.90 79(1)(a): 5.100 79(6): 6.260 82: 9.170 84: 9.170 85: 9.170 86: 9.170 87: 5.140, 6.260, 6.270, 9.170 87(2): 9.170 87(4)(a): 9.170 87(4)(b): 9.170 89: 5.120, 9.180 89(1)(a): 5.120 89(2): 9.180 89(3): 6.260

r 91: 4.90, 9.200 r 91(2): 6.260 r 94: 4.80 r 94(4): 4.80 r 94(6): 6.260 r 95(4): 6.260 r 97: 9.210 r 98: 9.190 r 101(1)(a): 9.110 r 104: 9.220 Pt 9: 5.30 Pt 12: 9.260

National Gas (South Australia) Act 2008: 3.110, 3.150, 7.110, 9.10, 9.30, 9.110, 12.130, A.10 National Gas (South Australia) Regulations 2009: 9.240 Railways (Operations and Access) Act 1997: 6.110, 11.380 s 7: 11.380 s 9: 11.380 Pt 5: 11.380 Pt 6: 11.380 Pt 8: 11.380

Railways (Operations and Access) (Miscellaneous) Amendment Act 2009: 11.390

South Australian Ports (Bulk Handling Facilities) Act 1996: 11.130 Water Industry Act 2012: 6.110

Tasmania Economic Regulator Act 2009: 6.100, 11.270 s 6: 11.270

Electricity – National Scheme (Tasmania) Act 1999 s 6: 8.40

Gas Pipelines Access (Tasmania) Act 2000: 9.10 s 7: 9.80

National Gas (Tasmania) Act 2008 s 7: 9.10, 9.30, 9.110

Tasmanian Ports Corporation Act 2005: 11.270

Water and Sewerage Industry Act 2008: 6.100

Victoria Essential Services Commission Act 2001: 6.90, 11.220 s 33: 11.220

xxxii

Table of Statutes

Essential Services Commission Act 2001 — cont Pt 3: 11.220

Gas Pipelines Access (Victoria) Act 1998: 9.10 s 7: 9.80

National Electricity (Victoria) Act 1997 s 6: 8.70

National Electricity (Victoria) Act 2005 s 6: 8.40 s 13: 8.70 s 32: 8.180, A.10

National Gas (Victoria) Act 2008 s 7: 9.10, 9.30, 9.110

Office of the Regulator General Act 1994: 12.80

Port Management Act 1995: 11.220 s 49: 11.220 s 53: 11.220

Rail Management Act 1996 s 38D: 11.360 s 38I: 11.360 s 38W: 11.360, 11.370 s 38X: 11.360 Pt 2A: 11.360

Western Australia Economic Regulation Authority Act 2003: 6.120, 11.260 s 3: 11.260 s 38: 11.260

Gas Pipelines Access (Western Australia) Act 1998: 9.10 National Gas Access (WA) Act 2009: 6.120, 9.10, 9.110, 12.80 Sch 1: 9.30

National Gas Access (WA) (Part 3) Regulations 2009 s 1: 9.240

Port Authorities Act 1999: 11.260 s 37: 11.260 s 72: 11.260

Railway and Port (The Pilbara Infrastructure Pty Ltd) Agreement Act 2004 Sch 1: 11.420

Railways (Access) Act 1998: 11.410 ss 20 to 23: 11.420 s 28: 11.420 Sch 4: 11.420

Railways (Access) Code 2000: 11.420 Sch 1: 11.420

New Zealand Telecommunications Act 2001 Sch 1: 4.200

Glossary ABS .................................................Australian Bureau of Statistics ACCC ..............................................Australian Competition and Consumer Commission ACCP...............................................Australian Council for Competition Policy (proposed body) ADJR Act ........................................Administrative Decisions (Judicial Review) Act 1977 (Cth) ADSL...............................................asymmetric digital subscriber line AEMC..............................................Australian Energy Market Commission AEMO .............................................Australian Energy Market Operator AER .................................................Australian Energy Regulator ANZMEC ........................................Australian and New Zealand Minerals and Energy Council APR .................................................Access and Pricing Regulator (proposed body) ARC.................................................Administrative Review Council ARTC...............................................Australian Rail Track Corporation ATO .................................................Australian Tax Office AWB ................................................Australian Wheat Board BBM ................................................Boral Besser Masonry Ltd BHPB...............................................BHP Billiton Minerals Pty Ltd and BHP Billiton Iron Ore Pty Ltd BROCs.............................................binding rules of conduct capex................................................capital expenditure CAPM..............................................Capital Asset Pricing Model CCA.................................................Competition and Consumer Act 2010 (Cth) CESS................................................Capital expenditure sharing scheme CGS .................................................Commonwealth Government Securities CIRA................................................Competition and Infrastructure Reform Agreement COAG..............................................Council of Australian Governments CPA..................................................Competition Principles Agreement CPI...................................................Consumer Price Index CPRA...............................................Competition Policy Reform Act 1995 (Cth) DAC.................................................depreciated actual cost DBCT ..............................................Dalrymple Bay Coal Terminal DMIA ..............................................demand management innovation allowance DMIS ...............................................demand management incentive schemes DNSP...............................................distribution network service provider DORC ..............................................depreciated optimised replacement cost DRP .................................................debt risk premium DSL..................................................digital subscriber line DSLAM ...........................................digital subscriber line access multiplexer

xxxiv

Glossary

DTCS...............................................domestic transmission capacity service EAG.................................................Energy Action Group EBSS................................................efficiency benefit sharing scheme ERA .................................................Economic Regulation Authority (Western Australia) ESA..................................................exchange service area ESC Act (SA)..................................Essential Services Commission Act 2002 (SA) ESC Act (Vic) .................................Essential Services Commission Act 2001 (Vic) ESCOSA..........................................Essential Services Commission of South Australia ESCV...............................................Essential Services Commission of Victoria EUAA ..............................................Energy Users Association of Australia FLSM...............................................fixed line services model FMG ................................................Fortescue Metals Group FOAS...............................................fixed originating access service FTAS................................................fixed terminating access service FTTB ...............................................fibre to the building FTTN ...............................................fibre to the node FTTP................................................fibre to the premises FTTx ................................................fibre to the node or fibre to the premises Gas Code .........................................National Third Party Access Code for Natural Gas Pipeline Systems GFC .................................................Global Financial Crisis GPAL ...............................................Gas Pipeline Access (South Australia) Act 1997 (SA) Harper Review ................................Competition Policy Review HFC .................................................hybrid fibre coaxial Hilmer Committee...........................Independent Committee of Inquiry into Competition Policy in Australia ICRA................................................initial cost recovery account ICRC................................................Independent Competition and Regulatory Commission IPART ..............................................Independent Pricing and Regulatory Tribunal IPART Act .......................................Independent Pricing and Regulatory Tribunal Act 1992 (NSW) kbps..................................................kilobits per second LCS..................................................local carriage service LNG.................................................liquefied natural gas LRAC ..............................................long run average cost LRMC..............................................long run marginal cost LSS ..................................................line sharing service LTIE.................................................long-term interests of end users LTRCM............................................long term revenue constraint methodology Mbps ................................................megabits per second MCE ................................................Ministerial Council on Energy MDF ................................................main distribution frame

Glossary xxxv

MRP.................................................market risk premium MSA Act..........................................Maritime Services (Access) Act 2000 (SA) MTAS ..............................................mobile terminating access service NBN.................................................National Broadband Network NBN Co...........................................National Broadband Network Company Limited NBN Co SAU .................................National Broadband Network Company Limited Special Access Undertaking NCC.................................................National Competition Council NCP .................................................National Competition Policy NEL .................................................National Electricity Law NEM ................................................National Electricity Market NER .................................................National Electricity Rules NGL.................................................National Gas Law NGMC .............................................National Grid Management Council NGR.................................................National Gas Rules NSP..................................................network service provider NT Power ........................................NT Power Generation Pty Ltd ODV ................................................optimised deprival value opex .................................................operating expenditure ORC.................................................optimised replacement cost OTTER ............................................Office of the Tasmanian Economic Regulator PA Act..............................................Port Authorities Act 1999 (WA) PAWA ..............................................Power and Water Authority PIAC ................................................Public Interest Advocacy Centre PM Act (Vic) ...................................Port Management Act 1995 (Vic) PMA Act (NSW).............................Ports and Maritime Administration Act 1995 (NSW) PMD ................................................Price Monitoring Determination PoMC...............................................Port of Melbourne Corporation PPS ..................................................Pricing Policy Statement PSTN OA ........................................public switched telephone network originating access PSTN TA .........................................public switched telephone network terminating access QCA.................................................Queensland Competition Authority QCA Act ..........................................Queensland Competition Authority Act 1997 (Qld) QWI .................................................Queensland Wire Industries RA Act.............................................Railways (Access) Act 1998 (WA) RAB.................................................regulatory asset base RA Code ..........................................Railways (Access) Code 2000 (WA) RBA.................................................Reserve Bank of Australia RIN ..................................................regulatory information notice RIO ..................................................regulatory information order RM Act ............................................Rail Management Act 1996 (Vic)

xxxvi

Glossary

ROA Act ..........................................Railways (Operations and Access) Act 1997 (SA) RTIO ................................................Rio Tinto Ltd SAU .................................................special access undertaking SCER ...............................................Standing Council on Energy and Resources SDSL ...............................................symmetric digital subscriber line SECWA............................................State Energy Commission of Western Australia SFAA ...............................................Standard Form of Access Agreement SL-CAPM........................................Sharpe-Lintner Capital Asset Pricing Model SMS .................................................short messaging service SSU..................................................structural separation undertaking STPIS...............................................service target performance incentive scheme TFP ..................................................total factor productivity TNSP ...............................................transmission network service provider TPA ..................................................Trade Practices Act 1974 (Cth) TPC Act...........................................Tasmanian Ports Corporation Act 2005 (Tas) Tribunal ...........................................Australian Competition Tribunal TSLRIC ...........................................total service long-run incremental cost TSLRIC+ .........................................total service long-run incremental cost plus an allocation of joint/common costs ULLS ...............................................unconditioned local loop service WACC..............................................weighted average cost of capital WEM Act ........................................Wheat Export Marketing Act 2008 (Cth) WLR ................................................wholesale line rental xDSL................................................asymmetric digital subscriber line or symmetric digital subscriber line

1

Introduction to Access Regulation [1.10] OVERVIEW ............................................................................................................................................ 1 [1.20] WHAT IS ACCESS REGULATION? .................................................................................................. 2 [1.30] STRUCTURE OF THIS BOOK ............................................................................................................ 3 [1.40] Part I – Introduction to access regulation ......................................................................................... 4 [1.50] Part II – Forms of access regulation .................................................................................................. 4 [1.60] Part III – Approach to access regulation in Australia .................................................................... 5 [1.70] Part IV – Access regimes in the electricity, gas, telecommunications, and port and rail sectors ...................................................................................................................................................... 5 [1.80] Part V – Review mechanisms ............................................................................................................. 7

OVERVIEW [1.10] The regulation of access to services provided by major infrastructure impacts upon virtually every business and every individual in Australia. While potentially relevant to services provided by any kind of infrastructure, access regulation has a particularly critical role to play in the delivery of electricity, gas and telecommunications services, which are essential to the operation of the economy1 and everyday life. Access regulation was implemented in Australia at the same time that many major infrastructure businesses were privatised in the 1990s and 2000s. At that time, access regulation was designed to ensure that private owners of infrastructure could not exercise market power in a way that prevented effective competition in related markets (such as preventing access or otherwise hindering access by charging monopoly prices for services or imposing unreasonable terms and conditions on a service). Where infrastructure remained in government hands, access regulation provided for competitive neutrality, so that government-owned businesses were not advantaged merely by virtue of their ownership, and also provided these businesses with incentives to operate efficiently. The access regulation framework, and its effectiveness, continues to be debated by policy makers, economists and legal practitioners. In particular, there are recurrent questions about what industries should be regulated, 1 Australia’s major infrastructure industries contributed 10.2% of gross domestic product in 2014-15 (BITRE, Yearbook 2015: Australian Infrastructure Statistics, December 2015, Canberra, 13).

2

Access Regulation in Australia

the form that regulation should take, and how the scope of regulation should change over time as markets and technologies evolve. In light of the importance and pervasiveness of access regulation, and the continual evolution of the regulatory framework, this book considers both the theory and application of access regulation in order to provide readers with a foundation upon which to critically examine the current framework. This book addresses: • the economic concepts, and legal and policy principles, that underpin access regulation; • the key forms of access regulation, including a detailed discussion of the building block model, which is the main methodology used in Australia for setting revenues that regulated businesses are permitted to earn; • the approach to access regulation in Australia, including the role of regulators and the general Pt IIIA access regime; • the regimes in place in the electricity, gas, telecommunications, and port and rail sectors in Australia; and • the review mechanisms available. This introductory chapter begins with a brief discussion of access regulation – what it is and why it is critical to ensuring outcomes that would be expected in workably competitive markets, either in the market in which the regulated service is provided or in related markets. It then gives a detailed overview of the rest of the chapters in this book.

WHAT IS ACCESS REGULATION? [1.20] In Australia, as in other modern economies, there is often only one supplier of services in major infrastructure industries, such as the electricity, gas, and telecommunications industries, and transport industries, such as port and rail, in a particular geographic area. The markets for services provided using major infrastructure tend to be defined by economists as natural monopolies because the fixed costs and economies of scale associated with supplying the services are such that it is most efficient to have one supplier. In economic parlance, this is referred to as a “market failure”. Access regulation has traditionally been, and continues to be, the most suitable tool to address the “market failure” that arises when the owner of natural monopoly infrastructure has both the ability and the incentive to exercise market power to the detriment of competition in upstream or downstream markets, or is otherwise not subject to incentives to price access to its services efficiently because it is a monopoly supplier. This is because, for economic efficiency reasons, it is desirable to have a single supplier of infrastructure services, but for competition and efficiency reasons, it is desirable for this supplier to be subject to regulation so that there is a constraint on its ability and incentive to exercise market power, such that the price of access replicates what would be expected in a workably competitive market.

1 Introduction to Access Regulation

3

Access regulation – as the name suggests – is designed to facilitate third party access to services provided by essential infrastructure and to mimic the price, service and economic efficiency outcomes that would be observed in a workably competitive market. The most popular form of access regulation is cost-based regulation. Cost-based regulation typically aims to deliver access charges that are based on the efficient cost of providing services. This is generally achieved through direct regulation of the infrastructure provider’s prices and/or revenue. Other forms of access regulation include the retail-minus approach, price caps, profit sharing and benchmarking. The mechanics of regulating access are complex. Regulators with revenue and pricing functions are tasked with approving or setting a forwardlooking revenue allowance that provides an infrastructure provider with a sufficient return to operate its business effectively and to continue to invest efficiently in its infrastructure over time, while ensuring that users and consumers do not pay any more than they should for the services they receive. At a high level, access regulation can also be described as an ex ante application of competition law. When a particular infrastructure owner is subject to access regulation, it has generally already been determined that that owner has “market power” that is capable of being “misused” to the detriment of competition in another market. That is, the business has the ability and incentive to “give less and charge more”. In addition to the promotion of competition in related markets, which is its primary policy objective, access regulation is also designed to promote efficient investment and economically efficient outcomes more generally. As set out in the report of the Independent Committee of Inquiry into Competition Policy in Australia (“the Hilmer Committee”): “Competition policy … seeks to facilitate effective competition in the interests of economic efficiency whilst accommodating situations where competition does not achieve economic efficiency or conflict with other social objectives.” The question of why access is regulated is explored in more depth in Ch 3 of this book.

STRUCTURE OF THIS BOOK [1.30] This book is divided into the following parts: • Part I (Chs 2-3) – Introduction to access regulation and its economic and legal policy underpinnings; • Part II (Chs 4-5) – Forms of access regulation; • Part III (Chs 6-7) – Approach to access regulation in Australia;

4

Access Regulation in Australia

• Part IV (Chs 8-11) – Access regimes in telecommunications, port and rail sectors; and

the

electricity,

gas,

• Part V (Ch 12) – Review mechanisms.

Part I – Introduction to access regulation [1.40] Chapter 2 introduces readers to some preliminary economic concepts that are important to the discussion in the rest of this book. These include market structure (monopoly, oligopoly, perfect competition, and natural monopoly) and key determinants of market structure (barriers to entry, and others). Chapter 2 also introduces some important cost concepts (marginal cost, long-run cost, and others) relevant to the discussion of cost-based regulation later in this book. Chapter 3 discusses the economic and policy principles that underpin access regulation in Australia. It analyses the “problem” that access regulation is seeking to address: the potential for owners of certain infrastructure to exercise market power in a way that prevents effective competition in related markets (such as preventing access or hindering access by charging monopoly prices for services or imposing unreasonable terms and conditions on a service). Chapter 3 also examines the other ways in which this problem can be addressed, including by relying on s 46 of the Competition and Consumer Act 2010 (Cth) (“CCA”), price monitoring, vertical separation and government ownership. It briefly outlines the regulatory measures that have emerged in Australia across different industry sectors, as well as the policy rationale and objectives that underpin those measures. In particular, Ch 3 provides an overview of the regulatory measures in place in the electricity, gas, telecommunications, port and rail sectors (discussed in more detail in Part IV of this book). Finally, it analyses the circumstances when it may not be appropriate to apply access regulation, such as when the costs exceed the benefits.

Part II – Forms of access regulation [1.50] Chapter 4 explains the key forms of access regulation, the most common being cost-based regulation. Cost-based regulation typically aims to deliver access charges that are based on the efficient costs of supply. This is because, in a competitive market, firms are expected to recover no more than efficient costs, including a commercial return on capital employed. Cost-based regulation, if properly implemented, should lead to efficient market outcomes, commensurate with what would be expected if the service was provided in a workably competitive market. This chapter discusses the rationale for cost-based regulation and the drawbacks of this form of regulation. It then discusses the other key forms of access regulation: retail-minus, price caps and benchmarking. Chapter 5 explains the building block model – the most popular regulatory model used in Australia – which involves determining a cost-based access

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5

price by reference to certain cost building blocks. The chapter provides an introduction to the model, including its key components and the decisions that must be made by a regulator in relation to each of the building block components.

Part III – Approach to access regulation in Australia [1.60] Chapter 6 introduces the various regulatory bodies that make decisions in respect of third party access and discusses the scope of the decision-making powers of these bodies. Depending on the statutory framework that applies to the infrastructure that is the subject of regulation, regulators can have different roles and varying degrees of discretion to make decisions. In some regimes, the role of the regulator may be limited to resolving access disputes that are notified to it, while in other regimes, the regulator may take a more proactive role in determining the terms and conditions of access upfront. Chapter 7 provides an overview of the general access regime in Pt IIIA of the CCA (known as the “National Access Regime”). This access regime provides various mechanisms by which services delivered by facilities of national significance may become subject to economic regulation, including by declaration or the acceptance of an access undertaking. Once a service becomes subject to regulation, this triggers the operation of the regulatory control mechanisms that are discussed in later chapters of this book.

Part IV – Access regimes in the electricity, gas, telecommunications, and port and rail sectors [1.70] Chapter 8 covers the access regime applying to electricity networks. This regime is one of the most detailed regulatory regimes currently in operation in Australia. Within the National Electricity Market, electricity distribution and transmission businesses (unless exempt) are subject to cost-based (building block) regulation administered by the Australian Energy Regulator (“AER”) under the National Electricity Rules (“NER”). Decisions of the AER may be the subject of merits review and/or judicial review. The electricity access regime has come under close scrutiny, with the regulator and other stakeholders proposing significant amendments to the NER, which resulted in important changes to it in late 2012. The merits review provisions applying to distribution and transmission determinations were also the subject of significant amendment in late 2013. Chapter 9 is concerned with the access regime applying to gas pipelines. Varying degrees of regulation are provided for under the National Gas Rules (“NGR”), including no regulation, light regulation and full regulation. The choice between these forms of regulation will depend on, among other things, whether access to services provided by a particular pipeline would promote a material increase in competition in at least one other market, and whether it would be uneconomic for anyone to develop another

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pipeline to provide the same services. For pipelines that are subject to full regulation, the NGR requires the cost-based (building block) regulation of reference services. The regulation of gas pipelines is administered by the AER in most states (the exception being Western Australia, where the Economic Regulation Authority is responsible for administering the regime), with decisions subject to merits review and/or judicial review. As in electricity, it is a well-developed and detailed access regime. However, it differs from electricity in a number of respects, including in relation to the degree of regulation that may apply to a pipeline and how extensions and expansions of a pipeline that is the subject of regulation are regulated. Similarly to electricity, the NGR and the merits review provisions applying to access arrangement decisions have recently been the subject of significant amendment. Chapter 10 provides an overview of the telecommunications access regime, which is primarily set out in Pt XIC of the CCA. A defining feature of the telecommunications industry is the diversity of competitive conditions across markets in which various services are supplied. While certain infrastructure continues to display bottleneck characteristics, other infrastructure and the services supplied over that infrastructure are far more competitive. Telecommunications is also different from electricity and gas because of the more rapid pace of technological change, which requires a regulatory framework that is robust to developments in technology which cannot be foreseen and in respect of which the regulator may have to respond to quickly in order to prevent damage to competition. Significant changes in market structure also distinguish the telecommunications sector from gas and electricity. The rollout of the government-owned National Broadband Network has resulted in substantial amendments to the regulatory framework in Pt XIC. Part XIC of the CCA confers powers on the Australian Competition and Consumer Commission (“ACCC”) to determine which services are to be regulated and then make regulatory determinations applying to those services. While the ACCC has historically applied a relatively unique form of regulation to telecommunications services (known as TSLRIC+ – the total service, long run incremental cost plus a proportion of common costs), it changed its approach a few years ago to be more in line with the building block approach applied in other industries. Decisions of the ACCC under Pt XIC of the CCA are no longer subject to merits review, although a recent review by an expert panel appointed by the Australian Government has supported the reintroduction of merits review for particular decisions. Chapter 11 examines the various arrangements in place in the port and rail sectors. There is a mix of different arrangements currently in place, including state-based access regimes, application of the general National Access Regime and a specific national framework for one limited class of port access service.

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Most port and rail infrastructure is subject to a more “light-handed” form of regulation relative to services provided by electricity, gas and telecommunications infrastructure. The most common form of regulation applied to ports is price monitoring, while rail operators are most commonly subject to a negotiate/arbitrate framework and/or voluntary access undertakings. However, some port and rail infrastructure is subject to more “heavy-handed” regulation, such as the rail network in Victoria.

Part V – Review mechanisms [1.80] Finally, Ch 12 discusses the mechanisms that are available for review of regulatory decisions in Australia. These include judicial review and, for some decisions, merits review. The scope, availability and processes of merits review are considered in some detail, with reference to the merits review frameworks that are applicable to particular regulatory regimes in Australia. Merits review is compared with judicial review, which is more widely available but is more limited in scope.

2

Economic Concepts [2.10] OVERVIEW ............................................................................................................................................ 9 [2.20] COST CONCEPTS ............................................................................................................................... 10 [2.30] Long-run costs v short-run costs ...................................................................................................... 10 [2.40] Marginal costs ...................................................................................................................................... 11 [2.50] Common costs ...................................................................................................................................... 11 [2.60] Sunk costs ............................................................................................................................................. 12 [2.70] Opportunity cost ................................................................................................................................. 12 [2.80] Efficient costs ........................................................................................................................................ 12 [2.90] EFFICIENCY CONCEPTS .................................................................................................................. 13 [2.100] Productive efficiency ......................................................................................................................... 13 [2.110] Allocative efficiency .......................................................................................................................... 13 [2.120] Dynamic efficiency ............................................................................................................................ 14 [2.130] SUPPLY, DEMAND AND EFFICIENT MARKET OUTCOMES ............................................... 14 [2.140] Allocatively efficient outcomes ....................................................................................................... 14 [2.150] Productive and dynamic efficiency ................................................................................................ 15 [2.160] MARKET STRUCTURES ................................................................................................................. 16 [2.160] Perfect competition ........................................................................................................................... 16 [2.170] Workable competition ....................................................................................................................... 16 [2.180] Monopoly ............................................................................................................................................ 17 [2.190] Natural monopoly ............................................................................................................................. 19 [2.200] Determinants of market structure .................................................................................................. 22 [2.210] VERTICAL INTEGRATION ............................................................................................................ 24 [2.220] SUMMARY ......................................................................................................................................... 26

OVERVIEW [2.10] This chapter provides an introduction to some basic economic concepts that are important in order to understand the rationale for, and mechanics of, access regulation. The key concepts introduced in this chapter are: • different types of cost, including long-run and short-run costs, marginal costs, common costs and sunk costs; • economic efficiency; • the basic microeconomic theory of the efficient market outcome; • market structures, including monopoly, natural monopoly and “workable competition”; and • economic issues associated with vertical integration.

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COST CONCEPTS [2.20] Later chapters of this book will refer to various categories of cost, such as short-run/long-run costs, marginal costs and fixed costs. These cost concepts are important in the development of access regulation and its application, and it is therefore necessary to understand them, particularly where there is cost-based regulation of prices or revenue. This section will briefly discuss the distinction between each of the different categories of cost referred to in later chapters.

Long-run costs v short-run costs [2.30] Access regulation frameworks often refer to the long-run cost of supply. A key objective of price regulation is to match the access price with the long-run cost of supply. The long-run cost of supply includes all costs incurred over the long run in supplying the relevant service. The “long run” in this context is an economic concept referring to the period of time over which all inputs into the supply of the service are variable. For example, in the long run, a supplier is able to vary the quantity or nature of its inputs, such as machinery or labour, while, in the short run, a supplier cannot vary at least some of its inputs (not without incurring some costs). The term of the long run will depend on the nature of the service being supplied. For example, for a professional services firm with a short-term lease on its office space, the long run may be no more than a year – within a year the firm may move to new premises, augment its workforce and enter into new contracts for office supplies. On the other hand, for a manufacturing or mining business the long run may be a longer period of time (say 20 or 30 years), since the business may have invested in long-term leases for land and/or machinery with a long life. In the context of regulated utility industries, such as telecommunications or electricity, the long run is likely to be a relatively long period of time. The key input into the provision of services in these sectors is network infrastructure, which is fixed in place for long periods of time and is mostly made up of assets with long lives. Therefore, any calculation of long-run costs for service providers in these industries will need to take into account costs incurred over a long period of time (potentially several decades), including the cost of network assets purchased over this period. There is a relationship between the concept of long-run costs and the concepts of fixed and variable costs. Depending on the term of reference (whether it is the long run or the short run), the distinction between fixed and variable costs may be very different. Over the long run, all costs of supply will be variable. However, in the short run, at least some costs of supply will be fixed.

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Marginal costs [2.40] The term “marginal cost” (otherwise referred to as “incremental cost”) refers to the additional cost incurred in supplying a marginal unit of a good or service. For example, if a business can supply 99 units at a cost of $1000 or 100 units at $1005, the marginal cost of the 100th unit is $5. Marginal cost may be measured over the long run or the short run. The long-run marginal cost (or long-run incremental cost) will be the difference between long-run costs of supply, with and without supply of the additional unit. The short-run marginal cost will only take into account the difference in costs incurred over the short-run. Marginal costs will also depend on the definition of the marginal unit – the broader the definition of the marginal unit, the larger will be the marginal cost. For example, in the case of a rail network, the relevant marginal unit could be any of: • a single train service between points A and B; or • all train services between points A and B (that is, a schedule of train services between two points); or • an entire network of train services between two points. If the marginal unit is defined as simply a single train service, then the marginal cost would be relatively small because the costs associated with the train, track and signalling equipment would not be attributable to that marginal unit (assuming there are other train services on the same route that would use that equipment). However, if a broader definition of the marginal unit is adopted, the marginal cost would be higher as it would include the cost of the trains, track and signalling equipment at least on that route, and potentially for the entire network.

Common costs [2.50] Common costs are costs associated with activities that contribute to the supply of multiple units of output. These may be overhead costs, such as head office costs. For a network business, they are likely to include costs associated with central or integral parts of the network. In the case of regulated utilities, many costs are common, in the sense that they are incurred in connection with assets or activities that contribute to the supply of multiple customers or units of output. For example, a gas transmission pipeline will be able to transport many units of gas through its pipeline and serve a multitude of customers. Common costs will generally be allocated across all of the units that rely on the common asset or activity, meaning that the marginal cost for each unit will include a proportion of the common cost. For example, if a new piece of infrastructure is built with capacity to supply 100 additional units, the marginal cost for each of the 100 units will include a proportion of the associated cost.

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Sunk costs [2.60] Sunk costs are costs that cannot be recovered if the service provider decides to cease supplying the relevant service. These may be costs associated with bespoke machinery that has no alternative use and therefore cannot be resold. Where there are significant sunk costs associated with supply of a particular service, these may create barriers to market entry. High sunk costs imply that new entrants will need to commit to significant amounts of capital in order to enter the market, in the knowledge that they may not be able to recover this investment if they decide to exit the market. Therefore, the existence of high sunk costs may discourage entry, or may make competition more difficult for those firms that do enter. At the extreme, very high sunk costs may give rise to a “natural monopoly” for the supply of a particular service (see [2.190]), which may lead to the imposition of access regulation in respect of the supply of that service.

Opportunity cost [2.70] Opportunity cost refers to the cost of resources devoted to a particular activity, in terms of the value that could have been derived from those resources had they been put to an alternative use. Put another way, it is the cost of forgoing the opportunity to put resources to a different use. The opportunity cost of financial capital is often referred to in the context of setting a regulated rate of return for an infrastructure business. The opportunity cost of capital that is invested in the business in this context is represented by the return that could have been achieved had the relevant capital been invested elsewhere (for example, in a diversified portfolio of shares and debt instruments). Opportunity cost may also be referred to in the context of valuing assets for the purposes of regulatory price setting. One way of valuing assets used in the delivery of regulated services may be to determine the opportunity cost to the service provider of using the assets for that purpose, in terms of the value that could be derived from the sale or alternative use of those assets.

Efficient costs [2.80] In some cases, a distinction may be drawn between the “efficient cost” of supplying a particular service and the actual cost of supplying that service. The efficient cost is the cost that would be incurred by a hypothetical efficient operator. The actual cost, on the other hand, is the cost that is incurred in supplying the service. The actual cost may be similar to the

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efficient cost in some cases (where the service provider is using modern technology and meeting benchmark levels of efficiency) or they may be quite different. Regulatory schemes will often provide for remuneration of a service provider based on the efficient cost of supplying the relevant service, rather than the service provider’s actual costs. For example, the pricing principles in Pt IIIA of the Competition and Consumer Act 2010 (“CCA”) state that regulated access prices should: (i) be set so as to generate expected revenue for a regulated service or services that is at least sufficient to meet the efficient costs of providing access to the regulated service or services; and (ii) include a return on investment commensurate with the regulatory and commercial risks involved.1

If the service provider is not subject to any form of competition and is allowed to recover its actual costs, it will have no incentive to seek out efficiencies and pass these on to users. On the other hand, if the service provider is remunerated based on some measure of efficient costs, it will face strong incentives to seek out efficiencies, because its shareholders will receive a higher return if the service provider’s actual costs are lower than the efficient cost benchmark, and vice versa. The benefits and drawbacks of using an efficient cost standard are discussed further in Ch 4.

EFFICIENCY CONCEPTS [2.90] Later chapters of this book refer to various types of efficiency, such as productive, allocative and dynamic Understanding these concepts is important to the application regulation, particularly where regulation is designed to achieve that are in some sense efficient.

economic efficiency. of access outcomes

Productive efficiency [2.100]

Productive efficiency (or technical efficiency) refers to the number of inputs that are required to produce a given output. Productive efficiency will be maximised when output is produced at the lowest possible cost, using the least-cost combination of inputs. For a natural monopoly industry, it will be significantly less costly for one firm to serve demand than two or more firms and therefore it is productively efficient for there to be only one provider.

Allocative efficiency [2.110]

Allocative efficiency pertains to the allocation of resources between various activities. Allocative efficiency will be maximised where

1 CCA, s 44ZZCA. See also National Electricity Law, s 7A(2) and National Gas Law, s 24(2).

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all resources are allocated to their highest-value use. For any given good or service, allocative efficiency is achieved where price (marginal benefit) is equal to marginal cost (including social costs that accrue outside the firm, such as environmental and other costs that are not traded in markets). In an infrastructure context, if third party access increases competition in downstream or upstream markets, prices and output in those markets should tend toward their allocatively efficient levels.

Dynamic efficiency [2.120]

Dynamic efficiency is a market outcome in which resources are deployed efficiently between present and future uses, so that the welfare of society is maximised over time (that is, allocative and productive efficiency are achieved jointly over time). This term also refers to the ability of firms and markets to adapt over time in response to changes in consumer preferences and/or technology by implementing measures that result in a reduction in costs, improvements in product quality or the development new products. In an infrastructure context, a firm is dynamically efficient if it invests in existing infrastructure facilities (including upgrading, maintaining and expanding upon its existing infrastructure) as well as in new facilities

SUPPLY, DEMAND AND EFFICIENT MARKET OUTCOMES [2.130]

As will be discussed in Ch 3, at least one objective of access regulation is to promote economically efficient market outcomes. These are usually seen to be in the interests of consumers and society more generally, because the efficient market outcome will be one that maximises economic welfare.2

Allocatively efficient outcomes [2.140]

In an allocatively efficient market outcome the price is such that the volume firms are willing to supply is equal to demand (shown in Figure 2.1 below as P* and Q*). Supply will equal demand where the market price reflects both the marginal cost of the last unit of output, and consumers’ willingness to pay for that last unit. A firm’s decision on whether to supply an additional unit will depend on the marginal cost of supplying that additional unit, and therefore the supply function for a firm can be represented by its marginal cost curve. Demand for a service will reflect the willingness of consumers to pay. Therefore, the demand function for a particular service will reflect consumers’ marginal willingness to pay. At the point where supply is equal to demand, economic welfare, as measured by “total surplus”, is maximised. Total surplus is the sum of

2 As discussed in Ch 3, access regulation may also have other objectives, such as social objectives. If this is the case, then the relevant economic objectives may need to be balanced against the other objectives.

2 Economic Concepts

15

consumer surplus and producer surplus. Consumer surplus in this context refers to the extent to which consumers’ willingness to pay (or the value they put on the service being supplied) exceeds the market price across all units of output. Producer surplus is the extent to which the market price exceeds producers’ marginal cost across all units of output. Any increase in output beyond this point will diminish overall welfare, because the marginal cost of the incremental unit will exceed the marginal willingness to pay for that extra unit. At any lower level of output, welfare could be increased by supplying additional units (up to the point at which demand is equal to supply), because the marginal willingness to pay for those additional units will exceed the marginal cost of supply. Figure 2.1 Supply, demand and the allocatively efficient market outcome

Productive and dynamic efficiency [2.150]

Productive and dynamic efficiency will depend on other market factors, and will not necessarily be maximised at the point where market demand is equal to supply. Depending on the nature of the industry, it may be that the productive efficiency of the industry is greatest when there are only a small number of suppliers. This may be the case because of large sunk costs involved in establishing operations. In extreme cases, productive efficiency may be maximised where there is only one supplier – such as in the case of a natural monopoly (see [2.190]). Dynamic efficiency is likely to be driven by the strength of incentives for innovation and new investment, and the particular risks involved in investing in new technologies.

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MARKET STRUCTURES Perfect competition [2.160]

Perfect competition describes a situation where all firms are “price takers” and no firm can individually influence the market price. It requires that there are no barriers to entry, meaning that new firms may enter the market immediately and at no cost. The existence of this condition implies that incumbent firms cannot raise prices above the competitive level (or reduce output below the competitive level) since any price increase (or output reduction) would immediately be defeated by new entry. Where perfect competition exists, the allocatively efficient market outcome (where demand meets supply) will be achieved. This is because, where there are many firms (or potentially many firms), each firm will continue to supply up to the point at which consumers’ willingness to pay equals marginal cost. However, perfect competition can rarely (if ever) be used to describe markets in practice, because these conditions are highly unlikely to exist. There are almost always some barriers to entry, although in some cases these barriers may be easy to overcome. Some examples of barriers to entry are set out in Table 2.1. While these factors may not entirely prohibit new entry, they may increase the time and cost of new entry. While perfect competition rarely (if ever) exists in practice, some markets exhibit characteristics that are close to perfect competition. For example, the market for trading of shares in a large listed company would be close to perfectly competitive – in this market, all traders will be price-takers, and it is unlikely that any single seller or acquirer could influence the share price.

Workable competition [2.170]

A more common market structure than perfect competition (see [2.160]) is “workable competition”. It has no clear definition in economics or law. However, the term is often used to describe a market structure that is not perfectly competitive, but where there is at least some restraint on the exercise of market power by suppliers. It is the benchmark typically applied in access regulation, as Parker J noted in Re Dr Ken Michael AM; Ex parte Epic Energy (WA) Nominees Pty Ltd: I am left with the clear impression that in the field of competition policy, especially market regulation, the prevailing view and usage among economists is that a reference to a competitive market is to a workably competitive market. In the particular context of the promotion of a competitive market for natural gas it would be surprising if what was contemplated was a theoretical concept of perfect competition, as the subject matter involves very real-life commercial situations. Workable competition seems far more obviously to be what is contemplated. …

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[W]ith workable competition market forces will increase efficiency beyond that which could be achieved in a non-competitive market, although not necessarily achieving theoretically ideal efficiency.3

The Australian Competition Tribunal noted in Chime: Quite what workable competition should consist of has caused much controversy. At one level competition might be “workable” if there is rivalry between firms. But, how much rivalry is required is not specified. Another approach is to view competition as not “workable” if there is an absence of restraint on a firm’s economic activities. Yet there are few markets in which a firm is entirely unrestrained. Another possibility is that there is workable competition if no firm is able to influence the market price for goods. This, however, is not significantly different from the model of perfect competition. … Perhaps the best shorthand description of workable competition is to envisage a market with a sufficient number of firms (at least four or more), where there is no significant concentration, where all firms are constrained by their rivals from exercising any market power, where pricing is flexible, where barriers to entry and expansion are low, where there is no collusion, and where profit rates reflect risk and efficiency.4

Another term that is sometimes used to describe a similar state of affairs is “effective competition”.5 Examples of workably competitive markets might include, for example, markets for airline travel on certain routes. While there may be some barriers to new entry in these markets (for example, loyalty to existing airline brands, sunk capital costs), the behaviour of existing players may be consistent with what would be expected in a perfectly competitive market.

Monopoly [2.180]

A monopoly market structure is one where there is a single firm offering a product with no close substitute. In this situation the monopolist is a price maker – this means that the price is determined by the monopolist, rather than by the market. This can be contrasted with perfect competition (see [2.160]), where the price is determined by the market (that is, where demand meets supply) and all firms are price takers, in the sense that they cannot individually influence the market price. Since the monopolist is a price maker, it can, in the absence of price regulation, be expected to set a price that maximises its profit. The profit maximising output for a monopolist is where the monopolist’s marginal revenue curve intersects with its marginal cost curve. If the monopolist produces a higher quantity than this and supplies additional units at the

3 Re Dr Ken Michael AM; Ex parte Epic Energy (WA) Nominees Pty Ltd [2002] WASCA 231 (23 August 2002) [124], [128]. 4 Application by Chime Communications Pty Ltd (No 2) [2009] ACompT 2, [35], [37]. 5 Application by Chime Communications Pty Ltd (No 2) [2009] ACompT 2, [38].

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lower price, its profit will fall because the marginal revenue on additional units will be less than the marginal cost of supplying those units. On the other hand, if it produces a lower volume, it will forgo some profit, since it could lower its price and supply some additional units for which its marginal revenue would exceed marginal cost. The amount of profit earned by the monopolist will reflect the extent to which the consumers’ willingness to pay exceeds the monopolist’s marginal cost. In this situation, there is an allocative efficiency loss, relative to the perfect competition scenario (shown in Figure 2.2). Put simply, the welfare loss arises because the monopolist is charging more and supplying less than would be the case under perfect competition. Figure 2.2 Monopoly outcome

Despite the allocative efficiency loss, there may be a productive efficiency benefit associated with a monopoly. Where there are significant economies of scale associated with the supply of a particular service (such as the distribution of electricity), a single supplier may be more productively efficient than multiple suppliers. This will be the case where there is a natural monopoly for the supply of a particular service (see [2.190]). Additionally, in some cases dynamic efficiency benefits may be associated with a monopoly market structure, to the extent that the lure of monopoly profits is required to spur innovation and investment in new technologies, or to expand infrastructure where that expansion may be risky (for example, expansion into new geographic regions where demand is uncertain). This is often cited as a justification for granting time-limited monopolies over the supply of newly developed products through patents or expansions of infrastructure into “greenfield” areas.

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Natural monopoly A natural monopoly is a market failure6 as it can lead to economic inefficiencies, including allocative inefficiency. The standard economic definition of “natural monopoly” refers to a situation where a single firm can supply a good or service to an entire market at a lower cost than could two or more firms.7 As Richard Posner stated:

[2.190]

If the entire demand within a relevant market can be satisfied at lowest cost by one firm rather than by two or more, the market is a natural monopoly, whatever the actual number of firms in it. If such a market contains more than one firm, either the firms will quickly shake down to one through mergers or failures, or production will continue to consume more resources than necessary. In the first case competition is shortlived and in the second it produces inefficient results. Competition is thus not a viable regulatory mechanism under conditions of natural monopoly.8

Natural monopolies tend to occur in circumstances where capital costs are significant and “sunk” (that is, irretrievable) and the cost of supplying an additional customer (the marginal cost) is very small. In these circumstances, the long-run average total cost (total cost divided by total output) and the marginal cost (the derivative of total cost at a specific level of output) decrease as output increases. Electricity transmission networks will typically be natural monopolies. There are significant sunk capital costs involved in constructing an electricity transmission network and supplying an additional megawatt of electricity, once the network is constructed, will cost effectively zero.9 Other examples of natural monopolies referred to throughout this book include electricity distribution networks, some gas transmission and distribution pipelines, fixed-line telecommunications networks, and some rail networks. Importantly, large sunk capital costs are a necessary but not sufficient factor to signal that an industry is a natural monopoly. That is, while high sunk capital costs are a common feature of natural monopolies, there are a number of industries that involve significant capital costs that are not natural monopolies. The airline industry is one such example – airplanes

6 A market failure is an economic concept describing the situation where the free market does not deliver an efficient outcome. Market failures are commonly associated with externalities, public goods and information asymmetries, among others. 7 Joshua Gans, Stephen King and N Gregory Mankiw, Principles of Microeconomics (Thomson, 2nd ed, 2004) 309. 8 Richard Posner, Natural Monopoly and its Regulation (Cato Institute, 30th ed, 1999) 1. 9 An additional megawatt of electricity would cost very little if the transmission network was not capacity constrained. Even if the network was capacity constrained, an expansion of the network’s capacity would not involve a significant capital cost.

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involve significant costs but many airline travel markets are workably competitive with at least three carriers or more on most routes.10 Box 2.1 outlines the key features of a natural monopoly. Box 2.1: Natural monopoly — A primer Economics textbooks define natural monopolies as: • A situation where one firm can meet the total market demand at a lower cost than two or more firms. • A situation where the minimum efficient scale is a large share of total market demand such that only one firm can operate in the market to capture the available economies of scale. • A situation where the long-run average cost curve continually declines as output expands. All these definitions are in effect the same. The essential feature of a natural monopoly is that there are economies of scale at all levels of output – that is, the long run average cost per unit (“LRAC”) decreases as output increases. LRAC is falling because long run marginal cost (“LRMC”) is below LRAC:

10 While airport terminals have natural monopoly characteristics and are often subject to access regulation or price oversight, airline travel markets tend to be considered to be workably competitive. For example, the Australia-UK/Europe market is competitive with the mid-point carriers competing strongly with end-point carriers, such as Qantas and British Airways. See, for example, ACCC, Final Determination – Applications for Authorisation Lodged by Qantas Airways Limited and Emirates in Respect of a Master Coordination Agreement to Coordinate the Operations of the Applicants, 27 January 2013, 81.

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The relationship between market demand and costs may also reflect unexhausted economies of scope. Economies of scope exist where one firm can produce two or more goods at a lower cost than two or more firms each specialising in one of the goods. Economies of scope tend to arise in situations where goods are supply-side substitutes, such as local and long-distance telephone calls. In general, a natural monopoly will endure over time if there are no close substitutes for the goods or services that the firm produces. While other firms will be motivated to enter the market to earn a share of the monopoly profits, they will be deterred from entering as they know that they cannot achieve the same low costs that the single monopolist firm enjoys. Changes in market circumstances can “erode” a natural monopoly over time. Such changes could include: • An increase in substitutes – As technologies evolve new technologies can compete with older ones in the supply of certain services. For example, a number of countries including the United States and the United Kingdom have infrastructure-based competition with cable television providers competing with fixed-line telephone providers in the supply of content services (that is, cable television now competes with internet protocol television). Similarly, there are increasing levels of substitution between fixed-line telephone services and mobile telephone services.11 • An increase in the size of the market – Consider a mobile network. When the population is small, the network may be a natural monopoly as the single network can satisfy the entire demand for mobile calls and services at lowest cost. However, as the population grows, the mobile network becomes congested, which decreases data speeds and, at worst, could lead to network dropouts. To satisfy the population’s demand, a second and a third mobile network may be required. Therefore, as a market expands, a natural monopoly can develop into a workably competitive market. • A decrease in the capital costs of entry – As technologies evolve new technologies may make it possible for another business to enter the market as the capital costs are no longer significant.

11 Fixed line and mobile substitution have been recognised as close substitutes by some regulators. See, eg, Commerce Commission of New Zealand, Determination – Spark New Zealand Trading Limited and Craig Wireless New Zealand Spectrum Operations Limited and Woosh Wireless Holdings Limited [2016] NZCC 7, 23 March 2016, [50]-[55].

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Given the cost structure relative to the total market demand, economists consider it to be more economically efficient to permit a natural monopolist to supply an entire market and then subject the firm to access regulation, as opposed to seeking to facilitate a market structure in which several smaller firms compete in the relevant market.12 Where a natural monopoly exists, effective competition will not be possible. This is because any new entrant will face higher average costs than the incumbent monopolist and will therefore be unable to compete effectively. It is for this reason that natural monopolies are often subject to access regulation. The primary economic objective of access regulation of natural monopolies is to mimic the price and service outcomes that would occur in a workably competitive market. In other words, access regulation is designed to procure workably competitive market outcomes where competition is not possible.

Determinants of market structure [2.200]

The degree of competition in a market, and whether the market is classified as perfectly competitive, workably competitive or monopolistic, will depend critically on the height of barriers to entry and expansion. If there are no material barriers to entry and expansion, the behaviour of market participants will be disciplined by both existing competitors and the threat of new entry. The market outcome will closely reflect the expected outcome of perfect competition, because any deviation from this outcome will be met with a competitive response. It will not be rational for any market participant to deviate from the competitive market outcome (for example, by raising prices or restricting output) because it will lose market share to existing competitors (who may easily expand output) and potentially new entrants as well. On the other hand, if there are significant barriers to entry, incumbent firms may be able to restrict output and/or raise prices above the competitive level, because the threat of a competitive response will be diminished. Existing competitors may not be able to expand their operations, and potential new competitors may not be able to enter. It is barriers to entry and expansion that give incumbent firms market power or, in some cases, monopoly power – the power to charge more and produce less than what would be observed in a perfectly competitive market.

12 William J Baumol and Alan S Blinder, Economics: Principles and Policy (South Western Cengage Learning, 11th ed, 2009) 55.

2 Economic Concepts

23

This was noted by the High Court in Queensland Wire v BHP.13 The joint judgment of Mason CJ and Wilson J stated: It is only when for some reason it is not rational or possible for new entrants to participate in the market that a firm can have market power: see Continental Can, at p 248; p 227 of CMLR. There must be barriers to entry. As Professor FM Scherer has written, “significant entry barriers are the sine qua non of monopoly and oligopoly, for … sellers have little or no enduring power over price when entry barriers are non-existent”.14

Similarly, Dawson J (who agreed with Mason CJ and Wilson J) stated: The existence of barriers to entry may be conclusive in determining the relevant market and the degree of market power in it. In the context of s.46, the existence of significant barriers to entry into a market carries with it market power on the part of those operating within the market. Market power follows as a natural consequence of barriers to entry which are also a prerequisite to the establishment and maintenance of a monopoly.15

Barriers to entry may arise for various reasons, and may either be a function of the industry characteristics and structure (“structural barriers”), legal restrictions or regulations (“legal barriers”) or of the behaviour and strategy of incumbent firms (“strategic barriers”). Examples of barriers to entry are set out in Table 2.1. Table 2.1 Examples of barriers to entry and expansion Structural barriers Cost structures/economies of scale Cost structures may be such that it is very difficult for new firms to enter and effectively compete with incumbent firms. For example, it may be that there are very high fixed costs and low or constant marginal costs associated with the supply of a particular service, meaning that average costs are very high at low levels of output and low at higher levels of output. In this case, a new entrant is likely to be at a significant cost disadvantage compared to incumbent firms. Economies of scale are likely to be present in capital-intensive infrastructure industries such as electricity distribution and telecommunications. High sunk costs High sunk costs may discourage new entry, because sunk costs cannot be recovered if and when the firm decides to exit the market. High sunk costs therefore increase the risk associated with market entry. Customer loyalty or “stickiness” If customers are particularly loyal to existing suppliers or their brands, this may make it difficult for new firms to successfully enter. Alternatively, it may mean that entry requires significant sunk costs to be incurred in establishing a brand through marketing (see above in relation to sunk costs). For example, new entrants into markets for supply of soft drinks may face barriers due to loyalty of customers to existing brands, such as Coca-Cola and Pepsi.

13 Queensland Wire Industries Pty Ltd v Broken Hill Pty Co Ltd (1989) 167 CLR 177. 14 Queensland Wire Industries Pty Ltd v Broken Hill Pty Co Ltd (1989) 167 CLR 177, 189-90. 15 Queensland Wire Industries Pty Ltd v Broken Hill Pty Co Ltd (1989) 167 CLR 177, 201.

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Legal barriers Patents Patents create a temporary barrier to entry by preventing potential entrants from replicating a particular product design. However, once the patent expires, this barrier will effectively disappear. Regulatory requirements In some industries, there may be requirements to obtain certain regulatory approvals or some form of licence prior to commencing operations (for example, a mining licence). If the processes for obtaining the necessary approvals and/or licences are particularly lengthy or expensive, this may create a barrier to new entry or expansion of existing operations. Strategic barriers Artificially reduced prices Incumbent firms may seek to raise barriers to entry by artificially reducing prices for a period of time. Reducing prices will lower the returns that new entrants may earn, and may make entry less attractive. If incumbent firms can reduce prices below what would be necessary for a new entrant to recover its costs, this may make entry appear unviable. Such conduct may, in some cases, amount to a breach of s 46 of the CCA, which prohibits misuse of market power. Where an incumbent firm has market power and/or a substantial market share and it reduces prices below cost for a sustained period of time for the purposes of preventing or deterring entry, this conduct may be found to breach this provision. In Boral Besser Masonry Ltd v Australian Competition and Consumer Commission (2003) 215 CLR 374, it was alleged that Boral Besser Masonry Ltd (“BBM”) had misused its market power for the purposes of eliminating or substantially damaging its competitors by reducing the prices of certain concrete masonry products below its cost of supply. However, the majority of the High Court (Kirby J dissenting) found that, in that case, s 46 had not been breached, principally because BBM was found not to have the requisite degree of market power. Raised input costs Incumbent firms may also seek to raise barriers to entry by restricting access to essential inputs and/or raising the cost of those inputs. Incumbent firms may have the ability to do this where they control access to an essential input. This type of conduct may also amount to a breach of s 46 of the CCA (see NT Power in Box 2.2).

VERTICAL INTEGRATION [2.210]

Vertical integration refers to a situation in which one firm operates at multiple levels of the supply chain, for example, in manufacturing, distribution and retail. Vertical integration is relatively common, and can be observed in many industries. For example, many petrol companies, such as BP, are fully vertically integrated, from crude oil extraction through refining and distribution to petrol retailing. Vertical integration potentially has a number of economic benefits: it may reduce transaction costs and may provide for better investment signals across the supply chain and therefore encourages more efficient and timely investment.

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In most cases, vertical integration will not cause any problem in and of itself. Vertical integration may simply be the most efficient market structure in some cases. However, it may cause concern where: • a vertically integrated firm operates across multiple parts of the supply chain, including some that have natural monopoly characteristics and others that are potentially competitive; and • potential competitors require essential inputs from the vertically integrated firm. In such cases, the vertically integrated firm may face incentives to damage rivals in the potentially competitive parts of the supply chain, by either withholding supply of the essential input or discriminating against competitors in the supply of this input. An example of vertical integration that may give rise to conduct that causes concern from an economic (and legal) perspective is set out in Box 2.2. Box 2.2: NT Power — Vertical integration The case of NT Power Generation v Power and Water Authority (2004) 219 CLR 90 is an example of where vertical integration can cause economic harm. This was a case of a vertically integrated business refusing to provide a competitor with access to an essential input. NT Power Generation Pty Ltd (“NT Power”) generated electrical power at its plant in the Northern Territory. It decided to sell power to consumers within the Northern Territory, but could not do so without access to the existing electricity transmission and distribution infrastructure in and around Darwin and Katherine. That infrastructure was owned by the Power and Water Authority (“PAWA”). PAWA operated a vertically integrated electricity enterprise; that is, PAWA generated electricity as well as purchasing electricity generated by others. It transported that electricity from generation sites to distribution points via its transmission equipment, then transported it from distribution points to customers via its distribution equipment, and charged customers directly. NT Power requested that PAWA supply to it the electricity transmission and distribution infrastructure services needed for its plan to sell electricity to consumers in competition with PAWA. Though there was no safety, technical or other problem preventing PAWA from acceding to that request, PAWA rejected it. The Federal Court found that, in refusing to provide access, PAWA had misused its market power in transmission and

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distribution for an improper purpose (that is, to prevent entry and/or deter competitive conduct in the supply of electricity to consumers). On appeal, the majority of the High Court (Kirby J dissenting) agreed with this finding. Following the conduct that was the subject of this case, an access regime for electricity network infrastructure in the Northern Territory was established. Where a vertically integrated firm operates across multiple parts of the supply chain, including some that have natural monopoly characteristics and others that are potentially competitive, it is relatively common for the natural monopoly (or “bottleneck”) components of the supply chain to be subject to access regulation. The key rationale for regulation in these cases is that it allows for competition in markets downstream and/or upstream of the bottleneck. For example, in the telecommunications industry, access to certain “bottleneck” infrastructure (such as the fixed customer access network) is subject to access regulation. One of the main rationales for applying access regulation to this component of the supply chain is that it promotes competition in other parts of the supply chain. This is discussed in more detail in Ch 3.

SUMMARY [2.220]

Underpinning the practice of access regulation are a number of basic economic concepts. Access regulation is typically concerned with the pursuit of economic objectives, and relies on economic tools and concepts in its implementation. Practitioners will often refer to different concepts of cost, and different concepts of efficiency, in the context of implementing access regulation. This chapter has provided an introduction to these concepts. This chapter has also provided an introduction to the economics of different market structures, including competitive and monopoly market structures. It is this economic theory which underpins much of the rationale for access regulation, which is discussed in the next chapter.

Questions for discussion 1. 2. 3. 4.

Explain the differences between short-run and long-run costs. What is meant by workable competition? Describe the three categories of barriers to entry. What does it mean if a business is vertically integrated? Is vertical integration always a problem?

3

Why Regulate Access? [3.10] OVERVIEW .......................................................................................................................................... 27 [3.20] THE PROBLEM: PREVENTING THE EXERCISE OF MARKET POWER ............................... 28 [3.30] When does a firm have market power? ......................................................................................... 28 [3.40] How can market power be exercised? ............................................................................................ 29 [3.50] ALTERNATIVES TO ACCESS REGULATION .............................................................................. 30 [3.100] ACCESS REGULATION IN AUSTRALIA .................................................................................... 35 [3.100] Origins of access regulation ............................................................................................................ 35 [3.110] What access regimes have emerged in Australia? ...................................................................... 37 [3.120] THE OBJECTIVES OF ACCESS REGIMES IN AUSTRALIA .................................................... 39 [3.130] What are the objectives? .................................................................................................................. 39 [3.170] Views on the objectives of access regimes .................................................................................... 42 [3.180] A final word on objectives ............................................................................................................... 44 [3.190] WHEN SHOULD ACCESS REGULATION NOT BE APPLIED? ............................................. 45 [3.200] SUMMARY ......................................................................................................................................... 47

OVERVIEW [3.10] This chapter provides an explanation of the economic concepts and policy principles that underpin access regulation in Australia. In particular, it examines the “problem” that access regulation seeks to address: the potential for owners of certain infrastructure to exercise market power in a way that prevents effective competition in related markets (such as preventing access, charging monopoly prices for services or imposing unreasonable terms and conditions on a service). Put another way, access regulation is designed to address market failure in the supply of certain infrastructure services. This chapter also examines alternatives to access regulation, including s 46 of the Competition and Consumer Act 2010 (Cth) (“CCA”), price monitoring, vertical separation and government ownership. The regulatory measures that have emerged in Australia across different industry sectors, as well as the policy rationales and objectives that underpin those measures, are outlined. In particular, this chapter provides an overview of the regulatory measures in place in the electricity, gas, telecommunications, port and rail sectors (further detail on the regulatory measures in place are set out in Pt IV of this book). Finally, it analyses the circumstances when it may not be appropriate to apply access regulation, such as when the costs exceed the benefits.

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THE PROBLEM: PREVENTING THE EXERCISE OF MARKET POWER [3.20] Economists suggest that access regulation should only be applied in situations where a firm can exercise market power in the supply of infrastructure services in a way that is detrimental to competition in an upstream or downstream market.1 This is considered to be a “market failure” that could suitably be addressed by access regulation. In its review of the National Access Regime, the Productivity Commission stated: A “market failure” occurs when there is an enduring lack of effective competition due to natural monopoly, in markets for infrastructure services. Large, usually sunk, fixed costs and economies of scale typically associated with natural monopoly can serve as impediments to prospective competitors entering infrastructure service markets. Policy tools other than access regulation are more suited to addressing sources of market power other than natural monopoly. (emphasis in original)2

However, even where an infrastructure service provider has the ability and incentive to exercise market power, access regulation should not be imposed unless the benefits of increased competition that may be achieved with access outweigh the costs of regulated third party access.

When does a firm have market power? [3.30] In broad terms, a firm will have “market power” where it operates free from competitive constraints and therefore has an ability and incentive to charge monopoly prices (charge more) and/or refuse access to an essential service or reduce volume (give less).3 Given that the courts in Australia have adopted a purposive approach to market definition (that is, the market is defined in the context of the alleged conduct being examined), there is a close relationship between market definition and the degree of market power that a firm has in a market.4 The factors that are generally considered relevant to an assessment of whether a firm has market power include: • the ability to raise prices above the cost of supply without competitors taking away customers;5 1 William J Baumol and Alan S Blinder, Economics: Principles and Policy (South Western Cengage Learning, 11th ed, 2009), 92. 2 Productivity Commission, National Access Regime, Inquiry Report 66, 2013, Canberra, 6–7. 3 See, for example, Re Queensland Cooperative Milling Association Limited and Defiance Holdings Limited (1976) ATPR 40-012, 17247; and Queensland Wire Industries v The Broken Hill Proprietary Company (1989) 167 CLR 177, 188. 4 See, for example, Queensland Wire Industries v The Broken Hill Proprietary Company (1989) 167 CLR 177, 187–188; Australian Competition and Comsumer Commission v Australian Safeway Stores Pty Ltd (2003) 129 FCR 339, 396. 5 Queensland Wire Industries v The Broken Hill Proprietary Company (1989) 167 CLR 177, 188.

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• market share;6 • the extent of barriers to entry;7 and • whether the firm is otherwise able to behave independently of competition and competitive forces.8 In an infrastructure context, it may be that the above factors will all be present, particularly where a service provider is the sole supplier of an essential service in a particular area or region. However, although a service provider may have market power, it may be prevented or limited from exercising that power. Factors typically considered relevant to assessing whether a firm is prevented or limited from exercising market power include: • the countervailing power of customers – customers of the service provider may have certain characteristics that enable them to credibly threaten to bypass the service provider, such as by vertically integrating into the upstream market or sponsoring new entry. In the event bypass was to occur, the service provider could be left with an expensive asset in respect of which it is no longer earning a return, or is earning a reduced return (see also below in relation to asset stranding risk); • the availability of substitute services – where customers are able to use alternative services to those provided by a particular firm, that firm will face some constraints in the price and non-price aspects of the services it offers to customers in order to ensure it attracts and retains customers. The degree of constraint will depend on how substitutable the services are; and • asset stranding risk – because of the significant sunk costs typically associated with infrastructure and the long lives of these assets, a service provider may have an incentive to attract access seekers to use the asset’s services in order to recover its costs as early as possible in the life of the asset. This will assist in avoiding a situation where, because of either changes in the market structure or changes in technology, the asset becomes stranded prior to the end of its economic life and no longer earns an economic return.

How can market power be exercised? [3.40] A service provider can exercise market power by: • preventing access; and/or • hindering access by restricting throughput or charging monopoly prices; and/or • reducing service quality. 6 Dowling v Dalgety Australia Limited (1992) 34 FCR 109, 142. 7 Dowling v Dalgety Australia Limited (1992) 34 FCR 109, 138 and 141. 8 See Queensland Wire Industries v The Broken Hill Proprietary Company (1989) 167 CLR 177, 200; Eastern Express Pty Ltd v General Newspapers Pty Ltd (1992) 32 FCR 43, 62 and 65.

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A service provider that is able to exercise market power in these ways can reduce economic efficiency and impede the achievement of outcomes that are consistent with workable competition in upstream and/or downstream markets.

ALTERNATIVES TO ACCESS REGULATION [3.50] Like all regulation, access regulation should only be applied in settings where there is no competing instrument or mechanism that would provide a more efficient or effective way to address the “market failure” (including the option of doing nothing (see [3.60])) and achieve the overarching policy rationale. Recognised principles of good regulation include that it is well targeted, proportionate to the issue the regulation addresses and is superior to alternatives.9 Therefore, before access regulation is applied, policy makers should be satisfied that access regulation is superior to other policy instruments and best meets the relevant policy objectives. Alternatives to access regulation include: • doing nothing and relying on competition laws to address any misuse of market power (see [3.60]); • bringing the infrastructure (back) under government ownership (currently occurring in the telecommunications sector in Australia with the rollout of the Australian Government-owned National Broadband Network) (see [3.70]); • price monitoring (see [3.80]); or • vertically separating an integrated firm into two or more firms (although this option is sometimes used in conjunction with access regulation, such as in the electricity, gas and telecommunications sectors) (see [3.90]). The alternatives set out above are generally considered to be imperfect substitutes for regulation because, in many cases, they will not fully address the relevant economic problem (that is, the potential for exercise of market power). However, they are sometimes used as alternatives to access regulation. There are a number of other possible instruments that are not considered in this section, since they are not relevant to access to infrastructure that has natural monopoly characteristics. These include some forms of competitive tendering for the right to operate assets for a certain period, with government retaining ownership over the assets. This type of instrument tends to be used in transport and urban water. The key alternative instruments to access regulation and the advantages and disadvantages of each are discussed at [3.60]–[3.90]. 9 See, for example, Regulation Taskforce, Rethinking Regulation: Report of the Taskforce on Reducing Regulatory Burdens on Business, Report to the Prime Minister and the Treasurer, Canberra, January 2006, Box 2.3.

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Do nothing / s 46 of the CCA

[3.60] One option for policymakers considering access regulation is to do nothing on the basis that private negotiations over access will occur and rely on s 46 of the CCA to deal with any misuse of market power by the asset owner (see Box 3.1 for a discussion of the use of s 46 in an access case). Section 46(1) of the CCA relevantly provides: A corporation that has a substantial degree of power in a market shall not take advantage of that power in that or any other market for the purpose of: (a) eliminating or substantially damaging a competitor of the corporation or of a body corporate that is related to the corporation in that or any other market; (b) preventing the entry of a person into that or any other market; or (c) deterring or preventing a person from engaging in competitive conduct in that or any other market.

Box 3.1: Section 46 — A substitute for access regulation? In Queensland Wire Industries v The Broken Hill Proprietary Company10 the High Court considered whether s 46 of the CCA could allow for access to essential facilities. Queensland Wire Industries (“QWI”) claimed that the respondents, BHP and AWI, had misused their market power in violation of s 46 by refusing to supply it with a steel product known as Y-bar (a product required to make star picket posts used in fencing). The refusal meant that QWI could not make the star picket post and could not compete effectively with BHP and AWI in the relevant market. In support of its case, QWI claimed that Y-bar could be likened to an essential facility, and relied on United States authorities providing that while a monopolist as a general rule can refuse to deal with other competitors, if the monopolist controls an essential facility, then the monopolist is under a duty to give access to competitors. The Full Federal Court rejected these submissions (affirmed by the High Court), citing, among other reasons, that: • the submissions were “not readily accommodated to the terms of s 46 itself”; • Y-bar is not an “essential service” when considered against transport, power or telecommunications services; and • it may be a “legitimate business purpose” to refuse to deal with QWI as BHP, a vertically integrated monopolist, was committed to its own manufacturing operations.11

10 (1989) 167 CLR 177 (“Queensland Wire”). 11 Queensland Wire Industries Pty Ltd v The Broken Hill Proprietary Company Limited (1987) 17 FCR 211, 221–222.

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Some 15 years later, the High Court revisited these issues in its consideration of NT Power Generation Pty Ltd v Power and Water Authority.12 The Power and Water Authority (“PAWA”) was a vertically integrated electricity service provider that owned electricity generation, transmission, distribution and retail assets. NT Power Generation Pty Ltd (“NT Power”), an electricity generation business, requested access to PAWA’s transmission and distribution infrastructure to enable it to supply electricity to customers at the retail level in the NT in competition with PAWA. PAWA refused access. The High Court found that PAWA’s refusal constituted a misuse of market power in breach of s 46. In particular, the Court found that, by refusing access, PAWA was “simply … protect[ing] its revenue position”.13 In reaching this conclusion, the High Court endorsed s 46 as a substitute for the general Pt IIIA access regime and noted that, in terms of timing, s 46 had some benefits over Pt IIIA. As discussed in greater detail at [3.100], the Independent Committee of Inquiry into Competition Policy in Australia (“Hilmer Committee”) considered in its Report14 that s 46 of the CCA (previously the Trade Practices Act 1974) was inadequate to deal with the potential for misuse of market power by a firm that owned infrastructure that exhibited natural monopoly characteristics. The main drawback that the Hilmer Committee cited was the high evidentiary thresholds associated with proving a breach of s 46 – most notably, users and prospective users would need to show the infrastructure owner had a “proscribed purpose”15 for refusing access. The Committee also considered that the courts would be ill equipped to determine access prices and other access terms and that an access process through the courts would be both lengthy and costly. The Hilmer Committee also considered that court processes pursuant to s 46 would not be able to be readily applied to other prospective users that were not party to the court proceedings. 12 (2004) 219 CLR 90. 13 NT Power Generation Pty Ltd v Power and Water Authority (2004) 219 CLR 90, 119, 140. 14 Frederick Hilmer (Chair), Mark Rayner, and Geoff Taperell, National Competition Policy – Report by the Independent Committee of Inquiry (25 August 1993, Australian Government Publishing Service, Canberra). 15 There are three proscribed purposes under s 46 of the CCA: the purpose of eliminating or substantially damaging a competitor; the purpose of preventing entry into a market (which can be the market in which the corporation has market power in or any other market); and the purpose of deterring or preventing a person from engaging in competitive conduct in a market (which can be the market in which the corporation has market power in or any other market): see s 46(1).

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The views of the Hilmer Committee can be contrasted with the views of the High Court in NT Power Generation Pty Ltd v Power and Water Authority16 (see Box 3.1). Government ownership

[3.70] Another option to solve the problem of a monopolist charging more and/or giving less is for government to build or acquire the relevant assets and operate them itself. Historically, governments in Australia and overseas have owned public utilities such as electricity networks and gas pipelines, and operated the relevant assets in a vertically integrated manner. However, following the Hilmer Report and the associated National Competition Policy reforms, the trend has been to privatise public utilities, apply access regulation to the “natural monopoly” elements (transmission and distribution) and encourage competition in the competitive elements (retail). A notable exception to this trend is the rollout of the National Broadband Network, which is being undertaken by the wholly Australian Government-owned National Broadband Network Company (“NBN Co”) (although it is intended that this company be privatised at some point in the future). While government ownership can allow the assets to be operated efficiently in a vertically integrated manner, such efficient operation may not occur in practice. As managers of government-owned entities have less accountability to “shareholders” and therefore less of an incentive to profit maximise compared with privately owned entities, they may be less motivated to incur only efficient costs and innovate. A government-owned entity could also be subject to political interference, which may mean the entity is required to pursue other objectives, including social objectives. Further, government ownership will not necessarily address the potential for exercise of market power. Subject to any government directives, a government-owned service provider may face a similar incentive and ability to exercise market power as that faced by privately owned service providers. As a result, access regulation is often applied to governmentowned utilities; government ownership is not always seen as a substitute for access regulation. Examples of government-owned utilities subject to access regulation include NBN Co and electricity network service providers in some states. Moreover, recent experience indicates that privatisation of public utilities has brought substantial benefits, in terms of promoting efficient service delivery. In the Harper Review – the recently completed “root and branch” review of competition law and competition policy – the Panel concluded that privatisation of government-owned public utilities (and then subjecting 16 (2004) 219 CLR 90.

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the private owner to access regulation) has brought “considerable public benefit”.17 The Panel examined evidence which demonstrated that prices are lower in jurisdictions where network assets have been privatised compared to those where they have not been privatised.18 In addition, the Panel found that privatisation has allowed for the more efficient management of assets, and investments in network assets have been more responsive to changes in market demand.19 Price monitoring

[3.80] Price monitoring is a “lighter-handed” option that does not directly require the firm to change its behaviour. Price monitoring generally involves a regulator reviewing price and cost data on a regular basis and considering whether prices are excessive. By requiring prices oversight, firms may feel somewhat constrained and therefore may choose not to charge monopoly prices. However, monitoring in and of itself does not prevent firms from using their monopoly position to increase prices, restrict access or lower service standards. This is the main disadvantage of price monitoring. In circumstances where it is clear that firms are completely unconstrained from engaging in this type of market power, more intrusive regulation may be warranted. In Australia, a small number of firms are subject to prices surveillance under the provisions in the CCA (and previously under the now-repealed Prices Surveillance Act 1983 (Cth)). For instance, the pricing of aeronautical and car-parking services at Sydney airport are monitored by the Australian Competition and Consumer Commission (“ACCC”). However, recent comments made by the ACCC Chairman, Rod Sims, indicate that the ACCC considers price monitoring to be ineffective in constraining prices charged by infrastructure owners: “Price monitoring for monopolies is ill-conceived in theory and not working in practice.”20 Vertical separation

[3.90] Policy makers usually consider three types of vertical separation: 1. full structural separation, involving the separation of ownership of the natural monopoly component of the business from the competitive components of the business; or 17 Ian Harper, Peter Anderson, Su McCluskey and Michael O’Bryan, Competition Policy Review, Final Report, March 2015, 193 (“Harper Review”). 18 See references to New South Wales Government, Electricity Prices and Services: Fact Sheet 11, 2014, NSW Government ; Harper Review, 193, citing Australian Energy Regulator, Electricity Distribution Network Service Providers: Annual Benchmarking Report (Melbourne, 2014) 6. 19 Harper Review, 193. 20 Rod Sims, How Did the Light Handed Regulation of Monopolies Become No Regulation?, Speech to Gilbert + Tobin Regulated Infrastructure Policy Workshop, Melbourne, 29 October 2015, .

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2. functional separation of these components of the business, involving the separation of staff and operational decisions; or 3. accounting separation of these components of the business. Structural separation (and functional separation to a lesser extent) aims to level the playing field for users and prospective users by removing the service provider’s incentive to discriminate between its affiliate in the competitive market and other competitors in this market. However, as the Hilmer Committee noted, vertical separation does not, in and of itself, solve all the problems associated with a potential misuse of market power in these circumstances. Unless price controls or some other measure are applied at the same time, the wholesaler or upstream firm can continue to set prices in a way that maintains monopoly rents. Implementing structural and/or functional separation can be challenging. For instance, it may be difficult to precisely separate the assets (including employees) that are used by both the infrastructure and competitive divisions of a firm. Separation also has a number of potential drawbacks. First, separation can result in greater contracting and coordination costs. Second, it may lead to inefficiencies as it can be more costly for the infrastructure owner to monitor usage and plan capacity increases to meet future demand compared with a vertically integrated infrastructure owner. While accounting separation is less challenging to implement than structural and functional separation, it only enables detection of price discrimination.21 Therefore, unless accounting separation is coupled with other regulatory measures (for example, obligations to supply on a non-discriminatory basis), accounting separation may be unlikely to impact upon the incentives of the service provider to provide access. Even with an obligation to supply on a non-discriminatory basis, other forms of discrimination – such as delaying aspects of a service, placing limits on services or providing different service quality – may remain unchecked.

ACCESS REGULATION IN AUSTRALIA Origins of access regulation [3.100]

The origins of a national approach to access regulation in Australia can be traced back to the Hilmer Committee. The Hilmer Committee was established in the early 1990s at a time when Australian governments had commenced the process of privatising previously government-owned infrastructure facilities. After an extensive consultation process, the Hilmer Committee published its report in August 1993. The Hilmer Report made a number of

21 Accounting separation addresses price discrimination indirectly by requiring the infrastructure owner to publish its accounts.

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recommendations designed to encourage competition in markets that were not workably competitive. A key recommendation of the report was that Australian governments should establish an access regime that would facilitate third party access to “essential facilities”.22 The Hilmer Committee found that some facilities “occupy strategic positions”23 in certain industries and these facilities can exhibit “natural monopoly” characteristics, in the sense that the facilities “cannot be Electricity transmission grids, duplicated economically”.24 telecommunications networks, rail tracks, major pipelines, ports and airports were identified as examples of facilities that came within this description.25 The Hilmer Committee defined these facilities as “essential”26 because access to these services is required for a business to compete in upstream or downstream markets.27 In line with economic theory, the Hilmer Committee considered that the role of access regulation was to prevent owners of essential facilities from exercising market power. In circumstances where owners of essential facilities are vertically integrated and compete in markets upstream or downstream of the market in which access is sought, the Hilmer Committee found that the ability and incentive to exercise market power was even more pronounced. This is because vertically integrated owners have an incentive to deny access altogether, or to provide access on unfavourable terms and conditions. As the Hilmer Committee noted: [T]he potential [for owners of essential facilities] to charge monopoly prices may be combined with an incentive to inhibit competitors’ access to the facility. For example, a business that owned an electricity transmission grid and was also participating in the electricity generation market could restrict access to the grid to prevent or limit competition in the generation market. Even the prospect of such behaviour may be sufficient to deter entry to, or limit vigorous competition in, markets that are dependent on access to an essential facility.28

Access regulation was therefore seen by the Hilmer Committee as an effective and efficient means to address market power. The Hilmer Report also noted that s 46 of the CCA (which prohibits misuse of market power) was inadequate and could not effectively deal with these issues (see [3.60]). 22 Hilmer Report, 248-249. 23 Hilmer Report, 240. 24 Hilmer Report, 248–249. 25 Hilmer Report, 240. The Hilmer Committee distinguished these particular stages of the various production processes from the other stages, which did not fit within the definition of an “essential facility”. Electricity generation is an example of a stage in a production process that does not have natural monopoly characteristics. 26 An essential facility was defined as “a monopoly” which permitted “the owner to reduce output and/or service and charge monopoly prices, to the detriment of users and the economy as a whole”: Hilmer Report, 239. 27 Hilmer Report, 240. 28 Hilmer Report, 241.

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37

The Hilmer Committee recommended the introduction of a third party access regime to apply to essential facilities in circumstances where the owners are vertically integrated in upstream or downstream markets.29 Where an owner is not vertically integrated, the Committee considered that either access regulation or a prices oversight mechanism may be appropriate and the choice between these will vary on a case-by-case basis.30 While the Hilmer Committee considered the primary response in this context would be to introduce a third party access regime, it noted that where this was “not practical or sufficient, some form of price-based response may be appropriate.”31 That is, the Hilmer Committee recommended that, in some circumstances, a third party access regime should be coupled with some form of price regulation. The Hilmer Committee’s recommendation to introduce a third party access regime was one of many recommendations that were given effect by a set of agreements made by the Council of Australian Governments (“COAG”) in 1995. These agreements formed the National Competition Policy (“NCP”) package. One agreement in the package, the Competition Principles Agreement (“CPA”), provided for the Commonwealth to put forward legislation to “establish a regime for third party access to services provided by means of significant infrastructure facilities”.32 In line with the CPA, the Australian Government inserted Pt IIIA (“Access to Services”) into the then Trade Practices Act 1974 (Cth) (“TPA”) (now the CCA) through the passing of the Competition Policy Reform Act 1995 (Cth).

What access regimes have emerged in Australia? [3.110]

A range of access regimes and associated regulatory mechanisms have emerged in Australia over the past 25 to 30 years – from the general access regime enshrined in Pt IIIA of the CCA and the specific access regime for telecommunications in Pt XIC of the CCA to the national access regimes in place for electricity and gas. Table 3.1 shows the access regimes and other regulatory mechanisms that are currently in operation in Australia by sector.

29 Hilmer Report, 241. 30 In particular, the Hilmer Committee noted that “whether the issues arising in relation to a particular facility would be best addressed under the access regime or prices oversight process would be considered on a case-by-case basis”. Hilmer Report, footnote 3, 241. 31 Hilmer Report, 187. 32 Competition Principles Agreement, COAG, 11 April 1995.

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Table 3.1 Access regimes currently in place in Australia Sector General

Electricity

Gas

Telecommunications

Rail

Regulatory mechanism The National Access Regime under Pt IIIA of the CCA. Under Pt IIIA, there are four “pathways” to access: 1. declaration (application by a party to the National Competition Council/Minister to declare a service); 2. certification (existing access regimes can be certified); 3. the provision of an access undertaking by the service provider; and 4. access to a service under terms established through a competitive tender process approved by the ACCC. The national access regime for services provided by electricity transmission and distribution networks in the National Electricity Market (“NEM”) under the National Electricity Law (“NEL”). The NEL is in the Schedule to the National Electricity (South Australia) Act 1996 (SA). In Western Australia, there is a state-based access regime. The national access regime for services provided by gas transmission and distribution networks in the National Gas Law (“NGL”). The NGL is set out in the Schedule to the National Gas (South Australia) Act 2008 (SA). This regime provides for varying degrees of regulatory intervention depending on the market power of the pipeline. The core transmission and distribution networks are subject to revenue regulation. A number of gas pipelines are subject to “light regulation” provisions in the NGL – which is a more limited form of access regulation. Other gas pipelines are not subject to economic regulation. The national access regime under Pt XIC of the CCA. Part XIC primarily regulates services that are provided by Telstra’s existing fixed line (copper) network and NBN Co’s network. The prices of these services are set upfront in an access determination or, in the case of NBN Co, in a special access undertaking given by NBN Co and approved by the ACCC. Other services that have been declared by the ACCC and are subject to price regulation include the mobile terminating access service. A number of state-based regimes are in place in relation to rail. For example, in Queensland, access to the below-rail networks of Queensland Rail and Aurizon is provided for under the respective access undertakings in place (which were approved by, and are administered by, the Queensland Competition Authority). In Western Australia, there is a state-based access regime in place (which has been certified as effective by the NCC/Minister). However, rail networks owned by BHP Billiton, Rio Tinto and some networks owned by the government/Australian Rail Track Corporation (“ARTC”) are not subject to the regime. Some rail infrastructure is regulated under the National Access Regime, rather than these state-based regimes. In particular, the ARTC’s interstate and Hunter Valley rail networks are subject to access undertakings accepted by the ACCC under Pt IIIA of the CCA.

3 Why Regulate Access? Sector Ports

39

Regulatory mechanism Ports are subject to state-based regulatory regimes, which vary in the degree to which they provide for price oversight. The most common form of regulation for ports is price monitoring, which applies to ports in New South Wales, Victoria and South Australia. There is only one port in Australia that is subject to deterministic price regulation (Dalrymple Bay Coal Terminal in Queensland). In some states – notably Western Australia and Tasmania – there is no independent price monitoring or regulation of port access charges.

THE OBJECTIVES OF ACCESS REGIMES IN AUSTRALIA [3.120]

The economic theory and the policy rationale discussed at [3.20]–[3.40] and [3.100] are reflected in the objectives of the various access regimes in Australia. These are set out at [3.130]–[3.160], which also consider whether the differences in the objectives of the access regimes indicates that there are substantive differences in regulatory decisions made under these regimes.

What are the objectives? The general access regime in Pt IIIA

[3.130]

In line with the findings of the Hilmer Committee, the Second Reading Speech that inserted Pt IIIA into the TPA (now the CCA) made clear that the core rationale of the access regime was to encourage competition: “The notion underlying the regime is that access to certain facilities with natural monopoly characteristics, such as electricity grids or gas pipelines, is needed to encourage competition in related markets, such as electricity generation or gas production.”33

The supplementary materials (and the legislation) do not make any reference to the distinction that was made by the Hilmer Committee between vertically integrated owners and non-vertically integrated owners. In this respect, however, the Productivity Commission has stated that the practical effect of monopoly pricing by a non-vertically integrated owner may be similar to an absolute denial of access by a vertically integrated owner.34 In 2006, an objects clause was inserted into Pt IIIA. The objects clause was inserted following the Productivity Commission’s review of the National Access Regime in 2001.35 The Productivity Commission considered it appropriate that the objects clause make clear that competition is promoted 33 Commonwealth, Parliamentary Debates, Senate, 29 March 1995, 2434 (Rosemary Crowley). 34 Productivity Commission, Review of the National Access Regime, Inquiry Report No 17 (Melbourne, 2001) 52–53. 35 Productivity Commission, Review of the National Access Regime, Inquiry Report No 17 (Melbourne, 2001) xxii.

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through the promotion of economic efficiency (see [2.90]) and that the regime provide appropriate incentives for investment.36 Section 44A of the CCA relevantly provides: The objects of this Part are to: (a) promote the economically efficient operation of, use of and investment in the infrastructure by which services are provided, thereby promoting effective competition in upstream and downstream markets; and (b) provide a framework and guiding principles to encourage a consistent approach to access regulation in each industry.

The Pt IIIA access regime is discussed in detail in Ch 7. National Electricity Law

[3.140]

Services provided by electricity transmission and distribution networks in Australia that form part of the NEM are regulated under the NEL (Schedule to the National Electricity (South Australia) Act 1996 (SA)). Other states and territories that form part of the NEM have introduced Application Acts, which provide that the National Electricity Law as set out in the Schedule to the National Electricity (South Australia) Act 1996 (SA) applies as law in the relevant jurisdiction. Pursuant to the NEL, services that are provided by the primary electricity transmission and distribution networks in the NEM are subject to price and/or revenue regulation. Networks (primarily smaller private networks serving a particular locality, for example, a mine or business park) may be exempt from these regulatory requirements. The objective of the NEL, the national electricity objective, is set out in s 7, which states that: The objective of this Law is to promote efficient investment in, and efficient operation and use of, electricity services for the long term interests of consumers of electricity with respect to – (a) price, quality, safety, reliability and security of supply of electricity; and (b) the reliability, safety and security of the national electricity system.

The revenue and pricing principles in s 7A of the NEL provide further guidance for decision-makers in making determinations. These principles include that service providers should be provided with: • a reasonable opportunity to recover at least the efficient costs incurred in the provision of services; and • effective incentives to promote efficient investment in the network and the efficient operation and use of the network. The NEL access regime is discussed in detail in Ch 8. 36 Productivity Commission, Review of the National Access Regime, Inquiry Report No 17 (Melbourne, 2001) xxii–xxiii.

3 Why Regulate Access?

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National Gas Law

[3.150]

Similarly to the NEL (see [3.140]), the regulatory framework applying to services provided by gas networks follows a lead-legislator model, with the NGL set out in the Schedule to the National Gas (South Australia) Act 2008 (SA). The objective of the NGL, the national gas objective is set out in s 23, which relevantly provides: “The objective of this Law is to promote efficient investment in, and efficient operation and use of, natural gas services for the long term interests of consumers of natural gas with respect to price, quality, safety, reliability and security of supply of natural gas.” The NGL also contains revenue and pricing principles in s 24 that guide decision-makers when making decisions. These principles mirror the revenue and pricing principles set out in the NEL. The NGL access regime is discussed in detail in Ch 9.

Part XIC telecommunications access regime

[3.160]

Access to telecommunications is primarily governed by Pt XIC of the CCA, which contains a telecommunications-specific access regime.37 Part XIC mirrors the provisions of Pt IIIA to some extent, but at the time the access regime was inserted into the then Trade Practices Act 1974 (Cth), it was considered that the special nature and complexity of telecommunications warranted a separate access regime. The Second Reading Speech38 and Explanatory Memorandum39 explain that Pt IIIA would not achieve its objectives in regulating telecommunications because: • it was a complex, horizontally and vertically integrated industry; • technology was considered to be moving far more rapidly and in uncertain directions compared with most other areas of infrastructure; • there was considered to be scope for incumbent operators generally to engage in anti-competitive conduct, such as anti-competitive crosssubsidies, because competitors in downstream markets depend on access to the carriage services controlled by them; and • as competitors had to use each other’s networks, it was important to facilitate any-to-any connectivity. The Second Reading Speech summarises the role of Pt XIC in the market as a foundation for access that can be supplemented with additional commercially negotiated arrangements:40 37 There is a facilities access regime in Sch 1, Pt 1 to the Telecommunications Act 1997, which enables carriers to access other carriers’ infrastructure. 38 Commonwealth, Parliamentary Debates, Senate, 25 February 1997, 935 (Ian Campbell). 39 Explanatory Memorandum to the Trade Practices Amendment (Telecommunications) Bill 1996 (Cth) 6. 40 Commonwealth, Parliamentary Debates, Senate, 25 February 1997, 935 (Ian Campbell).

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The telecommunications access regime in Part XIC provides foundation access rights to all industry operators and establishes a framework within which the industry can develop additional arrangements to improve the efficiency with which access is supplied. The access regime provides for regulated access rights to be established for specific carriage services and related services, and provides a framework within which the terms and conditions of access can be determined. It will reduce the power of those owning or controlling important infrastructure or services which are necessary for competitive services to be supplied to end users. In doing so, judgments by new and existing operators about whether to build their own networks or buy capacity on existing networks will be driven by normal commercial factors. Decisions to build will only be taken when commercial considerations clearly favour this strategy. The regime will therefore promote the efficient use of, and investment in, infrastructure.

Part XIC has an objects clause in s 152AB. Section 152AB relevantly provides that the object of the access regime “is to promote the long-term interests of end users of carriage services or of services provided by means of carriage services” (“LTIE”). Section 152AB(2) unpacks the LTIE objective into three objectives: 1. promoting competition in markets for listed services; 2. achieving any-to-any connectivity in relation to carriage services that involve communication between end-users; 3. encouraging the economically efficient use of, and the economically efficient investment in, the infrastructure by which listed services are supplied and any other infrastructure by which listed services are, or are likely to become, capable of being supplied. While the objects clause has remained unchanged over time, the provisions in Pt XIC have changed significantly since their introduction. Chapter 10 explores the changes to the telecommunications access regime in further detail.

Views on the objectives of access regimes Long-term interests of consumers: A separate goal or interrelated with economic efficiency?

[3.170]

The objectives of Pt XIC, the NEL and the NGL set out that the overarching goal is to promote efficient investment in, and efficient operation and use of, services in the long-term interests of consumers/endusers. Part IIIA does not make explicit reference to the long-term interests of consumers or end-users in its objects clause.41 There is some debate as to whether the interests of consumers are achieved through the promotion of 41 Although the Pt IIIA objective does not refer to the long-term interests of consumers or end-users, there is explicit reference to the welfare of Australians generally in the overarching objective of the CCA. Section 2 of the CCA provides that the object of the CCA is to “enhance the welfare of Australians through the promotion of competition and fair trading and provision for consumer protection”.

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43

efficiency (that is, so long as efficiency is promoted, this is consistent with the interests of consumers), or whether the promotion of efficiency and the interests of consumers are separate issues and must be considered separately (that is, that the mere promotion of efficiency will not necessarily be consistent with the interests of consumers). The ACCC has stated that it considers there to be significant overlap between the pursuit of economic efficiency and the promotion of the long-term interests of consumers, and therefore the lack of a reference to the long-term interests of consumers in the Pt IIIA objects clause is not an issue.42 However, other commentators have suggested that where consumers are explicitly referred to in an objects clause together with efficiency objectives, this has significant implications for how the task of economic regulation should be approached in that particular legislative framework. For example, in commenting on the objects clause in the electricity and gas frameworks, the Expert Panel appointed by the Standing Council on Energy and Resources to review the Limited Merits Review Regime was of the view that “it is not the case that higher efficiency necessarily promotes the long-term interests of consumers”.43 The Expert Panel illustrated this point with a textbook example of a monopolist engaging in perfect price discrimination with one that does not price discriminate. The Expert Panel stated that the former is operating efficiently, but the latter is operating in a way that is more in the interests of consumers. Other commentators have suggested that the application of the “long-term interest of consumers” test is problematic in an access context. For instance, Paul Kerin, the CEO of the Essential Services Commission of South Australia (“ESCOSA”), is of the view that an overarching goal of the long-term interests of consumers is difficult to achieve because it encompasses both economic and equity considerations. Kerin argues that the regulator’s role should be purely focused on economic considerations to maximise the “size of the pie” and if that involves an outcome that is not equitable, governments should step in to redistribute the resources.44 The High Court’s view appears to be that the promotion of efficiency and consumer welfare are not dissimilar. In East Australian Pipeline Pty Ltd v Australian Competition and Consumer Commission, the High Court noted in relation to the objectives of the previous gas access regime: The framework for third party access to natural gas pipelines … directs attention to the multiple objectives of an approved access regime. Stripped to essentials, 42 ACCC, Submission to the Productivity Commission Inquiry into the National Access Regime – ACCC Submission on Issues Paper, February 2013, 13. 43 George Yarrow, The Hon Michael Egan and Dr John Tamblyn, Stage Two Report – Review of the Limited Merits Review Regime, 30 September 2012, 26. 44 Paul Kerin, “In Whose Interest?”, Network – A publication by the ACCC for the Utility Regulators Forum, Issue 43, March 2012, 1–7.

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such a regime is at least intended to allow efficient costs recovery to a service provider and at the same time ensure pricing arrangements for the consuming public which reflect the benefits of competition, despite the provision of such services by monopolies. The balancing of those objectives properly has a natural flow-on effect for future investment in infrastructure in Australia.45

The view that there is no conflict between the long-term interest of consumers and economic efficiency components of the national electricity and gas objectives was confirmed recently by the Australian Competition Tribunal: The ultimate objective reflected in the NEO and NGO is to direct the manner in which the national electricity market and the national gas market are regulated, that is, in the long term interests of consumers of electricity and natural gas respectively with respect to the matters specified. The provisions proceed on the legislative premise that their long term interests are served though the promotion of efficient investment in, and efficient operation and use of, electricity and natural gas services. This promotion is to be done “for” the long term interests of consumers. It does not involve a balance as between efficient investment, operation and use on the one hand and the long term interest of consumers on the other. Rather, the necessary legislative premise is that the long term interests of consumers will be served by regulation that advances economic efficiency.46

A final word on objectives [3.180]

While each access regime tends to have a slightly different objective, the core objective at the heart of all Australian access regimes is an economic one: to promote the efficient operation and use of, and investment in, the relevant facilities (or “bottlenecks”) and, in so doing, to promote effective competition in upstream and/or downstream markets. Put another way, the overarching objective is to mimic the price and service outcomes that would be expected in a workably competitive market. In Re Michael; Ex Parte Epic Energy (WA) Parker J made this clear in relation to the national gas access regime: This subject matter and the intergovernmental and legislative history of the Act and Code, which commenced with the Hilmer Report, provides a compelling reason to regard the Act and Code as deriving from, and being directed towards, national economic reform, especially in the field of competition policy and its application to infrastructure regulation. This persuasively indicates, in my view, that the concepts and objectives of the legislation have their basis in the particular field of the discipline of economists to which I have referred. The purpose of the legislation is to guide and regulate the affairs of a quite narrow

45 East Australian Pipeline Pty Ltd v Australian Competition and Consumer Commission (2007) 233 CLR 229, 243. 46 Applications by Public Interest Advocacy Centre Ltd and Ausgrid [2016] ACompT 1, [77].

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45

and specialised section of the community versed in economic theories of infrastructure regulation and practical application of those theories …47

Essentially, access regulation is designed to address an enduring lack of effective competition as a consequence of natural monopoly in markets for infrastructure services where access is required for third parties to compete effectively in an upstream or downstream market. For example, in Application by Telstra Corporation Limited, the Australian Competition Tribunal surmised that the Pt XIC access regime seeks to “provide an equality of opportunity for all downstream rivals to compete on the same terms as the vertically integrated infrastructure owner in relation to the costs of supply and access to the infrastructure needed to supply telephony and broadband services”.48

WHEN SHOULD ACCESS REGULATION NOT BE APPLIED? [3.190]

Access regulation, like all other forms of regulation, should only be applied where there is a net benefit and when it is the superior option given any alternatives. Given that there are a number of access regimes already in place (see Table 3.1) across the relevant sectors in Australia, the question that should be considered is: what are the infrastructure facilities for which access regulation will be required in the future?49 The Productivity Commission recently concluded that the Pt IIIA National Access Regime is likely to generate benefits to the community, but that its scope “should be confined to ensure its use is limited to the exceptional cases where the benefits arising from increased competition in dependent markets are likely to outweigh the costs of regulated third party access to infrastructure services”.50 In the Harper Review, the Panel agreed with the Productivity Commission’s conclusion.51 Whether access regulation provides a net benefit will involve a consideration of the benefits and the costs. A clear benefit of an access regime is that it has the potential to promote competition in upstream and downstream markets by offering access to a service that is necessary to compete in those markets on reasonable terms and conditions and at a price that reflects the efficient cost of service provision. Access regulation may also provide for other benefits, such as increased innovation and cost minimisation.

47 Re Dr Ken Michael AM; Ex parte Epic Energy (WA) Nominees Pty Ltd [2002] WASCA 231 [119]. 48 Application by Telstra Corporation Limited [2009] ACompT 1, [44]. 49 Harper Review, 426. 50 Productivity Commission, National Access Regime, Inquiry Report 66 (Canberra, 2013) 2. 51 Harper Review, 73.

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Access regulation, however, has a number of costs. These include that the application of access regulation is complex, it typically involves making binding decisions when future outcomes are uncertain, and it takes considerable time: • Complexity – price and revenue regulation typically uses complicated models to determine regulated revenues and access prices. The application of these models within a legal framework will usually call upon a range of different and interrelated disciplines, including regulatory, economic, accounting, and legal disciplines • Uncertainty – not only is the modelling complex, but it also relies on a number of inputs that are forecasts. Forecasts for inputs such as operating and capital expenditure, and demand, are typically for periods of five years or more so are inherently uncertain. • Time – as the The Pilbara Infrastructure Pty Ltd v Australian Competition Tribunal52 (see Box 3.2) demonstrates, the time between considering whether a service should be declared under Pt IIIA and actual physical access to the service may be several years (in that case, access to the service was never granted and the consideration of whether the service should be declared took more than eight years). Even if an access regime is in place, regulators tend to take 12 to 18 months on average to set regulated revenues and prices for the next regulatory period. Box 3.2: The “long haul” — Access to rail facilities in the Pilbara In 2004, FMG applied for declaration of rail facilities that BHP Billiton Iron Ore Pty Ltd and BHP Billiton Minerals Pty Ltd (“BHPB”) and Rio Tinto Ltd (“RTIO”) use to transport iron ore from mines in the Pilbara region of Western Australia to port. The relevant facilities to which access was sought included: • use of the Robe and Hamersley rail facilities, owned by RTIO; • use of the Goldsworthy railway and Mt Newman railway line, owned by BHPB. The decision of the designated Minister (in these matters, the Commonwealth Treasurer) was: • to declare the Robe River facility for a period of 20 years; • to declare the Hamersley facility for a period of 20 years; • to declare the Goldsworthy facility for a period of 20 years; and • not to declare the Mt Newman facility.

52 (2012) 246 CLR 379.

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47

The Minister’s decision was then the subject of review proceedings before the Australian Competition Tribunal. The effect of the Tribunal’s decision was that BHPBIO’s Mt Newman facility and Rio Tinto’s Hamersley facility were not declared, but BHPBIO’s Goldsworthy facility and Rio Tinto’s Robe River facility were declared.53 The Tribunal’s decisions concerning Rio Tinto’s facilities (but not BHP Billiton’s facilities) were appealed to the Full Court of the Federal Court, which determined that neither of Rio Tinto’s facilities should be declared.54 The High Court granted FMG special leave to appeal that decision to the High Court. The High Court decision – handed down in 2012 – set out a new approach to analysing some of the declaration criteria (discussed in detail in Ch 7) and remitted the matter back to the Tribunal.55 The Tribunal in 2013 set aside both the Hamersley and Robe River declarations.56 As a result of the decisions, the only services that are declared are the services provided by BHPB’s Goldsworthy facility. There are several substantive costs of access regulation. Access regulation, if inappropriately applied, may: • • • •

discourage efficient investment and hinder innovation; hinder efficient pricing; create incentives to provide services of a poor quality; and create costs (in terms of the compliance burden).

The biggest risk is that access regulation, if not properly applied, may lead to access prices that are “too low”, which may discourage both investment and innovation and adversely affect the financial viability of the asset owner.

SUMMARY [3.200]

Access regulation is seeking to address the potential for a service provider to exercise market power. Market power can be exercised by preventing access, hindering access by retricting throughput or charging monopoly prices or reducing service quality. There are a number of alternatives to access regulation to address the exercise of market power in the infrastructure context. These alternatives

53 In the matter of Fortescue Metals Group Limited [2010] ACompT 2. 54 Pilbara Infrastructure Pty Ltd v Australian Competition Tribunal (2011) 193 FCR 57. 55 The Pilbara Infrastructure Pty Ltd v Australian Competition Tribunal (2012) 246 CLR 379. 56 Applications by Robe River Mining Co Pty Ltd and Hamersley Iron Pty Ltd [2013] ACompT 2.

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include the “do nothing” approach which involves relying on the misuse of market power provisions in s 46 of the CCA, government ownership, price monitoring and a form of separation – structural, accounting or functional. What measure is best to use must be determined on a case-by-case basis. In 1995, the Hilmer Committee recommended a single national access regime. However, a range of different regulatory regimes have emerged in Australia over the past three decades. These regimes are discussed in more detail in Part IV of this book.

Questions for discussion 1. What is the economic problem that access regulation is seeking to address? 2. What is market power and how can it be exercised in an infrastructure context? 3. What are the origins of access regulation in Australia? 4. Taking an electricity transmission network as an example, why are such networks subject to access regulation? 5. What is the overarching objective of access regulation? 6. If a facility has natural monopoly characteristics, should access regulation be applied? Why/why not?

4

Key Forms of Access Regulation [4.10] OVERVIEW .......................................................................................................................................... 49 [4.20] RATIONALE FOR COST-BASED REGULATION ......................................................................... 50 [4.30] Providing for cost recovery ............................................................................................................... 50 [4.50] Promoting efficient investment in regulated infrastructure ........................................................ 52 [4.60] Promoting efficient use of regulated infrastructure ...................................................................... 52 [4.70] Promoting competition in dependent markets .............................................................................. 53 [4.80] COST-BASED REGULATION – IMPLEMENTATION IN PRACTICE ...................................... 54 [4.80] Relevant measure of cost: Marginal versus average cost ............................................................ 54 [4.90] Relevant measure of cost: Efficient versus actual cost ................................................................. 55 [4.100] Cost-based regulation in Australia ................................................................................................ 57 [4.110] DRAWBACKS OF COST-BASED REGULATION ....................................................................... 59 [4.120] Incentive issues .................................................................................................................................. 59 [4.140] Information requirements ................................................................................................................ 61 [4.150] Resource requirements ..................................................................................................................... 63 [4.160] OTHER KEY FORMS OF ACCESS REGULATION .................................................................... 64 [4.170] Retail-minus ....................................................................................................................................... 64 [4.180] CPI-X price caps ................................................................................................................................ 65 [4.190] Profit sharing ...................................................................................................................................... 66 [4.200] Benchmarking .................................................................................................................................... 67 [4.210] SUMMARY ......................................................................................................................................... 68

OVERVIEW [4.10] There are several forms of access regulation. In Australia, the main form is cost-based regulation (sometimes referred to as “rate of return” or “cost of service” regulation). Other forms of access regulation include retail-minus, CPI-X price caps, profit sharing and benchmarking. Cost-based regulation typically aims to deliver access charges that are based on the efficient costs of providing services. As discussed at [4.90], the efficient cost of providing access to a service provided by the relevant infrastructure is generally considered to include operating costs, plus a reasonable return on and of capital employed, based on an efficiently provisioned capital base, and a rate of return that is commensurate with the regulatory and commercial risks involved in the provision of services. This chapter will outline the basic rationale for cost-based regulation and will explain how it is typically implemented in practice. It will describe

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some of the limitations of cost-based regulation and how these may be overcome. The chapter will then consider the other key forms of regulation and the circumstances in which they might be applied as an alternative to, or in combination with, cost-based regulation. Later chapters will go into more detail in relation to the models and methods used by regulators in applying cost-based regulation. In particular, Ch 5 will provide a detailed description of the building block model, which is the most frequently used model in cost-based access regulation in Australia.

RATIONALE FOR COST-BASED REGULATION [4.20] Access charges based on the efficient cost of supply will generally promote the key objectives of access regulation, including: • providing the service provider with the opportunity to earn a stream of revenue that recovers the efficient costs of providing the services (see [4.30]); • providing incentives for efficient investment in the relevant infrastructure in order to maintain safe and reliable supply of services and to meet the projected demand for services (see [4.40]); • providing the service provider with an incentive to seek out productive efficiencies (see [4.50]); • providing signals for efficient use of the relevant infrastructure (see [4.60]); and • promoting competition in dependent markets (see [4.70]).

Providing for cost recovery [4.30] Providing the service provider with an opportunity to recover the efficient cost of supply through access prices is generally considered to be one part of the “regulatory contract” or implicit long-term contract between the service provider and its customers. In return, users or prospective users are entitled to access the services provided using the infrastructure at a price that is no higher than what would prevail in a workably competitive market. The nature of the regulatory bargain has been described by the Queensland Competition Authority in the following way: The regulation of public utilities can be viewed as a form of long term contract between the monopoly service provider of the essential service or infrastructure and its customers, overseen by an independent third party, the regulator. This long term contract is, in effect, a governance mechanism that functions to protect and incentivise relationship-specific, sunk investment between these parties. Once the investment is sunk, its value to investors depends on receiving an

4 Key Forms of Access Regulation

51

appropriate rate of return on, and of, capital, and its value to customers depends on access to the service at a reasonable price and expected standard of service.1

If the regulatory regime does not provide for recovery of efficient costs associated with providing access, the service provider may not be able to cover its operating costs or the cost of funding its past investments in the shared network infrastructure. This may ultimately force the service provider out of business or result in a substantial reduction in the quality of services, both of which would be detrimental to consumers.

[4.40] It is well recognised that the objectives of access regulation will not be achieved where the service provider is unable to recover its costs such that it is forced to run at a loss, or is forced out of business. In this case, there will not be efficient investment in, operation of and/or use of the relevant infrastructure. This was observed by the Federal Court in Telstra Corporation Ltd v ACCC,2 in the context of the object of the telecommunications access regime – the promotion of the long-term interests of end-users. Rares J observed: In Telstra [2008] FCA 1436 at [122] Lindgren J held that s 152CR(1)(a) is the factor which should be given fundamental weight, namely, whether the determination will promote the long-term interests of end-users of services supplied by means of carriage services. This was because, he held, that factor reflected the sole object of Part XIC of the Act as expressed in s 152AB(1): see Telstra [2008] FCA 1436 at [17]. Of course, s 152AB(2)(e) supplements this concept by identifying an objective of encouraging the economically efficient use of, and economically efficient investment in, the infrastructure by which listed services are supplied. Often that objective may not be attained if an infrastructure investment is not economically feasible for the service provider to make or support. So, by dint of s 152AB(2)(e) the interests of end-users may well include that the service provider is not forced to act in a way which for it is economically unjustifiable. Possibly, a monopolist may be able to be forced to lower prices or make way for competition under s 152AB(2)(e), but not to run the business as a charitable exercise or at a loss.3

It is rare in Australia for efficiently run, regulated businesses to operate at a loss, partly because the form of regulation typically applied in Australia is cost-based regulation. Under properly applied cost-based regulation, businesses will be provided with at least a reasonable opportunity to recover the efficient cost of supplying services.4

1 Queensland Competition Authority, Discussion Paper: Risk and the Form of Regulation, November 2012, vi. 2 (2008) 176 FCR 153. 3 Telstra Corporation Ltd v ACCC (2008) 176 FCR 153, 183. 4 It is possible that an inefficient or poorly run business may incur losses. However, if a business is efficiently run, it should have a reasonable opportunity to recover its efficiently incurred costs.

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Promoting efficient investment in regulated infrastructure [4.50] Providing for recovery of efficiently incurred costs (including a return on and of capital, based on an appropriate rate of return) will create incentives for efficient investment in the relevant infrastructure. This will ensure that the infrastructure is appropriately maintained, upgraded or expanded where it is necessary and prudent to do so. Unless there is a commitment to ensuring recovery of sunk capital, the service provider will not be willing (or able) to fund investment in renewal or expansion of network infrastructure. This may ultimately lead to declining quality or reliability of services. Although a scenario in which there has been widespread failure of a network because of underinvestment has not yet arisen in Australia, it has in some overseas jurisdictions. An example is set out in Box 4.1. Box 4.1: Example of network failure in New Zealand Auckland experienced widespread blackouts in early 1998, leaving parts of the city without electricity for up to six weeks. This followed the failure of four power cables operated by Mercury Energy Limited, the major distributor and retailer of electricity in Auckland.5 An inquiry into the incident found that among the causes of the network failure were: • the absence of a well-developed asset audit and asset management program for the 110kV cables used in Auckland; and • deficiencies in the specification, management and monitoring of maintenance contracts for the 110kV cables. In order to address these issues and ensure the problem would not recur in the summer peak load period, Mercury Energy indicated that it would need to invest in infrastructure to reinforce supply to the CBD by November 1998.

Promoting efficient use of regulated infrastructure [4.60] As discussed in Ch 2, efficient use of resources will be achieved where prices reflect the efficient cost of resources being used. Therefore, prices based on some measure of the efficient cost of service provision will promote efficient use of the relevant infrastructure.

5 See, for example, Auckland Council, Infrastructure Failure, .

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As will be discussed at [4.80], while economic theory would suggest that prices should be based on marginal cost in order to promote efficient usage, there may need to be a departure from this principle in some cases in order to ensure recovery of fixed and sunk costs.

Promoting competition in dependent markets [4.70] Where effective competition in upstream or downstream markets depends on access to relevant infrastructure, cost-based access pricing should promote efficient competition in these dependent markets. This is for two reasons: 1. cost-based pricing will provide appropriate signals for efficient entry into dependent markets and efficient investment in complementary infrastructure; and 2. where the infrastructure provider also competes in upstream or downstream markets, cost-based access pricing should provide for a “level playing field” in these dependent markets. If the infrastructure provider is required to supply access to competitors at a price that reflects the efficient cost of supply, then all competitors should face the same effective access price. In this way, cost-based regulation promotes the competitive process, rather than promoting the interests of a particular competitor or group of competitors. While lower (or higher) access prices may promote the interests of particular competitors, prices set at the cost of supply will provide for efficient competition. As noted by the Australian Competition Tribunal in Re Seven Network Limited (No 4),6 the key to promoting competition is providing for “sustainably low prices” – that is, prices that allow for the sustainable and reliable supply of services, but are no higher than is necessary to achieve this. The Tribunal observed: [I]t 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.7

The remainder of this chapter explains how cost-based regulation is typically implemented in Australia, in terms of the relevant cost components that form the basis for pricing, and the way in which these are measured. Later chapters explain in detail the cost models that are typically applied for this purpose. In particular, Ch 5 explains the building block model and how costs are measured in that model. 6 [2004] ACompT 11. 7 Re Seven Network Limited (No 4) [2004] ACompT 11, [121].

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COST-BASED REGULATION – IMPLEMENTATION IN PRACTICE Relevant measure of cost: Marginal versus average cost [4.80] As discussed in Ch 2, economic theory suggests that efficient use of infrastructure will occur where access prices reflect the marginal cost of service provision. Where prices reflect marginal cost, supply of access services should equal demand, and hence usage will be allocatively efficient. In theory, a higher level of usage (associated with a lower access price) would be inefficient, because the marginal cost of that additional usage will exceed the marginal willingness to pay for that extra usage. Similarly, at lower levels of usage (associated with a higher access price) economic welfare could be increased by additional usage (up to the point at which demand is equal to supply), because the marginal willingness to pay for that additional usage will exceed its marginal cost. However, access prices will rarely be set to recover marginal cost only. This is because infrastructure businesses will typically have very high fixed and common costs, meaning that pure marginal cost pricing is unlikely to allow for cost recovery. This results in the well acknowledged problem in utility pricing that if a price is charged that reflects the cost of an additional unit of consumption – marginal cost – much of the cost of providing the service would not be recovered. The response to this, at least where the service provider is privately owned and not a recipient of government subsidies, is that the fixed costs (which need to be recovered to ensure continued investment) should be recovered in the least distortionary way possible. That is, fixed costs are typically allowed to be recovered in a manner that has the smallest impact on how services would be consumed, compared to the situation where the consumer paid a price that is equal to marginal cost. In practice, a combination of tools is used to best achieve this outcome, including: • multi-part tariffs – fixed and sunk costs are recovered through a fixed charge, and variable costs through a usage-based charge; and/or • Ramsey pricing – a greater proportion of fixed and sunk costs are recovered from those customers whose demand is less responsive to changes in price (that is, where demand is relatively inelastic).8 These alternative approaches are reflected in the pricing principles for gas distribution pipelines (see Box 4.2). Note in particular sub-rule 5, which states that if prices based on marginal cost would lead to the service provider not recovering expected revenue, tariffs must be adjusted to ensure recovery of expected revenue with minimum distortion to efficient patterns of consumption.

8 Likewise, a lower proportion of fixed and sunk costs is recovered from customers whose demand is more responsive to changes in price (that is, where demand is elastic).

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Box 4.2: Pricing principles for gas distribution pipelines9 94 Tariffs – distribution pipelines (1) For the purpose of determining reference tariffs, customers for reference services provided by means of a distribution pipeline must be divided into tariff classes. (2) A tariff class must be constituted with regard to: (a) the need to group customers for reference services together on an economically efficient basis; and (b) the need to avoid unnecessary transaction costs. (3) For each tariff class, the revenue expected to be recovered should lie on or between: (a) an upper bound representing the stand alone cost of providing the reference service to customers who belong to that class; and (b) a lower bound representing the avoidable cost of not providing the reference service to those customers. (4) A tariff, and if it consists of 2 or more charging parameters, each charging parameter for a tariff class: (a) must take into account the long run marginal cost for the reference service or, in the case of a charging parameter, for the element of the service to which the charging parameter relates; (b) must be determined having regard to: (i) transaction costs associated with the tariff or each charging parameter; and (ii) whether customers belonging to the relevant tariff class are able or likely to respond to price signals. (5) If, however, as a result of the operation of subrule (4), the service provider may not recover the expected revenue, the tariffs must be adjusted to ensure recovery of expected revenue with minimum distortion to efficient patterns of consumption.

An alternative to recovering fixed and sunk costs through prices charged to customers, is to subsidise the service provider for bearing some or all of the fixed cost of supply, either through explicit subsidies or through taxpayer funding for government-owned businesses. However, this is not the usual approach across regulated industries in Australia. Rather, the more usual approach is that service providers (whether private or government-owned) will be allowed to recover fixed costs through charges levied on network users.

Relevant measure of cost: Efficient versus actual cost [4.90] Where access prices are based on the cost of supply, regulators will generally seek to use the efficient cost of supply as the pricing benchmark. The efficient cost of supply may or may not reflect the service provider’s actual costs. 9 NGR, r 94.

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Basing prices on efficient costs ensures that service providers face incentives to operate their businesses prudently and efficiently and mimics the pressures they would be subject to if they operated in a workably competitive market. Under this approach, efficient service providers will be provided with a reasonable opportunity to recover at least sufficient revenue to cover their capital and operating costs, while any inefficiently incurred costs will not be recoverable. The efficient costs of supply include: • efficiently incurred operating and maintenance costs; • a return of capital, based on an efficiently provisioned capital base; • a return on capital, with the rate of return commensurate with the efficient financing costs of an efficient entity with a similar degree of regulatory and commercial risks as that which applies to the service provider; and • an allowance for net tax liabilities. In relation to the capital base, as discussed in Ch 5, it is common for the initial value for the asset base to be locked in at the commencement of the regulatory regime, and then rolled forward each year by adding in the value of any prudently incurred new capital expenditure and deducting the value of any assets recovered through depreciation, asset disposals or capital contributions. Requirements for prices to be based on efficient costs will often be codified in the relevant rules or codes that apply to price setting. An example of these types of rules, relating to operating and capital expenditure for regulated gas pipelines, is set out in Box 4.3. Box 4.3: Provisions relating to operating and capital expenditure for regulated gas pipelines10 Section 24(2) Revenue and pricing principles (2) A service provider should be provided with a reasonable opportunity to recover at least the efficient costs the service provider incurs in– (a) providing reference services; and (b) complying with a regulatory obligation or requirement or making a regulatory payment. Rule 91 Criteria governing operating expenditure Operating expenditure must be such as would be incurred by a prudent service provider acting efficiently, in accordance with accepted good industry practice, to achieve the lowest sustainable cost of delivering pipeline services.

10 NGL, s 24(2), NGR, r 91 and r 79.

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Rule 79 New capital expenditure criteria (1) Conforming capital expenditure is capital expenditure that conforms with the following criteria: (a) the capital expenditure must be such as would be incurred by a prudent service provider acting efficiently, in accordance with accepted good industry practice, to achieve the lowest sustainable cost of providing services …

While efficient cost standards are more commonly used, in some cases actual costs may need to be used either as the basis for pricing or at least as a starting point. Actual costs may be used in circumstances where it would be difficult and costly to determine what the efficient cost of supply would be, and where actual cost data is readily available. Actual costs may also be used if the service provider is considered to have the right incentives to pursue efficiencies. In this case, the service provider’s revealed cost is assumed to reflect the efficient cost.

Cost-based regulation in Australia [4.100]

The legal basis for cost-based regulation in Australia varies between industries. In some sectors, a particular form of cost-based regulation (such as the “building block model”: see Ch 5) is required to be used to determine regulated revenues by legislation or regulations. This is the case in the electricity and gas sectors, where use of a building block cost model to determine access prices is prescribed in the relevant rules.11

In other sectors, cost-based regulation is applied as a matter of practice, on the basis that this approach satisfies certain objectives and/or criteria set out in the legislation. An example of this is the telecommunications sector, where a cost-based approach to pricing is now typically adopted by the ACCC on the basis that it is consistent with the legislative objective (promotion of the long-term interests of end-users). The ACCC has effectively “locked in” a cost-based methodology for determining access prices through fixed principles in its access determinations for fixed line services.12 These fixed principles require use of a building block model to determine prices for the declared fixed line services. Prior to adopting the building block model, the ACCC applied a TSLRIC+13 methodology in

11 NER, Ch 6, cl 6.4.3 (distribution) and Ch 6A, cl 6A.5.4 (transmission); NGR, rule 76. 12 As discussed in Ch 10, the term “fixed line services” refers generally to services provided by Telstra’s copper network that, until the commencement of the rollout of the National Broadband Network, connected almost every residential premises in Australia. 13 “TSLRIC+” stands for the total service long run incremental cost, with the plus denoting the allocation of joint/common costs.

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respect of a number of the fixed line services. See Box 4.4 for further details on TSLRIC+ and why the ACCC moved away from this approach in regulating fixed line services. Box 4.4: The TSLRIC+ methodology While the building block methodology involves estimating the revenue that would be required by a service provider to recover at least its efficient costs in a particular regulatory period (usually five years), the TSLRIC+ methodology involves estimating the revenue that would be required by the service provider to recover the incremental costs, and a share of joint/common costs, of providing the “total service” over the long run. The key point of difference between the TSLRIC+ and building block methodologies as applied by the ACCC relates to the revaluation of assets. Under the TSLRIC+ methodology, the regulated asset base was revalued at the time of each and every price review. In contrast, under the building block model, the asset base is valued once and “locked in” at the first price review and then is “rolled forward” in subsequent price reviews. When the TSLRIC+ methodology was first adopted in telecommunications, it appeared that there were good reasons for diverging from the approach adopted in other sectors. At a high level, TSLRIC+ is a model that was considered capable of providing the necessary signals for investment and facilities-based competition. Implicit in this view, however, was that telecommunications technology was likely to change rapidly and in uncertain directions over time, such that costs and the nature of demand will also change significantly over time.14 However, following a comprehensive review in 2009–10, the ACCC determined that, at least for fixed line

14 See, for example, Commonwealth, Parliamentary Debates, Senate, Tuesday 25 February 1997, 895 (Ian Campbell).

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telecommunications services, the underlying technology, asset costs and nature of demand do not change so rapidly over time, and that a building block model was therefore appropriate to use in regulating those services.15 The building block model was also considered to be a simpler methodology to apply in practice. While the legal basis for cost-based access pricing may vary, the way in which it is applied in practice is relatively consistent among regulated industries. In most regulated industries in Australia, cost-based pricing is calculated by applying the building block model, which is discussed in detail in Ch 5.

DRAWBACKS OF COST-BASED REGULATION [4.110]

There are three potential drawbacks associated with cost-based regulation: 1. application of cost-based regulation may give rise to incentives for the service provider to spend inefficiently and/or inflate forecasts of its expenditure requirements (see [4.120]); 2. cost-based regulation requires the regulator to be able to obtain detailed cost information from the service provider (see [4.140]); and 3. cost-based regulation is likely to impose a significant resource burden on the regulator and the service provider (see [4.150]). All of these potential issues are widely acknowledged. It is also generally acknowledged that each of these potential issues can be at least partially overcome.

Incentive issues [4.120]

Setting access prices based on cost can give rise to two related incentive issues: 1. Where pricing is based on the service provider’s actual costs, the service provider may have an incentive to “over-invest”. This is because the costs of any investment undertaken by the service provider (including a return on that investment) are passed straight through to customers through access prices. If the return on investment that is recoverable through access prices is above the service provider’s actual cost of capital, there will be an incentive to continue investing, even if it is not economically efficient to do so. This is sometimes referred to as an incentive to “gold plate”.

15 ACCC, “ACCC Proposes New Simpler Approach for Wholesale Fixed Line Telecommunications Services Pricing”, Media release, 17 September 2010, .

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2. Where pricing is based on a forecast of the service provider’s costs, the service provider may have an incentive to inflate forecasts of its expenditure requirements. Each of these issues can be at least partially overcome by appropriate regulatory mechanisms. The first issue can be addressed in one of two ways. The first option is to set prices based on forecast costs rather than actual costs, with the amount forecast subject to ex ante regulatory scrutiny – this is the approach currently taken in setting prices for telecommunications access services. The second option (which may be used in conjunction with the first option) is for the regulator to conduct an ex post review of expenditure to ensure that only prudent and efficient capital expenditure is rolled into the asset base and reflected in prices. The latter approach is adopted in setting access prices for gas pipelines and, more recently, electricity networks. It was adopted for electricity networks in 2012, following a review of the rules for economic regulation of electricity network service providers. This review was initiated in response to concerns that electricity network providers may have had incentives to “gold plate” under the previous rules (see Box 4.5). Box 4.5: Regulatory response to “gold plating” concerns in the electricity sector Prior to November 2012, the National Electricity Rules had provided for roll forward of the capital base based on actual capital expenditure in the prior regulatory period. This meant that all capital expenditure incurred by a network business would be recoverable from customers through access prices, even if not all of this expenditure was efficiently incurred. This led to concerns about “gold plating” of electricity network infrastructure; that is, spending more on these networks than what would be efficient. These concerns were amplified by the fact that network charges were rising rapidly in the period from 2009 onwards, as a consequence of increasing network expenditure and high costs of funding during and post the Global Financial Crisis. Partly in response to these concerns about gold plating, changes were made to the National Electricity Rules in November 2012. One of the more significant changes made was the introduction of an ex post review mechanism for capital expenditure.

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Under the ex post review mechanism, the Australian Energy Regulator (“AER”) may review a service provider’s actual capital expenditure in a prior period in the following circumstances:16 • where a service provider has overspent against its approved capital expenditure in a prior period (the overspending requirement); • where capital expenditure in a prior period included margin amounts referable to arrangements that, in the opinion of the AER, do not reflect arm’s length terms (margin requirement); or • where capital expenditure in a prior period includes amounts which, under the service provider’s capitalisation policy, should have been classified as operating expenditure (capitalisation requirement). If one or more of these requirements is satisfied, the AER may potentially reduce the amount of capital expenditure to be rolled into the capital base for that period. The consequence of actual capital expenditure not being rolled into the capital base is that the service provider will not earn a return on and of that expenditure. The issue of inflated forecasts can be addressed through mechanisms for review and approval of expenditure forecasts, prior to their incorporation in access pricing calculations. This is a common feature of regulatory frameworks.

[4.130]

Tools that may be used by regulators to assess the prudency and efficiency of expenditure forecasts include: • comparing forecast expenditure with historical (actual) expenditure; • benchmarking the service provider’s proposed expenditure requirements against those of similar (or comparable) businesses; and • conducting an expert review of individual projects or expenditure programs. Each of these assessment tools is discussed in more detail in later chapters.

Information requirements [4.140]

Cost-based regulation requires a great deal of information about the service provider’s costs and drivers of those costs. There will inevitably be some degree of information asymmetry: the service provider will know more about its cost position and key cost drivers than the regulator. However, it should not be assumed that the service provider

16 NER, Ch 6, cl S6.2.2A (distribution) and Ch 6A, cl S6A.2.2A (transmission).

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has perfect information. Because of how records may have been kept historically and particularly where the ownership of a service provider has changed, a service provider may not have good information upon which to forecast costs. The information asymmetry between the service provider and the regulator can be overcome to some extent by granting the regulator powers to obtain information. Such powers are frequently exercised by regulators in advance of regulatory reviews to gather information on the service provider’s historical actual costs, cost trends and other information that may be relevant to setting access prices. An example of information-gathering powers under the National Gas Law (“NGL”) is set out in Box 4.6. Information asymmetries can also be at least partly addressed through incentive schemes designed to “reveal” a service provider’s efficient costs. For example, one objective of the AER’s efficiency benefit sharing scheme (“EBSS”) for electricity network service providers is to incentivise these service providers to reveal their efficient operating costs. This is achieved by allowing the service provider to keep the benefit (or incur the cost) of delivering actual operating expenditure lower (higher) than forecast operating expenditure in each year of a regulatory control period. Any benefit (carryover amount) is then included as a building block in the next regulatory control period.17 Incentive schemes are discussed further in Ch 5. Box 4.6: Information-gathering powers under the National Gas Law The AER has broad information gathering powers under the NGL. Section 42 of the NGL sets out the general power of the AER to gather information and documents as follows: 42–Power to obtain information and documents in relation to performance and exercise of functions and powers (1) If the AER has reason to believe that a person is capable of providing information or producing a document that the AER requires for the performance or exercise of a function or power conferred on it under this Law or the Rules, the AER may, by notice in writing, serve on that person a notice (a relevant notice).

Section 42 of the NGL also provides for penalties where a person served with a notice fails to comply without reasonable excuse. In addition to this general information-gathering power, the AER has powers under the NGL to issue a “regulatory

17 AER, Explanatory Statement: Efficiency Benefit Sharing Scheme for Electricity Network Service Providers, November 2013, 7.

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information notice” (“RIN”) or make a general regulatory information order (“RIO”). This power is set out in s 48 as follows: 48–Service and making of regulatory information instrument (1) Subject to this Division, the AER, if it considers it reasonably necessary for the performance or exercise of its functions or powers under this Law or the Rules, may– (a) serve a regulatory information notice on a scheme pipeline service provider or a related provider; or (b) make a general regulatory information order.

The AER frequently uses its power to issue a RIN to collect cost and other information relevant to the determination of access prices. This information is usually collected by the AER in advance of, or during, a reset of regulated access prices.

Resource requirements [4.150]

Related to the issue of information requirements, cost-based regulation can impose significant resource burdens on the regulator and service providers. The process for determining or resetting regulated access prices can be time consuming and resource intensive as a result of the need for the regulator to gather information and consult extensively with stakeholders.

By way of example, the process for resetting access prices for electricity networks takes 32 months (almost three years) from formulation of the “framework and approach” through to a final determination.18 Any appeal of the regulator’s decision will further prolong the process. Given that access prices are typically set for a period of five years, this means that electricity network businesses (and the regulator) are on a virtually constant regulatory cycle. However, it is generally recognised that the benefits of cost-based regulation will outweigh the costs in terms of time and resource requirements if the service provider has significant market power and an incentive and ability to exercise that power to the detriment of users (for example, by charging monopoly prices, hindering access or restricting output).19

18 NER, Ch 6, Pt E (distribution); Ch 6A, Pt E (transmission). 19 Productivity Commission, National Access Regime, Inquiry Report 66, 2013, Canberra, 7.

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OTHER KEY FORMS OF ACCESS REGULATION [4.160]

As noted at [4.110]–[4.150], there are some drawbacks to cost-based regulation. To address some of these drawbacks, regulators may choose to adopt other forms of access regulation either as an alternative to or to supplement cost-based regulation. The other main forms of access regulation include: • the retail-minus approach (see [4.170]); • CPI-X price caps (see [4.180]); • profit sharing (see [4.190]); and • benchmarking (see [4.200]).

Retail-minus [4.170]

Retail-minus is an approach to setting access prices by reference to the retail prices in related downstream markets. Under a retail-minus approach, the principle is that a vertically integrated service provider would receive the same revenue regardless of whether it supplied the end-customer itself or whether the users supplied the end-customer after being supplied the service by the service provider. This principle translates to an access price set equal to the retail price, minus any expenses that would be forgone as a result of providing access (for example, retailing costs). A key benefit of the retail-minus approach is that it can promote productive efficiency because users will only enter the downstream retail market if they are at least as efficient as the service provider in providing contestable functions (for example, retailing). Another benefit is that it is conceptually a simple approach to apply. However, there a number of issues when implementing the retail-minus approach in practice. First, since it is based on market outcomes in the way of prices and not costs, it may not provide the service provider with appropriate incentives to invest to the efficient level in the relevant network infrastructure. Such investment is needed to ensure the supply of services is safe and reliable and to meet projected demand for services over time. Similarly, this approach may not provide access seekers (consumers) with appropriate incentives to invest (consume) efficiently. Second, the application of this approach can lead to monopoly pricing. This is because an access provider will have an incentive to set the retail price at, or very close to, the monopoly level as this will maximise its profits. That said, this concern can be addressed by only using the retail-minus approach in circumstances where the retail prices of the access provider are already regulated/fixed by reference to efficient costs. Finally, like other forms of regulation, there are significant information requirements.

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The retail-minus approach was previously used for a small number of telecommunications services, such as wholesale line rental. However, when the ACCC moved away from the TSLRIC+ methodology in 2009–10 for fixed line services, it also decided to move away from the retail-minus approach such that it now prices all regulated fixed line telecommunications services using the building block model.

CPI-X price caps [4.180]

A CPI-X price cap – as the name suggests – sets a maximum allowable inter-temporal path of prices for a particular product or service. This formulation sets the maximum price path, which increases at the inflation rate, as measured by the Consumer Price Index, but decreases by X, which is a rate set by the regulator in advance. The value of X tends to reflect potential cost savings by the regulated firm. These cost savings could be as a result of cost cutting, efficiency improvements or technological progress. The value of X and the absolute level of the price cap index are reviewable by the regulator at the end of each regulatory period. The method of regulation discussed here is to be distinguished from the building block method of regulation widely used in Australia, where an “X factor” is used to set the path of prices that is the outworking of the building block model. Under this method of regulation, the X factor is not the outworking of a building block model. Rather, as noted, the value of X in the CPI-X price cap method is intended to reflect potential future productivity gains.

Setting the value of X under the CPI-X price cap method (and in the absence of a building block model) may be difficult for a regulator. Regulators tend to set X to reflect expected productivity improvements in excess of those expected for the economy as a whole; and expected changes in the regulated firm’s input prices that differ from the economy-wide rate of price change.20 Historical information on the performance of the firm or similar firms in the industry, as well as historical information on input prices, can be useful in assisting regulators to set X. However, regulators must exercise caution using this information, particularly when the regulated firm was previously subject to other regulation (such as cost-based regulation) or previously owned by the government. Such practical limitations have been seen as inhibiting use of this and similar methods in Australia. In June 2011, the Australian Energy Market Commission (“AEMC”) published a report into the potential use of a “total factor productivity” (“TFP”) method for determination of prices and

20 Stephen King, “Principles of Price Cap Regulation” in Margaret Arblaster and Mark Jamison (eds), Infrastructure Regulation and Market Reform: Principles and Practice (Commonwealth of Australia, 1998) 45–53.

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revenues for energy network businesses.21 The TFP method considered by the AEMC was similar to the CPI-X method described above, in that it would have involved using TFP indices to set the allowed rate of change in regulated revenue. The AEMC observed that the TFP method may have some advantages over existing cost-based approaches in that it has the potential to create stronger incentives for service providers to pursue cost efficiencies and may reduce scope for information asymmetries. However, the AEMC did not recommend immediate introduction of a TFP methodology, citing practical limitations of this approach. In particular, the AEMC noted that sufficiently robust data was not available and that it would be too problematic to reconstruct existing data for the purpose of a TFP methodology.22 The CPI–X method of regulation is not currently used widely in Australia. When airports were first privatised in the late 1990s, some were subjected to a CPI–X price cap, with the X factors intended to reflect achievable productivity gains. However, following a Productivity Commission review in 2002,23 price caps were removed altogether and were replaced with a form of price monitoring.

Profit sharing [4.190]

Profit sharing is usually used in combination with price caps and results in the service provider to retain only some of its profits over a certain level. The remainder is “shared” with customers of the service provider in the form of ex post rebates or price reductions in future periods. Profit sharing is generally considered to have three advantages:24

1. it can promote allocative efficiency as it supports cost-reflective pricing; 2. it is considered to be consistent with distributional fairness; 3. it means that the risks of regulation are shared among the service provider and users. However, it is administratively very difficult to apply in practice. In particular, it is difficult to determine the level at which the profits are shared. It is also very costly to administer by the regulator. Given that it is both costly and difficult to apply, profit sharing is not currently used widely (if at all) in regulating access to various infrastructure services in Australia. 21 AEMC, Final Report: Review into the Use of Total Factor Productivity for the Determination of Prices and Revenues, 30 June 2011. 22 AEMC, Final Report: Review into the Use of Total Factor Productivity for the Determination of Prices and Revenues, 30 June 2011, ii. 23 Productivity Commission, Price Regulation of Airport Services, Inquiry Report 19, 2002, Canberra. 24 See, for example, Colin Mayer and John Vickers, “Profit Sharing Regulation: An Economic Appraisal” (1996) 17(1) Fiscal Studies 1.

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Benchmarking [4.200]

Benchmarking or “yardstick regulation” is a way in which access prices can be set by reference to an external set of benchmarks. Alternatively, benchmarks can be used as an ex post check on a price set based on a service provider’s costs when applying cost-based regulation. One benefit of benchmarking is that it can reduce the asymmetry of information between service providers and regulators. In situations where there are a number of identical and non-competing service providers providing a similar service but in different areas, a benchmark based on actual costs of other firms would be an effective mechanism.25 This approach can foster competition “across markets” between service providers. However, if there is not a sufficient number of identical and non-competing businesses, benchmarking may not be particularly effective. Therefore, it is important that the set of businesses that form the benchmark are sufficiently comparable to the service provider, in terms of their size and scale, their operating environment and the services they provide. Alternatively, if there are some differences, it is important that these are adequately dealt with in the selection and use of the benchmark. Benchmarking has been used in Australia and overseas to set prices for some telecommunications access services. For example: • as discussed in Ch 10, a form of benchmarking is used to determine prices for regulated transmission services. This involves using observed prices on unregulated competitive transmission routes to determine prices for regulated routes; and • international benchmarking has been used to determine prices for some regulated telecommunications access services in New Zealand. For example, in a 2012 decision, the New Zealand Commerce Commission set prices for the unbundled copper local loop (“UCLL”) service based on international benchmarks.26 Benchmarking is also used by a number of regulators in Australia in a more limited way, as a tool for estimating particular costs (generally capital expenditure and operating expenditure) in the building block model. The use of benchmarking within the building block model is explained further in Ch 5, and a recent application of this form of benchmarking in the electricity sector is discussed in Ch 8. 25 Andrei Schleifer, “A Theory of Yardstick Competition” (1985) 16(3) Rand Journal of Economics 319. 26 New Zealand Commerce Commission, Final Determination on the Benchmarking Review for the Unbundled Copper Local Loop Service, Decision No NZCC 37, 3 December 2012. Under Sch 1 to the Telecommunications Act 2001 (NZ), the initial pricing principle for UCLL is: “benchmarking against prices for similar services in comparable countries that use a forward-looking cost-based pricing method”.

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SUMMARY [4.210]

Cost-based regulation is the most commonly used form of access regulation in Australia. Cost-based regulation involves establishing a revenue allowance based on the cost of supplying the regulated services. The relevant measure of cost for this purpose is the long-run efficient cost of supply. Cost-based regulation is seen to have a number of benefits, including that, if property applied, it provides for recovery of efficient costs by the service provider, it will promote efficient investment in, and efficient use of, the infrastructure by which services are supplied, and will promote efficient competition in dependent markets. Cost-based regulation can also have some drawbacks, including that it can be information and resource-intensive. Alternative forms of regulation are also available, including retail-minus price regulation, benchmarking and profit sharing methods. However these alternative methods are less frequently used in Australian regulatory practice. Later chapters of this book will go into more detail on how the most widely used form of access regulation – cost-based regulation – is applied in practice across a range of regulated industries.

Questions for discussion 1. What is the rationale for cost-based access regulation? 2. What is the main way that cost-based access regulation is applied in Australia? 3. Outline the key difference between the building block model and the TSLRIC+ methodology? 4. Describe some drawbacks of cost-based regulation. 5. Compare and contrast the retail-minus approach with cost-based regulation.

5

The Building Block Model [5.10] OVERVIEW .......................................................................................................................................... 69 [5.20] THE BUILDING BLOCK MODEL ................................................................................................... 70 [5.40] KEY COMPONENTS OF THE BUILDING BLOCK MODEL ..................................................... 72 [5.50] Valuation of the asset base ................................................................................................................ 73 [5.110] Return of capital ................................................................................................................................ 80 [5.130] Return on capital ............................................................................................................................... 82 [5.190] Operating costs .................................................................................................................................. 89 [5.200] Treatment of taxation ........................................................................................................................ 91 [5.220] Treatment of inflation ....................................................................................................................... 93 [5.230] Total revenue requirement ............................................................................................................... 94 [5.240] Revisiting the building block revenue allowance ....................................................................... 94 [5.260] INCENTIVE MECHANISMS .......................................................................................................... 96 [5.270] Efficiency incentive mechanisms .................................................................................................... 96 [5.290] Service standard incentive mechanisms ........................................................................................ 98 [5.310] Other incentive schemes .................................................................................................................. 99 [5.320] SUMMARY ......................................................................................................................................... 99

OVERVIEW [5.10] The building block model is the access pricing model that is most commonly used by economic regulators in Australia. This chapter will provide an introduction to the building block model, including key components and the decisions that must be made in relation to each building block. Reference will be made to applications of the building block model in several regulated industries, which will be discussed in more detail in Pt IV of this book. The basic principle underpinning the building block model is that the regulated business should be provided with a reasonable opportunity to recover at least the efficient economic costs of providing regulated services, including a reasonable return on capital employed. The building block model seeks to give effect to this principle by calculating the maximum revenue that the business may recover over a specified period (often referred to as the “regulatory period”) as the sum of certain cost items or “building blocks”. The building blocks that are typically included in the model are: • a return on capital (a return to debt and equity holders); • a return of capital (depreciation of capital stock); • operating and maintenance costs; and

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• an allowance for net tax liabilities. Each of these core building blocks is discussed in detail in this chapter. Different models may include additional building blocks, for example, an additional increment or decrement that may arise from the application of an incentive scheme. Although the basic principles of the building block model are generally well accepted, the way in which the model is applied can vary considerably across industries and regulators. In particular, different regulators may take different approaches to (among other things) the valuation of the asset base (which is a significant input to the calculation of the return on capital), the determination of the rate of return, or the treatment of depreciation. In some cases, the approach taken by a particular regulator will reflect the incentives it wishes to create for the regulated business or desired outcomes for end-users. This chapter explores a number of different approaches that may be taken to the individual building blocks. In later chapters of this book, the specific regulatory regimes applying in electricity, gas, telecommunications, and port and rail will be examined in more detail. As will be seen from these later chapters, the way the model is applied, the process for determining model inputs and the extent of regulatory discretion involved in this process can all vary considerably between industries. As a result, the outcomes of regulation can vary between industries, notwithstanding the adoption of a common model.

THE BUILDING BLOCK MODEL [5.20] The building block model has become a well-accepted approach for determining the revenue requirement for regulated businesses and, depending on the form of regulatory control the business is subject to, formulating a revenue or price cap. The term used to describe this form of regulation refers to the cost building blocks that are combined to calculate the service provider’s revenue requirement. The building block approach has been used by Australian regulators in one form or another since the early 1990s. However, it was not until the late 1990s that the term “building block model” was first used. Since its inception in the late 1990s, this term has been adopted by several Australian regulators, including the Australian Competition and Consumer Commission (“ACCC”) and the Australian Energy Regulator (“AER”).1 1 The ACCC first used this term in its statement of principles for regulation of electricity transmission businesses (see ACCC, Draft Statement of Principles for the Regulation of Transmission Revenues, 27 May 1999, x). It has more recently used it to describe its approach price regulation of a number of declared telecommunications services (ACCC, Inquiry to Make Final Access Determinations for the Declared Fixed Line Services: Final Report, July 2011, 27).

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[5.30] The building block model has been codified in several key regulatory instruments, including: • the National Electricity Rules (“NER”);2 • the National Gas Rules (“NGR”);3 • access determinations made by the ACCC in respect of a number of declared telecommunications services;4 and • undertakings accepted by the ACCC and state regulatory bodies for access to certain port and rail facilities.5 An example of how the building block model has been codified is presented in Box 5.1, and further detail on each of the regulatory regimes referred to above can be found in Pt IV of this book. Box 5.1: Codification of the building block model in the NGR A form of the building block model is codified in Pt 9 of the NGR, which provides for economic regulation of gas transmission and distribution pipelines. Division 3 of Pt 9 of the NGR requires total revenue for each regulatory year to be determined using a “building block approach”, and the requirements for each building block are set out in later divisions of Pt 9. Division 3 states:

2 NER, Ch 6, Pt C (distribution); Ch 6A, Pt C (transmission). 3 NGR, Pt 9, Div 3. 4 ACCC, Final Access Determination No 1 of 2011 (LSS), cl 6; ACCC, Final Access Determination No 2 of 2011 (LCS), cl 6; ACCC, Final Access Determination No 3 of 2011 (PSTN OA), cl 6; ACCC, Final Access Determination No 4 of 2011 (PSTN TA), cl 6; ACCC, Final Access Determination No 5 of 2011 (ULLS), cl 6; ACCC, Final Access Determination No 6 of 2011 (WLR), cl 6; Final Access Determination No 1 of 2013 (WADSL), cl 6. The same fixed principles have been included in the replacement access determinations for each service published in October 2015 (Final Access Determinations 2 to 8 of 2015, 7 October 2015). The fixed principles set out in these determinations have a nominal expiry date of 30 June 2021. 5 For example, the Queensland Competition Authority (“QCA”) refers to the methodology applied under access undertakings for the Dalrymple Bay Coal Terminal (“DBCT”) as a “building blocks approach”: see, for example, QCA, Final Decision: Dalrymple Bay Coal Terminal 2010 Draft Access Undertaking, September 2010, 7.

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Access Regulation in Australia Division 3 Building block approach 76 Total revenue Total revenue is to be determined for each regulatory year of the access arrangement period using the building block approach in which the building blocks are: (a) a return on the projected capital base for the year (See Divisions 4 and 5); and (b) depreciation on the projected capital base for the year (See Division 6); and (c) if applicable – the estimated cost of corporate income tax for the year; and (d) increments or decrements for the year resulting from the operation of an incentive mechanism to encourage gains in efficiency (See Division 9); and (e) a forecast of operating expenditure for the year (See Division 7).

Further detail on the regime for economic regulation of gas businesses is provided in Ch 9 of this book.

KEY COMPONENTS OF THE BUILDING BLOCK MODEL [5.40] The building block model is designed to build up a revenue allowance for the service provider over a particular period6 by reference to cost building blocks. Depending on the form of regulation that applies, this revenue allowance may then be translated into a price cap based on projections of demand for the regulated service or, alternatively, it may form the basis upon which the service provider is to determine the prices to be charged for regulated services based on a methodology that may need to be approved by the regulator. The building blocks usually included in the model are: • a return on capital; • a return of capital (otherwise referred to as “depreciation”); • operating and maintenance costs; and • an allowance for net tax liabilities. Additional building blocks may also be included to incorporate revenue increments or decrements associated with incentive schemes (see [5.260]–[5.310]). 6 Regulators in Australia tend to make regulatory determinations for periods of between three and five years, although some determinations have been made for periods of 10 years or more. For example, most electricity and gas network businesses have a five-year regulatory period, while Telstra is currently subject to four-year regulatory determinations in respect of its regulated fixed line wholesale services. The regulator will set a period that is long enough to provide some stability and certainty for the business, while allowing for the components of building block model to be revisited in future as demand and expenditure needs change. Between three and five years is generally considered to be a reasonable period.

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The basic building blocks are illustrated in Figure 5.1. Figure 5.1 Building blocks

Valuation of the asset base [5.50] An important preliminary step in the determination of building block revenues is valuation of the asset base. The value ascribed to the asset base is relevant to the determination of both the return of capital and the return on capital. The “asset base” refers to the set of assets used to provide regulated services. For example, the asset base for an electricity distribution network includes the poles, wires, substations, transformers and other assets it uses to distribute electricity. The asset base for a railway operator includes track and signalling equipment. The asset base is also referred to as the “capital base”, “regulated asset base” or “RAB”. The asset base will need to be assigned a value each time the building block model is used to determine regulated revenues. Generally, a value for the asset base will be determined at the beginning of each year, so as to determine the revenue allowance for that year. There are two key issues that arise in relation to the valuation of the asset base: 1. the initial valuation of the asset base, at the time the assets first become subject to regulation (see [5.60]); and 2. the value of the asset base in each year of the regulatory period (see [5.90]). Initial valuation of the asset base

[5.60] At the time a set of assets first becomes regulated, an initial valuation must be undertaken for the purposes of calculating the return of

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and return on capital. The selection of the methodology used to determine the initial value can often be contentious because different methodologies can lead to fundamentally different values, and the asset value will in turn have a significant impact on the determination of regulated revenues, both in the short term and over the remaining life of the assets. There are several different approaches that may be taken to the initial valuation of the asset base. These include: • Historic cost – The historic cost of the asset base is the capital cost incurred when the asset was constructed together with the costs associated with subsequent capital expenditure programs. The historic purchase cost will often (but not always) be indexed for inflation, so that the historic values are expressed in dollars of the current day. • Depreciated historic cost – A depreciated historic cost valuation takes an historic cost value as its starting point and deducts an amount of depreciation, which should be commensurate with the value that has already been recovered by the asset owner through service revenues or capital contributions. Depreciated historic cost is sometimes referred to as “depreciated actual cost”, or “DAC”. • Depreciated optimised replacement cost (“DORC”) – A DORC valuation uses an optimised replacement cost (“ORC”) value as its starting point and deducts an amount of depreciation. An ORC valuation is based on the cost of constructing an asset with the same service capability as the asset that is being valued, but using current technology and an optimised design. Since the asset design is notionally optimised for the purposes of valuation, an ORC value may be very different to a depreciated historic cost value of the same asset. For example, if current technology is cheaper and more efficient than the technology used to originally construct the asset, then the ORC may be expected to be lower than historic cost. • Optimised deprival value (“ODV”) – The ODV is calculated as the lesser of DORC and economic value, where economic value is the higher of scrap value and the present value of expected future revenues. ODV is intended to reflect the value an asset owner would lose if it were deprived of the asset. Hence it is equivalent to the current cost of constructing a new asset (DORC) if the economic value of the newly constructed asset would exceed its cost. • Present value – Under this approach, the value of the asset is calculated as the present value of the expected future cash flows generated by the asset, with the future cash flows based on the prices, revenue or returns prevailing at the time the value is determined. • Price paid for the asset in a recent transaction – Where the relevant assets have been acquired through a sale (for example, where the government has privatised assets and has sold them to a private third party), the price paid for the asset may be used to inform the value adopted for the asset base. In cases where this market-based valuation approach has been used, regulators have paid particular attention to the circumstances surrounding the transaction to ascertain: whether the asset was

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purchased through an arm’s-length transaction; if the buyer exercised reasonable commercial judgment; and if the price paid may have been influenced by the buyer’s expectation that it would earn monopoly profits. Regulators and courts have recognised that there is no one “correct” methodology to be applied in all circumstances. Rather, the selection of the valuation methodology to be applied will depend on the specific circumstances in which the valuation exercise is being undertaken. For example, the ACCC recently noted in relation to the valuation of Telstra’s fixed network assets: In determining the initial RAB value as at 1 July 2009, the ACCC has applied the same methodology as it adopted in the April 2011 Discussion Paper. The ACCC confirms its view that there is no uniquely “correct” value for the RAB. Consequently, the ACCC considered a number of alternative valuation methodologies including DAC, DORC and current cost accounting in settling on an appropriate initial RAB value.7

In that decision, the ACCC took into account both DORC and historic cost approaches to valuing Telstra’s fixed network assets. The ACCC ultimately adopted a value that was between historic cost and DORC values.8 The High Court has similarly noted in the context of the previous Gas Code (the predecessor to the NGR) that there are a number of wellrecognised asset valuation methodologies. In this context, the High Court noted the importance of certainty and predictability around the choice of valuation methodology, and the risks associated with “idiosyncrasy”: Section 8.4 of the Code, as amended, refers to the “Capital Base” as “the value of the capital assets that form the Covered Pipeline or are otherwise used to provide Services” … The primary and natural significance of the words used in, and the structure of, s 8.10(a)–(d) mandates consideration of values derived from “well recognised asset valuation methodologies” followed by a comparative weighing up of these approaches to valuation. It is clear that a range of well recognised asset valuation methodologies can be considered and within that range a choice of value may be made. The discretion permitted is wide but limited. The reference to well recognised asset valuation methodologies emphasises that valuation, in this context, is a practical exercise. Idiosyncrasy in valuing an initial capital base is capable of distorting the proper calculation of a rate of return …9

[5.70] The choice of valuation methodology typically depends on (among other things): • methodologies previously used to value the same assets (if any); 7 ACCC, Inquiry to Make Final Access Determinations for the Declared Fixed Line Services: Final Report, July 2011, 43. 8 ACCC, Inquiry to Make Final Access Determinations for the Declared Fixed Line Services: Final Report, July 2011, 42–46. 9 East Australian Pipeline Pty Limited v Australian Competition and Consumer Commission (2007) 233 CLR 229, 243.

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• current pricing for services provided by the assets, and the expected impact on prices of applying different methodologies; • incentives for efficient investment in, and use of, the assets; • the extent to which the value of the assets has already been recovered from users (either through depreciation or capital contributions); • availability of information on historic costs; and • relative complexity associated with modelling optimised replacement costs. Where an asset has been subject to regulation previously and a path for regulated revenues and prices has been established, regulators will often adopt an approach that maintains a relatively stable price path, to the extent possible. This may involve either adopting the same methodology that was previously adopted or adopting a methodology that provides for stability. An example of the latter approach is the ACCC’s 2011 determination in respect of Telstra’s fixed line assets – in this decision, the ACCC adopted a value between historic cost and DORC on the basis that this chosen value provided for “price stability” (more specifically, it allowed the existing price for the Unconditioned Local Loop Service in metropolitan areas to be maintained).10

[5.80] The most commonly used asset valuation methodology for Australian utilities is DORC. DORC was used to provide an initial valuation of most electricity networks11 and some gas pipelines12 and is also the basis for valuation of several port and rail assets.13 From an economic efficiency perspective, DORC is seen to have two key advantages over other methodologies, such as depreciated historic cost: 1. A DORC valuation will better reflect the value that would be ascribed to assets in a competitive market and will therefore be more likely to result in efficient outcomes in terms of prices and service take-up. In a hypothetically competitive market, prices would not be allowed to rise 10 ACCC, Inquiry to Make Final Access Determinations for the Declared Fixed Line Services: Final Report, July 2011, 42–46. 11 See, for example, IPART, Pricing for Electricity Networks and Retail Supply: Report: Volume I, June 1999, s 5. For the New South Wales electricity distribution networks, IPART considered a range for the initial RAB between a value representing a roll-forward of a previous value (that previous value having been determined to deliver a particular price outcome) and a DORC value. For all but one of the networks, the value ultimately adopted by IPART was the DORC value. 12 For example, the Moomba to Sydney Pipeline was valued on a DORC basis, pursuant to a decision of the Australian Competition Tribunal on review of an access arrangement decision by the ACCC (Re East Australian Pipeline Limited [2004] ACompT 8, [68]). The decision of the Tribunal was later upheld by the High Court (East Australian Pipeline Pty Limited v Australian Competition and Consumer Commission (2007) 233 CLR 229). 13 For example, the Dalrymple Bay Coal Terminal at the Port of Hay Point and the rail network used for coal haulage in central Queensland, both of which are regulated by the QCA.

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above “efficient costs” – that is, the costs that would be incurred by an efficient operator using modern assets and current technology – since any attempt to price above this level would be defeated by new entry from a hypothetical efficient operator. Accordingly, in order to mimic the competitive market outcome, regulated prices should be based on a valuation of assets which reflects current technology and optimised asset design (that is, DORC). 2. Where there is a potential for new entry and bypass of the incumbent’s assets, regulation of pricing based on replacement cost will ensure that efficient entry occurs. Pricing based on a different valuation methodology may either discourage efficient investment and entry (if the valuation is below current replacement cost) or encourage inefficient entry. However, in some circumstances, DORC methodologies can have disadvantages compared to other methods. In particular, the process of optimisation and estimation of replacement costs can be information intensive and highly contentious. By contrast, where reliable historic cost information is available, an historic cost methodology will be relatively simple to implement. A further potential drawback of DORC methodologies is that the resulting value of assets that may be recovered through access charges may differ from the historic cost incurred by the access provider, meaning that there may be a degree of under- or over-recovery of historic investment costs. This is more likely to be the case where there has been significant technological change, resulting in divergence between the historic cost incurred by the access provider and current replacement costs. For these reasons, the appropriate choice of asset valuation methodology will depend on the particular circumstances of each case. There is no one methodology that can be said to be the best in all cases. Value of the asset base over time

[5.90] Where the building block model applies over an extended period of time, the value of the asset base will need to be updated to reflect the value of the asset base that is recovered via regulated revenue (through the allowance for depreciation), as well as any expansion or augmentation of the asset base. The updating of the asset base can be done either by revaluing the asset base in its entirety or by “locking in” the value of existing assets and making only incremental adjustments for new capital expenditure, asset disposals, depreciation and, in some regimes, stranded assets (that is, “rolling forward” the value of the regulatory asset base over time). It is (now) rare in Australian utility regulation that the asset base is revalued in its entirety at each regulatory review. This was the approach the ACCC took to regulate Telstra’s fixed line access services from 1997 until 2010. However, the ACCC has now abandoned this approach (at least in respect of fixed line services) in favour of a “lock in and roll forward”

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approach, noting that the continual revaluation of network assets had led to uncertainty around the future level of access prices and significant disputation around each revaluation.14 The more common approach is to lock in a value for the asset base and update this over time for incremental capital expenditure, asset disposals and depreciation (the “lock in and roll forward” approach). This is the approach taken in all sectors covered in this book (although a different approach has previously been taken in telecommunications and is still taken in respect of some services, for example, those regulated services provided by mobile networks). The “lock in and roll forward” approach is codified in the NGR,15 the NER16 and access determinations made by the ACCC in respect of Telstra’s fixed line assets (through fixed principles with a nominal expiry date of June 2021).17 A relatively simple example is set out in Box 5.2. Box 5.2: Roll-forward mechanism for Telstra’s fixed line assets 6.7 Roll-forward mechanism (a) The RAB is to be rolled forward each year according to the formula below: RABt+1 = RABt + capext – depreciationt – asset disposalst where “RABt+1” opening RAB for the next regulatory year “RABt” opening RAB for the current year “capext” forecast capital expenditure during the current year “depreciationt” regulatory depreciation during the current year “asset disposalst” asset disposals during the current year Source: ACCC, Final Access Determinations No 1, 2, 3, 4, 5 and 6 of 2011

14 ACCC, Review of the 1997 Telecommunications Access Pricing Principles for Fixed Line Services: Draft Report, September 2010, 15. 15 NGR, r 77(2). 16 NER, cl S6.2.1(e) (for distribution); cl S6A.2.1(f) (for transmission). 17 ACCC, Final Access Determination No 1 of 2011 (LSS), cl 6.7; ACCC, Final Access Determination No 2 of 2011 (LCS), cl 6.7; ACCC, Final Access Determination No 3 of 2011 (PSTN OA), cl 6.7; ACCC, Final Access Determination No 4 of 2011 (PSTN TA), cl 6.7; ACCC, Final Access Determination No 5 of 2011 (ULLS), cl 6.7; ACCC, Final Access Determination No 6 of 2011 (WLR), cl 6.7; Final Access Determination No 1 of 2013 (WADSL), cl 6.7. The same fixed principles have been included in the replacement access determinations for each service published in October 2015 (Final Access Determinations 2 to 8 of 2015, 7 October 2015). The fixed principles set out in these determinations have a nominal expiry date of 30 June 2021.

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A further adjustment that may be made to the asset base when it is rolled forward is an adjustment for inflation. Whether this further adjustment is made will depend on how the regulator has chosen to calculate the return on capital (see [5.130]) and the return of capital (see [5.110]). An adjustment for inflation will be required where the regulator has chosen to use a real rate of return, or where a nominal rate of return is used and there is an offsetting reduction of the return of capital building block for inflation. An adjustment for inflation will not be required where the regulator has chosen to use a nominal rate of return and there is no offsetting reduction of the return of capital building block for inflation.18 The different ways in which inflation may be accounted for in the building block model are discussed in further detail at [5.220].

[5.100]

In relation to new capital expenditure, this will generally be subject to some form of prudency review by the regulator, which may take the form of an ex ante and/or an ex post review. An ex ante review will involve the regulator reviewing the service provider’s forecast capital expenditure for the forthcoming period and assessing whether the forecast amount represents prudent and efficient expenditure. An ex post review will involve the regulator reviewing amounts of capital expenditure incurred over a past period and assessing whether all of this expenditure was prudently and efficiently incurred. The regulator will only allow amounts of capital expenditure to be added to the asset base (and recovered through regulated revenue) to the extent that the applicable prudency and efficiency tests have been satisfied. The tests for prudency and efficiency of capital expenditure vary between sectors and regulators. However, these tests generally require the regulator to be satisfied that the expenditure would be incurred (or would have been incurred) by a prudent service provider acting efficiently, having regard to applicable service standards, regulatory obligations and expected levels of demand. For example, the NGR states that “capital expenditure must be such as would be incurred by a prudent service provider acting efficiently, in accordance with accepted good industry practice, to achieve the lowest sustainable cost of providing services”.19

18 Where a nominal rate of return is used, this will compensate the access provider for the erosion of asset values resulting from inflation and therefore an adjustment to the asset value is not required. The treatment of inflation is discussed further at [5.220]. 19 NGR, r 79(1)(a).

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Return of capital [5.110]

The building block model includes an allowance for depreciation of the value of the asset base, which is sometimes referred to as the “return of capital”. This building block allows the regulated business to recover the value of its investment in the assets used to provide regulated services, over the life of those assets.

Depreciation is most commonly calculated on a “straight line” basis. Straight line depreciation implies that the amount of depreciation included in the building block model in any year is equal to the value of the relevant assets at the commencement of that year divided by their remaining life.20 This is referred to as straight line depreciation because the amount of depreciation is the same in each year of the asset’s life (at least in nominal terms21), meaning that the value of the asset base is reduced in a linear fashion. Under the straight line method (and also other methods), the amount included in the building block model for depreciation will depend on the value of the asset base (see [5.50]) and the economic life of the assets used in the provision of regulated services. The economic life of the assets in question will depend on how long they are expected to deliver services,22 which in some cases may be 50 years or more. Although straight line depreciation is the most common approach, other approaches to calculating the depreciation building block are available. In some circumstances, it may be appropriate to either defer depreciation (meaning that the amount of depreciation allowed is lower in early years of the asset’s life)23 or accelerate depreciation (meaning that the amount of depreciation allowed is higher in early years of the asset’s life).24 An example of an approach that involved deferral of depreciation was the ACCC’s “positively tilted annuity”, which was (until recently) applied in the calculation of prices for regulated fixed line services provided by Telstra.25 20 For example, if the value of the asset base is $100 and its remaining life is 10 years, the amount of depreciation for each year will be $10. 21 Depending on the treatment of inflation, the amount of depreciation in real terms may not be the same in each year. The different ways in which inflation may be treated are discussed at [5.220]. 22 The economic life may be equal to the technical life of the asset or may be shorter than this if there is a risk the asset may become redundant or stranded prior to the end of its technical life. 23 This is sometimes referred to as “back-end loaded depreciation”. 24 This is sometimes referred to as “front-end loaded depreciation”. 25 Use of an annuity formula allows the regulator to set a smooth path for capital returns (including the return on and of capital), over the life of assets used to provide regulated services. This approach may be used where it is desirable for prices to follow a particular path over time; for example, if it is desirable for prices to be lower in early years and

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Whether it is appropriate to defer or accelerate depreciation will, to some extent, depend on the nature of demand for regulated services, since the approach to depreciation will affect the path of prices over time. Deferral of depreciation will lead to lower prices earlier in the life of the asset and higher prices later on, all other things being equal. Therefore, an approach involving some deferral of depreciation may be appropriate in circumstances where demand for the regulated service is relatively weak or where the market is immature, which may be the case for newer assets or for assets with substantial spare capacity.

[5.120]

The choice of depreciation methodology will generally be guided by a set of principles or criteria that the chosen methodology must satisfy. These will include: • that assets are not depreciated more than once (that is, the service provider is not allowed to recover depreciation multiple times, and may not continue to earn revenue from an asset once it is fully depreciated); and • that assets are depreciated over their economic life. Additional principles or criteria may also be included to explicitly allow for the deferral or acceleration of depreciation in certain circumstances. An example of depreciation criteria (from the NGR) is set out in Box 5.3. Box 5.3: Depreciation criteria in the NGR 89 Depreciation criteria (1) The depreciation schedule should be designed: (a) so that reference tariffs will vary, over time, in a way that promotes efficient growth in the market for reference services; and (b) so that each asset or group of assets is depreciated over the economic life of that asset or group of assets; and (c) so as to allow, as far as reasonably practicable, for adjustment reflecting changes in the expected economic life of a particular asset, or a particular group of assets; and (d) so that (subject to the rules about capital redundancy), an asset is depreciated only once (ie that the amount by which the asset is depreciated over its economic life does not exceed the value of the asset at the time of its inclusion in the capital base (adjusted, if the accounting method approved by the AER permits, for inflation)); and (e) so as to allow for the service provider’s reasonable needs for cash flow to meet financing, non-capital and other costs.

increase thereafter. In the case of Telstra’s fixed line assets, a positively tilted annuity was applied as part of the TSLRIC+ methodology previously employed by the ACCC. The positively tilted annuity provided for increasing capital returns (and therefore increasing prices) over time, and had the effect of delaying depreciation on Telstra’s fixed line assets (relative to a straight line approach). See, for example, ACCC, Assessment of Telstra’s Unconditioned Local Loop Service Band 2 Monthly Charge Undertaking: Final Decision (Public Version), April 2009, 255–275.

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Access Regulation in Australia (2) Compliance with subrule (1)(a) may involve deferral of a substantial proportion of the depreciation, particularly where: (a) the present market for pipeline services is relatively immature; and (b) the reference tariffs have been calculated on the assumption of significant market growth; and (c) the pipeline has been designed and constructed so as to accommodate future growth in demand.

Return on capital [5.130]

The return on capital is intended to represent the return that the regulated business would need to offer investors so as to attract necessary capital. The return on capital is sometimes referred to as the “cost of capital”, since the return required by investors is a cost to the business itself. The cost of capital manifests in two forms: 1. as dividends paid to equity holders (the return on equity for those investors, and the cost of equity to the business); and 2. as interest paid to debt-holders (the return on debt for debt-holders, and the cost of debt to the business). The building block model calculates a return on capital for each year as the product of the opening value of the asset base for that year (discussed at [5.50]) and the rate of return for that year. That is: Return on capital = (Opening asset value) × (Rate of return) The assumption behind this calculation is that the regulated business will need to finance the value of its asset base through some combination of equity and debt, and will incur a cost in doing so, in the form of a return paid to investors (both debt and equity) on the value of its asset base.

Determining the rate of return

[5.140]

The rate of return used to calculate the return on capital is intended to reflect the return that would be required by investors looking to invest in a business with a similar degree of risk as that faced by the regulated service provider. The rate of return is invariably calculated as a weighted average of the cost of debt and the cost of equity, referred to as the “weighted average cost of capital” (“WACC”). The weightings assigned to the cost of debt and cost of equity in this calculation are typically based on an efficient benchmark gearing level; that is, the proportions of the asset base that are assumed to be financed by debt and equity respectively. The WACC calculation can be expressed in the following way: WACC = (D/V) × Kd + (1 – D/V) × Ke

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where: “D/V” is the assumed proportion of the asset base financed through debt26 “Kd” is the cost of debt “Ke” is the cost of equity. The WACC may be expressed in different ways, including: • As a pre-tax or post-tax WACC – A pre-tax WACC will reflect the return that would be required by investors prior to payment of company tax, and will therefore include compensation for tax that would need to be paid on that return. A post-tax WACC reflects the return to investors after the payment of company tax, and will therefore be lower than the pre-tax return. If a post-tax WACC is used, then a separate building block will be required to compensate the business for tax liabilities (see [5.200]). • As a real or nominal WACC – A real WACC is the return that would be required by investors on the real value of the asset base (that is, adjusted for inflation), while a nominal WACC reflects the return required on the nominal (unadjusted) value of the asset base. A nominal WACC will effectively compensate the regulated business for inflation, and will therefore be higher than a real WACC whenever inflation is positive. If a real WACC is used, the asset base will need to be adjusted for inflation, so as to maintain its real value (see [5.220] in relation to treatment of inflation). In most regulatory frameworks, the use of some form of WACC to calculate the rate of return is codified in the rules and/or fixed principles governing regulatory determinations. For example, the use of a WACC is required under the NER and the NGR.27 The cost of debt

[5.150]

The cost of debt for a regulated business is the return that would need to be offered to prospective debt-holders, given the financing risk associated with the regulated business. The greater the financing risk associated with the business, the higher will be the cost of debt (all other things being equal) – this is because a higher return will need to be offered to investors in order for them to be willing to take on greater financing risk. The cost of debt is typically estimated by reference to reported yields on corporate bonds with a particular credit rating and term to maturity. The credit rating and term to maturity will be determined having regard to the financing risk associated with the provision of the regulated services and term of debt that it would be expected to issue. The cost of debt may be

26 For most regulated businesses, the assumed gearing (that is, D/V in the above formula) is around 50 per cent. Electricity and gas network businesses are assumed to finance 60 per cent of their asset base through debt, while for Telstra the current assumption is 40 per cent. 27 NER, Ch 6, cl 6.5.2 (distribution); Ch 6A, cl 6A.6.2 (transmission); NGR, r 87.

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expressed either as simply the relevant corporate bond yield or equivalently as the sum of the risk free rate28 and the “debt risk premium”.29 The financing risk associated with the regulated business may be based on the business’ actual credit rating, or it may be based on the characteristics of a notional benchmark efficient business. In telecommunications, the ACCC uses Telstra’s actual credit rating (currently A–) to estimate the cost of debt, while for electricity and gas network businesses the AER uses a benchmark credit rating of BBB+.30 The term to maturity will typically be a long term, such as ten years. This reflects the fact that utilities tend to make long-lived investments (for example, purchase of plant and equipment with an expected life of several decades) and issue long-term debt to finance these investments.

[5.160]

Once the regulator has selected the form of debt instrument (including credit rating and term to maturity) that will be used to determine the cost of debt, it must then decide how to measure the return that would be required by investors on such an instrument. The regulator may need to decide (among other things) what data sources will be used to measure returns, and over what period these returns will be measured. For example, if the regulator has chosen to estimate the cost of debt by reference to the yield on ten-year BBB+-rated corporate bonds, it will need to decide the period over which yields will be measured and which data sources will be used. The measurement period has to date usually been based on a relatively short period (for example, 20 to 40 business days) measured close to the time of the regulator’s final decision. This is to ensure that the cost of debt reflects both prevailing conditions in debt markets and the cost of debt that would be faced by the business if it were to raise debt finance around the time of the decision. Recently, however, some regulators have moved to measuring the cost of debt over historic periods, recognising that the regulated business may not necessarily finance all of its debt around the time of the regulatory decision. Changes have now been made to the NER

28 The risk-free rate is the return required by investors on a notional risk-free asset. In Australia, this is usually measured by reference to the yield on Commonwealth Government Securities (“CGS”). 29 The debt risk premium (“DRP”) is the premium above the risk-free rate required by investors to invest in riskier assets. The DRP will be higher for assets that are considered to be relatively riskier (all other things being equal). The DRP is measured as the difference between the relevant corporate bond yield used to measure the cost of debt and the CGS yield used to measure the risk-free rate. Therefore, calculating the cost of debt as the sum of the risk-free rate and the DRP should be equivalent to measuring it simply by reference to the relevant corporate bond yield. 30 AER, Explanatory Statement: Rate of Return Guideline, December 2013, 126.

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and NGR to allow measurement of the cost of debt over an historic period, and the AER has started using such an approach.31 Issues around the measurement period and choice of data source have become highly contentious in recent years, as there has been more limited trading of corporate bonds (and therefore more limited data on yields) and as corporate bond yields have become volatile since the onset of the global financial crisis (“GFC”). These issues have been central to several recent merits review proceedings before the Australian Competition Tribunal on these issues, including: • EnergyAustralia,32 which involved a decision of the AER made around the height of the GFC in relation to the averaging period to be used in measuring corporate bond yields and also the government bond yield used to determine the risk-free rate. The choice of averaging period had a very significant impact on the rate of return and ultimately the building block revenue allowance, because there was a very dramatic decline in government bond yields in particular following the onset of the GFC. Ultimately this decision turned on whether the AER had discretion under the NER to refuse the use of a particular averaging period that had been proposed. • ActewAGL,33 Jemena Gas (No 5),34 United Energy35 and APT Allgas,36 which all related to the choice of data to be used in measuring corporate bond yields. Once again this choice had very significant impacts on the rate of return and building block revenues, due to a wide divergence between yields estimated by different data providers. The divergence in yields was largely attributable to limited trading of long-dated bonds (and therefore limited data on long-dated bond yields) in the wake of the GFC. 31 Prior to November 2012, the NER and NGR both required the rate of return to be consistent with “prevailing conditions in the market for funds”. This was generally interpreted as requiring the cost of debt to be measured over a period relatively close to the time of the regulator’s decision. However, as part of amendments made to both the NER and NGR in November 2012, the “prevailing conditions” requirement was removed in relation to the cost of debt (but retained in relation to the cost of equity). This amendment was partly in response to calls for greater flexibility in the rules around measurement of the cost of debt, including flexibility to use longer historic measurement periods: see Australian Energy Market Commission, Rule Determination: National Electricity Amendment (Economic Regulation of Network Service Providers) Rule 2012; National Gas Amendment (Price and Revenue Regulation of Gas Services) Rule 2012, 29 November 2012, Ch 7. 32 Application by EnergyAustralia [2009] ACompT 8, [72]–[117]. 33 Application by ActewAGL Distribution [2010] ACompT 4 (“ActewAGL”). 34 Application by Jemena Gas Networks (NSW) Ltd (No 5) [2011] ACompT 10 (“Jemena Gas (No 5)”). 35 Application by United Energy Distribution Pty Limited [2012] ACompT 1, [387]–[462] (“United Energy”). 36 Application by APT Allgas Energy Limited (No 2) [2012] ACompT 5 (“ATP Allgas”).

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Following comments made by the Australian Competition Tribunal in these decisions,37 several regulators have undertaken reviews of their cost of debt methodologies.38 These reviews have canvassed various alternative methodologies that seek to overcome the data availability and market volatility issues that arose in EnergyAustralia, ActewAGL, Jemena Gas (No 5), United Energy and APT Allgas. The alternative methodologies that have been canvassed (and which may be adopted in future) include use of shorter-term bonds and use of historic average (rather than prevailing) yields. The cost of equity

[5.170]

The cost of equity for a regulated business is the return that would need to be offered to prospective equity holders. The cost of equity is most commonly estimated using the Sharpe-Lintner capital asset pricing model (“SL-CAPM”). The SL-CAPM is a financial model that seeks to explain the expected return on a financial asset by reference to the expected return on a market portfolio and exposure of the asset in question to non-diversifiable market risk. The SL-CAPM formula can be expressed in the following way:39 Ke = Rf + β × (Rm – Rf) or Ke = Rf + β × (MRP)

where: “Ke” is the cost of equity “MRP” is the market risk premium and is calculated as the difference between the expected return on the market portfolio of risky assets (Rm) and the expected return on a risk-free asset (Rf) “β” represents the contribution of the asset to risk associated with the market portfolio, measured by the co-variance of the asset’s returns with the market return (also referred to as the “equity beta”).40 37 For example, in APT Allgas, the Tribunal noted that it would be open to the regulator to consider alternative methodologies in consultation with stakeholders, given the concerns expressed in relation to traditional methods: see Application by APT Allgas Energy Limited (No 2) [2012] ACompT 5, [115]. 38 See, for example, IPART, Developing the Approach to Estimating the Debt Margin: Final Decision, April 2011; Economic Regulation Authority, Discussion Paper: Measuring the Debt Risk Premium: A Bond-Yield Approach, December 2010. 39 The CAPM was (until recently) specified in cl 6.5.2 of the NER. Following changes made to the NER in November 2011, the CAPM is no longer specified. The rules are now framed more generally and provide greater flexibility in relation to the choice of financial model for estimating the cost of equity. Under the current rules, the CAPM may be used, but other models may also be used. 40 The equity beta is a measure of the risk associated with a particular asset, relative to market-wide risk. This is typically measured by reference to the co-variance of the asset’s returns with market returns (with market returns usually measured by an equities index). If the equity beta is one, this implies that the assets returns and risk profile are perfectly aligned with those of a diversified market portfolio. However, if equity beta is less than

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The SL-CAPM formula implies that if the asset’s risk profile is in line with that of the market portfolio, the value for the equity beta (β) will be one (1) and cost of equity (Ke) will be equal to the return on the market portfolio. However, if an asset is seen as less risky and its returns therefore move in the same direction as the broader market but to a lesser extent, the value of the beta (β) will be less than one and the cost of equity (Ke) will be lower than the return on the market portfolio.41 The SL-CAPM is almost universally relied upon by Australian regulators to estimate the cost of equity. Use of this model has in some cases been prescribed by applicable rules or regulatory instruments;42 however, in most cases it has been adopted as a matter of practice.43 Although the SL-CAPM is the most widely used and accepted model, other models also exist. These include the Fama-French Model44 and the Black CAPM.45 Variability in the regulated rate of return

[5.180]

The regulated rate of return can vary considerably between regulatory determinations. This can occur for several reasons, including: • fluctuations in financial market conditions, which can affect marketbased inputs into the rate of return calculation, such as the risk-free rate, corporate bond yields and expected returns on the market portfolio of risky equity assets; • the nature of the regulated business and its assumed risk profile, which will influence things like the credit rating and equity beta; and one (but greater than zero), this implies that the asset’s returns move in the same direction as the market portfolio but are less volatile. An equity beta greater than one implies greater risk and greater volatility in returns, compared to the market portfolio.

41 Likewise, if an asset is seen as more risky and its returns therefore move in the same direction as the broader market but to a greater extent, the value of the beta (β) will be greater than one and the cost of equity (Ke) will be greater than the return on the market portfolio. 42 For example, use of the CAPM is prescribed under the fixed principles established by the ACCC for determination of prices for declared fixed line telecommunications services. Use of the SL-CAPM used to be required under cl 6.5.2 and cl 6A.6.2 of the NER. However, since November 2012, the NER have provided greater flexibility in terms of the models that may be used to estimate the return on equity. 43 Even though the NER now provides flexibility in terms of the models that may be used to estimate the return on equity, the AER continues to use the SL-CAPM as its “foundation model” for estimating the return on equity (see, for example: AER, Final Decision: Ausgrid Distribution Determination 2015–16 to 2018–19, Attachment 3 – Rate of Return, April 2015). 44 The Fama French Three Factor Model is different to the SL-CAPM in that it includes two additional factors: size and book-to-market ratio. The development of this model was based on empirical observation of additional factors that were significant in explaining variation in stock returns, but which were not accounted for in the SL-CAPM. 45 The Black CAPM is a variant of the SL-CAPM. The Black CAPM relaxes the assumption of the SL-CAPM that the return on a zero-beta asset is equal to the risk-free rate. The Black CAPM uses a “zero-beta return” parameter in place of the risk-free rate.

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• the approach taken by the regulator to the rate of return calculation, including the models relied upon and data sources used. Table 5.1 shows the variation in regulated rates of return across various regulated sectors in recent years. The observed variation between businesses and over time reflects a number of factors, including: • characteristics of individual businesses, which influence industryspecific parameters in the rate of return calculation. For example, the equity beta applied to Telstra is lower than that applied to most other businesses in the table and its assumed credit rating is higher, which partly explains why its WACC is lower than for other businesses with decisions around the same time; and • fluctuations in financial market conditions, which impact on bond yields used to calculate the cost of debt and the risk-free rate. This was particularly evident during 2015, when there was a very dramatic reduction in yields on Commonwealth Government Securities used to determine the risk-free rate. This resulted in rates of return falling to around five per cent (post-tax nominal) for some businesses, which was around five percentage points lower than what had been determined for the same or comparable businesses during 2009 and 2010. These fluctuations in the rate of return can have very significant impacts on building block revenue allowances. To illustrate, if the rate of return falls by three percentage points for a business with an asset base worth $1 billion, this would reduce its revenue allowance by $30 million per year ($150 million if the rate of return is locked in for a five-year regulatory period). Table 5.1 Comparison of regulated returns 2009–15 Utility

Sector

Regulator

EnergyAustralia Integral Energy Country Energy Energex Ergon Energy ETSA Utilities Jemena Gas QR Network Citipower Powercor Jemena Electricity SP AusNet UED DBCT Envestra APT Allgas Telstra Aurora Powerlink

Electricity Electricity Electricity Electricity Electricity Electricity Gas Rail Electricity Electricity Electricity Electricity Electricity Ports Gas Gas Telecoms Electricity Electricity

AER AER AER AER AER AER AER QCA AER AER AER AER AER QCA AER AER ACCC AER AER

Post-tax nominal WACC 10.02% 10.02% 10.02% 9.72% 9.72% 9.76% 10.43% 9.96% 9.49% 9.49% 10.33% 9.75% 9.49% 9.86% 10.28% 9.94% 8.50% 8.28% 8.61%

Date of decision April 2009* April 2009* April 2009* May 2010* May 2010* May 2010* June 2010* September 2010 October 2010* October 2010* October 2010* October 2010* October 2010* October 2010 June 2011* June 2011* July 2011 April 2012 April 2012

5 The Building Block Model Utility

Sector

Regulator

APA GasNet ElectraNet Telstra SP AusNet Aurizon Network Ausgrid Essential Energy Endeavour Energy TransGrid Jemena Gas Telstra

Gas Electricity Telecoms Electricity Rail Electricity Electricity Electricity Electricity Gas Telecoms

AER AER ACCC AER QCA AER AER AER AER AER ACCC

Post-tax nominal WACC 7.22% 7.50% 6.33% 7.87% 7.17% 6.68% 6.68% 6.68% 6.75% 5.41% 6.00%

89

Date of decision March 2013* April 2013 May 2013 January 2014 April 2016 April 2015** April 2015** April 2015** April 2015 June 2015** October 2015

* Decision that was the subject of concluded merits review proceedings. For these decisions, the date in the final column is the date of the original decision, but the WACC is as varied on review. ** These figures are from the AER’s final determinations and are for the first year of the relevant period to which the decision relates. The AER’s final determinations were, including on grounds for review relating to the return on debt, set aside by the Tribunal on 26 February 2016 and remitted back to the AER to be made again. On 24 March 2016, the AER subsequently sought judicial review of the Tribunal’s determinations, including on grounds relating to the return on debt. At the time of writing, these judicial review proceedings had not been determined.

Operating costs [5.190]

The building block model will include an allowance for the operating and maintenance costs the service provider is expected to incur. This is sometimes referred to as the “opex building block”. The operating expenditure allowance usually includes: • ongoing asset maintenance costs; • a share of head office costs (for example, costs of administration and finance departments); and • in the case of telecommunications network businesses, network power and transmission costs (for example, costs of powering network buildings and telecommunications equipment). The operating expenditure allowance will be based on the costs that the regulated business would be expected to incur in providing regulated services, assuming that it is acting efficiently and prudently. The operating expenditure allowance may be estimated in various ways, including: • Top-down – A top-down estimate may be derived by starting with an amount of operating costs incurred in a previous year and making adjustments to this. This will require selection of a “base year” to be used as the starting point, and consideration of what adjustments may be appropriate. Adjustments may be made to remove one-off costs in the

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base year that are not expected to recur (for example, costs associated with a natural disaster) or to account for expected changes in operating conditions that may lead to step changes in operating costs. Adjustments may also be made to account for expected efficiency improvements (for example, efficiency improvements associated with new technology). • Bottom-up – A bottom-up estimate may be derived by modelling the costs that a hypothetical service provider would incur in delivering the regulated services. This bottom-up estimate would not be based on the costs actually incurred by the regulated business. The modelling exercise would require assumptions to be made regarding (for example) the number of staff required to undertake particular tasks, the cost per hour of staff time and the regularity of maintenance works. Depending on the assumptions made, this bottom-up estimate may be quite different to the costs actually incurred by the regulated business. • Benchmarking – Operating costs may be based on costs incurred by comparable businesses. Benchmarking requires selection of a set of businesses that are sufficiently comparable with the regulated business, in terms of their scale, operating environment and the services they provide. The benchmark operating cost allowance would be based on the costs actually incurred by these businesses. Depending on the businesses used for comparison, there may need to be adjustments made to reflect differences in their respective operating environments. In some cases, the operating expenditure allowance may be based on a combination of the above measures. For example, a bottom-up model may be used as the primary measure, but with cross-checks based on top-down estimates and relevant benchmarks. Once the operating expenditure allowance has been set in the building block model, this will determine the amount of operating and maintenance costs the service provider may recover through regulated charges. If the service provider actually incurs more than what is allowed for, it will generally not be able to recover the amount in excess of its allowance.46 Conversely, if the service provider actually incurs less than what is allowed for, it will generally be entitled to keep the difference between its allowance and the amount actually incurred. This provides the regulated business with incentives to improve efficiency (see [5.260]–[5.310] for a more detailed discussion of efficiency incentive mechanisms).

46 As discussed at [5.240], there may be limited exceptions to this. In particular, where there are unforeseen events that impact on operating costs during the regulatory period (for example, acts of terrorism or natural disasters), there may be scope to pass through any additional costs associated with these events.

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Treatment of taxation [5.200]

The building block model also provides an allowance for the net tax liabilities that the regulated business is expected to incur. This accounts for the fact that at least some of the income earned by the business from the provision of regulated services will be subject to corporate tax.47

Taxation is usually dealt with in one of two ways: 1. The revenue allowance may be calculated on a pre-tax basis, which means that the rate of return will be the return that is required by investors prior to paying company tax. In a pre-tax model, the rate of return will be higher, reflecting the fact that some company tax will need to be paid on that return. 2. The revenue allowance may be calculated on a post-tax basis, which means that the rate of return will be the return that is required by investors after payment of company tax. The rate of return in a post-tax model will be lower (all other things being equal), since company tax is assumed to have already been paid. However, in this model there will be a separate building block to account for the cost of corporate taxation (this separate building block does not appear in the pre-tax model). If the same assumptions are made about the corporate tax rate and other parameters, the pre-tax and post-tax models should deliver the same revenue outcome. The key difference between the two models is that the post-tax model allows for different assumptions to be made about the value of the asset base and asset lives for tax purposes.

[5.210]

The more common approach in Australian utility regulation is the post-tax approach. As noted at [5.200], this involves application of a post-tax rate of return and inclusion of a separate net tax liabilities building block. The net tax liabilities building block is calculated as: Tax = TI × t × (1 – γ) Where: “TI” is the regulated businesses’ taxable income “t” is the corporate tax rate (usually set at the statutory rate) “γ” (gamma) is the assumed value of imputation credits. The business’ taxable income will be the revenue it receives from regulated services, less any deductions. Deductions will usually include its operating

47 Even where the access provider is subject to a reduced tax burden (for example, if it is a government-owned business), the tax building block will usually be included and calculated in the same manner. This is to maintain “competitive neutrality”.

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costs, depreciation48 and debt servicing costs (that is, the return on debt). Therefore, the taxable income will effectively be equivalent to the return on equity. The value for gamma (γ), which represents the assumed utilisation of tax imputation credits, can be the most contentious element of the tax calculation. It has been highly contentious in recent years, with several merits and judicial review proceedings focusing on the appropriate value for gamma.49 Gamma will take a value between zero and one, with zero indicating that investors place no value on imputation credits. A higher value for gamma reduces the amount of revenue allowed for the cost of corporate income tax (all other things being equal) as it is assumed that more of the corporate tax liability is effectively “recovered” by investors through imputation credits. Gamma is conventionally calculated as the product of two inputs: 1. The imputation credit payout ratio, or distribution rate. The payout ratio or distribution rate is typically based on the economy-wide distribution rate (that is, the average rate of distribution across all companies), which can be observed from publicly available tax statistics. In some cases, however, this may be determined by reference to the distribution rate of the regulated business itself.50 2. The assumed value of distributed imputation credits (sometimes referred to as “theta”). This parameter is more difficult to estimate and there are several different methods available. Some information on the value of distributed credits may be obtained from “redemption rates” (that is, the proportion of distributed credits that are redeemed by investors). However, this will at best provide an upper bound for the value of distributed credits. The more widely accepted approach is to rely on empirical studies – known as “dividend drop-off studies” – which examine changes in share prices around the time of imputation credit distribution.51 48 Depreciation for tax purposes may or may not be the same as the amount of depreciation that is allowed in the annual revenue requirement (the depreciation building block referred to at [5.110]). Whether or not it is the same will depend on whether the tax lives used for accounting purposes are the same as the economic lives used to calculate the depreciation allowance in the annual revenue requirement. 49 See, for example, Application by Energex Limited (No 2) [2010] ACompT 7; Application by United Energy Distribution Pty Limited [2012] ACompT 1, [512]–[517]; Applications by Public Interest Advocacy Centre Ltd and Ausgrid [2016] ACompT 1, [1006]-[1120]. 50 For example, in determining the value for gamma to apply to Telstra, the ACCC has regard to Telstra’s actual payout ratio. In its October 2015 determination of prices for Telstra’s declared fixed line wholesale services, the ACCC noted that Telstra’s actual payout ratio was 0.95, based on a 10-year average to 2014–15: ACCC, Public inquiry into Final Access Determinations for Fixed Line Services: Final Decision, October 2015, 95. 51 A dividend drop-off study measures the change in the prices of shares around the time of dividend payout. The reduction in share price is referred to as the “dividend drop-off” and is attributed to the combined value investors derive from cash dividend and

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In a series of decisions handed down between 2010 and 2012, the Australian Competition Tribunal set a value for gamma of 0.25, based on a distribution rate of 0.7 and a value for theta of 0.35. These decisions were based on a newly commissioned dividend drop-off study as well as a review of the existing evidence on payout ratios and the value of distributed credits.52 However, not all regulators have adopted the value for gamma established by the Tribunal. For example, the ACCC has set a value for gamma of 0.45 for Telstra and the AER has applied a gamma of 0.40 in a series of recent electricity and gas network pricing decisions.53 Estimation of gamma continues to be highly contentious. In a recent decision, the Australian Competition Tribunal has set aside the AER’s decision to use a gamma of 0.40 and directed the AER to use a gamma of 0.25, in line with the Tribunal’s earlier decisions.54 The AER has appealed this ruling to the Federal Court (this appeal had not be heard at the time of writing).

Treatment of inflation [5.220]

The building block model will compensate the service provider for the effects of inflation. Inflation is treated as a cost to the business, in the sense that it erodes the value of the asset base over time. If inflation is not compensated for, the business will not be able to recover the real value of its investments. Inflation may be accounted for in the building block model in one of three ways: 1. A real asset value may be used in combination with a real rate of return. In this scenario the value of the asset base is increased each year to account for the effect of inflation, thus maintaining a real asset value. The return on capital is then calculated using a real rate of return (that is, a rate of return which accounts for the effect of inflation and is therefore lower than a nominal return in the presence of positive inflation). 2. A nominal asset value may be used in combination with a nominal rate of return. In this scenario the value of the asset base is not increased to associated imputation credits. Dividend drop-off studies measure empirically the value ascribed to imputation credits and cash dividends using data on the size of the dividend drop-off: see, for example, SFG Consulting, Dividend Drop-off Estimate of Theta: Final Report, 21 March 2011.

52 Application by Energex Limited (No 2) [2010] ACompT 7; Application by United Energy Distribution Pty Limited [2012] ACompT 1, [512]–[517]. 53 ACCC, Public inquiry into Final Access Determinations for Fixed Line Services: Final Decision, October 2015, 94–95; AER, Final Decision: SA Power Networks Distribution Determination 2015–16 to 2019–2020, Attachment 4 – Value of imputation credits, October 2015. 54 Applications by Public Interest Advocacy Centre Ltd and Ausgrid [2016] ACompT 1, [1006]-[1120].

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account for the effect of inflation and therefore remains in nominal terms. However, the rate of return will be higher (assuming positive inflation) since it is expressed in nominal terms. 3. A real asset value may be used in combination with a nominal rate of return, but with an additional adjustment to the revenue allowance. In this scenario the value of the asset base is increased each year to account for the effect of inflation, and the business receives a (higher) nominal rate of return. However, since the business is effectively being compensated twice for the effect of inflation, there is an offsetting adjustment made to the depreciation building block. This is the approach that is prescribed in the NER.55 If applied consistently, the three approaches set out above should deliver the same revenue outcome over the life of the assets used to deliver regulated services. However, there may be some difference in the timing of returns in some cases.

Total revenue requirement [5.230]

The total revenue requirement for the regulated business is calculated as the sum of the building block items discussed at [5.110]–[5.200]. That is: • • • •

the return of capital (depreciation); plus the return on capital; plus operating and maintenance costs; plus an allowance for net tax liabilities (in a post-tax model).

Depending on the form of regulation that is applied, the revenue allowance calculated by the building block model may apply as a simple revenue cap, or may be translated into a more complex control mechanism. For example, the revenue allowance may be allocated between different services offered by the regulated business and used to derive price caps for these services (this will require assumptions about demand for each service), and/or the revenue allowance may be used to derive a price path.

Revisiting the building block revenue allowance Adjustments during the regulatory period

[5.240]

Once the building block model has been applied to determine the revenue allowance and/or price cap to apply for a particular period, this will be largely “locked in”. For the most part, the regulated business will bear the risk of its costs being higher or lower than what has been allowed for in the building block revenue allowance. However, there may be some limited scope to revisit the revenue allowance if certain unforeseen or uncertain events occur during the regulatory period.

55 NER, Ch 6, cl 6. 4. 2(b)(1)(ii) (distribution); Ch 6A, cl 6A.5.4(b)(1)(ii) (transmission).

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There are broadly two types of events that may allow the business to revisit the revenue allowance that has been set, if they occur during the regulatory period: 1. Uncertain events – events that are likely to occur at some point in future and which will trigger additional expenditure when they occur. Since it is not known at the time of the regulatory determination exactly when (or if) the relevant “trigger event” will occur, the additional expenditure is too uncertain to be factored into the building block model. However, the regulatory determination may identify the additional expenditure as being contingent on certain events occurring and may allow for the expenditure to be included in the building block model if and when the relevant trigger event occurs.56 For example, the regulatory determination may identify the completion of a complementary piece of infrastructure as a trigger for undertaking a particular contingent project. 2. Unforeseen events – events that could occur at any time during the regulatory period, and which (if they were to occur) would have an impact on costs but the magnitude of this impact is unknown at the time of the regulatory determination. These may include events such as acts of terrorism, changes in tax laws or changes to externally determined service standards. The regulatory determination may account for such unforeseen events by allowing for pass through of additional costs associated with the event. Pass through of any additional costs will usually be subject to approval by the regulator if and when the event occurs.57 Adjustments at the end of the regulatory period

[5.250]

There may also be a review of certain matters at the end of a regulatory period, and consequential adjustments to the building block model to reflect the outcome of such a review.

The most common form of ex post adjustment is for capital expenditure undertaken during the regulatory period. Typically, there will be an adjustment at the end of the regulatory period for the difference between expenditure actually incurred during the period and the amount that was forecast, where that additional expenditure has been assessed as prudent and efficient.58 This adjustment is made to the value of the asset base, which is to be used in the building block model going forward, to ensure that the asset value reflects amounts of capital expenditure actually incurred. 56 This is provided for under the NER. See NER, Ch 6, cl 6.6A (distribution), Ch 6A, cl 6A.8 (transmission). 57 NER, Ch 6, cl S6.2.1(e)(3) (distribution), Ch 6A, cl S6A.2.1(f)(3) (transmission). 58 For example, the NER provides that in determining the value of the RAB as at the commencement of a new regulatory period, the previous value of the RAB must be “trued up” by adjusting for any difference between actual and forecast expenditure in the previous regulatory period: NER, cl S6.2.1(e)(3), cl S6A.2.1(f)(3).

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Other ex post adjustments are less common. Allowances for operating costs, taxation and the cost of capital are usually not revisited, except in the case of unforeseen events (see [5.240]). This means that the business will bear the risk of these costs actually being higher than what has been allowed for in the building block model, and will keep the benefit if these costs turn out to be lower. However, the costs that have actually been incurred in past regulatory periods may be relevant to setting future allowances, to the extent that there have been material differences between what has been allowed by the regulator and what has been incurred.

INCENTIVE MECHANISMS [5.260]

The building block model may (but need not) incorporate incentive mechanisms. These mechanisms will typically be reflected in the model as additional building blocks to allow for incentive payments or penalties imposed on the regulated business. There are broadly two types of incentive mechanisms which are sometimes incorporated in the building block model: 1. Efficiency incentive mechanisms, which are intended to offer incentives for the regulated business to improve efficiency (see [5.270]); and 2. Service standard incentive mechanisms, which are intended to offer incentives for the regulated business to maintain and/or improve service standards (see [5.290]).

Efficiency incentive mechanisms [5.270]

Efficiency incentive mechanisms are primarily designed to induce operational efficiency gains. Operational efficiency gains will be achieved where the regulated business can reduce its operating costs while maintaining the same or higher levels of service. A regulated business will ordinarily face some incentives to seek out operational efficiency gains where its operating expenditure allowance has been approved by the regulator and fixed in the building block model and where the amount of revenue it is allowed to recover is based on this pre-approved amount. This incentive arises because the business will be allowed to “keep” any savings in operating expenditure during the period for which the allowance has been set. For example, if the operating expenditure allowance is set at $100 for each year of the regulatory period but the business achieves savings such that it only incurs $95 each year in operating costs, then it will usually be able to “keep” the $5 per year in savings as a reward for improving efficiency. However, when the regulator comes to reset the operating expenditure allowance as part of recalculating building block revenues for a new period, it will usually take into account the fact that efficiency gains have been realised and will therefore set the allowance for the new period at $95 per year. Therefore, the business will only keep the benefit of efficiency gains during the period in which they are realised.

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Similarly, if the operating costs of the business increase such that it actually incurs $105 per year, the business will usually have to absorb the additional $5 per year in costs for each year in the regulatory period (unless this additional cost can be claimed as a pass-through: see [5.240]). However, when the operating expenditure allowance is reset, the regulator may allow for the increase in costs in the allowance for the new period, provided that it is satisfied that this level of operating costs reflects what a prudent operator would incur. In this way, the design of the building block model can provide some incentives for efficiency. However, the limitation in simply relying on the design of the building block model is that this will not provide for continuous incentives. While incentives for efficiency will be quite strong in the early years of a regulatory period, these incentives will wane in later years – this is because the business will be able to “keep” the benefit of an efficiency gain that is achieved in early years for longer, since there will be a longer period of time before the operating expenditure allowance is reset. In order to overcome this limitation, more sophisticated efficiency incentive mechanisms may be deployed by the regulator. These mechanisms can be designed to ensure that the business faces a continuous incentive for efficiency gains throughout the regulatory period.

[5.280]

An example of a more sophisticated efficiency incentive mechanism is the efficiency benefit sharing scheme (“EBSS”) applied by the AER to electricity businesses.59 The effect of the EBSS is to allow businesses to “keep” the benefit of an efficiency gain (or incur the penalty associated with an efficiency loss) for a full five years, which corresponds to the length of a regulatory period. After the five years have elapsed, the benefit or penalty is effectively transferred to consumers through the reset of the operating expenditure allowance. The EBSS appears in the building block model for electricity businesses as a separate building block item. The value of the EBSS building block will reflect the benefits (from efficiency gains) and penalties (from efficiency losses) accrued by the business over the preceding five-year period. These accrued benefits and penalties are reflected in the building block model as adjustments to the total revenue allowance. This is provided for under the NER, which requires the revenue building blocks for each year to include, among other things, “the revenue increments or decrements (if any) for that year arising from the application of any efficiency benefit sharing scheme”.60 The application of the EBSS to electricity businesses under the NER is discussed in more detail in Ch 8.

59 AER, Efficiency Benefit Sharing Scheme for Electricity Network Service Providers, November 2013. 60 NER, cl 6.4.3(a)(5), cl 6A.5.4(a)(5).

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The AER’s capital expenditure incentive scheme operates in a similar way.61 When coupled with an ex post capex review, the operation of this scheme means consumers only pay a portion of efficient overspends, pay nothing for inefficient overspends, and share in the benefits of any underspend.

Service standard incentive mechanisms [5.290]

The building block model may also incorporate mechanisms designed to offer incentives to maintain or improve service standards. These mechanisms will typically provide for incentive payments to be made where the business achieves certain service levels and/or penalties where standards are not met. Depending on the industry, service standards may be established by reference to various metrics, for example: • network outage or fault rates; • fault repair times; or • throughput rates. The target values for each service parameter will typically be based on the standards that have historically been maintained by the service provider. In some cases, an adjustment may be made to the historic standard to reflect expectations of service level improvements in future. As for efficiency incentive schemes, any benefit or penalty associated with meeting (or failure to meet) service standards will be reflected as an additional revenue block in the building block model.

An example of a service standard incentive mechanism currently in operation is the service target performance incentive scheme (“STPIS”), which applies to electricity transmission businesses.62 Under the STPIS, each transmission business has benchmarks set for various service levels and network capability parameters, and is offered financial incentives to meet and/or exceed these benchmarks. The key service parameters relate to outage rates, loss of supply event frequency and average outage duration. The financial incentives for meeting or exceeding these benchmarks are capped at between one and two per cent of service providers’ annual revenue.

[5.300]

The setting of service standards has wider implications beyond the service standard incentive mechanism. Service standards will impact on the amount and timing of expenditure that needs to be undertaken – all other things being equal, higher service standards should lead to greater

61 AER, Capital Expenditure Incentive Guidelines for Electricity Network Service Providers, November 2013. 62 AER, Electricity Transmission Network Service Provider: Service Target Performance Incentive Scheme Version 5, October 2015.

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and more immediate expenditure needs (which will increase the amount of revenue that needs to be recovered from customers) as assets may need to be replaced or augmented earlier in their life. Therefore, the setting of service standards and associated incentives will involve a balance between ensuring adequate levels of service are maintained, on the one hand, and avoiding unnecessary increases in prices, on the other. Recent debates in the electricity sector demonstrate that striking an appropriate balance between these two objectives is not a simple task.63

Other incentive schemes [5.310]

Other more bespoke incentive mechanisms may also apply in some industries depending on the objectives of regulation in that particular industry. In some cases, these mechanisms may be designed to promote wider social or political objectives, such as ensuring service delivery to particular parts of the community or promoting development of environmentally friendly technologies. Some of these more bespoke schemes are discussed in the industry-specific chapters later in this book. Where these schemes apply and involve financial incentives for the service provider, there may be additional adjustments to be applied in the building block model. These adjustments will typically be applied similarly to adjustments made for the efficiency and service standard incentive schemes discussed at [5.270] and [5.290].

SUMMARY [5.320]

The building block model is the most commonly used economic regulatory tool in Australia. It is currently used to determine the price of access to the services provided by electricity, gas and telecommunications networks and is also used in a number of other sectors, including port and rail. The building block model is codified in various regulatory instruments, regulatory determinations and access undertakings across a broad range of utility sectors. Although there are a number of variations on the building block model and different ways in which each component can be determined, the core principle is that the access provider should be entitled to recover the long-run efficient cost of providing access to its infrastructure, including a reasonable return on capital. The building block model gives effect to this core principle by calculating the regulated business’ revenue requirement as the sum of the following building blocks: • a return of capital (or depreciation of the asset base); • a return on capital; • operating and maintenance costs; and

63 See, for example, Productivity Commission, Electricity Network Regulatory Frameworks, Inquiry Report 62, 2013, 525–546.

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• an allowance for net tax liabilities. Additional cost building blocks may also be included to account for the effects of inflation (depending on how this is accounted for in the asset value and return on capital) and/or benefits or penalties associated with incentive schemes. Later chapters will discuss the application of the building block model in specific regulated industries focusing on the different ways in which the various model inputs are determined by the regulator in each industry and the legal constraints that apply to the regulatory decision-making process.

Questions for discussion 1. What are the key building blocks in the building block model? 2. Compare and contrast the different methods of valuing the initial asset base. 3. How is the rate of return typically calculated? 4. What is the purpose of an incentive scheme?

6

Role of Regulatory Bodies [6.10] OVERVIEW ........................................................................................................................................ 101 [6.20] REGULATORY BODIES ................................................................................................................... 101 [6.20] Commonwealth bodies .................................................................................................................... 101 [6.70] State and territory regulators .......................................................................................................... 105 [6.150] Recommendations for reform of regulatory institutions ......................................................... 109 [6.160] MODELS FOR REGULATORY INTERVENTION ..................................................................... 110 [6.170] Negotiate/arbitrate ......................................................................................................................... 110 [6.200] Propose/respond ............................................................................................................................. 113 [6.230] Consider/determine ........................................................................................................................ 115 [6.250] REGULATORY DISCRETION ....................................................................................................... 117 [6.260] Use of permissive and mandatory language ............................................................................. 117 [6.270] Prescription of methods to be applied ........................................................................................ 117 [6.280] Requirements to have regard to particular matters .................................................................. 119 [6.290] Discretion to consider other relevant matters ............................................................................ 119 [6.300] Relevance of the decision subject matter .................................................................................... 120 [6.310] SUMMARY ....................................................................................................................................... 120

OVERVIEW [6.10] Access regulation in Australia is administered by a number of different federal, state and territory regulatory bodies. Their regulatory powers are drawn from various federal, state and territory statutes that establish these bodies and set out their functions. Depending on the statutory framework, regulators can have different roles and varying degrees of discretion in making decisions. In some regimes, the role of the regulator may be limited to resolving access disputes that are notified to it, while in other regimes, the regulator may be required to take a more proactive role in determining the terms and conditions of access. This chapter provides an introduction to the various regulatory bodies that are involved in making access regulation decisions, and the scope of their powers. Specific applications of these powers in the context of particular regulated industries will be discussed in later chapters.

REGULATORY BODIES Commonwealth bodies Australian Competition and Consumer Commission

[6.20] The Australian Competition and Consumer Commission (“ACCC”) is an independent Commonwealth statutory authority

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established under Pt II of the Competition and Consumer Act 2010 (Cth) (“CCA”). The ACCC has a number of powers under the CCA, including to: regulate access to services provided by certain nationally significant infrastructure; assess mergers; investigate anti-competitive conduct; institute court proceedings; and enforce remedies. The key powers of the ACCC relevant to access regulation are: • under Pt IIIA of the CCA (the National Access Regime), the ACCC is empowered to arbitrate disputes between service providers and third parties for access to declared services (Div 3) and to assess access undertakings put forward by service providers and access codes put forward by industry bodies (Div 6); • under Pt IVB of the CCA, the ACCC may have a role under industry codes (where such codes have been established), including powers to initiate investigations and issue infringement notices for contraventions; • under Pt VIIA of the CCA, the ACCC has certain price surveillance powers; and • under Pt XIC of the CCA (the telecommunications access regime), the ACCC has a range of powers for regulating access to telecommunications services, including powers to declare services, make access determinations, assess access undertakings, and ensure compliance with determinations and binding rules of conduct. The ACCC also has: a role in the regulation of rural water pricing (under the Water Act 2007 (Cth)); a role in the regulation of access to certain rail infrastructure (under Pt IIIA of the CCA); a price surveillance function for airports and postal services (under Pt VIIA of the CCA); and a monitoring role in relation to wheat export (under the Terminal Access (Bulk Wheat) Code of Conduct, a mandatory industry code established by regulations made under Pt IVB of the CCA). Decisions of the ACCC are potentially subject to judicial review. Certain ACCC decisions under Pt IIIA of the CCA are also subject to merits review by the Australian Competition Tribunal. Merits review is not available for decisions of the ACCC under Pt XIC of the CCA. Australian Energy Regulator

[6.30] The Australian Energy Regulator (“AER”) is an independent Commonwealth statutory authority established under Pt IIIAA of the CCA. The AER shares staff, resources and facilities with the ACCC, but has an independent board. Although it is established under a Commonwealth statute, the primary functions of the AER are under state and territory energy laws. The CCA

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provides that powers may be conferred on the AER by state or territory energy law or by a local energy instrument.1 The key powers of the AER relating to access regulation include: • regulating price and/or revenue allowances for electricity distribution and transmission networks within the National Electricity Market (“NEM”), pursuant to powers under the National Electricity Law (“NEL”) (as adopted by legislation in each of the NEM states) and the National Electricity Rules (“NER”); and • regulating price and/or revenue allowances for covered gas pipelines, pursuant to powers under the National Gas Law (“NGL”) (adopted by legislation in each state) and the National Gas Rules (“NGR”). In addition to its role as regulator of network access, the AER also has a role in wholesale and retail energy markets. However, it does not set wholesale or retail energy prices; rather, it is more focused on monitoring compliance with market rules, reporting and enforcement. Decisions of the AER are potentially subject to judicial review by the Federal Court. Certain decisions of the AER made pursuant to the NEL and NGL are also subject to merits review by the Australian Competition Tribunal. Australian Energy Market Commission

[6.40] The Australian Energy Market Commission (“AEMC”) was established in 2005 pursuant to the Australian Energy Market Commission Establishment Act 2004 (SA). Although established under an Act of the South Australian Parliament, the AEMC has a role in the economic regulation of gas and electricity network businesses that extends beyond South Australia. The AEMC is the principal rule-making body under the NEL and NGL. One of its key roles is to assess proposals for changes to the NER (which apply to participants in the NEM and, most relevantly for the purposes of this book, contain the rules relating to the economic regulation of electricity network businesses in the NEM) and the NGR (which apply to gas pipelines). The establishment of the AEMC was part of a coordinated policy response to the 2002 Council of Australian Governments (“COAG”) Energy Market Review (“Parer Review”). As part of its policy response to the Parer Review, the relevant COAG Council (the then Ministerial Council on Energy, now the COAG Energy Council) recommended that a new rule-making and market development body (the AEMC) be established.2 The existence of a rule-making body that is separate and independent from the regulator is a distinguishing feature of the framework for access 1 CCA, s 44AI. 2 Ministerial Council on Energy, Report to the Council of Australian Governments: Reform of Energy Markets, 11 December 2003.

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regulation in the energy sector. In other sectors, such as telecommunications, the regulator can have a role in both establishing key regulatory principles and in applying those principles in making determinations.3 National Competition Council

[6.50] The National Competition Council (“NCC”) was established under Pt IIA of the CCA. Its role is primarily as a research and advisory body, rather than as a decision-making body. The NCC’s key functions are to: • make recommendations to the responsible Minister in relation to applications for declaration of services and certification of state or territory access regimes under the National Access Regime (Pt IIIA of the CCA); • make recommendations on the coverage of gas pipelines under the NGL; and • carry out research or provide advice on matters referred to it by the responsible Minister.4 As discussed at [6.150], at the time of writing, the Australian Government had announced it was open to recommendations that would establish a new national access regulator and a new advisory body, which between them would effectively subsume the current functions of the NCC. Australian Competition Tribunal

[6.60] The Australian Competition Tribunal was established under Pt III of the CCA. The Tribunal consists of a President, Deputy Presidents, and other members.5 The presidential members of the Tribunal (being the President and any Deputy Presidents) are judges of the Federal Court.6 Its other members are appointed by the Governor-General and must be qualified for appointment by virtue of their knowledge of, or experience in, industry, commerce, economics, law or public administration.7 The Australian Competition Tribunal has a role both as a primary decision-making body (for example, in relation to authorisation of mergers) and as a review body. However, its main role in relation to access 3 For example, in making an access determination under Pt XIC of the CCA, the ACCC may include fixed principles provisions establishing the pricing principles and methodology to be applied in future determinations. In recent determinations, the ACCC has used fixed principles provisions to lock in use of a building block pricing methodology. 4 CCA, s 29B. 5 CCA, s 30(2). 6 CCA, s 31(1). 7 CCA, s 31(2).

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regulation is conducting merits review of certain decisions of ministers and the ACCC under Pt IIIA, and the AER under the NEL and the NGL.8 Its merits review powers include: • merits review of declaration decisions under the National Access Regime (that is, decisions of the responsible Minister to declare a service, based on a recommendation from the NCC); • merits review of arbitration determinations made by the ACCC under the National Access Regime; • merits review of coverage decisions under the NGL (that is, a coverage decision of the responsible Minister, based on a recommendation from the NCC); and • merits review of certain network revenue and/or pricing decisions made by the AER under the NEL and NGL.

State and territory regulators Queensland Competition Authority

[6.70] The Queensland Competition Authority (“QCA”) was established under the Queensland Competition Authority Act 1997 (Qld) (“QCA Act”). The QCA has a range of functions and powers under the QCA Act, including the regulation of access to essential infrastructure in Queensland under Pt 5. Other QCA powers under Pt 5 of the QCA Act include: • making recommendations about declaration to the responsible state Minister; • approving access agreements; • arbitrating access disputes in relation to services declared under the QCA Act; and • assessing access undertakings put forward by service providers in respect of services declared under the QCA Act. The QCA’s decision-making is governed by a statutory framework that includes an object provision, pricing principles and matters that the QCA must have regard to in making particular decisions. The objects clause and pricing principles mirror the objectives and principles set out in other Australian third party access regimes, including the National Access Regime.9 Objectives and principles of this nature were originally recommended by the Productivity Commission10 for the National Access 8 For the purposes of hearing and determining proceedings, the Australian Competition Tribunal is constituted by a Division of the Tribunal, which consists of a presidential member and two non-presidential members (CCA, s 37). The presidential member presides at proceedings of a Division of the Tribunal (CCA, s 41). The presidential member also determines any questions of law that arise in proceedings before a Division of the Tribunal (CCA, s 42(1)). All other questions are determined in accordance with the opinion of a majority of the members constituting the Division (CCA, s 42(2)). 9 CCA, ss 44ZZA(3), 152BCA(1). 10 Productivity Commission, Review of the National Access Regime, Inquiry Report No 17, 2001.

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Regime, and were subsequently integrated into other access regimes (including the QCA Act regime) pursuant to a COAG agreement.11 Certain rail and port access services are taken to be declared services under the QCA Act.12 The QCA is therefore responsible for regulation of access to these services. It also has a delegated power in relation to regulation of retail electricity tariffs under the Electricity Act 1994 (Qld). This power was most recently delegated by the Queensland Minister for Energy and Water Supply in November 2015 in respect of retail electricity prices for customers in regional Queensland for the tariff year 2016–17. Finally, the QCA has a role in recommending prices for certain bulk water and irrigation services pursuant to Ministerial referrals under the QCA Act. Independent Pricing and Regulatory Tribunal

[6.80] The Independent Pricing and Regulatory Tribunal (“IPART”) was established under the Independent Pricing and Regulatory Tribunal Act 1992 (NSW) (“IPART Act”). IPART is responsible for price regulation of certain transport, water and retail gas services in New South Wales. It also has a licensing and monitoring role in the energy sector. IPART has powers of regulation under a number of New South Wales statutes, including the Gas Supply Act 1996 (NSW), the Water Industry Competition Act 2006 (NSW), the Passenger Transport Act 1990 (NSW) and the Transport Administration Act 1988 (NSW). IPART also has price monitoring and arbitration powers under the IPART Act. Essential Services Commission of Victoria

[6.90] The Essential Services Commission of Victoria (“ESCV”) is Victoria’s independent economic regulator, established under the Essential Services Commission Act 2001 (Vic). The ESCV is the successor to the Victorian Office of the Regulator-General. The ESCV’s key access regulation responsibilities relate to the Victorian transport and water sectors, and include: • assessment and approval of access arrangements for certain rail infrastructure in Victoria; • price monitoring of some Victorian ports; and • price regulation of bulk water and retail water and waste water services. 11 The object of Pt 5 of the QCA Act and the pricing principles were both inserted by the Queensland Competition Authority Amendment Act 2008 (Qld). As noted in the Second Reading Speech accompanying the amending Bill, these changes to the QCA Act implemented certain commitments made by the State of Queensland in the 2006 COAG Competition and Infrastructure Reform Agreement (“CIRA”) (Queensland, Parliamentary Debates, Legislative Assembly, 13 February 2008, 151 (AP Fraser)). The CIRA had included an agreement by COAG to streamline third party access regimes, and included in these regimes a consistent set of regulatory principles. 12 QCA Act, s 250.

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It also has a compliance monitoring, licensing and reporting role in the energy sector and an advisory role in relation to certain transport services (such as hire car and taxi services). Office of the Tasmanian Economic Regulator

[6.100]

The Office of the Tasmanian Economic Regulator (“OTTER”) was established in 2010 under the Economic Regulator Act 2009 (Tas). The OTTER replaced the statutory positions of the Electricity Regulator, Director of Gas, Government Prices Oversight Commission, and Water and Sewerage Economic Regulator. The OTTER’s main area of responsibility relating to access regulation is the Tasmanian water sector. Under the Water and Sewerage Industry Act 2008 (Tas), the OTTER is empowered to make price determinations in respect of regulated water and sewerage services. The OTTER also has a licensing and monitoring role in the energy sector and a prices oversight role in respect of government business enterprises.

Essential Services Commission of South Australia

[6.110]

The Essential Services Commission of South Australia (“ESCOSA”) was established under the Essential Services Commission Act 2002 (SA) (“ESC Act”), replacing the former regulator, the South Australian Independent Industry Regulator.

ESCOSA’s objective, as specified in the ESC Act, is the “protection of the long term interests of South Australian consumers with respect to the price, quality and reliability of essential services”.13 “Essential services” are defined as electricity, gas, water and sewerage, maritime, rail, and any other services prescribed from time to time.14 ESCOSA’s key access regulation functions relate to the transport and water sectors and include: • access regulation for the Tarcoola-Darwin railway and specified intrastate rail lines under the AustralAsia Railway (Third Party Access) Act 1999 (SA) and the Railway (Operations and Access) Act 1997 (SA); • pricing and access regulation for specified port services under the Maritime Services (Access) Act 2002 (SA); and • retail price regulation and performance monitoring in the water sector under the Water Industry Act 2012 (SA). ESCOSA also performs a licensing and performance monitoring role in the energy sector. Economic Regulation Authority of Western Australia

[6.120]

The Economic Regulation Authority of Western Australia (“ERA”) was established by the Economic Regulation Authority Act 2003

13 ESC Act, s 6(a). 14 ESC Act, s 3.

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(WA). The ERA has regulatory responsibilities in the gas, electricity, rail and water sectors in Western Australia. In relation to gas pipeline access, the ERA has similar powers and responsibilities to those of the AER in the eastern states. Under the National Gas Access (WA) Act 2009 (WA), the NGL applies in Western Australia with the ERA (rather than the AER) as the responsible regulator. At the time of writing, the Western Australian Department of Finance – Public Utilities Office was undertaking a project (the Transfer of Regulatory Functions Project) to, among other things, develop and implement legislative changes to transfer regulatory functions for regulating gas pipelines from the ERA to the AER.15 The electricity regulatory framework in Western Australia is currently undergoing reform directed at adopting the national electricity regulation framework under the NEL for regulating Western Power’s transmission and distribution network and transferring powers of regulation from the ERA to the AER. The adoption of the national electricity network regulation framework for regulation of Western Power’s network by the AER comes within the scope of the Transfer of Regulatory Functions Project mentioned above. It is anticipated that the first regulatory determination made by the AER for Western Power’s network will apply from 1 July 2018. Northern Territory Utilities Commission

[6.130]

The Northern Territory Utilities Commission is responsible for oversight of those industries that are declared to be regulated industries in the Northern Territory. The Utilities Commission has been established as a separate administrative unit within the Department of Treasury and Finance under the Utilities Commission Act 2000 (NT). Its current areas of responsibility are price regulation and performance monitoring in the electricity, and water and sewerage industries.

Independent Competition and Regulatory Commission

[6.140]

The Independent Competition and Regulatory Commission (“ICRC”) is the independent economic regulator in the Australian Capital Territory and was established under the Independent Competition and Regulatory Commission Act 1997 (ACT). The ICRC’s key responsibilities in relation to access regulation concern the water and sewerage sector. It has powers to issue price directions and to initiate inquiries and investigations in the water and sewerage sector in the Australian Capital Territory.

15 See Western Australia Department of Finance, Transfer of Regulatory Functions Project (27 November 2015) .

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Recommendations for reform of regulatory institutions [6.150]

The Competition Policy Review Final Report (“Harper Review”) was released on 31 March 2015.16 The Review Panel made a number of significant recommendations in relation to Australia’s competition and regulatory institutions. One of the key recommendations was that the access and pricing functions of the ACCC be transferred to a new body provisionally known as the Access and Pricing Regulator (“APR”). These functions would include telecommunications declaration and access functions under Pt XIC of the CCA, price monitoring functions under the Water Act 2007 (Cth), and access arbitration functions under the National Access Regime in Pt IIIA. The AER, which currently sits within the ACCC, would be moved to the APR as an integrated unit.17 The Review Panel recommended that the new APR take on the current functions of the NCC under the National Access Regime and the NGL. The Review Panel also suggests that some state and territory regulatory functions could be transferred to the APR where national frameworks and markets are established (for example, rail and water regulatory functions could be transferred to the APR in the longer term). Finally, the Review Panel recommended the establishment of a new Australian Council for Competition Policy (“ACCP”) as a national body accountable to the Commonwealth, state and territory governments. The ACCP would act as an advocate for competition, assess the progress of competition reform, undertake market studies and consider competition payments. Its role would be similar in some respects to that of the NCC in implementing the National Competition Policy in the 1990s, but with greater state and territory participation.18 In relation to the establishment of such a body, the Australian Government has stated that it “remains open” to this recommendation. The Government has indicated that it will continue discussions with states and territories on how a new national framework could be developed to promote economic growth and the most appropriate institutional arrangements to support reform.19 In relation to the establishment of a body such as the proposed ACCP, the Government supports the need for a body to oversee progress

16 Ian Harper, Peter Anderson, Su McCluskey and Michael O’Bryan, Competition Policy Review: Final Report, 31 March 2015. 17 Harper Review, 476–477. 18 Harper Review, 76. 19 Australian Government, Australian Government Response to the Competition Policy Review, 24 November 2015, 38.

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on competition reform and has indicated that it will discuss the design, role and mandate of such a body with the states and territories.20

MODELS FOR REGULATORY INTERVENTION [6.160]

The role of the regulator varies between regulatory regimes. In some regimes, the regulator’s role is largely reactive, limited to assessing proposals put to it and/or resolving access disputes. In other regimes, the regulator may take a more proactive role in determining the terms and conditions of access. The following discussion focuses on three broad regulatory intervention models: the “negotiate/arbitrate” model (see [6.170]); the “propose/ respond” model (see [6.200]); and the “consider/determine” model (see [6.230]). These represent three points along a spectrum of possible intervention models and there may be variations or hybrids of these three models. The three models are not mutually exclusive and they may, in some cases, be used in a complementary fashion.

Negotiate/arbitrate [6.170]

Of the three models that will be discussed, the “negotiate/ arbitrate” model is the least interventionist model for regulatory intervention. The negotiate/arbitrate model usually has the following features: • access seekers are free to negotiate terms of access with the access provider; • where terms of access cannot be agreed commercially, either the access seeker or access provider may notify a dispute to the regulator; • where a dispute is notified, the regulator is empowered to arbitrate the dispute and determine the terms of access to apply as between the parties to that dispute. Dispute procedures and determination powers of the regulator will be set out in the empowering legislation; • the regulator is not otherwise empowered to determine the terms of access. However, the regulator may, in some cases, establish pricing principles which it will apply in arbitrating access disputes. A key advantage of the negotiate/arbitrate model is that it gives commercial negotiation the primary role in determining the terms of access. The regulator will be called upon to make a determination only where commercial negotiation has failed. The negotiate/arbitrate model can be a relatively low-cost and light-touch model, provided that access seekers are in a position to effectively negotiate

20 Australian Government, Australian Government Response to the Competition Policy Review, 24 November 2015, 34–35.

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with the access provider. Where access seekers have limited negotiating power, negotiation will rarely be successful, leading to many disputes being notified to the regulator. In general, the negotiate/arbitrate model is most likely to be appropriate where the negotiating power of access seekers and the access provider is well balanced. For example, the negotiate/arbitrate model has been used for some airports and sea ports, where the access provider is not vertically integrated and there is a small number of large users. In these cases, the access provider will face incentives to negotiate with the large users to secure usage contracts. Conversely, the negotiate/arbitrate model is unlikely to be appropriate where the access provider is vertically integrated and/or there are a large number of potential users. In these cases, the access provider may not face the same incentive to negotiate with potential users. Examples of where the negotiate/arbitrate model has been used are discussed at [6.180] and [6.190]. National Access Regime

[6.180]

Where a service is declared under the National Access Regime (Pt IIIA of the CCA), the negotiate/arbitrate model may be used to determine the terms of access to that service in the absence of a commercial arrangement being struck between the service provider and the access seeker. Under the National Access Regime, the negotiate/arbitrate model is complementary to a propose/respond model. Arbitration of access disputes is only available in respect of those aspects of access that are not the subject of an access undertaking that has been proposed by the access provider and accepted by the ACCC (see [6.200] in relation to undertakings). If an access seeker is unable to agree with the access provider on one or more aspects of access to a declared service that is not the subject of an undertaking, either the access provider or the access seeker may notify the ACCC that an access dispute exists (CCA, s 44S). The ACCC is then required to arbitrate the dispute in accordance with Div 3 of Pt IIIA of the CCA. A determination by the ACCC in an arbitration under the National Access Regime may deal with any matter relating to access to the service, including matters that were not the basis for notification of the dispute (CCA, s 44V). This may include: • requiring the provider to provide access to the service by the third party; • requiring the access seeker to accept, and pay for, access to the service; • specifying the terms and conditions of the access seeker’s access to the service (including price terms); • requiring the access provider to extend the facility;

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• requiring the access provider to permit interconnection to the facility by the access seeker. The ACCC can only make such a determination under the National Access Regime where an access dispute has been notified. The ACCC is not otherwise empowered to specify the terms of access to a declared service. Telecommunications access regime

[6.190]

The negotiate/arbitrate model has been used in the telecommunications sector. From 1997 until 2010, the negotiate/arbitrate model was the primary means of determining the terms of access to declared telecommunications services under Pt XIC of the CCA. A negotiate/arbitrate model continues to apply in relation to access to certain facilities (including access to telecommunications transmission towers and underground facilities) under Sch 1 to the Telecommunications Act 1997 (Cth). For access to services declared under Pt XIC of the CCA, the negotiate/ arbitrate model was replaced with a “consider/determine” model from 2011 onwards (see [6.240]). For declared telecommunications access services, the negotiate/arbitrate model was found to be ineffective, with many disputes being notified to the ACCC and long delays in the arbitration of these disputes. The relevant Explanatory Memorandum notes: The negotiate-arbitrate model has proven to be complex and delay-prone. Each access dispute has to be arbitrated individually – even if it is very similar to disputes that have previously been arbitrated. For instance, an arbitration relating to one of the most important declared services, the unbundled local loop service (ULLS), which commenced in early 2005 was not finally decided by the ACCC until December 2007, despite the Commission having made numerous earlier statements on ULLS pricing. Rather than encouraging flexible negotiation, the process has been a source of uncertainty and delay for access seekers. … The negotiate-arbitrate model within the telecommunications access regime has been extensively criticised by a range of stakeholders across the industry. Access seekers have been the primary critics, but the ACCC and bodies such as the Internet Society of Australia have also expressed grave doubts that the regime is achieving its aims. Stakeholders’ main areas of concern have been that the negotiate-arbitrate model is very slow, cumbersome and open to gaming (if not outright obstruction), and that Part XIC in its current form does not provide sufficient regulatory certainty for investment. It is ineffective largely because it has not effectively constrained the incentive of the vertically-integrated Telstra to provide access to its network on terms that are not as favourable as those it supplies to its own retail business.21

The Explanatory Memorandum also notes that there had been a very large number of access disputes notified under the telecommunications access 21 Explanatory Memorandum, Telecommunications Legislation Amendment (Competition and Consumer Safeguards) Bill 2010 (Cth), 48.

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regime, compared to other sectors where a negotiate/arbitrate model applied. As at October 2010, 164 telecommunications access disputes had been notified since the commencement of the Pt XIC regime in 1997, compared to four access disputes that had been notified in other sectors.22 The large number of access disputes referred to arbitration, and the long delays in the resolution of these disputes, suggested that the negotiate/ arbitrate model was not well suited to the telecommunications sector. Commercial negotiation had not been effective in many cases, and arbitration had not provided an effective means for resolving disputes. Further detail on the regulatory framework telecommunications is set out in Ch 10.

that

is

applied

in

Propose/respond [6.200]

The propose/respond model broadly involves the following:

• the access provider putting a proposal to the regulator in relation to the terms of access. In some cases, the access provider may be required to put such a proposal to the regulator periodically, while, in other cases, the access provider may have the option of seeking the regulator’s endorsement for its proposal; • the regulator will be required to either accept or reject the access provider’s proposal; • where the regulator accepts the proposal, the terms of access that are approved by the regulator will typically become the “default” terms of access, to be made available to all access seekers. Access seekers will usually be free to negotiate alternative terms if they wish, but the regulator-approved terms will always be available as a default; • where the proposal is not approved, the regulator may be (but is not always) empowered to determine the default terms of access itself. As the description in the first point above suggests, there are at least two possible variations on the propose/respond model. The first may be described as “mandatory propose/respond”, and involves the access provider being required to periodically submit proposals to the regulator, with powers for the regulator to determine terms of access where it does not approve a proposal. The second is “non-mandatory propose/respond” and involves the access provider having an option to submit a proposal to the regulator for approval. A non-mandatory propose/respond model is rarely used on its own because without any other scope for regulatory intervention, the regulator could potentially be sidelined entirely. Under this model, the regulator may only intervene where the access provider chooses to submit a proposal to it and, in the absence of any other scope for intervention, the access provider 22 Explanatory Memorandum, Telecommunications Legislation Amendment (Competition and Consumer Safeguards) Bill 2010 (Cth), 48.

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may have limited incentives to do this. A non-mandatory propose/respond model is most commonly used in combination with a negotiate/arbitrate framework. Where it is used in this way, the access provider will have an incentive to submit proposals to the regulator for approval, in order to establish a set of default terms. Depending on the access regime, the regulator’s discretion to accept or reject the proposal may be limited to some extent. For example, in some cases it may be that the regulator must accept the proposal (or a particular element of the proposal) if certain criteria are satisfied. Alternatively, the access regime may provide that the regulator must not accept the proposal unless it is satisfied of certain matters. Some examples of where the propose/respond model has been applied are discussed at [6.210]–[6.220]. National Access Regime

[6.210]

The National Access Regime incorporates a non-mandatory propose/respond model for declared services. This is used in combination with a negotiate/arbitrate model, as discussed at [6.180].

Under the National Access Regime, a person who is, or expects to be, the provider of a service may give a written undertaking to the ACCC in connection with the provision of access to the service.23 Section 44ZZA of the CCA list several examples of matters that might be dealt with in an undertaking, including: • terms and conditions of access to the service; • procedures for determining terms and conditions of access to the service; • an obligation on the provider not to hinder access to the service; • an obligation on the provider to implement a particular business structure; • an obligation on the provider to provide information to the ACCC or to another person; • an obligation on the provider to comply with decisions of the ACCC or another person in relation to matters specified in the undertaking; or • an obligation on the provider to seek a variation of the undertaking in specified circumstances. As discussed at [6.270], the ACCC has a broad discretion to accept undertakings under the National Access Regime. Where an undertaking is accepted by the ACCC, this effectively precludes notification of an access dispute in relation to any matter covered by the undertaking, so long as the undertaking is in operation. 23 CCA, s 44ZZA.

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The National Access Regime also allows for an “access code” to be proposed by an industry body and approved by the ACCC. The matters the ACCC must have regard to in assessing a proposed access code are the same as for an access undertaking. If the ACCC does not accept a proposed undertaking or industry code, or if the proposal is withdrawn before the ACCC makes its decision, there is no power for the ACCC to determine alternative terms of access. In this case, there would be no default terms of access (except to the extent that another undertaking or code is in force) and the negotiate/arbitrate model would continue to apply. National framework for electricity network regulation

[6.220]

A mandatory propose/respond model applies to electricity distribution and transmission networks within the NEM. Under the NER, a network service provider is required to submit a regulatory proposal within 17 months of the expiry of an existing regulatory determination or, where there is no determination in place, within three months of being required to do so by the regulator.24 The NER set out a number of requirements for a regulatory proposal, including that, for direct control services, it must include a building block proposal. Following receipt of a regulatory proposal, and after consulting on that proposal in accordance with the NER, the AER is required to make a determination.25 This determination is predicated on a number of constituent decisions, such as decisions on the allowed rate of return, expenditure forecasts and total revenue allowances.26 Further detail on the electricity regulatory framework is provided in Ch 8.

Consider/determine [6.230]

The consider/determine model differs from the negotiate/ arbitrate and propose/respond models in that the regulator’s power to determine the terms of access is not contingent on either a dispute being referred to it or a proposal being made by the access provider. In this model, the regulator may make a determination on its own initiative. The access regime will typically specify the types of matters that may be the subject of a determination by the regulator and the factors that must (or may) be taken into account in making a determination. An example of where the consider/determine model has been applied is discussed briefly at [6.240].

24 NER, Ch 6, cl 6.8.2(b) (distribution); Ch 6A, cl 6A.10.1(a) (transmission). 25 NER, Ch 6, cl 6.11.1 (distribution); Ch 6A, cl 6A.13.1 (transmission). 26 NER, Ch 6, cl 6.12.1 (distribution), Ch 6A, cl 6A.14.1 (transmission).

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Telecommunications access regime

[6.240]

As noted at [6.190], the telecommunications access regime has recently been substantially amended, including to provide for a consider/ determine model for regulatory intervention in respect of declared services. The ACCC may now make written determinations relating to access to a declared service (an access determination) on its own initiative.27 This power is not contingent on there being an access dispute or a proposal in relation to the terms of access to that declared service. An access determination may do any of the following:28 • specify any or all of the terms and conditions on which a carrier or carriage service provider is to comply with any or all of the standard access obligations applicable to the carrier or provider; • specify any other terms and conditions of an access seeker’s access to the declared service; • require a carrier or carriage service provider to comply with any or all of the standard access obligations applicable to the carrier or provider in a manner specified in the determination; • require a carrier or carriage service provider to extend or enhance the capability of a facility by means of which the declared service is supplied; • impose other requirements on a carrier or carriage service provider in relation to access to the declared service; • specify the terms and conditions on which a carrier or carriage service provider is to comply with any or all of those other requirements; • require access seekers to accept, and pay for, access to the declared service; • provide that any or all of the obligations referred to in s 152AR of the CCA are not applicable to a carrier or carriage service provider, either unconditionally or subject to such conditions or limitations as are specified in the determination; • restrict or limit the application to a carrier or carriage service provider of any or all of the obligations referred to in s 152AR of the CCA; • deal with any other matter relating to access to the declared service. The ACCC must have regard to a range of factors in making a determination, including: whether the determination will promote the long-term interests of end-users; the legitimate business interests of a carrier or carriage service provider who supplies, or is capable of supplying, the declared service; the interests of all persons who have rights to use the declared service; and the direct costs of providing access.29 27 CCA, s 152BC. 28 CCA, s 152BC(3). 29 CCA, s 152BCA.

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REGULATORY DISCRETION [6.250]

The degree of regulatory discretion involved in making a particular decision on the terms of access can vary depending on the statutory framework for decision-making and, to some extent, the nature of the decision subject matter. Some key factors affecting the degree of regulatory discretion are discussed at [6.260]–[6.300].

Use of permissive and mandatory language [6.260]

Decision-making rules may use either permissive or mandatory language. Where mandatory language is used, this will tend to limit the regulator’s discretion in respect of that decision.

In some cases, the regulator may be required to accept a proposal from the regulated business (or an element of that proposal), provided that it satisfies certain criteria. For example, under the NER, the AER “must accept” the forecast of expenditure that is included in a service provider’s proposal if the AER is satisfied that the forecast reasonably reflects the criteria set out in the NER.30 Similarly, under the NGR, where the AER’s discretion under a particular provision is limited, the AER may not withhold its approval to an element of an access arrangement proposal that is governed by that provision if the AER is satisfied that it complies with applicable requirements of the law and is consistent with applicable criteria (if any) prescribed by the law.31 In other cases, more permissive language may be used, allowing more discretion for the regulator in that aspect of its decision. For example, under some provisions of the NGR, the AER has “full discretion”, meaning that the AER has a discretion to withhold its approval to an element of an access arrangement proposal that is governed by that provision if, in the AER’s opinion, a preferable alternative exists that complies with applicable requirements of the law and is consistent with applicable criteria (if any) prescribed by the law.32 This means that where the AER is operating under a “full discretion” rule, it may approve an element of a proposal that is compliant with the relevant legal requirements and applicable criteria, but it is not required to do so. Instead, the AER may choose to substitute a preferable alternative that is also compliant.

Prescription of methods to be applied [6.270]

Decision-making rules can also vary in the level of prescription in the criteria to be applied by the regulator. Some regulatory regimes are

30 NER, Ch 6, cll 6.5.6(c), 6.5.7(c) (distribution), Ch 6A, cll 6A.6.6(c), 6A.6.7(c) (transmission). 31 NGR, r 40(2). The AER’s discretion is limited under the provisions governing new capital expenditure (r 79(6)), the depreciation criteria (r 89(3)), operating expenditure (r 91(2)) and tariffs (r 94(6)/95(4)). 32 NGR, r 40(3). The AER has full discretion in a number of areas, including in relation to determination of the rate of return (r 87).

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highly prescriptive as to the methods to be applied in determining terms and conditions of access. For example, both the NER and NGR prescribe the use of a building block methodology to determine revenue requirements for regulated electricity networks and for gas pipelines. The NER and NGR also prescribe methods and/or criteria to be applied in determining certain inputs into this methodology. Although the NER and NGR have been amended in recent years to provide for greater regulatory discretion around the determination of certain inputs, particularly the rate of return,33 these frameworks remain highly prescriptive compared to many other decision-making frameworks. By contrast, some regulatory regimes do not prescribe any particular method to be applied in determining terms of access, but instead require that the regulator be satisfied that a proposal is “reasonable” or that it complies with broad criteria. An example of this is the framework for acceptance of undertakings under the National Access Regime, which is extracted in Box 6.1. There are two points to note about this framework: first, permissive language is used; and second, the criteria and principles to be applied are relatively broad. Box 6.1: Framework for acceptance of undertakings under the National Access Regime The Commission may accept an access undertaking if it thinks it appropriate to do so having regard to the following matters specified under CCA, s 44ZZA(3): (aa) the objects of this Part; (ab) the pricing principles specified in section 44ZZCA; (a) the legitimate business interests of the provider; (b) the public interest, including the public interest in having competition in markets (whether or not in Australia); (c) the interests of persons who might want access to the service; (da) whether the undertaking is in accordance with an access code that applies to the service; (e) any other matters that the Commission thinks are relevant.

33 Clauses 6.5.2 and 6A.6.2 of the NER and r 87 of the NGR were substantially amended in November 2012. The effect of these changes was to remove the highly prescriptive framework that had previously applied and replace it with a more flexible framework, based around the achievement of a “rate of return objective”. Whereas the previous NER framework had prescribed use of a particular model to be used in estimating the return on equity, the amended framework makes no mention of any particular model, and allows the regulator to adopt the model (or combination of models) that will deliver an outcome that is consistent with the objective.

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Requirements to “have regard to” particular matters [6.280]

It is common for a statutory framework to require the decisionmaker to “have regard to” certain matters in making a determination. An example of this is the framework for accepting undertakings under the National Access Regime (see Box 6.1). The practical effect of such a requirement can vary depending on the context in which it is used. In some contexts, the requirement to “have regard to” particular matters has been construed as imposing a requirement to give “real weight” to those matters.34 In these cases, a requirement to have regard to specific matters or considerations may operate to constrain their discretion. For example, if the regulator is required to have regard to the “efficient costs” of providing access, this may constrain the way in which access prices are set.

However, in other contexts, the requirement to “have regard to” particular matters has been interpreted as imposing a lower standard. Some cases suggest that this requires the regulator to give “proper, genuine and realistic consideration” to the listed matters.35 This implies that the listed matters ought to be considered, but that the regulator has discretion as to what weight those matters are to be given in its determination. Whether something is to be given “fundamental weight”, given “real weight” or considered will depend on the statutory framework. Where the listed matter is an objective of the statutory framework, or a core set of principles, then it is likely to be interpreted as needing to be given substantial weight.36 On the other hand, if the listed matter has no other significance and is one of several listed matters that may be in some conflict or tension with other listed matters, the regulator is likely to have more discretion in considering what weight it should be given.

Discretion to consider other relevant matters [6.290]

Regulators will often be allowed to take into account “any other matters they consider relevant” in making their determination. For example, in making an access determination under the telecommunications access regime, in addition to the mandatory considerations, the ACCC may also take into account “any other matters that it thinks are relevant”.37

34 Re Dr Ken Michael AM; Ex parte Epic Energy (WA) Nominees Pty Ltd [2002] WASCA 231, [55]–[56]. 35 Origin Energy Electricity Ltd v Queensland Competition Authority [2012] QSC 414, citing Khan v Minister for Immigration and Ethnic Affairs [1987] FCA 457. 36 In the context of the telecommunications access regime, it has been held that one factor that ought to be given “fundamental weight” is the object of that regime. However, other listed considerations do not need to be given the same weight (see Telstra Corporation Ltd v Australian Competition & Consumer Commission [2008] FCA 1436). 37 CCA, s 152BCA(3).

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Where such an allowance is made, this will further broaden the regulator’s discretion. It potentially allows the regulator to introduce additional considerations and to weigh these against the other considerations it is required to have regard to.

Relevance of the decision subject matter [6.300]

The subject matter of the regulator’s decision will also be relevant to the extent of the discretion that is afforded in making that decision. In some aspects of a regulator’s decision, it may be that a range of alternatives is reasonably open, and the regulator has discretion to choose between these alternatives. However, in other aspects of the decision, there may be only one correct decision or a more limited set of alternatives. One area in which a regulator is likely to have significant discretion is in setting the initial capital base to apply in setting price/revenue allowances under a building block model (see [5.50]–[5.80]). It is generally recognised that there is no one “correct” method for determining the initial capital base and that the regulator will have some discretion to determine the appropriate valuation method. The High Court noted in East Australian Pipeline Pty Limited v Australian Competition and Consumer Commission:38 Section 8.4 of the Code, as amended, refers to the “Capital Base” as “the value of the capital assets that form the Covered Pipeline or are otherwise used to provide Services”. The ACCC referred to s 8.10(f) as supporting its “valuation” of the ICB. The primary and natural significance of the words used in, and the structure of, s 8.10(a)–(d) mandates consideration of values derived from “well recognised asset valuation methodologies” followed by a comparative weighing up of these approaches to valuation. It is clear that a range of well recognised asset valuation methodologies can be considered and within that range a choice of value may be made. The discretion permitted is wide but limited.

Other aspects of the regulator’s decision may involve a narrower range of choices and therefore less regulatory discretion. For example, where the formula or method for determining tariffs is prescribed, the regulator’s discretion will be very limited.

SUMMARY [6.310]

A number of federal, state and territory regulatory bodies administer access regulation in Australia. These bodies have a range of different powers and functions under various federal, state and territory statutes. Some regulatory bodies have a dual role in policy making and decision making and are proactive, while others perform a narrower decision making role and are more reactive. There are three broad models for regulatory intervention – negotiate/ arbitrate, propose/respond and consider/determine. While these models

38 (2007) 233 CLR 229, 243.

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represent three points along a spectrum, the models are not mutually exclusive and can be used in a complementary manner. Regulatory bodies have a varying degree of regulatory discretion in making certain decisions. The discretion that is afforded regulatory bodies will depend upong the nature of the decision-making rules, the level of prescription in the rule or provision being applied by the regulatory body and the factors to be considered in making a particular decision.

Questions for discussion 1. What are the national bodies responsible for access regulation? What sectors are each of these bodies responsible for regulating? 2. Which bodies are responsible for access regulation in each state and territory? 3. Describe some of the possible models for regulatory intervention. 4. What factors might influence the choice of model for regulatory intervention? 5. What features of the governing legislation might influence the degree of regulatory discretion available to a regulator?

7

The National Access Regime [7.10] OVERVIEW ........................................................................................................................................ 123 [7.20] OUTLINE OF THE NATIONAL ACCESS REGIME ................................................................... 124 [7.50] BACKGROUND TO THE NATIONAL ACCESS REGIME ....................................................... 128 [7.50] Origins and intentions: in brief ...................................................................................................... 128 [7.80] 1995: Establishment of the National Access Regime .................................................................. 129 [7.90] 2001–2005: Productivity Commission review / subsequent amendments to the National Access Regime ................................................................................................................................... 130 [7.100] 2006–2010: Further revisions to the National Access Regime ................................................. 132 [7.110] Current status ................................................................................................................................... 133 [7.120] AVENUES TO ACCESS UNDER THE NATIONAL ACCESS REGIME ............................... 134 [7.120] Overview .......................................................................................................................................... 134 [7.130] Declaration ........................................................................................................................................ 134 [7.230] Certification ...................................................................................................................................... 149 [7.250] Undertakings .................................................................................................................................... 153 [7.280] OBTAINING ACCESS UNDER PT IIIA ...................................................................................... 157 [7.290] Arbitration ........................................................................................................................................ 158 [7.310] THE NATIONAL ACCESS REGIME IN PRACTICE ................................................................ 160 [7.310] Has it been effective? ...................................................................................................................... 160 [7.320] Recent reviews of the National Access Regime ......................................................................... 162 [7.360] SUMMARY ....................................................................................................................................... 168

OVERVIEW [7.10] Part IIIA of the Competition and Consumer Act 2010 (Cth) (“CCA”) sets out the regime that provides for mandated third party access to services provided by means of significant infrastructure facilities where the service is “declared” under the regime. In addition to being called the “general” or “Part IIIA” access regime, it is more commonly known as the National Access Regime. The National Access Regime was introduced by the Australian, state and territory governments in 1995 as part of the National Competition Policy reforms following the report (“Hilmer Report”) of the Independent Committee of Inquiry into Competition Policy in Australia (“Hilmer Committee”). Although there are a number of industry-specific and state and territorybased access regimes (discussed in detail in Pt IV of this book), the

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National Access Regime has been found to play a role as a “backstop”.1 The regime provides for potential third party access to services provided by essential facilities where no existing regime or access arrangement is in place. Even where services have not been declared under the regime, the fact that a person may make an application for declaration may encourage infrastructure owners to engage in negotiations to provide access to services. Explaining the features of the National Access Regime is the focus of this chapter, which first provides an introduction to the current regime. There is then a discussion of the regime’s history and how the regime has evolved over time. Next, there is a detailed discussion of the four avenues to access available under the regime, including how those elements have been interpreted and applied by the National Competition Council (“NCC”), the Australian Competition and Consumer Commission (“ACCC”), the Australian Competition Tribunal and courts over time. The arbitration process is also explained. This chapter closes with a discussion of the effectiveness of the National Access Regime and sets out the proposed changes to the regime following the recent reviews carried out by the Productivity Commission and the Harper Review (the recently completed “root and branch” review of competition law and competition policy).2

OUTLINE OF THE NATIONAL ACCESS REGIME [7.20] Under the National Access Regime, third parties can seek access to services provided by nationally significant infrastructure facilities. When introduced into the then Trade Practices Act 1974 (Cth) (“TPA”) in 1995, the regime was designed to allow third parties to seek access to services provided by facilities that: • occupied a strategic position in an industry, such that access was necessary for third parties to compete3 in upstream or downstream markets; • were uneconomic for another party to duplicate; and • were nationally significant in regards to the size of the facility or its importance to trade.4 Although aspects of the regime have changed over time, the principles at the heart of the regime have endured (see [7.50]–[7.120]). 1 The Productivity Commission identified that Pt IIIA plays a “backstop role for infrastructure services that are not covered by other access arrangements”: see Productivity Commission, National Access Regime, Inquiry Report No 66, 2013, 211. 2 See Productivity Commission, National Access Regime, Inquiry Report No 66, 2013; Ian Harper, Peter Anderson, Su McCluskey and Michael O’Bryan, Competition Policy Review, Final Report, March 2015 (“Harper Review”). 3 The declaration criterion related to promoting competition has changed since the introduction of the regime: see [7.130]-[7.180]. 4 See, for example, Explanatory Memorandum to the Competition Policy Reform Bill 1995 (Cth), 1.

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The National Access Regime places primacy on commercial negotiation. It is only when negotiations do not lead to a commercial outcome between the relevant parties that the regime will come into play. When seeking declaration of a service, access seekers will need to demonstrate that all of the relevant criteria are satisfied to gain a “right” to access. The terms and conditions of access will then be either commercially negotiated or, failing agreement, arbitrated by the ACCC. See [7.250]–[7.290] for detailed discussion of these stages.

[7.30] Currently, there are four avenues to third party access under the National Access Regime (see also Figure 7.1): 1. Declaration – The declaration process can be initiated by a person requesting that the NCC make a recommendation about declaration to the responsible Minister. Once the Minister has received the NCC’s recommendation, the Minister will generally publish a declaration decision (in some cases, the responsible Minister does not publish a decision within the required timeframe, in which case the Minister will be deemed to have decided not to declare the service).5 The Minister’s decision (including a deemed decision) may be subject to a limited merits review by the Australian Competition Tribunal (and the Federal Court and the High Court on points of law). 2. Certification – Access to a service may be available through a state or territory access regime that has been certified as effective. Similar to declaration, the NCC conducts a consultation process before making a recommendation to the relevant Minister as to whether the regime should be certified. The Minister then makes a certification decision.6 Applications for certification are assessed against cll 6(2)–6(4) of the Competition Principles Agreement (“CPA”) (see Table 7.2). 3. Undertakings – Infrastructure owners may voluntarily submit access undertakings to the ACCC. Access undertakings must set out the proposed terms and conditions of access to a service. The ACCC is required to assess the access undertaking and decide whether to accept or reject the undertaking under s 44ZZA(3) of the CCA (see s 44ZZA(3) criteria set out in Table 7.3) after a public consultation process.7

5 CCA, s 44H(9). 6 If the Minister does not publish a decision within the 60 day timeframe, the Minister’s decision is taken to be a decision made in accordance with the NCC’s recommendation: CCA, s 44NB(3A)(a). 7 In addition to access undertakings, s 44ZZAA of the CCA allows industry bodies to give the ACCC a written code setting out the rules for access to the service. As the way in which the ACCC assesses access codes and access undertakings is similar, this chapter focuses on the process for, and the assessments of, access undertakings.

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Figure 7.1 Avenues to third party access

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4. Competitive tender – The Commonwealth Minister or the responsible Minister of a state or territory may ask the ACCC to approve a tender process for the construction and operation of a facility that is to be owned by the Australian, state or territory government, as a competitive tender process. If the tender process is approved by the ACCC, access to services provided by the facility will be available under the terms and conditions of access established through the competitive tender process.8 In addition to the four avenues to access under the National Access Regime, third party access may be available pursuant to private negotiation or by securing access under an uncertified state or territory access regime (as shown in Figure 7.1).

[7.40] As discussed at [7.140], access pursuant to a declaration process involves two stages: 1. Stage one: the declaration stage. A service may only be declared if certain criteria are satisfied.9 Currently, the declaration criteria in ss 44G(2) and 44H(4) of the CCA broadly require that: the facility is of national significance and uneconomic to duplicate; access to the facility is in the public interest; the service is not already subject to an effective access regime; and access would promote a material increase in competition in related markets. The declaration process is initiated by an application to the NCC asking it to recommend that a particular service be declared.10 Any person may make an application. The NCC then undertakes an extensive investigation into whether the relevant criteria are satisfied, which includes the consideration of public submissions. Following receipt of the NCC’s recommendation, the Minister will decide whether to declare the service (or will not make a decision within the required timeframe, which is deemed to be a decision not to declare the service).11 2. Stage two: the negotiate/arbitrate stage. The mere declaration of a service does not mean that access automatically follows. Where a service is declared, an access seeker may then engage in negotiations with the service provider as to the terms and conditions of access. If agreement cannot be reached, an access dispute may be notified to the ACCC. The ACCC may then arbitrate the dispute and may determine the terms and conditions of access. Once an arbitration decision is made, a party dissatisfied with the arbitration outcome can seek review in the Australian Competition Tribunal. The Tribunal’s decision can be appealed on points of law to the Federal Court and High Court. 8 The process for competitive tenders is set out in Div 2B of Pt IIIA of the CCA. As it has not been used to date, it is not considered further in this book. 9 CCA, s 44G(2) and s 44H(4). 10 CCA, s 44F(1). 11 As noted above, the Australian Competition Tribunal can conduct a merits review of the Minister’s decision and the Tribunal’s decisions may be appealed on points of law to the Federal Court and High Court.

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BACKGROUND TO THE NATIONAL ACCESS REGIME Origins and intentions: in brief [7.50] As discussed in Ch 3, the genesis of the National Access Regime can be traced back to the Hilmer Report.12 One of the Hilmer Report’s key recommendations was that Australian governments should establish an access regime to facilitate third party access to services provided by “essential facilities”.13 The Hilmer Committee considered that it was most appropriate to have a single, national regime to regulate access to essential facilities. The Hilmer Report noted that “different approaches or pricing principles adopted in different states have the potential to impede the development of efficient national markets for electricity, gas, rail and other key industries”.14 When should access regulation be applied?

[7.60] In circumstances where an infrastructure owner does not consent to providing access to services provided by its essential facility to third parties, the Hilmer Committee recommended that access regulation should only be applied (or a service declared) if three legislative criteria are satisfied: 1. access to the facility in question is essential to permit effective competition in a downstream or upstream activity; 2. the making of the declaration is in the public interest, having regard to: (a) the significance of the industry to the national economy; and (b) the expected impact of effective competition in that industry on national competitiveness; 3. the legitimate interests of the owner of the facility are protected through the imposition of an access fee and other terms and conditions that are fair and reasonable, including recognition of the owner’s current and potential future requirements for the capacity of the facility.15 The Hilmer Committee also noted that an affirmative recommendation of the NCC on whether or not the three legislative criteria are satisfied should be a prerequisite to the declaration by a Minister of an access service (although the Committee noted that the regime should provide that the Minister could decline to declare a service even if the recommendation of the NCC was to declare the service).16 12 Frederick Hilmer, Mark Rayner and Geoff Taperell, National Competition Policy – Report by the Independent Committee of Inquiry, 25 August 1993, (Australian Government Publishing Service, Canberra) (“Hilmer Report”). 13 Hilmer Report, 248–249. 14 Hilmer Report, 249. 15 Hilmer Report, 251–253. 16 Hilmer Report, 252.

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Once a service is declared, how should terms and conditions be set?

[7.70] The Hilmer Committee recommended that, in addition to creating a right of access in circumstances where a service is declared, pricing principles relating to access to that service should be formulated. It was recommended that these pricing principles be put in place at the time of declaration. The Hilmer Committee advocated for a regime that first allowed for agreement between service providers and access seekers on access terms and conditions and, if the parties could not reach agreement, the “fall back option” of binding arbitration by a regulator. That is, the regime was based on a “negotiate/arbitrate” framework (see [6.170] for a detailed discussion of this framework).

1995: Establishment of the National Access Regime [7.80] As noted in Ch 3, Pt IIIA was ultimately inserted into the then TPA by the Competition Policy Reform Act 1995 (Cth). Part IIIA established an access regime for third party access to services provided by facilities that: • occupied a strategic position in the industry; • would be uneconomic for another party to duplicate; and • were nationally significant in regards to the size of the facility or its importance to trade.17 Some notable differences between the regime as introduced in 1995 and the current regime are: • Declaration criteria – in 1995, the declaration criteria in ss 44G(2) and 44H(4) of the TPA broadly required that the facility be of national significance and uneconomic to duplicate, and for access to the services provided by means of the facility to be safe, in the public interest, not already subject to an effective access regime, and to promote competition in related markets. The two main differences between the initial criteria as introduced in 1995 and the current criteria are: (1) there was a criterion related to safety and human health; and (2) the promoting competition criterion did not explicitly state that a material increase in competition was required (although the NCC and the responsible Minister had approached the criterion in that way). • Nature of the review by the Tribunal – at the time of the regime’s introduction until the review provisions were revised in 2010 (see [7.90]–[7.100]), the Australian Competition Tribunal considered that it had the power to conduct a full merits review of the Minister’s decision. That is, the Tribunal’s approach was to reconsider the matter afresh, which included considering any new information in addition to the 17 See, for example, Explanatory Memorandum, Competition Policy Reform Bill 1995 Cth, 1.

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material that was before the Minister and the NCC.18 The current regime contains explicit provisions directed at ensuring that the Tribunal’s review is a limited merits review (“limited” in the sense of the material that the Tribunal may have regard to when reviewing a matter) (see Ch 12 for a discussion of the merits review provisions). • Time limits on decision making – when introduced, there were no time limits on the decisions of the NCC, the Minister, the Tribunal and the ACCC under Pt IIIA. There are now time limits in place.

2001–2005: Productivity Commission review and subsequent amendments to the National Access Regime [7.90] In 2001, the Productivity Commission reviewed the various elements of the National Access Regime as well as whether the regime as a whole should be retained.19 On the latter issue, the Productivity Commission concluded that:20 abandoning access regulation at this stage would be inappropriate. In its [the Productivity Commission’s] view, the natural monopoly characteristics of a number of essential infrastructure services mean that an explicit mechanism for facilitating efficient third party access is likely to be desirable. Moreover, the efficacy of the policy alternatives in this area is questionable. In particular, the Commission concurs with the widespread view that reliance on the competitive conduct provisions in Pt IV of the Trade Practices Act would not be a viable stand-alone mechanism for facilitating access to essential facilities.

In addition to recommendations that led to changes to procedural matters, the Productivity Commission made several recommendations that led to substantive changes to the operation of Pt IIIA (which were inserted into the TPA by the Trade Practices Amendment (National Access Regime) Act 2006 (Cth)):

18 Note that the revisions in 2010 (discussed at [7.100]) put beyond doubt that the Australian Competition Tribunal was only to conduct limited merits review on the material that was before the NCC and the Minister. Even for decisions made prior to these revisions, it was the High Court’s firm view that the Tribunal was acting outside the scope of its powers when it treated its review task as one that involved considering the matter afresh. Instead, the High Court considered that the Tribunal’s remit was a much narrower one that only involved reviewing the Minister’s decisions by “reconsidering” them on the material before the Minister, supplemented, if necessary, by any information given to the Tribunal by the NCC in response to a request made under ss 44K(6) and 44K(6A) of the CCA: see The Pilbara Infrastructure Pty Ltd v Australian Competition Tribunal (2012) 246 CLR 379, 407 (French CJ, Gummow, Hayne, Crennan, Kiefel and Bell JJ). 19 Productivity Commission, Review of the National Access Regime, Inquiry Report No 17, 2001, Melbourne. 20 Productivity Commission, Review of the National Access Regime, Inquiry Report No 17, 2001, Melbourne, xx.

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• The insertion of an objects clause – As noted in Ch 3, the Productivity Commission identified that Pt IIIA needed an objects clause.21 The Productivity Commission considered that the objects clause would clarify Pt IIIA’s role as one that seeks “to promote efficient use of essential infrastructure in a way that does not discourage efficient investment”.22 The insertion of an objects clause would require the NCC, the Minister, the Australian Competition Tribunal and the courts, to have regard to that clause when making decisions or determinations under Pt IIIA. • Change to one of the declaration criteria – As noted at [7.40] in relation to stage one of the two-stage declaration process, one of the criteria for declaration is that access to the service would promote competition in at least one market, other than the market for the service. The Productivity Commission proposed to amend this requirement so that a service may only be declared if access to the service will result in a substantial increase in competition in that market.23 The Australian Government’s response was to change the criterion to require that access to the service promote a material increase in competition.24 In responding to the Productivity Commission recommendation, the Government noted that: in this context, the term “substantial” may exclude situations where a small supplier is prevented from gaining access to nationally significant infrastructure. The Government therefore proposes to include the word “material” to ensure access declarations are only sought where the increases in competition are not trivial.25

While the Australian Competition Tribunal had previously interpreted the criterion in this way (and therefore the change was not controversial), the Productivity Commission considered that the change would guard against “the still present possibility of inappropriate declarations”.26 • The insertion of the competitive tendering provisions – The Productivity Commission found that “[w]here the right to construct and operate an essential facility is determined on the basis of the most favourable access terms and conditions offered in a competitive tender, the intent of access 21 Productivity Commission, Review of the National Access Regime, Inquiry Report No 17, 2001, Melbourne, xxii, 131. 22 Productivity Commission, Review of the National Access Regime, Inquiry Report No 17, 2001, Melbourne, 128. 23 Productivity Commission, Review of the National Access Regime, Inquiry Report No 17, 2001, Melbourne, xxiii. 24 Explanatory Memorandum, Trade Practices Amendment (National Access Regime) Bill 2005 (Cth), 21. 25 Peter Costello “Government Response to Productivity Commission Report on the Review of the National Access Regime”, Media release, 17 September 2002, . See, also Explanatory Memorandum, Trade Practices Amendment (National Access Regime) Bill 2005 (Cth), 3, 21, 25. 26 Productivity Commission, Review of the National Access Regime, Inquiry Report No 17, 2001, Melbourne, xxiii.

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regulation will have been achieved”.27 It therefore recommended that a competitive tendering approval process be inserted into Pt IIIA which would allow the ACCC to grant immunity from declaration under the National Access Regime in respect of services to be provided by means of the relevant facility. The Australian Government agreed and inserted Div 2B into Pt IIIA.28

2006–2010: Further revisions to the National Access Regime [7.100]

To address concerns about the efficiency and effectiveness of decision-making under the National Access Regime, the Council of Australian Governments (“COAG”) signed the Competition and Infrastructure Reform Agreement on 10 February 2006, which committed governments to implement a series of reforms. As explained in Ch 12, these reforms – which were implemented by the Trade Practices Amendment (Infrastructure Access) Act 2010 (Cth) – included amendments to the merits review provisions to make clear that Australian Competition Tribunal reviews of decisions made under Pt IIIA are primarily limited to information that was before the primary decision-maker.29 The other key reforms in the COAG agreement were around the imposition of firm time limits on decisions and determinations made by the ACCC, the NCC, the Minister and the Tribunal under Pt IIIA.30 Another major reform in the Trade Practices Amendment (Infrastructure Access) Act 2010 (Cth) was the insertion of a provision that enabled a person with a material interest in a proposed new infrastructure facility to apply for a decision that a service to be provided by that facility is ineligible to be a declared service.31 The period for which the facility is ineligible is at least 20 years.32 The Productivity Commission had recommended this change in its 2001 review of the National Access Regime.33 Insofar as Pt IIIA was amended to provide for “access holidays” for new infrastructure, the change brought the National Access Regime into 27 Productivity Commission, Review of the National Access Regime, Inquiry Report No 17, 2001, Melbourne, xxvi. 28 Explanatory Memorandum, Trade Practices Amendment (National Access Regime) Bill 2005 (Cth), 35. 29 See Trade Practices Amendment (Infrastructure Access) Act 2010 (Cth), Sch 1, Pt 1. This legislative change confirmed the High Court’s position that the Australian Competition Tribunal was acting outside the scope of its powers when it treated its review task as one that involved conducting a full merits review: see The Pilbara Infrastructure Pty Ltd v Australian Competition Tribunal (2012) 246 CLR 379, 407. 30 Trade Practices Amendment (Infrastructure Access) Act 2010 (Cth), Sch 1, Pt 1. 31 Explanatory Memorandum, Trade Practices Amendment (Infrastructure Access) Bill 2009 (Cth), 35; Trade Practices Amendment (Infrastructure Access) Act 2010 (Cth), s 3, Sch 2 [7]. 32 CCA, s 44LB. 33 Productivity Commission, Review of the National Access Regime, Inquiry Report No 17, 2001, 315.

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line with the Gas Access Regime, which allows for owners of gas pipelines to apply for 15-year no coverage determinations.34 The declaration criteria were also revised by the 2010 amendments. The criterion related to safety and human health (previously ss 44G(2)(d) and 44H(4)(d) of the CCA) was repealed.35 As the Explanatory Memorandum makes clear, the issue of safety and human health was considered best dealt with by other regulation.36 The criterion related to whether access was already available pursuant to an effective access regime (ss 44G(2)(e) and 44H(4)(e) of the CCA) was recast so that the NCC and the responsible Minister only have to consider whether access to the service: • is not already subject to a state or territory access regime that has already been certified as effective under s 44N of the CCA; • is subject to a relevantly certified state or territory access regime under s 44N of the CCA, but the regime or the relevant principles in the CPA have been substantially modified since certification.37

Current status [7.110]

While the intention of the Hilmer Committee was to introduce a single access regime, the National Access Regime in Pt IIIA has ultimately become a model (insofar as state and territory access regimes adopt elements of it, or build upon it) and a backstop,38 which is only utilised when other access arrangements or access regimes do not apply. As noted in Ch 3, a number of access regimes have emerged in Australia over time. At present, the key access regimes in place are: • a (broadly) national access regime for electricity (which may be considered a state- and territory-based access regime insofar as the participating states and territories implement the access regime in their respective jurisdictions through application Acts that adopt as law the National Electricity Law, contained in the Schedule to the National Electricity (South Australia) Act 1996 (SA)) (see Ch 8); • a national access regime for gas (similarly to electricity, the gas access regime may be considered a state- and territory-based access regime, with the participating states and territories adopting as law the National Gas Law contained in the Schedule to the National Gas (South Australia) Act 2008 (SA)) (see Ch 9); 34 NGL, s 151. 35 Trade Practices Amendment (Infrastructure Access) Act 2010 (Cth), Sch 5, Pt 1, items 5, 8. 36 Explanatory Memorandum, Trade Practices Amendment (Infrastructure Access) Bill 2009 (Cth), 35. 37 Trade Practices Amendment (Infrastructure Access) Act 2010 (Cth), Sch 5, Pt 1, items 6, 9. 38 The Productivity Commission identified that Pt IIIA plays a “backstop role for infrastructure services that are not covered by other access arrangements”: see Productivity Commission, National Access Regime, Inquiry Report No 66, 2013, 211.

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• the telecommunications-specific access regime in Pt XIC of the CCA (see Ch 10); and • other national and state-based regimes covering a range of other sectors, including ports and rail infrastructure services (see Ch 11). Some further details on the history of the National Access Regime, and the Hilmer Report in particular, are set out in Ch 3.

AVENUES TO ACCESS UNDER THE NATIONAL ACCESS REGIME Overview [7.120]

This section explores three of the four avenues to access under the National Access Regime in detail.39 The first stage of the process is discussed at [7.130]–[7.230], and the second from [7.240]. It should be noted that the avenues to access under Pt IIIA are largely discrete or mutually exclusive in the sense that once one avenue applies, the others are generally no longer available for the period in which the relevant avenue is in effect or operation. For example, if a state or territory access regime is certified as effective, this applies exclusively such that the declaration and undertaking avenues are not available during the period for which the access regime has been certified as effective. That said, the provider of a declared service is not prevented from providing an access undertaking to the ACCC, which sets out the terms and conditions on which the declared service will be provided to third parties seeking access to the service.40

Declaration [7.130]

Declaration of a service gives those seeking access to that service a “right” to negotiate with the service provider for access (or to seek a binding arbitration by the ACCC on the terms and conditions of access if private negotiations do not lead to access).

Declaration process

[7.140]

The various steps in the declaration process, including the responsible parties, what is involved and the time limit (if any), are set out in Table 7.1.

39 The competitive tender process in Div 2B of Pt IIIA has not yet been used and is therefore not considered in detail in this book. 40 Previously this was not the case under the now repealed s 44ZZB of the CCA.

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Table 7.1 Steps in the declaration process Step

Who is responsible?

What is involved?

Preparation and submission of the application for declaration to the NCC

Applicant (generally a party or group of parties seeking access to a service, but can be a government or another body, or the relevant Minister)

Applicant must prepare and submit an application under s 44F of the CCA that: • defines the service to which access is sought (s 44B of the CCA sets out what can be a service and expressly excludes a production process from being a service (among other exclusions)); and • explains in detail why it considers each of the declaration criteria in s 44G(2) of the CCA are satisfied.

Assessment of NCC the application by the NCC Interested parties (including the applicant and the service provider)

Minister Decision on whether the service should be declared

NCC will consider the application and publish it on its website after a preliminary assessment.41

Timeframe (if any) -

180 days (CCA, s 44GA(2)), although this period can be extended (CCA, s 44GA(7))

Once published, the NCC will conduct a public consultation process in respect of the application with interested parties. After considering the submissions of interested parties and other material, the NCC will issue a draft recommendation. This sets out its views on whether the declaration criteria are satisfied. Following consultation on the draft recommendation, the NCC will then make a final recommendation on whether the declaration criteria are satisfied and will submit this to the relevant Minister. The Minister will consider the 60 days NCC’s recommendation on (maximum declaration. under CCA, s 44H(9))

41 A preliminary assessment involves checking that the application: • meets the requirements of reg 6A of the Competition and Consumer Regulations 2010 (Cth); • is in respect of access to a “service” within the meaning given to that term in s 44B of the CCA; • adequately defines the service for which the declaration is sought; and • adequately identifies the facility and provider (or providers) of the service. See NCC, Declaration of Services: A Guide to Declaration under Part IIIA of the Competition and Consumer Act 2010 (Cth), February 2013, Melbourne, 18 (“NCC Declaration Guide”).

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Step

Who is responsible?

What is involved?

Timeframe (if any)

The Minister will either: • publish the decision on declaration which sets out the Minister’s views on whether the declaration criteria are satisfied (CCA, s 44HA); or • not publish any decision, in which case the Minister is taken to have decided not to declare the service and to have published that decision. Note that the Minister has no residual discretion not to declare a service if he/she considers that all of the declaration criteria are satisfied.42 Parties can apply for review of Review of the Australian Competition Tribunal the Minister’s decision on Minister’s decision on declaration to the Australian declaration Competition Tribunal.43

Review of the Australian Competition Tribunal’s decision

Applicant for review of the Minister’s decision (generally the applicant for declaration or another party wanting declaration, or the service provider)

Under s 44K of the CCA, the Tribunal may affirm, vary or set aside the Minister’s decision on declaration.

Federal Court/High Court Applicant for review of Tribunal’s decision

Parties can apply for review of the Tribunal’s decision on declaration to the Federal Court/High Court on a point of law.

Application must be made within 21 days of publication of the Minister’s decision (CCA, s 44K(3)) 180 days for the Tribunal to review the decision (CCA, s 44ZZOA(2)) but can be extended (CCA, s 44ZZOA(7)) Application typically must be made within 28 days of the Tribunal decision44

The time limits set out in Table 7.1 were inserted into the CCA by the Trade Practices Amendment (Infrastructure Access) Act 2010 (Cth) to improve the timeliness and effectiveness of regulatory decision making under the regime.

[7.150]

While the time limits set out in Table 7.1 indicate that the declaration process could be completed in just under 12 months, there is scope for “stopping the clock”, which can lengthen the overall time

42 The Pilbara Infrastructure Pty Ltd v Australian Competition Tribunal (2012) 246 CLR 379, 424. 43 Parties may also be able to seek judicial review of the Minister’s decision. 44 Administrative Decisions (Judicial Review) Act 1977 (Cth), s 11(1), (3).

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considerably. For example, the NCC has scope to extend its 180-day assessment period. Under s 44GA(3) of the CCA, the NCC can “stop the clock” so that any time that elapses does not count toward the 180 days that the NCC has to assess the application when: • there is an agreement between the NCC, the applicant and the service provider (if the service provider is not the applicant) that a period will not count towards the 180 days; or • the NCC requests information from a person relevant to deciding what recommendation to make.45 The NCC can also extend the 180-day period by providing notice to the designated Minister of the extension, explaining why it has been unable to make its recommendation within the period and advising when the NCC can make its recommendation.46 These time limits were recently tested in relation to Glencore’s application for declaration of a shipping channel service at the Port of Newcastle.47 It appears from the public timeframe that both the NCC and the Minister adhered to these limits with only minimal use of clock stoppers. The NCC took 181 days to assess Glencore’s application and make a recommendation to the Minister on declaration, only needing to stop the clock once (for 14 days) when it requested further information.48 The Minister’s decision to not declare the service was made 59 days after receiving the NCC’s final recommendation.49

[7.160]

Prior to the imposition of the time limits set out in Table 7.1 in 2010, there was considerable concern that the declaration process (particularly when combined with the second stage negotiate/arbitrate process) involved a lot of steps (in addition to the steps in Table 7.1, there are potentially an additional five steps50 under the second stage) and took a significant amount of time (five years, if not longer).51 At the extreme, the time between the submission of the application for declaration and the final 45 CCA, s 44FA(1). 46 CCA, s 44GA(7). 47 See Glencore Coal Pty Ltd, Application for a Declaration Recommendation in Relation to the Port of Newcastle, May 2015. 48 The application was received on 13 May 2015 and the NCC made its final recommendation to the Minister on 10 November 2015. 49 The Minister received the NCC’s final recommendation on 10 November 2015 and made a decision on 8 January 2016. The decision was published on the NCC website on 11 January 2016. 50 These steps would be: (1) the service provider and access seekers negotiate the terms and conditions of access; (2) if a dispute arises, notify the ACCC to arbitrate the dispute; (3) ACCC to arbitrate and issue determination setting out terms and conditions of access; (4) review of ACCC determination by the Tribunal; (5) review of Tribunal’s decision on a point of law. 51 See, for example, ACCC, Productivity Commission Review of the National Access Regime: ACCC Submission to Issues Paper, February 2013, 50.

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decision of the High Court in The Pilbara Infrastructure Pty Ltd v Australian Competition Tribunal52 was just over eight years (and, in that case, the services that were the subject of the court appeals were not ultimately declared and, therefore, parties did not proceed to the second stage in respect of these services).53 For further background on The Pilbara Infrastructure Pty Ltd v Australian Competition Tribunal,54 see Box 3.2. It is not yet clear whether the imposition of time limits will be effective in making the declaration process more efficient and therefore a more practical option for those seeking access to services. However, even with these time limits, declaration is likely to remain a time-consuming and costly process. The ACCC has expressed the view that the costs associated with seeking declaration can be particularly significant in circumstances where the service provider has “deep pockets” and may seek to strategically prolong the declaration process with the goal of exhausting the resources of the other party.55 Declaration criteria

[7.170]

As Table 7.1 indicates, the application, and the consideration of the declaration by the NCC, the responsible Minister and the Tribunal, must all analyse whether the declaration criteria are satisfied. Sections 44G(2) and 44H(4) of the CCA provide that the NCC cannot recommend that a service be declared, and the Minister cannot declare a service, unless the NCC or the Minister (as relevant) are satisfied that the declaration criteria are met. If only one of the declaration criteria is not met, declaration cannot be recommended/made (Figure 7.2).

52 (2012) 246 CLR 379. 53 As noted in Box 3.2, only one rail service was declared – the below rail service on the Goldsworthy line that is owned by BHP Billiton. The other three rail services on facilities owned by BHP Billiton and Rio Tinto were not declared. 54 (2012) 246 CLR 379. 55 ACCC, Productivity Commission Review of the National Access Regime: ACCC Submission to Issues Paper, February 2013, 55.

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Figure 7.2 Consideration of declaration criteria

Below is a discussion of how each criterion has been interpreted and applied in practice. Note that all references below to the NCC should be read as the NCC/the Minister. Criterion (a) – would access (or increased access) to the service promote a material increase in competition in at least one other market?

[7.180]

In assessing whether criterion (a) is satisfied, the NCC currently adopts a three-step analysis: (1) identifies dependent (upstream or downstream) markets; (2) considers whether the dependent markets are separate from the market for the service to which access is sought; and (3) assesses whether access (or increased access) would be likely to promote a materially more competitive environment in any dependent markets.56

Under step 1, like other regulators, the NCC adopts a purposive approach to market definition. In Re Queensland Cooperative Milling Association Limited 56 NCC Declaration Guide, 26.

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and Defiance Holdings Limited,57 the then Trade Practices Tribunal (now Australian Competition Tribunal) defined a market as “the area of close competition between firms” or “the field of rivalry between them”.58 Usually the relevant dependent markets will be upstream or downstream of the market in which the service, once declared, would be supplied. The limit in s 4E of the CCA (which requires markets to be in Australia) does not apply as the criterion explicitly states that the market does not have to be in Australia. Once the relevant dependent markets are identified, step 2 requires consideration as to whether the dependent markets are separate from the market for the service in respect of which access is sought. This has been an issue in a number of declaration matters. The question ultimately turns on whether there are overwhelming “economies of joint production or joint consumption” that dictate that the vertically related activities “must be performed within the same economic entity”.59 The Tribunal’s analysis shows that this is a complex economic issue, noting that there may be perfect complementarity between services despite them being functionally distinct markets.60 In Re Sydney International Airport61 the Tribunal noted that, “[i]n other words, just because there is a one for one relationship between airport aprons and ramp handling services does not mean that the supply of these two types of services are in functionally the same market”.62 If the NCC finds there are separate dependent markets, then the next step is to assess whether the conditions or environment in those dependent markets are more conducive to competition63 “with” access than without. Importantly, there are two approaches to assessing the state of competition in a dependent market: • “with” and “without” access on reasonable terms and conditions through declaration (known as the with/without declaration test).64 • “with” and “without” a right or entitlement to access (known as the with/without access test).65 57 (1976) 25 FLR 169. 58 Re Queensland Cooperative Milling Association Limited and Defiance Holdings Limited (1976) 25 FLR 169, 190. 59 Re Sydney International Airport (2000) 156 FLR 10, 39. 60 Re Sydney International Airport (2000) 156 FLR 10, 39. 61 (2000) 156 FLR 10. 62 Re Sydney International Airport (2000) 156 FLR 10, 39. 63 In Re Sydney International Airport (2000) 156 FLR 10, 42, the Tribunal noted: “[t]hat is to say, the opportunities and environment for competition given declaration, will be better than they would be without declaration”. 64 See, for example, In the matter of Fortescue Metals Group Limited [2010] ACompT 2, [1066]. 65 Sydney Airport Corporation Limited v Australian Competition Tribunal (2006) 155 FCR 124.

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Over the past two decades, the approach taken by the NCC, the Australian Competition Tribunal and the courts has oscillated between these two alternatives. The appropriate approach to criterion (a) continues to be a matter of debate, with the NCC and the Australian Competition Tribunal taking markedly different approaches in their consideration of a recent application for declaration. In the 2006 Sydney Airport decision the Full Federal Court explicitly stated that “access” should not be equated to “declaration under Part IIIA” and instead should be applied in its “ordinary English sense”66(ie, the first of the two approaches identified above). However, the courts and the NCC have subsequently considered “access” in criterion (a) as “access on such reasonable terms and conditions as may be determined in the second stage of the Pt IIIA process”.67 The latter interpretation of “access” was applied by the NCC in the most recent consideration of criterion (a) by the NCC in respect of Glencore’s application for declaration of a shipping channel service at the Port of Newcastle. On 6 January 2016, the Acting Treasurer (as the designated Minister) issued a decision in respect of the application. The decision was not to declare the service as the Acting Treasurer was not satisfied that criterion (a) had been satisfied, adopting the NCC’s final recommendation.68 The NCC in its final recommendation noted that this criterion was not satisfied as many of the dependent markets were already effectively competitive (and therefore access will not lead to a material promotion of competition in those markets). The NCC also concluded that the charges for the shipping channel service represent a minor component of the free on board (“FOB”) cost of coal at the Port of Newcastle and, as such, are unlikely to impact on production or investment decisions such as to promote a material increase in competition in any dependent market.69 On 29 January 2016, Glencore applied to the Australian Competition Tribunal under s 44K(2) of the CCA for review of the Acting Treasurer’s decision. On 31 May 2016, the Australian Competition Tribunal set aside the decision of the Minister and declared the shipping channel service at the Port of Newcastle.70 In doing so, the Tribunal took a different approach to criterion (a) to that taken by the NCC, applying a with/without access test in line with the Federal Court’s approach in the Sydney Airport decision. The 66 Sydney Airport Corporation Limited v Australian Competition Tribunal [2006] FCAFC 146, [83]–[84]. 67 Pilbara Infrastructure Pty Ltd v Australian Competition Tribunal (2011) 193 FCR 57, [112]. 68 Mathias Cormann, Decision and Statement of Reasons concerning Glencore Coal Pty Ltd’s Application for Declaration of the Shipping Channel Service at the Port of Newcastle, 8 January 2016. 69 NCC, Declaration of the Shipping Channel Service at the Port of Newcastle – Final Recommendation, 2 November 2015, 41. 70 Application by Glencore Coal Pty Ltd [2016] ACompT 6.

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application of the with/without access test in this context was straightforward. The Tribunal stated criterion (a) was met because (1) the shipping channel service is a natural monopoly, (2) the port owner exerts monopoly power, and (3) the shipping channel service is a necessary input for effective competition in the dependent coal export market as there is no practical and realistic commercial alternative. Therefore, since access to the shipping channel service is essential to compete in the coal export market, criterion (a) is satisfied. The port owner applied for judicial review of the Australian Competition Tribunal’s decision on 14 July 2016.71 Criterion (b) – would it be uneconomical for anyone to develop another facility to provide the service?

[7.190]

The interpretation of criterion (b) has also been controversial (see Box 7.1 for further discussion).

Prior to the High Court’s decision in respect of the Pilbara railway lines in 2012 (see Box 3.2 in Ch 3 for background on The Pilbara Infrastructure Pty Ltd v Australian Competition Tribunal72), the NCC and the Tribunal applied a natural monopoly test (that is, could a single pipeline meet the expected future demand at a lower cost than two or more pipelines?). Under this test, the term “uneconomic” was “construed in a broader social cost benefit sense, in which the total costs and benefits of developing another facility are brought to account”.73 The majority judgment in the recent High Court decision in The Pilbara Infrastructure Pty Ltd v Australian Competition Tribunal overturned this view.74 In particular, the High Court with a six to one majority held that a private profitability test,75 and not a net social benefit test76 or natural 71 Notice of Filing and Hearing, Port of Newcastle Operations Pty Ltd v The Australian Competition Tribunal & Anor, NSD 1147/2016, 14 July 2016. 72 (2012) 246 CLR 379. 73 Re Duke Eastern Gas Pipeline Pty Ltd [2001] ACompT 2, [59]. 74 Essentially the High Court affirmed the Federal Court’s position that s 44G(2)(b) of the CCA, the uneconomic for anyone to duplicate the facility criterion, was to be interpreted as a private profitability test, not a natural monopoly test or a net social benefit test. This interpretation casts doubt on the previously held view that the objective of the Pt IIIA access regime was socially efficient use of infrastructure that had natural monopoly characteristics: see The Pilbara Infrastructure Pty Ltd v Australian Competition Tribunal (2012) 246 CLR 379, 411–412. 75 The High Court majority outlined the private profitability test as follows: it would be uneconomical to develop another facility if “there is not anyone for whom it would be profitable to develop another facility”: The Pilbara Infrastructure Pty Ltd v Australian Competition Tribunal (2012) 246 CLR 379, 411. 76 The High Court majority outlined the net social benefit test as follows: it would be uneconomical to develop another facility “for a likely range of reasonably foreseeable

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monopoly test,77 should be applied in considering criterion (b) of the declaration criteria in s 44G(2). After considering the Hilmer Report and other background materials to Pt IIIA, French CJ, Gummow, Hayne, Crennan, Kiefel and Bell JJ concluded that: It would not be economical, in the sense of profitable, for someone to develop another facility to provide the service in respect of which the making of a declaration is being considered unless that person could reasonably expect to obtain a sufficient return on the capital that would be employed in developing that facility. Deciding the level of that expected return will require close consideration of the market under examination. What is a sufficient rate of return will necessarily vary according to the nature of the facility and the industry concerned. And if there is a person who could develop the alternative facility as part of a larger project it would be necessary to consider the whole project in deciding whether the development of the alternative facility, as part of that larger project, would provide a sufficient rate of return. But the inquiry required by criterion (b) should be whether there is anyone who could profitably develop an alternative facility. … whether it would be economically feasible to develop an alternative facility – is a question that bankers and investors must ask and answer in relation to any investment in infrastructure. Indeed, it may properly be described as the question that lies at the heart of every decision to invest in infrastructure, whether that decision is to be made by the entrepreneur or a financier of the venture. If the Minister is satisfied that it would be uneconomical (in the sense of not profitable) for anyone to develop an alternative facility, criterion (b) is met.78

Thus, the current approach, in line with the majority view of the High Court, is to apply a “private profitability” test under criterion (b). However as noted in Box 7.1, the Australian Government has expressed a preference for a reversion to the “natural monopoly” test, and therefore there may be changes to this criterion in future. The NCC Declaration Guide currently sets out the NCC’s proposed approach to applying the the private profitability test, in line with the current High Court precedent. The NCC notes that, in its view, the application of criterion (b) would require that an applicant “demonstrate the basis on which it is unprofitable for it or anyone else to develop a new demand for the services provided by means of the facility, it would be more efficient, in terms of costs and benefits to the community as a whole, for one facility to provide those services rather than more than one”: The Pilbara Infrastructure Pty Ltd v Australian Competition Tribunal (2012) 246 CLR 379, 412. 77 The High Court majority outlined the natural monopoly test as follows: it would be uneconomical to develop another facility if “the facility in question can provide society’s reasonably foreseeable demand for the relevant service at a lower total cost than if it were to be met by providing two or more facilities”: The Pilbara Infrastructure Pty Ltd v Australian Competition Tribunal (2012) 246 CLR 379, 411. 78 The Pilbara Infrastructure Pty Ltd v Australian Competition Tribunal (2012) 246 CLR 379, 420–421.

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facility to provide the service”.79 The NCC Declaration Guide lists a significant amount of information that applicants should provide in any declaration application with respect to this matter:80 The NCC requests that applicants, in providing an assessment of profitability of a new facility: • provide estimates (including the basis for the estimates and assumptions underlying them81) for: (i) expected capital and operating costs of developing and operating a new facility; (ii) projected use of the facility and revenues; (iii) the required rates of return on the debt and equity necessary to finance the development of the facility; and (iv) based on the revenues, a consideration of profitability; • provide it for the period for which declaration is sought (at least) but may be referrable to another time period (e.g., the likely operating life of the new facility). • have regard to the return on capital employed in developing a new facility and the cost of that capital. • provide (if available) a relative assessment between the new facility and other uses of financial and other resources.

The NCC Declaration Guide also specifies extra requirements in different circumstances, as follows: Where it appears that the only party likely to be in a position to develop a new facility is the existing service provider/incumbent, the assessment of the profitability of the new facility should: (i) be based upon the development of a separate, new facility, and (ii) examine why an existing service provider would develop an alternative facility where there is the prospect that additional capacity could be provided at a lesser cost through augmentation of the service provider’s existing facility. Where development of a new facility may involve duplication of a natural monopoly, consideration will be given to whether the new facility is more efficient than the existing facility due to a cost or technological advantage. Where development of a new facility is unprofitable on a standalone basis but thought to be profitable as an integrated part of a larger project, the assessment of profitability should include consideration of the impact of the cost of developing the new facility on overall project profitability.82

In relation to criterion (b), the NCC in its final recommendation in respect of the application for declaration of a shipping channel service at the Port of Newcastle concluded that: 79 NCC Declaration Guide, 38. 80 NCC Declaration Guide, 38–39. 81 The NCC notes that it “is unlikely to rely on estimates that do not disclose, in a form that can be tested through the public consultation process, the underpinning assumptions and the sensitivity of the estimates to variations in critical assumptions. Where issues of confidentiality arise, the Council anticipates that it should be possible to still examine the material via the public consultation process by disclosing a range of figures”: NCC Declaration Guide, 39. 82 NCC Declaration Guide, 39.

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no party … has outlined a scenario that overcomes the significant physical and structural impediments to developing another facility to provide the service, let alone the profitability or economic feasibility of such a task. As such, it would appear that the cost of undertaking such an activity would likely be far in excess of any likely income received from the facility.83

As this criterion may be amended in the near future, this decision may be the last declaration decision made under the “private profitability” test for criterion (b) (see Table 7.7 below). Box 7.1: Criterion (b) — An evolving beast Criterion (b) has been the subject of different interpretations over time. The majority view of the High Court in The Pilbara Infrastructure Pty Ltd v Australian Competition Tribunal84 was that criterion (b) involves a consideration of whether it would be profitable for any current or potential participant in the marketplace to develop an alternative facility.85 If it would be profitable, then criterion (b) will not be satisfied. This view can be contrasted with the views of the Australian Competition Tribunal at first instance, and the dissenting High Court judgment of Justice Heydon. The Tribunal found that there were a number of factors that pointed away from a private profitability test, including that: • it did not “sit easily with” the objects of Pt IIIA, being the promotion of “effective competition”;86 • it “ignores efficiency considerations” and “may not lead to the efficient use and operation of a facility”;87 • it did not accord with “the emphasis on natural monopolies in the background materials to Part IIIA”. The Tribunal found that there were “two consistent themes which emerge from … [that] … material … (1) facilities requiring access exhibit natural monopoly characteristics; and (2) the notion of being ‘uneconomical’ has been linked to the definition of natural monopoly”;88 and

83 NCC, Declaration of the shipping channel service at the Port of Newcastle – Final recommendation, 2 November 2015, 44. 84 (2012) 246 CLR 379 (“Pilbara Case”). 85 The Pilbara Infrastructure Pty Ltd v Australian Competition Tribunal (2012) 246 CLR 379, 420–421. 86 In the matter of Fortescue Metals Group Limited [2010] ACompT 2, [818]. 87 In the matter of Fortescue Metals Group Limited [2010] ACompT 2, [819]–[820], [824]. 88 In the matter of Fortescue Metals Group Limited [2010] ACompT 2, [825].

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• it “would lead to a significant degree of overlap between criterion (a) and criterion (b)”.89 Heydon J similarly did not consider that a private profitability test was appropriate as it would create “a risk of two facilities being built in circumstances where building the second facility would waste resources and defy sound economic principles”.90 That is, Heydon J considered that two railway lines should not be built when one would satisfy demand at a lower cost. The Tribunal and Heydon J’s preferred test for criterion (b) is the natural monopoly test. The Tribunal articulated that the natural monopoly test should be applied as a two-step test: • “first, determine the reasonably foreseeable potential demand for the facility (strictly the service provided by the facility)”; and • “then compare the capital and operating costs of a shared facility to the sum of the capital and operating costs of an existing facility (or an expanded existing facility) and a new facility”.91 After analysing the practicalities of applying the different tests for criterion (b), the Productivity Commission in its Final Report on the National Access Regime concluded that the most appropriate test for criterion (b) is where total market demand could be met at least cost by the facility (that is, a natural monopoly test).92 This recommendation differs to the recommendation reached by the Panel in the Harper Review final report. The Panel effectively supported the majority of the High Court’s view in the Pilbara Case, concluding that “[c]riterion (b) should require that it be uneconomical for anyone (other than the service provider) to develop another facility to provide the service”.93 On 24 November 2015, the Australian Government adopted the Productivity

89 In the matter of Fortescue Metals Group Limited [2010] ACompT 2, [829]. 90 The Pilbara Infrastructure Pty Ltd v Australian Competition Tribunal (2012) 246 CLR 379,441. 91 In the matter of Fortescue Metals Group Limited [2010] ACompT 2, [855]. 92 Productivity Commission, National Access Regime, Inquiry Report No 66, 25 October 2013, 33. 93 Harper Review, 74.

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Commission’s recommendation to revert to a natural monopoly test. The Australian Government rejected the Harper Review’s recommendation for this criterion as it “would keep the bar for … declaration very high, potentially leading to inefficient duplication of infrastructure and weakening the incentive for commercially negotiated outcomes”.94

Criterion (c) – is the facility providing the service for which declaration is sought nationally significant having regard to: (i) the size of the facility; or (ii) the importance of the facility to constitutional trade or commerce; or (iii) the importance of the facility to the national economy

[7.200]

This criterion requires that the facility be “nationally significant” having regard to either its size, its importance to constitutional trade or commerce, or its importance to the national economy. As the criterion makes clear, a facility needs to satisfy only one of these requirements (although there is overlap between the requirements as a large facility is likely to be important to constitutional trade and commerce and the national economy).

In practice, the NCC and the Tribunal have tended to focus on whether the facility meets the second and/or third requirement(s) under this criterion. What is nationally significant will depend very much on the type of facility being considered. For example, in relation to airports, nationally significant was considered in terms of: (1) the volume and value of international trade that depends on the facility; (2) the airports’ strategic importance in the international air freight chain; (3) the implications for the performance of industries that rely on international air freight; and (4) the location of the airport.95 In relation to sewerage systems, it was considered that these systems were nationally significant as they were connected to sewerage networks (and therefore played a role in constitutional trade and commerce) and were pervasive (and therefore important to the national economy).96 Criterion (e) – is there an effective access regime already available?

[7.210]

Criterion (e) is only concerned with an effective access regime implemented by a state or territory government that has been certified under Pt IIIA. To the extent there is a state or territory access regime under development at the time a declaration application is being assessed, it may

94 Australian Government, Australian Government Response on the National Access Regime, 24 November 2015, 3. 95 See, eg, Re Virgin Blue Airlines Pty Limited [2005] ACompT 5, [78]. 96 See, eg, Re Services Sydney Pty Limited [2005] ACompT 7, [180]–[185].

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be taken into account by the NCC when assessing criteria (a) and (f) (but not criterion (e)), as well as when considering the appropriate duration of any declaration.97 Criterion (f) – would access (or increased access) to the service not be contrary to the public interest?

[7.220]

The term “public interest” is not defined in the CCA.

In previous applications, the NCC has indicated that it has assessed issues that are largely economic in nature under the public interest criterion. Issues that have been assessed under this criterion include economic efficiency, regulatory costs, disruption costs and investment effects.98 However, in The Pilbara Infrastructure Pty Ltd v Australian Competition Tribunal, the High Court found the matters the NCC (and Minister) may have regard to under criterion (f) are “very wide indeed” and may include consideration of “matters of broad judgment of a generally political kind” as distinct from the other criteria, which are of a “more technical kind”.99 In the NCC Declaration Guide, the NCC notes it will be guided by the matters listed in cl 1(3) of the CPA in its analysis of the public interest. The matters include: (a) ecologically sustainable development; (b) social welfare and equity considerations, including community service obligations; (c) government legislation and policies relating to matters such as occupational health and safety, industrial relations and access and equity; (d) economic and regional development, including employment and investment growth; (e) the interests of consumers generally or of a class of consumers; (f) the competitiveness of Australian businesses, and (g) the efficient allocation of resources.100 The NCC in its final recommendation in respect of the application for declaration of a shipping channel service at the Port of Newcastle set out its approach to considering criterion (f) as follows: The Council considers that the preferable approach to criterion (f) is to seek generally to identify any matter that could mean access (or increased access) might be contrary to the public interest and then assess whether the likelihood and consequences of that matter make access contrary to the public interest. The Council considers that this approach is more consistent with the Pilbara HCA decision in that it involves a judgment that the Council is able to advise on, and a Minister is well placed to make, rather than a detailed technical examination of costs and benefits for which only partial information is likely to be available.101 97 NCC Declaration Guide, 44. 98 NCC Declaration Guide, 46. 99 The Pilbara Infrastructure Pty Ltd v Australian Competition Tribunal (2012) 246 CLR 379, 401. 100 NCC Declaration Guide, 46. 101 NCC, Declaration of the Shipping Channel Service at the Port of Newcastle – Final Recommendation, 2 November 2015, 51.

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The NCC also concluded in relation to criterion (f) in its final recommendation that the costs and risks identified by the service provider are, of themselves, unlikely to prevent criterion (f) being satisfied. It noted that it had not identified any other matter which would mean criterion (f) would not be satisfied and therefore concluded that criterion (f) was satisfied.102

Certification Process

[7.230]

The NCC can assess state and territory access regimes and certify them as effective (see Div 2A of Pt IIIA of the CCA). Applications for certification of state or territory access regimes are made by the government of the state or territory to the NCC. The NCC conducts a public consultation on the application before making its recommendation to the designated Minister as to whether the Minister should certify the regime as effective. Following receipt of the NCC’s recommendation, the Minister decides whether or not the regime is effective. If the regime is considered to be effective, the Minister specifies the period for which that decision is in force.103

In deciding what recommendation the NCC should make to the Minister on whether a regime is effective, the NCC must: • apply the relevant principles (that is, the cl 6 principles – set out in Table 7.2) in the CPA and treat each principle as a guideline rather than a binding rule;104 • have regard to the objects clause in Pt IIIA;105 and • not consider any other matters.106 The same requirements apply to the Minister when making a decision on certification.107 Certification principles

[7.240]

Table 7.2 sets out the certification principles. In contrast to the declaration criteria, the language of ss 44M and 44N of the CCA and the fact that the cl 6 principles are to be treated as guidelines and not binding

102 NCC, Declaration of the Shipping Channel Service at the Port of Newcastle – Final Recommendation, 2 November 2015, 51. 103 A fuller description of the process and the steps involved in the process are set out in the NCC, Certification of State and Territory Access Regimes: A Guide to Certification under Part IIIA of the Competition and Consumer Act 2010 (Cth), November 2013, Melbourne. 104 CCA, ss 44M(4)(a), 44DA 105 CCA, s 44M(4)(aa). 106 CCA, s 44M(4)(b). It should be noted that state and territory regimes may contain additional matters as long as they are not inconsistent with the cl 6 principles. 107 CCA, s 44N(2).

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rules means that the NCC/Minister have significant discretion in considering whether regimes are effective. Table 7.2 Clause 6 principles – Guidelines for certification Category and Principle number Scope of the regime 6(3) For a State or Territory access regime to conform to the principles set out in this clause, it should: (a) apply to services provided by means of significant infrastructure facilities where: (i) it would not be economically feasible to duplicate the facility; (ii) access to the service is necessary in order to permit effective competition in a downstream or upstream market; and (iii) the safe use of the facility by the person seeking access can be ensured at an economically feasible cost and, if there is a safety requirement, appropriate regulatory arrangements exist; and (b) reasonably incorporate each of the principles referred to in subclause (4) and (except for an access regime for: electricity or gas that is developed in accordance with the Australian Energy Market Agreement; or the Tarcoola to Darwin railway) subclause (5). There may be a range of approaches available to a State or Territory Party to incorporate each principle. Provided the approach adopted in a State or Territory access regime represents a reasonable approach to the incorporation of a principle in subclause (4) or (5), the regime can be taken to have reasonably incorporated that principle for the purposes of paragraph (b). 6(4)(d) A State or Territory access regime should incorporate the following principles: (d) Any right to negotiate access should include a date after which the right would lapse unless reviewed and subsequently extended; however, existing contractual rights and obligations should not be automatically revoked. Interstate issues 6(2) The regime to be established by Commonwealth legislation is not intended to cover a service provided by means of a facility where the State or Territory Party in whose jurisdiction the facility is situated has in place an access regime which covers the facility and conforms to the principles set out in this clause unless: (a) the NCC determines that the regime is ineffective having regard to the influence of the facility beyond the jurisdictional boundary of the State or Territory; or (b) substantial difficulties arise from the facility being situated in more than one jurisdiction. 6(4)(p) A State or Territory access regime should incorporate the following principles: (p) Where more than one State or Territory regime applies to a service, those regimes should be consistent and, by means of vested jurisdiction or other cooperative legislative scheme, provide for a single process for persons to seek access to the service, a single body to resolve disputes about any aspect of access and a single forum for enforcement of access arrangements.

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Category and Principle number Negotiation framework A State or Territory access regime should incorporate the following 6(4)(a) – (c), principles: (e) – (i), (a) Wherever possible third party access to a service provided by means (m) – (o) of a facility should be on the basis of terms and conditions agreed between the owner of the facility and the person seeking access. (b) Where such agreement cannot be reached, governments should establish a right for persons to negotiate access to a service provided by means of a facility. (c) Any right to negotiate access should provide for an enforcement process. (e) The owner of a facility that is used to provide a service should use all reasonable endeavours to accommodate the requirements of persons seeking access. (f) Access to a service for persons seeking access need not be on exactly the same terms and conditions. (g) Where the owner and a person seeking access cannot agree on terms and conditions for access to the service, they should be required to appoint and fund an independent body to resolve the dispute, if they have not already done so. (h) The decisions of the dispute resolution body should bind the parties; however, rights of appeal under existing legislative provisions should be preserved. (i) In deciding on the terms and conditions for access, the dispute resolution body should take into account: (i) the owner’s legitimate business interests and investment in the facility; (ii) the costs to the owner of providing access, including any costs of extending the facility but not costs associated with losses arising from increased competition in upstream or downstream markets; (iii) the economic value to the owner of any additional investment that the person seeking access or the owner has agreed to undertake; (iv) the interests of all persons holding contracts for use of the facility; (v) firm and binding contractual obligations of the owner or other persons (or both) already using the facility; (vi) the operational and technical requirements necessary for the safe and reliable operation of the facility; (vii) the economically efficient operation of the facility; and (viii) the benefit to the public from having competitive markets.

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Category and Principle number Dispute resolution 6(4)(a) – (c), See above for 6(4)(a) – (c), (g) – (i). (g)–(l), (o) A State or Territory access regime should incorporate the following principles: (j) The owner may be required to extend, or to permit extension of, the facility that is used to provide a service if necessary but this would be subject to: (i) such extension being technically and economically feasible and consistent with the safe and reliable operation of the facility; (ii) the owner’s legitimate business interests in the facility being protected; and (iii) the terms of access for the third party taking into account the costs borne by the parties for the extension and the economic benefits to the parties resulting from the extension. (k) If there has been a material change in circumstances, the parties should be able to apply for a revocation or modification of the access arrangement which was made at the conclusion of the dispute resolution process. (l) The dispute resolution body should only impede the existing right of a person to use a facility where the dispute resolution body has considered whether there is a case for compensation of that person and, if appropriate, determined such compensation. (o) The dispute resolution body, or relevant authority where provided for under specific legislation, should have access to financial statements and other accounting information pertaining to a service. 6(5)(c) See below for 6(5)(c). Efficiency promoting terms and conditions of access See above for 6(4)(a) – (c), (e), (f), (i), (k). 6(4)(a) – (c), (e), (f), (i), (k), A State or Territory access regime should incorporate the following (n) principles: (n) Separate accounting arrangements should be required for the elements of a business which are covered by the access regime. 6(5) A state, territory or Commonwealth access regime (except for an access regime for: electricity or gas that is developed in accordance with the Australian Energy Market Agreement; or the Tarcoola to Darwin railway) should incorporate the following principles: (a) Objects clauses that promote the economically efficient use of, operation and investment in, significant infrastructure thereby promoting effective competition in upstream or downstream markets.

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Principle (b) Regulated access prices should be set so as to: (i) generate expected revenue for a regulated service or services that is at least sufficient to meet the efficient costs of providing access to the regulated service or services and include a return on investment commensurate with the regulatory and commercial risks involved; (ii) allow multi-part pricing and price discrimination when it aids efficiency; (iii) not allow a vertically integrated access provider to set terms and conditions that discriminate in favour of its downstream operations, except to the extent that the cost of providing access to other operators is higher; and (iv) provide incentives to reduce costs or otherwise improve productivity. (c) Where merits review of decisions is provided, the review will be limited to the information submitted to the original decision-maker except that the review body: (i) may request new information where it considers that it would be assisted by the introduction of such information; (ii) may allow new information where it considers that it could not have reasonably been made available to the original decision-maker; and (iii) should have regard to the policies and guidelines of the original decision-maker (if any) that are relevant to the decision under review.

On 24 November 2015, the Australian Government announced it would amend the CPA to reflect the amendments it has indicated it will seek to make to the declaration criteria in light of the Productivity Commission review and the Harper Review.108 These changes are likely to lead to a streamlining of the cl 6 principles.

Undertakings [7.250]

Infrastructure owners can voluntarily submit access undertakings to the ACCC that set out the proposed terms and conditions of access to a service that is supplied using their infrastructure facility. In other circumstances, infrastructure owners may be required (under other legislation or in a commercial agreement/lease) to submit an access undertaking to the ACCC.109 If accepted by the ACCC, the access undertaking will set out the terms and conditions of access to the service for a specified period.

108 Australian Government, Australian Government Response on the National Access Regime, 24 November 2015, 7. 109 For example, the Wheat Export Marketing Act 2008 (Cth) (which is no longer in force) required port terminal service providers who also exported wheat to pass an “access test”, which was able to be met by having a Pt IIIA undertaking in operation (the current access regime for these port terminal services is set out in the Port Terminal Access (Bulk

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Process

[7.260]

The various steps in the undertaking process, including the responsible parties, what is involved and the time limit (if any), are set out in Table 7.3. These steps are only indicative. As the ACCC has noted, “[t]he actual process for having an undertaking considered by the ACCC will depend on the circumstances in each case, and will be informed by a number of matters, including but not limited to, the characteristics and complexity of the undertaking that is put forward”.110

Table 7.3 Steps in the undertaking process111 Step Prelodgement discussions with ACCC

Who is responsible? ACCC and infrastructure owner

What is involved?

The ACCC is open to comprehensive pre-lodgement discussions, including meetings. At these discussions, the ACCC provides guidance on the broad access obligations it would be willing to accept under Pt IIIA. These discussions also provide an opportunity for other, non-contentious obligations that will form part of the undertaking to be dealt with. PreInfrastructure The infrastructure owner may also seek to lodgement owner and engage with potential users of its proposed discuspotential access service ahead of drafting and sions with users submitting the access undertaking to the potential users ACCC. Such discussions tend to resolve some areas of dispute and lead to a more efficient access undertaking assessment process. Infrastructure Infrastructure owner can prepare and Preparaowner who is, submit an access undertaking under tion and submission or expects to s 44ZZA of the CCA. The undertaking may be, the of undertak- provider of a deal with some/all of the following: • terms and conditions of access to the service ing to service; ACCC • procedures for determining terms and conditions of access to the service;

Time limit (if any) -

-

-

Wheat) Code of Conduct and is discussed further in Ch 11). Further, access undertakings under Part IIIA have been submitted as they meet the condition in a lease of assets from the Australian Government in the case of the Australian Rail Track Corporation’s interstate and the Hunter Valley railways. 110 ACCC, Productivity Commission Review of the National Access Regime, ACCC Submission to Issues Paper, February 2013, 52. 111 See, for example, ACCC, Productivity Commission Review of the National Access Regime, ACCC Submission to Issues Paper, February 2013.

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Who is responsible?

What is involved?

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Time limit (if any)

• an obligation on the provider:

ACCC Assessment of application by ACCC Interested parties (including the service provider and the proposed users of the service)

– not to hinder access to the service; – to implement a particular business structure; – to provide information to the ACCC or to another person; – to comply with ACCC decisions (or another party’s decisions); and – to seek a variation of the undertaking in specified circumstances. The undertaking must specify the expiry date. The ACCC will consider the access 180 days (CCA, undertaking and publish it on its website s 44ZZBC(1))), although this after a preliminary assessment.112 It may or period can be may not publish an issues paper when it extended publishes the undertaking. Once published, the ACCC will conduct a public consultation process on the undertaking with interested parties. After considering interested parties’ submissions and other material, the ACCC will give the service provider notice in writing of its proposed decision on the undertaking. It will also issue a public draft decision or position paper. Following the receipt of notice of the decision, the service provider can provide a submission within 14 days. Alternatively, the service provider may withdraw the access undertaking and submit a revised access undertaking for consideration.113 Further submissions may also be received by other interested parties at this time. Following receipt of these submissions, the ACCC will decide whether to accept or reject the undertaking and publish its decision.114

112 There is no formal preliminary assessment under the CCA, but the ACCC will consider whether the undertaking meets minimum requirements before commencing its consultation process. 113 Under s 44ZZAAA of the CCA, the ACCC is not required to accept the revised undertaking. 114 If the decision is to reject the undertaking, there is no requirement on the ACCC to consider what amendments to the undertaking would be necessary for it to accept an undertaking from the infrastructure owner (CCA, s 44ZZAAA(10)).

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Step Review of ACCC’s decision on access undertaking

Review of Tribunal’s decision

Who is responsible? Tribunal

Applicant for review of ACCC’s decision (generally the proposed service provider as review is generally sought when the ACCC rejects an undertaking) Federal Court/High Court Applicant for review of Tribunal’s decision

What is involved?

Time limit (if any) Application Parties can apply for review of the ACCC’s must be made decision on the access undertaking to the within 21 days Tribunal.115 of publication of ACCC’s decision 180 days for Under s 44ZZBF(6) and (7) of the CCA, the Tribunal to Tribunal may affirm or set aside the review decision ACCC’s decision in relation to the (CCA, undertaking. s 44ZZOA(2)); but can be extended

Parties can apply for review of the Tribunal’s decision on the access undertaking to the Federal Court/High Court on a point of law.

Application typically must be made within 28 days of Tribunal decision116

Similar to the declaration process (see Table 7.1), the time limits for the undertaking assessment process set out in Table 7.3 are not firm and may be subject to change. Under s 44ZZBC, the ACCC can stop the clock by issuing information requests to the infrastructure owner or by inviting public submissions, among others. The ACCC can also stop the clock by agreement with the infrastructure owner. However, in contrast to the declaration process, the timeframe of the undertaking process is not likely to extend significantly. This is because the process is initiated by the infrastructure owner. The infrastructure owner therefore has an incentive to resolve any issues and provide any additional information to the ACCC in a timely manner. That said, the nature of the process is that the infrastructure owner may make more than one “formal” undertaking application. This is because, if the ACCC’s draft decision is to reject the undertaking, the infrastructure owner may withdraw the proposed undertaking and resubmit an alternative undertaking that seeks to address the concerns identified by the ACCC in the draft decision. This process will restart the 180-day assessment timeframe. Given this, the conduct of the infrastructure owner in the assessment process may have a significant impact on the length of the timeframe.

115 Parties are also likely to be able to seek judicial review of the ACCC’s decision. 116 Administrative Decisions (Judicial Review) Act 1977 (Cth), s 11(1), (3).

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Assessment of access undertakings

[7.270]

As noted at [7.260], the ACCC must assess access undertakings under s 44ZZA(3) of the CCA. Table 7.4 sets out the s 44ZZA(3) factors. Table 7.4 Section 44ZZA(3) factors the ACCC considers when assessing access undertakings Subsection (aa) (ab)

(a) (b) (c) (da) (e)

Factor Objects clause in Pt IIIA Pricing principles in s 44ZZCA Section 44ZZCA provides that the pricing principles relating to the price of access to a service are: (a) that regulated access prices should: (i) be set so as to generate expected revenue for a regulated service or services that is at least sufficient to meet the efficient costs of providing access to the regulated service or services; and (ii) include a return on investment commensurate with the regulatory and commercial risks involved; and (b) that the access price structures should: (i) allow multi-part pricing and price discrimination when it aids efficiency; (ii) not allow a vertically integrated access provider to set terms and conditions that discriminate in favour of its downstream operations, except to the extent that the cost of providing access to other operators is higher; and (c) that access pricing regimes should provide incentives to reduce costs or otherwise improve productivity Legitimate business interests of the provider Public interest, including the public interest of having competition in markets in Australia Interests of persons who might want access to the service Whether the undertaking is in accordance with an access code that applies to the service Any other matters the ACCC considers relevant

As is evident from some of the factors in Table 7.4, the ACCC has considerable discretion in assessing access undertakings. The ACCC considers that the s 44ZZA(3) factors allows it to “take a tailored approach that addresses particular characteristics of an industry while maintaining high-level consistency across the regulatory principles applying to different industries”.117

OBTAINING ACCESS UNDER PT IIIA [7.280]

Once a service is declared or subject to an access undertaking, potential users of the service can obtain access to the service by either negotiating a private agreement with the service provider or, failing a private agreement, notifying the ACCC that an access dispute exists and

117 ACCC, Productivity Commission Review of the National Access Regime, ACCC Submission to Issues Paper, February 2013, 6.

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having the ACCC arbitrate the dispute.118 Where an access undertaking is in operation, a dispute may only be notified with respect to aspects of access that are not dealt with in the access undertaking.119

Arbitration [7.290]

The arbitration mechanisms are set out in Div 3 of Pt IIIA. The arbitration process is very similar to the access undertaking process (see [7.260]), with a similar list of factors to consider, the same time limits and a similar process involving a draft decision before a final decision.

Once the ACCC has been notified of the dispute, the ACCC will give notice in writing to the other party to the dispute (that is, if the access dispute was notified by a user, the ACCC will give notice of the dispute to the service provider) and any other person that the ACCC considers might want to become a party to the arbitration (that is, if the access dispute was notified by a user, other users or potential users).120 After considering the issues, the ACCC will issue a draft determination to the parties.121 It may also issue an interim determination, which applies until the final determination is made. The factors that the ACCC must consider when making a final determination, set out in Table 7.5, are similar to the s 44ZZA(3) factors considered when assessing an access undertaking (see Table 7.4).122 Table 7.5 Section 44X factors the ACCC must consider when making a final determination Subsection 1(aa) 1(a) 1(b) 1(c) 1(d) 1(e)

Factor Objects clause in Pt IIIA Legitimate business interests of the provider, and the provider’s investment in the facility Public interest, including the public interest of having competition in markets in Australia (whether or not in Australia) Interests of all persons who have rights to use the service Direct costs of providing access to the service The value to the provider of extensions whose cost is borne by someone else

118 Notification of the dispute is required pursuant to s 44S of the CCA. 119 CCA, s 44S(1). 120 Other users or potential users can apply in writing to be a party to the dispute and will be joined as parties if the ACCC considers that they have sufficient interest. 121 CCA, s 44V. 122 Under s 44X(3) of the CCA, the ACCC may take into account any of the matters in s 44X(1) or any other matters it considers relevant.

7 The National Access Regime Subsection 1(ea) 1(f) 1(g) 1(h) 2

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Factor The value to the provider of interconnections to the facility whose cost is borne by someone else The operational and technical requirements necessary for the safe and reliable operation of the facility The economically efficient operation of the facility Pricing principles in s 44ZZCA (see Table 7.4 for principles) Any other relevant matters

As with its assessment of undertakings, the ACCC has a considerable amount of discretion, including because the list of matters the ACCC must consider is non-exhaustive and relatively broad. Under s 44V of the CCA, determinations may be broad and can effectively deal with any matter relating to access (with the exception that if an access undertaking is place, a dispute cannot be notified with respect to that matter and, therefore, the arbitration cannot deal with matters covered by an access undertaking that is in operation). Section 44V(2) relevantly provides: By way of example, the determination may: (a) require the provider to provide access to the service by the third party; (b) require the third party to accept, and pay for, access to the service; (c) specify the terms and conditions of the third party’s access to the service; (d) require the provider to extend the facility; (da) require the provider to permit interconnection to the facility by the third party; (e) specify the extent to which the determination overrides an earlier determination relating to access to the service by the third party.

However, there are limits on determinations. These limits are set out in s 44W of the CCA. Restrictions include that a determination must not not have the effect of preventing an existing user from obtaining a sufficient amount of the service,123 depriving any person of a protected contractual right,124 resulting in the third party becoming the owner or any part of the facility or of extensions of the facility without the provider’s consent125 and requiring the provider to bear some or all of the costs of extending the facility.126 If a determination is in contravention of s 44W(1), then the determination is of no effect.127 As with the access undertaking assessment process (see [7.220]), the time limit on determinations is 180 days with scope for “stopping the clock”.128 123 CCA, s 44W(1)(a). 124 CCA, s 44W(1)(c). 125 CCA, s 44W(1)(d). 126 CCA, s 44W(1)(e). 127 CCA, s 44W(3). 128 CCA, s 44XA.

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[7.300]

The arbitration process is flexible. Under Div 3 of the CCA, the ACCC can effectively conduct the arbitration in any manner in which it considers appropriate. Parties to the arbitration are not bound by the rules of evidence and do not generally need to follow legal procedure,129 apart from refraining from doing an act or thing that would constitute a contempt of court.130 Similar to access undertakings, final determinations made by the ACCC are reviewable by the Australian Competition Tribunal and may also be the subject of judicial review. Under s 44ZP of the CCA, the Tribunal effectively re-arbitrates the dispute. The Tribunal will either affirm or vary the ACCC’s determination. The Tribunal’s decision on the determination is reviewable on a point of law to the Federal Court/High Court.131

THE NATIONAL ACCESS REGIME IN PRACTICE Has it been effective? [7.310]

The Hilmer Committee advocated for an access regime that was to be applied in a “limited category of cases”.132 The regime designed by the Hilmer Committee, and ultimately legislated in Pt IIIA of the CCA, requires an applicant to show that a facility is nationally significant, uneconomic to duplicate, and that access to the service at a facility is in the public interest, not already available pursuant to an effective access regime, and promotes a material increase in competition in related markets. Once these criteria are satisfied, the regime then allows for commercial negotiation and, failing a mutually agreeable outcome, a regulated outcome. A review of how the regime has been applied in practice demonstrates that the National Access Regime has been used “sparingly”133 (as the Hilmer Committee intended) (see Table 7.6).

129 CCA, s 44ZF. 130 CCA, s 44ZG(2). 131 CCA, s 44ZR. 132 Hilmer Report, xxxii. 133 Hilmer Report, 260.

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Table 7.6 National Access Regime: How has it been used in practice?134 Aspect of regime Declaration Certification

Access undertakings Competitive tenders ACCC arbitrations****

Number of Number of decisions applications 28 There have been six decisions to declare a service. Currently only two services are declared.* 24 There have been 19 regimes certified as effective, with one regime not certified as effective and four applications withdrawn before a final decision. 37** There are currently two access undertakings in effect.*** 0



3

1

Notes * While only six decisions to declare a service have been made, access to services provided by essential facilities are likely to have become available through undertakings or industry-specific access regimes (such as the gas, electricity and telecommunications access regimes). Currently, there are only two services declared: the Tasmanian railway network (which was declared in 2007) and the Goldsworthy railway line in the Pilbara, owned by BHP Billiton (which was declared in 2008). ** Of those access undertakings considered by the ACCC, the majority (22) of the access undertakings were provided by electricity network service providers pursuant to the then National Electricity Market Access Code135 – the access regime that was in place prior to the National Electricity Law coming into effect. The other access undertakings related to access services to be provided by wheat export terminals (eight), rail networks (four), airports (two) and gas pipelines (one). *** As at 30 April 2016, the services subject to access undertakings are: the below rail services on the interstate rail network; and the below rail services on the Hunter Valley rail network. **** There have been three access disputes notified to the ACCC under Part IIIA or a regime certified as effective under Part IIIA: (1) a dispute between Services Sydney and Sydney Water in relation to the methodology for pricing access in respect of the declared sewage transportation services; (2) a dispute between Virgin Blue (as it was then known) and Sydney Airport in relation to the pricing of an “airside service” (all movement of aircraft between runways and passenger arrival/departure gates and the servicing, maintenance, equipping and reequipping of aircraft at the start and end of a flight); and (3) a dispute between AGL Wholesale Gas Limited (AGLWG) and East Australian Pipeline Limited (EAPL) in relation to the terms and conditions on which EAPL would provide access to AGLWG at certain delivery points on the covered portions of the Moomba to Sydney gas pipeline. In respect of: (1) the ACCC issued a determination after eight 134 Sources: NCC website and ACCC access undertakings register. 135 Two access undertakings – those in respect of Basslink and Murraylink – were assessed in accordance with s 44ZZA of the then TPA.

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months in respect of the Services Sydney and Sydney Water arbitration, (2) the Virgin Blue/Sydney Airport access dispute was withdrawn by Virgin Blue after the parties settled the matter commercially and (3) the AGLWG/EAPL access dispute was withdrawn by AGLWG after the parties reached commercial agreement.

As Table 7.6 demonstrates, there are currently only two services declared136 and two services subject to access undertakings. Although declaration and regulation through access undertakings under Pt IIIA has been relatively rare (with the exception of those relating to electricity – discussed above in the note to Table 7.6), the National Access Regime has been found to be effective in its role as a “backstop” in that it only comes into play in circumstances where there is no industry-specific regime or other access mechanism available.137

Recent reviews of the National Access Regime Productivity Commission review

[7.320]

In February 2014, the Productivity Commission’s final report on the National Access Regime was released. The Productivity Commission analysed, among other things, whether elements of the regime should be revised and whether the regime as a whole should be retained. In relation to these issues, the Productivity Commission made the following recommendations:

• retain the National Access Regime, but confine its application to cases where the benefits arising from increased competition in dependent markets are likely to outweigh the costs of regulated third party access;138 • in respect of the declaration criteria:139 – amend the competition criterion (criterion (a))140 so that it is satisfied where access to an infrastructure service on reasonable terms and conditions through declaration (rather than access per se) would promote a material increase in competition in a dependent market; – amend the uneconomic to duplicate criterion (criterion (b))141 so that it effectively requires the application of a natural monopoly 136 Access has never been sought to one of the declared services, a rail service on the Goldsworthy rail line in the Pilbara. 137 See, for example, Harper Review, 426; and Productivity Commission, National Access Regime, Inquiry Report No 66, 25 October 2013, 14. 138 Productivity Commission, National Access Regime, Inquiry Report No 66, 25 October 2013, 10. 139 Productivity Commission, National Access Regime, Inquiry Report No 66, 25 October 2013, 31. 140 CCA, ss 44G(2)(a), 44H(2)(a). 141 CCA, ss 44G(2)(b), 44H(2)(b).

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test, not a private profitability test (see Box 7.1 for further details on the interpretation of this criterion over time); – replace the criterion around whether access is already available under another access regime (criterion (c))142 with a threshold test that a service cannot be declared if it is subject to a certified access regime; and – revise the public interest criterion (criterion (f))143 and shift the onus to the applicant to prove affirmatively that declaration would promote the public interest; • require access undertakings to be assessed against the declaration criteria to ensure they properly address economic problems and deliver net benefits.144 At the time that the report was released by the Australian Government, Minister Bruce Billson noted that reforms would not be considered until after the completion of the Harper Review (discussed at [7.330]).145 Harper Review On 31 March 2015, the Harper Review’s final report146 was released. The Panel concluded that Pt IIIA of the CCA has played, and will continue to play, an important role as a model for the development of other access regimes and as a “backstop” and should therefore be retained, but its scope confined to circumstances where the benefits of its application exceed the costs.147

[7.330]

In relation to Pt IIIA as a model, the Panel noted that “Part IIIA continues to provide a legislative framework upon which industry-specific access regimes are based”.148 The Panel reasoned that Pt IIIA has played an important role as a model through its indirect support of the establishment of industry-specific access regimes, such as the access regimes in place for electricity, gas and telecommunications.149 In relation to Pt IIIA as a backstop, the Panel concluded that: “Part IIIA will continue to provide a back stop to those industry-specific access regimes. While it would be possible to devise other legislative arrangements to 142 CCA, ss 44G(2)(e), 44H(2)(e). 143 CCA, ss 44G(2)(f), 44H(2)(f). 144 Productivity Commission, National Access Regime, Inquiry Report No 66, 25 October 2013, 31. 145 Bruce Billson, “Productivity Commission’s Final Report on National Access Regime Released”, Media release, 11 February 2014, . 146 Ian Harper, Peter Anderson, Su McCluskey and Michael O’Bryan, Competition Policy Review, Final Report, March 2015. 147 Harper Review, 73. 148 Harper Review, 73. 149 Harper Review, 73.

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maintain the current access regimes, it seems unnecessary to disrupt the role performed by Part IIIA in that context.”150 The Panel nevertheless considered that some changes to the National Access Regime would be appropriate to ensure that third party access would only be mandated where it is in the public interest. The Panel recommended: • changes to the declaration criteria to: – amend the competition criterion (criterion (a))151 so that it is satisfied where access to an infrastructure service on reasonable terms and conditions through declaration would promote a substantial increase in competition in a dependent market that is nationally significant; – amend the uneconomic to duplicate criterion (criterion (b))152 so that it effectively requires the application of a private profitability test (that is, effectively adopts the High Court’s position in The Pilbara Infrastructure Pty Ltd v Australian Competition Tribunal:153 see Box 7.1); and – amend the public interest criterion (criterion (f))154 so it requires the applicant to demonstrate declaration would promote the public interest (that is, that the benefits outweigh the costs that regulation imposes); and • retaining limited merits review by the Australian Competition Tribunal of access decisions but potentially expanding the scope of the review,155 including by allowing the Tribunal to hear directly from employees of the business concerned and relevant experts where that would assist. The Panel also recommended the establishment of a new national access and pricing regulator, which would take over the functions of the ACCC, NCC and the Australian Energy Regulator under the National Access Regime and the industry-specific access regimes. Where do the reviews leave us?

[7.340]

On 24 November 2015, the Australian Government responded to the Productivity Commission review and the Harper Review simultaneously.156 In relation to the declaration criteria (see Table 7.7), the

150 Harper Review, 429. 151 CCA, ss 44G(2)(a), 44H(2)(a). 152 CCA, ss 44G(2)(b), 44H(2)(b). 153 (2012) 246 CLR 379. 154 CCA, ss 44G(2)(f), 44H(2)(f). 155 The Panel noted that the merits review process should maintain incentives to ensure all relevant material is provided to the first-instance decision maker: see Harper Review, 480. 156 Australian Government, Australian Government Response on the National Access Regime, 24 November 2015; and Australian Government, Australian Government Response to the Competition Policy Review, 24 November 2015.

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Australian Government announced that it was largely adopting the Productivity Commission recommendations over the Harper Review recommendations. In particular, in respect of criterion (a), the Australian Government noted that “it agrees [with the Productivity Commission] that criterion (a) should be a comparison of access under the current situation versus access on reasonable terms and conditions through declaration as this is the most meaningful, realistic measure”.157 It considered that the Harper Review recommendation to require that a dependent market also be nationally significant would shift the focus of the National Access Regime from the infrastructure service in question. It also considered that the Harper Review recommendation to require a “substantial” increase in competition is problematic, particularly in a context where the impact on Australian markets is not significant, yet substantial benefits accrue within Australia from access.158 It should be noted that the Australian Government’s preferred approach to criterion (a) is consistent with the NCC’s current approach, but at odds with the approach most recently taken by the Australian Competition Tribunal and the approach of the Federal Court in the Sydney Airport case. In relation to criterion (b), the Australian Government adopted the Productivity Commission’s recommendation. The Government appears to consider that this interpretation would set the bar for declaration at the right level ensuring that the National Access Regime would remain “accessible and effective”.159 The Australian Government noted that the adoption of the Productivity Commission recommendation would, in effect, “amend criterion (b) to reflect the application of the law prior to the High Court’s interpretation”.160 In relation to criterion (f), the Australian Government adopted both the Productivity Commission review and Harper Review recommendations. The Government noted that: “[e]xpressing this test in the negative – ‘not contrary to the public interest’ – is too low a hurdle. Given that access is an imposition on infrastructure service providers, all tests should be framed from the perspective of protecting their property rights unless there are persuasive reasons not to”.161 157 Australian Government, Australian Government Response on the National Access Regime, 24 November 2015, 2. 158 Australian Government, Australian Government Response on the National Access Regime, 24 November 2015, 2. 159 Australian Government, Australian Government Response to the Competition Policy Review, 24 November 2015, 34. 160 Australian Government, Australian Government Response on the National Access Regime, 24 November 2015, 3. 161 Australian Government, Australian Government Response on the National Access Regime, 24 November 2015, 6.

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The Government also announced that it considers that the Australian Competition Tribunal’s existing merits review role should remain in place.162 At the time of writing, the Australian Government was still in the process of developing exposure draft legislation for consultation to give effect to these changes. Table 7.7 shows the current form of the declaration criteria and the proposed changes to the criteria. Table 7.7 Declaration criteria in the National Access Regime Declaration criterion (a) Access (or increased access) to the service would promote a material increase in competition in at least one market other than the market for the service, whether or not that market is in Australia

(b) It would be uneconomical for anyone to develop another facility to provide the service

Proposed changes The Australian Government indicated its support for the Productivity Commission recommendation in relation to criterion (a) from its Final Report on the National Access Regime. The Productivity Commission’s recommendation was to revise criterion (a) so that it involves a comparison of competition with and without access on reasonable terms and conditions through declaration.163 The Australian Government has noted that this amendment would, in effect, re-establish the pre-2006 interpretation of criterion (a). The Australian Government indicated its support for the Productivity Commission recommendation in relation to criterion (b). The Productivity Commission’s recommendation was to revise criterion (b) so that it is satisfied where total foreseeable market demand over the declaration period could be met at least cost by the facility. The Productivity Commission concluded that total market demand should include the demand for the service subject to the application as well as the demand for any substitute services, and the assessment of costs should include an estimate of any production costs incurred by the infrastructure service provider from coordinating multiple users of its facility.164 The Productivity Commission also noted that “anyone” should exclude the incumbent provider.

162 Australian Government, Australian Government Response to the Competition Policy Review, 24 November 2015, 34. 163 Australian Government, Australian Government Response on the National Access Regime, 24 November 2015, 2. 164 Australian Government, Australian Government Response on the National Access Regime, 24 November 2015, 3.

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Declaration criterion Proposed changes No proposed change. (c) The facility providing the service for which declaration is sought is nationally significant having regard to: (i) the size of the facility; or (ii) the importance of the facility to constitutional trade or commerce; or (iii) the importance of the facility to the national economy (d) repealed This criterion, which related to human health and safety, was repealed in 2010. The Australian Government indicated its (e) Access to the service: (i) is not already the subject of a regime support for the Productivity Commission’s in relation to which a decision under recommendation in relation to criterion (e). s 44N that the regime is an effective The Productivity Commission considers that access regime is in force (including as this criterion is not needed in addition to a result of an extension under s 44NB); the other four declaration criteria. Instead, or the Productivity Commission recommended (ii) is the subject of a regime in relation to inserting a threshold clause that states that a which a decision under s 44N that the service cannot be declared if it is already regime is an effective access regime is subject to an effective access regime.165 in force (including as a result of an extension under s 44NB), but the Council believes that, since the Commonwealth Minister’s decision was published, there have been substantial modifications of the access regime or of the relevant principles set out in the Competition Principles Agreement; (f) Access (or increased access) to the service The Australian Government indicated its would not be contrary to the public interest. support for the Productivity Commission’s and the Harper Review’s recommendations in relation to criterion (f). In both reviews, it was recommended that criterion (f) be amended to require an applicant to positively show that access to the service would be in the public interest. The Australian Government supported these recommendations and noted that “[g]iven that access is an imposition on infrastructure service providers, all tests should be framed from the perspective of protecting their property rights unless there are persuasive reasons not to”.166

165 Australian Government, Australian Government Response on the National Access Regime, 24 November 2015, 4. 166 Australian Government, Australian Government Response on the National Access Regime, 24 November 2015, 6.

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ACCC’s views on Pt IIIA

[7.350]

Recent comments made by ACCC Chairman Rod Sims indicate that the ACCC considers that the threat of regulation under Pt IIIA is an inadequate deterrent to monopoly pricing and other exercise of market power. Mr Sims has noted that there were two reasons for this: First, not all types of monopoly infrastructure services are vertically integrated into related markets, so it is difficult to demonstrate they have an incentive to deny access or set prices in a way that adversely affects competition in another market. Second, supply chain costs incurred from use of monopoly infrastructure can account for a small proportion of the delivered price of a good, so it can again be difficult to demonstrate access will promote a material increase in competition in a related market.167

Similar comments were made by the ACCC in its inquiry report on the east coast gas market. In that report, the ACCC concluded: Not only are few transmission pipelines regulated, but the threat of regulation is also failing to impose an effective constraint on the behaviour of a number of unregulated pipelines. This is because the current test for regulation under the NGL (the “coverage criteria”), which largely mirrors the declaration criteria in Part IIIA of the CCA, is unlikely to be met by the majority of transmission pipelines given the characteristics of the market. The criteria are also, as the Productivity Commission has noted, not designed to address the market failure that has been observed in this Inquiry, which is monopoly pricing that gives rise to economic inefficiencies with little or no effect on the level of competition in dependent markets.168

To address this limitation, the ACCC recommends that the current test for regulation in the National Gas Law and National Gas Rules be replaced with a new test, which focuses on whether (1) the pipeline in question has substantial market power and it is likely that the pipeline will continue to have substantial market power in the medium term; and (2) coverage of the pipeline will or is likely to contribute to the achievement of the national gas objective.169 At the time of writing, COAG had not publicly responded to the ACCC’s recommendations.

SUMMARY [7.360]

The origins of the National Access Regime can be traced back to the Hilmer Report in 1993. Over the past 20+ years, the regime has evolved,

167 ACCC Chairman Rod Sims, “Increasing efficiencies in supply”, Address to ABARES Outlook Conference, Canberra, 2 March 2016. 168 ACCC, Inquiry into the East Coast Gas Market, April 2016, pp 10-11. 169 The national gas objective is to promote efficient investment in, and efficient operation and use of, natural gas services for the long-term interests of consumers of natural gas with respect to price, quality, safety, reliability and security of supply of natural gas (NGL, s 23).

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with a number of legislative changes and differing interpretations from the courts and the Australian Competition Tribunal. The regime will continue to evolve in the future, with legislative change expected in the near term. The regime contains four avenues to access: • declaration; • certification; • access undertakings; and • competitive tender. While a number of other industry-specific regimes have emerged in Australia, Pt IIIA has played an important role as both a model for other access regimes and a “backstop”.

Questions for Discussion 1. What were the origins of, and intentions for, the National Access Regime? 2. What are the declaration criteria? 3. How has the interpretation of criterion (a) of the declaration criteria changed over time? What is the latest position? 4. Compare and contrast the declaration criteria and the s 44ZZA(3) factors that the ACCC considers when assessing an access undertaking. 5. Has the National Access Regime been effective to date? Will it continue to be effective in the future?

8

Electricity [8.10] PRELIMINARY NOTE (OF CAUTION) ....................................................................................... 171 [8.20] OVERVIEW ........................................................................................................................................ 172 [8.30] THE ELECTRICITY SUPPLY CHAIN AND ELECTRICITY ASSETS IN AUSTRALIA ....... 172 [8.40] HISTORY OF ACCESS REGULATION IN THE ELECTRICITY SECTOR .............................. 175 [8.50] 1990s reform ahead of the NEL and National Electricity Code ............................................... 175 [8.90] 2000s reform ahead of the new NEL and NER and beyond .................................................... 179 [8.140] CURRENT REGULATORY FRAMEWORK AND ROLE OF THE REGULATOR ............... 183 [8.140] National Electricity Law: Overview ............................................................................................ 183 [8.250] Scope of regulation – Electricity distribution ............................................................................. 192 [8.260] Scope of regulation – Electricity transmission ........................................................................... 194 [8.270] Application of the building blocks approach to electricity distribution and transmission ............................................................................................................................. 195 [8.480] Procedure for making distribution and transmission determinations .................................. 221 [8.530] Access disputes ................................................................................................................................ 225 [8.540] SUMMARY ....................................................................................................................................... 227

PRELIMINARY NOTE (OF CAUTION) [8.10] The economic regulatory regime that applies to services provided by electricity transmission and distribution networks is a highly detailed, complex and constantly evolving regime. The National Electricity Rules (“NER”), which govern the operation of the National Electricity Market (“NEM”), are over 1400 pages long and there have been some 70 versions of the NER published between 1 July 2005 and 30 June 2015. The glossary to the NER alone is over 100 pages. In grappling with an issue arising under the NER, a Federal Court judge observed (somewhat diplomatically): In the NER, italics are used to indicate words and terms which are defined. Thus what is revealed in the quoted definitions is what might aptly be described as the matryoshka or “Russian doll” method of definitional drafting. By that I mean that the definitions of these terms in turn incorporate other defined terms, layer upon successive layer, to some or all of which it is necessary to have recourse in order to construe any one given definition.1

Some further complexity arises because different terms are often used to describe similar concepts as they apply to distribution and transmission. For example, a distribution network service provider (“DNSP”) submits a “regulatory proposal” to the regulator, whereas a transmission network service provider (“TNSP”) submits a “revenue proposal”. This chapter 1 Ergon Energy Corporation Ltd v Australian Energy Regulator (2012) 213 FCR 576, 582 (Logan J).

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provides a simplification of the economic regulatory provisions of the NER. For ease of explanation and reading, this chapter does not always use terms as they may be defined in the NER. When considering a specific issue arising under the NER, reference should be had to the relevant provisions (and version) of the NER.

OVERVIEW [8.20] In Australia, the economic regulation of services provided by transmission and distribution systems that form part of the NEM is set out in the National Electricity Law (“NEL”) and the NER. This framework provides for price and/or revenue regulation of the core services provided by regulated distribution systems (distribution use of system services), and for revenue regulation of the core services provided by regulated transmission systems (transmission use of system services). This chapter explores the concepts and issues relating to access regulation as it applies to electricity systems. Commencing with an overview of the electricity supply chain, the chapter then outlines the policy and legislative history of electricity network regulation. This history can be divided into two separate stages: • the reviews and reforms carried out in the 1990s, which ultimately led to the introduction of the first electricity access regime – this comprised the arrangements set out in the NEL (being Sch 1 to the National Electricity (South Australia) Act 1996 (SA)) and the National Electricity Code, which was introduced in 1996; and • the reviews and reforms carried out in the early 2000s, which ultimately led to the introduction of the current regulatory framework on 1 July 2005. The chapter then sets out in detail how services provided by electricity systems are regulated, with particular emphasis placed on the revenue regulation of these services, which adopts a fairly orthodox building block approach (see Ch 5 for an overview of the building block approach) with some electricity-specific augmentations.

THE ELECTRICITY SUPPLY CHAIN AND ELECTRICITY ASSETS IN AUSTRALIA [8.30] The electricity supply chain is depicted in Figure 8.1.

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Figure 8.1 Electricity supply chain

The first stage of the electricity supply chain involves the generation of electricity. The majority of generation in the NEM is derived from coal, which supplied 76 per cent of output in the NEM in 2014–15.2 Gas-powered generators are the next largest source, supplying 12 per cent of output in 2014–15, followed by hydro (seven per cent), and wind (close to five per cent).3 Major owners of generation capacity in the NEM include AGL Energy, Origin Energy, Snowy Hydro, and EnergyAustralia.4 Most generation capacity in Victoria, New South Wales and South Australia is owned by private businesses.5 In Queensland and Tasmania, however, the majority of generation capacity is owned or controlled by government–owned corporations.6 The second stage of the supply chain involves the transmission of electricity by transmission networks from sources of generation to 2 AER, State of the Energy Market 2015, December 2015, 27. 3 AER, State of the Energy Market 2015, December 2015, 27–29. 4 AER, State of the Energy Market 2015, December 2015, 42 (Figure 1.15). 5 AER, State of the Energy Market 2015, December 2015, 39. 6 AER, State of the Energy Market 2015, December 2015, 39.

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distribution networks (or directly to large loads, such as mining and industrial customers). In broad terms, transmission networks operate at nominal voltages of 220kV and above.7 There are currently 12 TNSPs registered with the Australian Energy Market Operator (“AEMO”) as registered participants. These include: • Australian Capital Territory and New South Wales: TransGrid; • Victoria: AusNet Transmission Group Pty Ltd; • Queensland: Powerlink Queensland (Queensland Electricity Transmission Corporation Ltd); • South Australia: ElectraNet Pty Limited; and • Tasmania: Tasmania Networks Pty Ltd.8 Interconnectors link the various transmission networks in the NEM. These interconnectors include: Basslink (connecting Tasmania and Victoria); Heywood and Murraylink (connecting Victoria and South Australia); a Victoria to New South Wales interconnector running through the Snowy Mountains region; and two interconnectors connecting New South Wales and Queensland. Interconnectors may be regulated or unregulated. Where interconnectors are regulated, they are regulated in the same way as transmission and distribution networks. Where they are unregulated, they are classified as “market network service providers” and their primary source of revenue is from the regional price differences that occur when the interconnector operates at full capacity. Basslink is currently the only unregulated interconnector operating in the NEM. The third stage of the supply chain involves the distribution of electricity via distribution networks, which operate at a lower voltage than transmission networks. These networks have traditionally delivered electricity to urban and rural areas. However, with the proliferation of embedded generation (generators connected to the distribution network) and, in particular, “micro-embedded generators” (for example, residential rooftop solar systems), the traditional role of distribution networks providing one-way delivery of electricity is changing. People may use embedded generation as a substitute for consumption of electricity from the distribution network and may also supply electricity in excess of their needs (or “spill” energy) back into the distribution network. There are currently 17 DNSPs registered with AEMO. These include: • Australian Capital Territory: Actew Distribution Ltd and Jemena Networks (ACT) Pty Ltd trading as ActewAGL Distribution; • New South Wales: Ausgrid; Endeavour Energy; Essential Energy; • Victoria: AusNet Electricity Services Pty Ltd; CitiPower Pty Ltd; Jemena Electricity Networks (Vic) Ltd; Powercor Australia Ltd; United Energy Distribution Pty Ltd; 7 NER, Ch 10, definition of “transmission network”. 8 See AEMO Registration and Exemption List (Electricity), .

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• Queensland: Energex Limited; Ergon Energy Corporation Limited; • South Australia: SA Power Networks; and • Tasmania: Tasmania Networks Pty Ltd.9 The fourth stage of the supply chain involves the retail supply of electricity. Retailers purchase electricity from generators and “use of system” services from TNSPs and DNSPs and sell electricity on a delivered basis to retail customers. The largest retailers are AGL Energy, Origin Energy, and EnergyAustralia, which together supply over 70 per cent of small electricity customers in the NEM.10 These retailers are also vertically integrated with interests in generation and together have a 45 per cent market share in electricity generation.11 There is full retail contestability in each of the NEM jurisdictions – meaning that customers connected to the national electricity grid can choose their own retailer. There remains some retail price regulation in the Australian Capital Territory, Tasmania and Queensland.12 The elements of the electricity supply chain that are subject to access regulation – electricity transmission and distribution – are the focus of this chapter.

HISTORY OF ACCESS REGULATION IN THE ELECTRICITY SECTOR [8.40] The access regime that currently applies to regulated electricity transmission and distribution systems is set out in the NEL and the NER, as implemented in each of the states and territories.13 The “new” NEL commenced on 1 July 2005 with the South Australian Government acting as the lead legislator – that is, passing the Act that contained the NEL as a schedule to that Act. 1990s reform ahead of the NEL and National Electricity Code [8.50] The Industry Commission’s Energy Distribution and Generation Report released on 17 May 1991 was the first detailed review of the reforms 9 See AEMO Registration and Exemption List (Electricity), . 10 AER, State of the Energy Market 2015, December 2015, 18. 11 AER, State of the Energy Market 2015, December 2015, 127. 12 AEMC, 2015 Retail Competition Review: Final Report, 30 June 2015, 20. In a draft report, the Queensland Productivity Commission recommended that electricity prices be deregulated in South East Queensland from 1 July 2016: see Queensland Productivity Commission, Electricity Pricing Enquiry: Draft Report, 3 February 2016, 133. 13 South Australia – National Electricity (South Australia) Act 1996 (SA), s 6; New South Wales – National Electricity (New South Wales) Act 1997 (NSW), s 6; Victoria – National Electricity (Victoria) Act 2005 (Vic), s 6; Queensland – Electricity–National Scheme (Queensland) Act 1997 (Qld), s 6; Tasmania – Electricity – National Scheme (Tasmania) Act 1999 (Tas), s 6; Australian Capital Territory – Electricity (National Scheme) Act 1997 (ACT), s 5; NT – National Electricity (Northern Territory) (National Uniform Legislation) Act 2015 (NT), s 6.

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required in the national electricity sector.14 The Industry Commission report found that the inefficiencies in the electricity industry had been detrimental to the economy as a whole and that reform of the industry had the potential to yield substantial benefits: Analysis undertaken by the Commission suggests that, if the electricity supply industry’s performance was as good as international best practice and cross-subsidies between users were eliminated, national output could expand by around $2.2 billion annually. In effect, this represents the annual cost to the nation resulting from the centralised planning system which has been imposed on the industry.15

The Industry Commission noted that, because of its natural monopoly characteristics, electricity transmission was an activity that was unlikely to be duplicated. However, in order for competition to exist upstream and downstream of transmission, fair access to transmission facilities was necessary.16 The Industry Commission considered three options for providing access to the transmission network: • rely on the provisions of the Trade Practices Act 1974 (Cth) (“TPA”); • establish the transmission operator as a separate accounting entity within existing utilities that would be subject to oversight by a regulatory body (ring-fencing); or • create a separate body responsible for transmission and require it to act as an open access carrier.17 The Industry Commission considered that the third option would minimise access problems and regulatory costs.18 At the time of the Industry Commission’s report, the activity described as “distribution” covered both distribution and retail activities. The Industry Commission considered that there was some scope for introducing competition into this sector, but that effective competition would need multiple distributors (franchises) in each state and a requirement that

14 Industry Commission, Energy Generation and Distribution, Report No 11, Canberra, 17 May 1991. In 1998, the Productivity Commission subsumed the functions of the Industry Commission, which were to hold inquiries and make reports on matters related to industry: see Industry Commission Act 1989 (Cth), s 6, as repealed by the Productivity Commission (Repeals, Transitional and Consequential Amendments) Act 1998 (Cth), s 3, Sch 1, item 2. 15 Industry Commission, Energy Generation and Distribution, Report No 11, Canberra, 17 May 1991, 1–2. 16 Industry Commission, Energy Generation and Distribution, Report No 11, Canberra, 17 May 1991, 16. 17 Industry Commission, Energy Generation and Distribution, Report No 11, Canberra, 17 May 1991, 16. 18 Industry Commission, Energy Generation and Distribution, Report No 11, Canberra, 17 May 1991, 16.

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distributors provide open access to their networks.19 The Industry Commission considered that competition could then develop in a number of ways, including that large energy users in one franchise area could purchase supply from another franchise holder.20 The recommendations made in the Industry Commission’s report included: • separation of the generation, transmission and distribution functions; • requiring all transmission and distribution bodies to provide open access; • the corporatisation (within 12 months of the report) of all public bodies engaged in electricity generation, transmission and distribution, to place them on a commercial basis at arm’s length from government; and • the progressive sale of publicly owned electricity generation and distribution assets to the private sector.21

[8.60] Following the Industry Commission report, the Council of Australian Governments (“COAG”) established the National Grid Management Council (“NGMC”) in 1991 to “encourage and coordinate the most efficient, economic and environmentally sound development of the electricity industry in eastern southern Australia”.22 In June 1993, the Prime Minister, the Premiers of New South Wales, Victoria, Queensland and South Australia, and the Chief Minister of the Australian Capital Territory agreed to put in place the necessary structural changes to allow a competitive electricity market to commence as recommended by the NGMC from 1 July 1995.23 These structural changes included the establishment of an interstate electricity transmission network, with the transmission elements of the relevant existing electricity utilities to be separated out from generation and placed in separate corporations.24 At the COAG meeting on 25 February 1994, a detailed progress report on electricity reform noted the steps that had been taken to allow the implementation of a competitive electricity market from 1 July 1995. These steps included: • substantial progress in Victoria and Queensland in the structural separation of generation, transmission, system control and distribution elements, and the commitment by New South Wales to form a separate incorporated transmission subsidiary as the first step in separation of transmission; 19 Industry Commission, Energy Generation and Distribution, Report No 11, Canberra, 17 May 1991, 17–18. 20 Industry Commission, Energy Generation and Distribution, Report No 11, Canberra, 17 May 1991, 18. 21 Industry Commission, Energy Generation and Distribution, Report No 11, Canberra, 17 May 1991, 24. 22 COAG, Special Premiers’ Conference Communiqué, Sydney, 30 July 1991. 23 COAG, Council of Australian Governments Communiqué, 8–9 June 1993. 24 COAG, Council of Australian Governments Communiqué, 8–9 June 1993.

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• commitments by New South Wales and Victoria to review the structure of their generation sectors before 1 July 1995; • the commencement of a market trial by the NGMC in all participating states to “spread the market culture” and to provide prospective market participants with experience in the use of market instruments.25

[8.70] At the 25 February 1994 COAG meeting, a uniform approach to network pricing and regulation was agreed. This included common asset valuation methodologies and rates of return. There was also agreement to proposals by the NGMC for a regulatory framework for the electricity industry that reflected the decision of COAG on the Hilmer Committee recommendations (discussed in Ch 3). The areas of agreement included that: • the regulatory approach for the competitive national electricity industry would encompass a code of conduct; • there would be a national regulator for market conduct; • the code of conduct would be subject to authorisation by a national regulator (the then Trade Practices Commission) with oversight of areas including network pricing and network connection and access.26 Progress continued throughout 1994, with COAG, at its August 1994 meeting, noting the following progress since 25 February 1994: • in Victoria, a competitive market would apply from October 1994, with five distribution organisations, a grid company, a wholesale market company and a generation holding company under which individual generators would act independently; • the establishment in New South Wales of a transmission company in July 1994; • in Queensland, the generation sector was to be separated from transmission and distribution in early 1995; • reviews of the electricity industries in Tasmania and South Australia with a view to structural reform consistent with the national model; • the successful completion of the market trial held by the NGMC.27 The NGMC undertook the drafting of the initial National Electricity Code. Following consideration of the proposed regulatory arrangements, it was recognised that the code would need to be supported by legislation. The participating jurisdictions agreed to adopt an “application of laws” approach, which would ensure uniformity in legislation across all participating jurisdictions. In May 1996, the energy Ministers from each jurisdiction signed the National Electricity Market Legislation Agreement to formalise these arrangements. South Australia agreed to pass lead legislation and all other relevant jurisdictions cooperated in the drafting of 25 COAG, Council of Australian Governments Communiqué, 25 February 1994. 26 COAG, Council of Australian Governments Communiqué, 25 February 1994. 27 COAG, Council of Australian Governments Communiqué, 19 August 1994.

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the Bill. The NEL was set out as a schedule to the South Australian Act,28 and was applied as law in the other participating jurisdictions (New South Wales, Victoria, Queensland and the Australian Capital Territory) via application Acts.29

[8.80] In light of the market arrangements under the National Electricity Code and the potential for some of the arrangements to be considered anti-competitive practices or processes, the ACCC was requested to authorise the Code.30 The ACCC conditionally authorised the Code on 10 December 1997.31 The Code was also lodged with the ACCC as an access Code under Pt IIIA of the TPA. The ACCC published its decision to accept the Code as an access Code on 16 September 1998.32 Following the ACCC’s acceptance of the Code, the individual transmission and distribution networks were able to submit applications to the ACCC for access undertakings under s 44ZZA(1) of the TPA. Where such applications for access undertakings had been made and accepted by the ACCC, the relevant networks were then protected from a declaration recommendation in the event an application was made to the National Competition Council (“NCC”) for a recommendation that a service provided by the network be declared.33 2000s reform ahead of the new NEL and NER and beyond [8.90] In 2002, COAG published the final report of the Parer Review,34 which found that Australia’s energy sector had “confused governance arrangements and excessive regulation” and that further reform was required.35 The Parer Review recommended a number of changes to the 28 National Electricity (South Australia) Act 1996 (SA). 29 New South Wales – National Electricity (New South Wales) Act 1997 (NSW), s 6; Victoria – National Electricity (Victoria) Act 1997 (Vic), s 6 (repealed by National Electricity (Victoria) Act 2005 (Vic), s 13, Version No. 1); Queensland – Electricity–National Scheme (Queensland) Act 1997 (Qld), s 6; Australian Capital Territory – Electricity (National Scheme) Act 1997 (ACT), s 5. 30 South Australia, Parliamentary Debates, Legislative Council, 30 May 1996, 1481 (Kenneth Griffin, Attorney-General). 31 ACCC, Application for Acceptance: National Electricity Market Access Code, 16 September 1998, i. 32 ACCC, Application for Acceptance: National Electricity Market Access Code, 16 September 1998, i. 33 An application to the NCC for a recommendation that a particular service be declared is made under s 44F(1) of the Competition and Consumer Act 2010 (Cth) (“CCA”). The NCC cannot recommend declaration of a service that is the subject of an access undertaking in operation (CCA, s 44G(1)). 34 COAG, Towards a Truly National and Efficient Energy Market – Final Report of the Council of Australia Governments’ Independent Review of Energy Market Directions, December 2002 (“Parer Review”). 35 Parer Review, 10.

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institutions involved in economic regulation of electricity networks, as well as to network regulation itself. These included that: • electricity distribution owners should have price, and not revenue, caps, because revenue caps can lead to prices that are too low to build and maintain the network where demand exceeds forecasts; • there should be bonuses and penalties for meeting defined service standards to address the problem that the (then) existing regulatory framework only provided an incentive to cut costs; • uncertainty should be reduced, with greater guidance given on how the gains from cost reductions will be shared over time, and increased certainty on how particular investments will be treated in the cost base.36 Following the Parer Review, the Ministerial Council on Energy37 (“MCE”) (which had been established as a committee of COAG in June 2001) provided a report to COAG responding to the Parer Review, setting out the recommendations the MCE considered provided the basis for development of a truly national and efficient energy market (see Box 8.1 for key recommendations).38

[8.100]

Box 8.1: Key MCE energy market reform recommendations In its report to COAG on the reform of energy markets on 11 December 2003, the MCE recommended a reform package which, among other things, provided for the following matters with respect to economic regulation and rule making:39 • Two new statutory commissions to be established on 1 July 2004, funded by industry levy: – Australian Energy Market Commission (AEMC), with responsibility for rule-making and market development; – Australian Energy Regulator (AER) with responsibility for market regulation. • The AER to be a constituent part of the ACCC but operate as a separate legal entity. State jurisdictions to appoint two AER members, with the third drawn from the ACCC. Chair to be agreed by both the Commonwealth and majority of states/territories.

36 Parer Review, 16. 37 Reform of the COAG councils in February 2011 saw the functions of the MCE subsumed by the new Standing Council on Energy and Resources. Following further streamlining of the council structure in December 2013, the COAG Energy Council was created and now has responsibility for pursuing national energy reforms: see COAG Communiqués of 8 June 2001, 13 February 2011 (Attachment C) and 13 December 2013. 38 MCE, Reform of Energy Markets: Report to the Council of Australian Governments, 11 December 2003, 3. 39 MCE, Reform of Energy Markets: Report to the Council of Australian Governments, 11 December 2003, 3.

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• The AEMC to also be a separate legal entity, accountable to and subject to the power of policy direction from the MCE. The AEMC to comprise three Members, with two (including the Chair) appointed by the states. • The new bodies to initially be responsible for electricity wholesale and transmission in the connected (NEM) jurisdictions, extended in 2005 to include gas transmission for all other than WA … Provision to be made for WA and NT to join for electricity, and WA for gas under the AER by agreement. … • Agreement that the AER will be responsible for the regulation of distribution and retailing (other than retail pricing), following development of an agreed national framework. Work will commence on the national framework in 2004, and the MCE will consider the outcome in 2005. Following MCE agreement on the framework, the AER will assume responsibility for national regulation of distribution and retailing (other than retail pricing) by 2006. Any jurisdiction may, at their discretion, opt to transfer responsibility for retail pricing to the AER once it has assumed distribution and retail responsibilities.

[8.110] After release of the Parer Review and the MCE report responding to it, COAG signed the intergovernmental Australian Energy Market Agreement on 30 June 2004.40 This agreement established the AER as the national economic regulator in the NEM and the body responsible for monitoring and enforcing national energy legislation, and the AEMC as a rule-making and energy market development body.41 The Australian Energy Market Agreement also required the development and implementation of a national legislative framework for energy,42 leading to the introduction of the “new” NEL and NER in 2005. Most relevantly, the “new” NEL: • set out an overarching objective (the national electricity market objective);43 • provided that the regulatory code (in this case, the NER) has the force of law;44

40 COAG, Australian Energy Market Agreement, 30 June 2004, . 41 Five years later, in 2009, the AEMO was established to manage the NEM and gas markets. 42 COAG, Australian Energy Market Agreement, 30 June 2004, 6.2, 10–13. 43 NEL (as commenced on 1 July 2005), s 7. There are some minor differences between the national electricity market objective as it appears in the 1 July 2005 NEL, and the current form of the objective. The 1 July 2005 version of s 7 provided: “The national electricity market objective is to promote efficient investment in, and efficient use of, electricity services for the long term interests of consumers of electricity with respect to price, quality, reliability and security of supply of electricity and the reliability, safety and security of the national electricity system.” 44 NEL (as commenced on 1 July 2005), s 9.

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• set out the functions and powers of the AER and the manner in which the AER must perform or exercise economic regulatory functions;45 • set out the functions and powers of the AEMC and the subject matter for the NER;46 • required the AEMC to make rules for, or with respect to, transmission system revenue and pricing;47 • provided that the relevant South Australian Minister may make Rules for, or with respect to, distribution system revenue and pricing;48 • set out the process for the making of the NER.49

[8.120]

The NEL provided that the relevant South Australian Minister would make the initial NER.50 The second reading speech accompanying the amendments that introduced the new NEL explained: Given the need to have Rules in place at the same time as the National Electricity Law comes into operation, the initial National Electricity Rules will not be made under this Rule change process. Instead, they will be made, on the recommendation of the Ministerial Council on Energy, by a Ministerial notice. The initial Rules will largely consist of the provisions of the current National Electricity Code as amended to accommodate the reforms contained in the new National Electricity Law, the new governance and institutional arrangements, the status of the Rules as law, and various other consequential modifications. However, once made, these Rules will be subject to change in accordance with the new Rule change process, including through the application of the Rule making test and the public consultation arrangements. It is important to note that this initial Rule making power can only be exercised once.51

As required by the NEL, the AEMC made the rules concerning transmission system revenue and pricing on 16 November 2006.52 Although they have been the subject of significant amendment since they were made, these rules form the basis of the economic regulation that currently applies to transmission systems, and which is discussed in detail below. The relevant South Australian Minister made the rules concerning distribution system revenue and pricing on 16 December 2007.53 Similarly to the initial transmission rules made by the AEMC, the rules as made by 45 NEL (as commenced on 1 July 2005), ss 15, 16. 46 NEL (as commenced on 1 July 2005), ss 29, 34. 47 NEL (as commenced on 1 July 2005), s 35. 48 NEL, s 90A(1)(a). 49 NEL (as commenced on 1 July 2005) pt 7 (ss 87 – 108). 50 NEL, s 90. 51 South Australia, Parliamentary Debates, House of Assembly, 9 February 2005, 1454 (John Hill). 52 AEMC, National Electricity Amendment (Economic Regulation of Transmission Services) Rule 2006 No 18, 16 November 2006. 53 National Electricity (Economic Regulation of Distribution Services) Amendment Rules 2007.

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the Minister, although amended in some material respects since they were made, form the basis of the economic regulation that currently applies to distribution systems, which is also discussed in detail at [8.250].

[8.130]

Some material amendments, commencing on 1 January 2008, were made to the NEL in late 2007 by the National Electricity (South Australia) (National Electricity Law – Miscellaneous Amendments) Amendment Act 2007 (SA). The amendments were legislated in response to a report by an expert panel appointed by the MCE to advise on a model to achieve a common approach to network revenue and price regulation across the national energy market. The report of the Expert Panel on Energy Access Pricing (“Expert Panel”) was provided to the MCE in April 2006.54 Its key amendments included: • insertion of provisions to recognise two available forms of regulation: direct control network services and negotiated network services, with the price for direct control network services to be regulated in a revenue or network pricing determination, and negotiated network services to be regulated under a negotiate/arbitrate regime; • introduction of the “form of regulation factors” to guide a decision by the AER as to the classification of services as either direct control network services or negotiated network services; • insertion of revenue and pricing principles to guide the AEMC in making rules, and the AER when making regulatory transmission and distribution determinations; • amendments to extend the AER’s information-gathering powers; • introduction of limited merits review by the Australian Competition Tribunal of specified regulatory decisions of the AER, including transmission and distribution determinations; • introduction of a new procedure for disputes relating to access. Each of these aspects of the NEL are examined in the following discussion of the current regulatory framework.

CURRENT REGULATORY FRAMEWORK AND ROLE OF THE REGULATOR National Electricity Law: Overview [8.140]

The electricity regulatory framework primarily covers prices and revenues for services provided by transmission and distribution systems through transmission and distribution determinations made by the AER. For discussion of the aspects of the NEL that are of particular relevance to the making of these determinations by the AER, see [8.180]–[8.220]. The scope of operation of the NEL is very broad. In relation to network activities, it provides that a person must not engage in the activity of

54 Expert Panel on Energy Access Pricing, Report to the Ministerial Council on Energy, April 2006.

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owning, controlling or operating a transmission system or distribution system that forms part of the interconnected national electricity system unless the person is a registered participant in relation to that activity, or is otherwise exempt from the requirement to be a registered participant.55 For completeness, any person engaged in activities associated with a generating system that is interconnected with the national electricity system (generators) or the activity of purchasing electricity directly through a wholesale exchange (retailers) must also be a registered participant or be otherwise exempt from the requirement to be registered.56 The AER is the relevant body to which requests for exemption for transmission system or distribution system owners, controllers and operators are to be directed.57

[8.150]

The AER has published guidelines on exemptions from registration, which set out three types of exemption: deemed; registrable; and individual.58 Deemed and registrable exemptions are class exemptions that apply to particular groups of persons who come within the class. Deemed exemptions apply automatically. Registrable exemptions apply where the relevant information has been provided to the AER and the exemption appears on the AER’s public register. The guidelines contain a number of conditions that attach to registrable exemptions.59 Individual exemptions are available where the particular activities do not come within the class exemptions or where the conditions that attach to the registrable exemption cannot, for some reason, be complied with. As the name suggests, individual exemptions are specific to a particular person and situation. Deemed exemptions are generally available for small, private networks that supply electricity to third parties, for example, caravan parks selling metered energy in short-term accommodation. Registrable exemptions also generally apply to private networks, but those supplying larger numbers of third parties or supplying energy on a larger scale, for example, networks that service a mine, or retirement villages selling to permanent residents. Network service providers exempt from the requirement to be registered with AEMO are not subject to economic regulation.60 55 NEL, s 11(2). 56 NEL, s 11(1), (4). 57 NEL, s 13(1). 58 AER, Electricity Network Service Provider Registration Exemption Guideline, 27 August 2015. 59 AER, Electricity Network Service Provider Registration Exemption Guideline, 27 August 2015, Pt B. 60 Under the NEL, only “regulated” entities are required to comply with network revenue or pricing determinations (ss 14A and 14B). Regulated entities are registered participants (NEL, s 2, definitions of “regulated distribution system operator” and “regulated transmission system operator”).

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[8.160]

A regulated transmission system operator must comply with a transmission determination that applies to the electricity network services provided by that operator.61 A “regulated transmission system operator” is an owner, controller or operator of a transmission system who is a registered participant and whose revenue from, or prices that are charged for, the provision of electricity network services are regulated under a transmission determination.62 A “transmission determination” is a determination by the AER under the NER that regulates any one or more of the following: • the terms and conditions for the provision of electricity network services that are the subject of economic regulation under the NER, including the prices an owner, controller or operator of a transmission system charges or may charge for those services; • the revenue an owner, controller or operator of a transmission system earns or may earn from the provision by that owner, controller or operator of electricity network services subject to economic regulation under the NER.63

[8.170]

A regulated distribution system operator must comply with a distribution determination that applies to the electricity network services provided by that operator.64 A “regulated distribution system operator” is defined to be an owner, controller or operator of a distribution system who is a registered participant and whose revenue from, or prices that are charged for, the provision of electricity network services are regulated under a distribution determination.65 A “distribution determination” is a determination of the AER under the NER that regulates any one or more of the following: • the terms and conditions for the provision of electricity network services subject to economic regulation under the NER, including the prices an owner, controller or operator of a distribution system charges or may charge for those services; • the revenue an owner, controller or operator of a distribution system earns or may earn from the provision by that owner, controller or operator of electricity network services that are the subject of economic regulation under the NER.66 AER’s functions and powers

[8.180]

The AER’s functions and powers under the NEL include:

61 NEL, s 14A. 62 NEL, s 2 (definition of “regulated transmission system operator”). 63 NEL, s 2, (definition of “transmission determination”). 64 NEL, s 14B. 65 NEL, s 2 (definition of “regulated distribution system operator”). 66 NEL, s 2 (definition of “distribution determination”).

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• monitoring compliance by regulated network service providers with transmission determinations and distribution determinations (collectively referred to as “network revenue or pricing determinations”67);68 • investigating breaches – or possible breaches – of provisions of the NEL or the NER;69 • exempting persons proposing to engage, or engaged, in the activity of owning, controlling or operating a transmission system or distribution system forming part of the interconnected transmission and distribution system from being registered as registered participants;70 • preparing and publishing reports on financial and operational performance of network service providers in providing electricity network services;71 and • AER economic regulatory functions or powers.72 AER economic regulatory functions or powers are those performed or exercised by the AER under the NEL or the NER that relate to: • the economic regulation of services provided by: – a regulated distribution system operator by means of, or in connection with, a distribution system; or – a regulated transmission system operator or the AEMO73 by means of, or in connection with, a transmission system; or • the preparation of a network service provider performance report; or • the making of determination; or

a

transmission

determination

or

distribution

• an access determination.74

[8.190]

When the AER is performing or exercising an AER economic regulatory function or power, the NEL requires it to perform or exercise those functions or powers in a manner that will, or is likely to, contribute to the achievement of the national electricity objective75 as set out in s 7 of the NEL: 67 NEL, s 2 (definition of “network revenue or pricing determination”). 68 NEL, s 15(1)(a)(ii). 69 NEL, s 15(1)(b). 70 NEL, s 15(1)(e). 71 NEL, s 15(1)(ea). 72 NEL, s 15(1)(f). 73 In Victoria, AEMO has particular functions in respect of the transmission network that it does not have in the other NEM jurisdictions. These functions include to plan, authorise, contract for, and direct, augmentation of the transmission network and to provide shared transmission services by means of, or in connection with, the transmission network (NEL, s 50C; National Electricity (Victoria) Act 2005 (Vic), s 32). 74 NEL, s 2 (definition of “AER economic regulatory function or power”). 75 NEL, s 16(1)(a).

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The objective of this Law is to promote efficient investment in, and efficient operation and use of, electricity services for the long term interests of consumers of electricity with respect to– (a) price, quality, safety, reliability and security of supply of electricity; and (b) the reliability, safety and security of the national electricity system.

Where the relevant function or power being performed or exercised relates to the making of a distribution determination or transmission determination, the AER is required to take into account the revenue and pricing principles when exercising a discretion in making those parts of a determination that relates to direct control network services.76 The revenue and pricing principles are contained in s 7A of the NEL and are set out in Box 8.2. Box 8.2: Revenue and pricing principles — National Electricity Law, s 7A 7A–Revenue and pricing principles (1) The revenue and pricing principles are the principles set out in subsections (2) to (7). (2) A regulated network service provider should be provided with a reasonable opportunity to recover at least the efficient costs the operator incurs in– (a) providing direct control network services; and (b) complying with a regulatory obligation or requirement or making a regulatory payment. (3) A regulated network service provider should be provided with effective incentives in order to promote economic efficiency with respect to direct control network services the operator provides. The economic efficiency that should be promoted includes– (a) efficient investment in a distribution system or transmission system with which the operator provides direct control network services; and (b) the efficient provision of electricity network services; and (c) the efficient use of the distribution system or transmission system with which the operator provides direct control network services. (4) Regard should be had to the regulatory asset base with respect to a distribution system or transmission system adopted– (a) in any previous– (i) as the case requires, distribution determination or transmission determination; or (ii) determination or decision under the National Electricity Code or jurisdictional electricity legislation regulating the revenue earned, or prices charged, by a person providing services by means of that distribution system or transmission system; or (b) in the Rules. (5) A price or charge for the provision of a direct control network service should allow for a return commensurate with the regulatory and commercial risks involved in providing the direct control network service to which that price or charge relates. 76 NEL, s 16(2)(a)(i).

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Access Regulation in Australia (6) Regard should be had to the economic costs and risks of the potential for under and over investment by a regulated network service provider in, as the case requires, a distribution system or transmission system with which the operator provides direct control network services. (7) Regard should be had to the economic costs and risks of the potential for under and over utilisation of a distribution system or transmission system with which a regulated network service provider provides direct control network services.

[8.200]

The AER must take into account the revenue and pricing principles when it makes an access determination relating to a rate or charge for an electricity network service.77 For these purposes, a reference to “direct control network service” in the revenue and pricing principles must be read as a reference to an “electricity network service”.78 In making a distribution determination or transmission determination, the AER is required to ensure that, among other stakeholders, the regulated network service provider to which the determination will apply, as well as any user or consumer associations or user or consumer interest groups that the AER considers have an interest in the determination, are, in accordance with the NER, informed of material issues under consideration by the AER and given a reasonable opportunity to make submissions in respect of the determination before it is made.79 Distribution and transmission determinations are “reviewable regulatory decisions”.80 The AER is subject to additional requirements when making reviewable regulatory decisions: • the AER must specify the manner in which the constituent components of the decision relate to each other and the manner in which that interrelationship has been taken into account in the making of the reviewable regulatory decision;81 and • if there are two or more possible reviewable regulatory decisions that will, or are likely to, contribute to the achievement of the national electricity objective, to make the decision that the AER is satisfied will or is likely to contribute to the achievement of the national electricity objective to the greatest degree (which is referred to in the NEL as the “preferable reviewable regulatory decision”) and specify the reasons as to the basis on which the AER is satisfied that the decision is the preferable reviewable regulatory decision.82 77 NEL, s 16(2)(b). 78 NEL, s 16(3). 79 NEL, s 16(1)(b). 80 NEL, s 71A, (definition of “reviewable regulatory decision”). 81 NEL, s 16(1)(c). 82 NEL, s 16(1)(d).

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[8.210]

The AER has extensive information-gathering powers under the NEL, which the AER will often use in connection with making transmission and distribution determinations.

If the AER has reason to believe that a person is capable of providing information or producing a document that the AER requires for the performance or exercise of a function or power conferred on it under the NEL or the NER, the AER may serve on that person a notice that requires the person to provide information, or to produce documents.83 There are a limited number of circumstances in which the person can refuse to provide the information or documents to the AER, including if providing the information might tend to incriminate the person or make the person liable to a criminal penalty or if the information is the subject of legal professional privilege.84 However, it is not a reasonable excuse to fail to comply with a notice on the ground of any duty of confidence.85 The power to obtain information and documents by serving a notice is a relatively broad power in the sense that such a notice can be served on any person. The primary limit on the power is that there must be a nexus between the information or documents that are the subject of the notice and the performance or exercise of a function or power by the AER.

[8.220]

The AER may issue regulatory information notices (“RINs”) and general regulatory information orders (“RIOs”) to obtain information – these are referred to collectively as “regulatory information instruments”.86 The AER may serve regulatory information instruments on regulated network service providers or on “related providers”. A “related provider” is a person who supplies a service that contributes in a material way to the provision of an electricity network service by a regulated network service provider (defined as a “contributing service”).87 The primary difference between the two types of regulatory information instruments is that RINs are issued to individual regulated network service providers or related providers, whereas RIOs are issued to a specified class of regulated network service provider or related provider (see Box 8.3). Box 8.3: Regulatory information instruments A RIN is a notice that requires the regulated network service provider, or a related provider, named in the notice to do either or both of the following: • provide to the AER the information specified in the notice; 83 NEL, s 28(1) and (2). 84 NEL, s 28(6) and (8). 85 NEL, s 28(7). 86 NEL, s 2, (definition of “regulatory information instrument”). 87 NEL, s 28A (definitions of “contributing service” and “related provider”), s 28B(1).

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• prepare, maintain or keep information specified in the notice in a manner and form specified in the notice.88 A RIO is an order that requires each regulated network service provider of a specified class, or each related provider of a specified class, to do either or both of the following: • provide to the AER the information specified in the notice; • prepare, maintain or keep information specified in the notice in a manner and form specified in the notice. Similarly to the general information gathering power the AER has to issue notices requiring a person to provide information or documents, the relevant threshold to be met for a regulatory information instrument to be served (in the case of a RIN) or made (in the case of a RIO) is that the AER considers it reasonably necessary for the performance or exercise of its functions or powers under the NEL or the NER to serve the notice or make the order, as relevant.89 Civil penalties may apply for non-compliance with regulatory information instruments.90 The NEL also provides that where there is non-compliance with an instrument, or the information provided pursuant to an instrument is insufficient, and the instrument has been served or made for the purpose of enabling the AER to make an economic regulatory decision (or the information is relevant to the making of such a decision), the AER may make the decision on the basis of the information it has at the time it makes that decision and may make reasonable assumptions (including assumptions adverse to the interests of the service provider) in respect of the matters the information required under the instrument would have addressed had the information been provided.91 Similarly to the general information gathering powers, a person cannot rely on any duty of confidence to refuse to comply with a regulatory information instrument.92 It is a

88 NEL, s 28D. 89 NEL, s 28F(1). 90 NEL ss 28N and 28O. 91 NEL, s 28Q. 92 NEL, s 28S.

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reasonable excuse not to comply with an instrument on the basis of protection against self-incrimination, and a person is also not required to provide information that is the subject of legal professional privilege or to produce documents that would disclose information subject to legal professional privilege.93

AEMC’s role in making rules

[8.230]

The AEMC makes the rules that govern the economic regulation of electricity transmission and distribution networks. Section 34 of the NEL provides that the AEMC may make rules (the NER) for or with respect to any matter or thing specified in Sch 1 to the NEL,94 which covers:

• the registration of persons as registered participants or otherwise for the purposes of the NEL and the NER;95 • the regulation of revenues earned or that may be earned by owners, controllers or operators of distribution or transmission systems from the provision by them of services that are the subject of a transmission determination;96 • the regulation of prices charged or that may be charged by owners, controllers or operators of distribution or transmission systems for the provision by them of services that are the subject of a transmission determination;97 • principles to be applied, and procedures to be followed, by the AER in exercising or performing an economic regulatory function or power relating to the making of a distribution or transmission determination;98 • the economic framework, mechanisms or methodologies to be applied or determined by the AER for the purposes of the regulation of revenues or prices, including the economic framework, mechanisms or methodologies to be applied or determined by the AER for the derivation of the revenue or prices to be applied by the AER in making a distribution or transmission determination;99 and • incentives for regulated distribution and transmission system operators to make efficient operating and investment decisions including, where applicable, service performance incentive schemes.100 93 NEL ss 28T and 28U. 94 NEL, s 34(1)(a)(i) and (iii). 95 NEL, Sch 1, item 1. 96 NEL, Sch 1, items 15, 25. 97 NEL, Sch 1, items 16(1), 26. 98 NEL, Sch 1, items 17, 26A. 99 NEL, Sch 1, items 20, 26D. 100 NEL, Sch 1, items 23, 26G.

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The AEMC may only make a rule if it is satisfied that the rule will contribute to the achievement of the national electricity objective.101

[8.240]

Where the AEMC is making a rule that specifies an electricity network service as a direct control network service or negotiated network service, or confers a function or power on the AER to specify under a network revenue or pricing determination an electricity network service as a direct control network service or a negotiated network service, the AEMC must take into account the form of regulation factors.102

The form of regulation factors are as follows: • the presence and extent of any barriers to entry in a market for electricity network services; • the presence and extent of any network externalities (that is interdependencies) between an electricity network service provided by a network service provider and any other electricity network service provided by the network service provider; • the presence and extent of any network externalities between an electricity network service provided by a network service provider and any other service provided by the network service provider in any other market; • the extent to which any market power of a network service provider is mitigated by the countervailing market power of a user; • the presence and extent of any substitute, and the elasticity of demand, in a market for an electricity network service in which a network service provider provides that service; • the presence and extent of any substitute for, and the elasticity of demand in a market for, electricity or gas (as the case may be); • the extent to which a user has access to information that enables the user to negotiate with the network service provider on an informed basis.103 The AEMC is also required to take into account the revenue and pricing principles (set out in Box 8.2) where making rules for or with respect to transmission system revenue and pricing,104 distribution system revenue and pricing,105 and regulatory economic methodologies.106

Scope of regulation – Electricity distribution [8.250]

Chapter 6 of the NER deals with the economic regulation of distribution services and is concerned primarily with price-related terms and conditions of access. Other chapters of the rules are also relevant to

101 NEL, s 88. 102 NEL, s 88A. 103 NEL, s 2F. 104 NEL, Sch 1, items 15 – 24. 105 NEL, Sch 1, items 25 – 26H. 106 NEL, Sch 1, items 26I and 26J.

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access, including Chs 4 (power system security), 5 (network connection, planning and expansion) and 7 (metering). Distribution services are regulated through distribution determinations made by the AER. The NER require the AER to make a distribution determination for each DNSP.107 Distribution services provided by a DNSP are classified in a distribution determination as either: • a direct control service; or • a negotiated distribution service.108 Direct control services are the focus of economic regulation under NER, Ch 6 and are subject to price and/or revenue regulation. A lighter form of regulation is in place for negotiated distribution services. In classifying services as either direct control services or negotiated distribution services, the AER is required to have regard to a number of matters, including the form of regulation factors set out at [8.240]. Other factors include the form of regulation that previously applied to the relevant service and the desirability of consistency in the form of regulation for similar services, both within and between jurisdictions.109 In essence, a negotiated distribution service is subject to some constraint (for example, competitive service provision), such that it is appropriate for a less intrusive form of regulation to apply to it. Services are classified as part of a distribution determination, and the classification operates for the regulatory control period for which the determination is made.110 Direct control services are further divided into two subclasses: 1. standard control services; and 2. alternative control services. Standard control services may be thought of as the “core” regulated services provided by a distribution network. In a gas context, these services are equivalent to reference services (see [9.110]). Alternative control services are services where, similarly to negotiated distribution services, there is, or could develop, some constraint on the service provider in terms of their provision, and they may therefore be regulated in a more light-handed way relative to standard control services. A service may also be classified as an alternative control service where the costs of providing the service are directly attributable to the person or persons to whom the service is provided, and that person or persons can be easily identified. 107 NER, Ch 6, cl 6.2.4(a) (distribution). 108 NER, Ch 6, cl 6.2.1(a) (distribution). 109 NER, Ch 6, cl 6.2.1(c) (distribution). 110 NER, Ch 6, cl 6.2.3 (distribution).

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In classifying direct control services as standard control services or alternative control services, the AER is required to have regard to a number of matters, including the potential for development of competition in the relevant market and how the classification might influence that potential.111 A distribution determination imposes controls over the prices of direct control services and/or the revenue to be derived from direct control services.112 The control mechanism may take a number of forms, including a schedule of fixed prices, caps on the prices of individual services, and caps on the revenue to be derived from a particular combination of services.113 For standard control services, the control mechanism is required to be of the prospective CPI minus X form, or some incentive-based variant of the prospective CPI minus X form, in accordance with the building block approach (discussed in detail at [8.270]).114 In deciding on the form of control mechanism to apply to alternative control services, the AER is required to have regard to a number of matters, including the potential for development of competition in the relevant market and how the control mechanism might influence that potential.115

Scope of regulation – Electricity transmission [8.260]

Chapter 6A of the NER is concerned with the economic regulation of transmission services. Clause 6A.1.4 provides that the AER is responsible for the economic regulation of prescribed transmission services provided by TNSPs by means of, or in connection with, transmission systems that form part of the national grid.

Transmission services are regulated through transmission determinations made by the AER. The NER require the AER to make transmission determinations for TNSPs in respect of “prescribed transmission services” and “negotiated transmission services”.116 Prescribed transmission services may be thought of as the “core” services provided by TNSPs. Unlike services provided by means of, or in connection with, distribution systems, transmission services do not need to be classified as either prescribed or negotiated services by the AER as part of making a determination. Rather, the NER, through the definitions given to these services, identifies the services that are prescribed or negotiated. A transmission determination comprises: • a revenue determination in respect of prescribed transmission services; 111 NER, Ch 6, cl 6.2.2(c)(1) (distribution). 112 NER, Ch 6, cl 6.2.5(a) (distribution). 113 NER, Ch 6, cl 6.2.5(b)(1), (2), and (3) (distribution). 114 NER, Ch 6, cl 6.2.6(a) (distribution). 115 NER, Ch 6, cl 6.2.5(d)(1) (distribution). 116 NER, Ch 6A, cl 6A.2.1 (transmission).

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• a determination relating to the TNSP’s negotiating framework (which sets out the procedure the TNSP must follow during negotiations with any person who wishes to receive a negotiated transmission service from the TNSP);117 • a determination that specifies the negotiated transmission service criteria that apply to the TNSP (these are the criteria that are to be applied by the TNSP in negotiating: the terms and conditions of access for negotiated transmission services, including prices; and any access charges);118 • a determination that specifies the pricing methodology that applies to the TNSP.119 Central to calculating the revenue that a TNSP is permitted to earn from the provision of prescribed transmission services is the building block approach, which is set out in NER, Ch 6A, Pt C (discussed in detail at [8.270]).120

Application of the building blocks approach to electricity distribution and transmission [8.270]

The building block approach to determining annual revenue requirements for DNSPs and TNSPs for each year of a regulatory control period is set out in Pt C of Ch 6 (distribution) and Pt C of Ch 6A (transmission) of the NER. The building blocks are: • indexation of the regulatory asset base (applied as a negative adjustment to the annual revenue requirement); • a return on capital for the year; • depreciation for that year; • the estimated cost of corporate income tax of the service provider for that year; • revenue increments or decrements (if any) for that year arising from the application of an incentive scheme; • other revenue increments and decrements (if any) for that year arising from the application of a control mechanism in the previous regulatory control period (distribution only); • revenue decrements (if any) for that year arising from the use of assets that provide standard control services (distribution)/prescribed transmission services (transmission) to provide certain other services; • the forecast operating expenditure for that year; and • compensation for other risks (transmission only).121

117 NER, Ch 6A, cl 6A.9.5(a) (transmission). 118 NER, Ch 6A, cl 6A.9.4(a)(1) (transmission). 119 NER, Ch 6A, cl 6A.2.2 (transmission). 120 NER, Ch 6A, cl 6A.5.4 (transmission). 121 NER, Ch 6, cl 6.4.3(a) (distribution); Ch 6A, cl 6A.5.4(a) (transmission).

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Calculation of the regulatory asset base (which is an input to the first three building blocks) is discussed at [8.280] and key building blocks 1 to 5, and 8 are examined at [8.320]–[8.470]. Determination of the regulatory asset base

[8.280]

The regulatory asset base for a distribution system is the value of the assets used by the DNSP to provide standard control services, but only to the extent that those assets are used to provide such services.122 The regulatory asset base for a transmission system is the value of the assets used by the TNSP to provide prescribed transmission services, but only to the extent that those assets are used to provide such services.123 In order to make a network revenue or pricing determination, it is necessary to establish: • an opening regulatory asset base (the value of the asset base as at the commencement of the regulatory control period); and • asset base values for each year of the regulatory period. The calculation of the opening regulatory asset base value requires the regulatory asset base to be rolled forward from the first year of the previous regulatory control period to the first year of the regulatory control period for which the determination is being made. The calculation of asset base values for each year of the relevant regulatory control period requires the value of the opening regulatory asset base to be rolled forward between the years of relevant regulatory control period, which gives a regulatory asset base for each year of that regulatory control period. The NER require the AER to publish a model for the roll forward of the regulatory asset base (the “roll forward model”) that sets out the method for rolling forward the regulatory asset base from one regulatory control period to the next regulatory control period, as well as between regulatory years within a regulatory control period.124 The roll forward model is required to provide for the value of the regulatory asset base to be adjusted for actual (or “outturn”) inflation.125 In simplified terms, the roll forward of the regulatory asset base from the first year of a regulatory control period to the first year of the immediately

122 NER, Ch 6, cl 6.5.1(a) (distribution). 123 NER, Ch 6, cl 6A.6.1(a) (transmission). 124 NER, Ch 6, cl 6.5.1(b) and (e) (distribution); Ch 6A, cl 6A.6.1(b) and (e) (transmission). 125 NER, Ch 6, cl 6.5.1(e)(3) (distribution); Ch 6A, cl 6A.6.1(e)(3) (transmission).

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following regulatory control period involves the steps set out in Table 8.1. Table 8.1 Roll forward steps 1

2

3

4

5

Roll forward step Take the opening regulatory asset base from the first year of the previous regulatory control period126 (regulatory control period A) Increase the previous value of the regulatory asset base by the amount of all capital expenditure incurred during regulatory control period A127 Reduce the previous value of the regulatory asset base by the amount of depreciation of the regulatory asset base during the previous regulatory control period, calculated in accordance with the distribution determination for that period128 Reduce previous value of regulatory asset base by the disposal value of any asset where that asset has been disposed of during the previous regulatory control period129 Reduce previous value of regulatory asset base by any amounts the AER determines should not be included (that otherwise were included under step 1) because the expenditure: was in excess of forecast capital expenditure and was not prudent and efficient; represents a margin paid by the DNSP under arrangements that the AER considers do not reflect arm’s length terms; or should properly be treated as operating expenditure130

Worked example Opening regulatory asset base regulatory control period A: $1,000,000 Assume capital expenditure: $200,000 Value of regulatory asset base increases to: $1,200,000 Depreciation of the regulatory asset base determined in regulatory control period A: $170,000 Value of regulatory asset base decreases to: $1,030,000

Disposal of a transformer, disposal value: $10,000 Value of regulatory asset base decreases to: $1,020,000 Amount of capital expenditure spent in excess of forecast capital expenditure: $50,000; AER determines $10,000 of overspending not prudent and efficient Value of regulatory asset base decreases to: $1,010,000

Step 5 in Table 8.1 is a relatively new step. Prior to the NER being amended in November 2012, the NER did not provide for an ex post review of capital expenditure – the regulatory asset base was essentially rolled forward on 126 127 128 129 130

NER, NER, NER, NER, NER,

Ch Ch Ch Ch Ch

6, 6, 6, 6, 6,

cl cl cl cl cl

S6.2.1(e)(1) (distribution); Ch 6A, cl S6A.2.1(f)(1) (transmission). S6.2.1(e)(1)(i) (distribution); Ch 6A, cl S6A.2.1(f)(1)(i) (transmission). S6.2.1(e)(5) (distribution); Ch 6A, cl S6A.2.1(f)(5) (transmission). S6.2.1(e)(6) (distribution); Ch 6A, cl S6A.2.1(f)(6) (transmission). S6.2.1(g) (distribution); Ch 6A, cl S6A.2.1(g) (transmission).

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the basis of actual capital expenditure incurred over the previous regulatory control period. However, in light of concerns that the incentives relating to capital expenditure may not have been sufficiently strong to ensure that only prudent and efficient capital expenditure was being rolled into the regulatory asset base, the NER were amended to enable an ex post review of capital expenditure to be undertaken. The NER was also amended to provide that the AER could develop capital expenditure sharing schemes to further strengthen the incentives for service providers to only incur efficient expenditure – the scheme that has been developed by the AER is discussed at [8.410].

[8.290] Prior to the AER’s ability to undertake ex post reviews of capital expenditure and to apply capital expenditure incentive schemes, the primary incentive a service provider had not to overspend the forecast capital expenditure amount set out in a determination during a regulatory control period was that the service provider would bear the “carrying costs” of that expenditure in the regulatory period. That is, the entity would not earn a return on that expenditure until the actual expenditure was rolled into the regulatory asset base, which would occur at the commencement of the following regulatory control period. A symmetrical incentive existed with respect to underspending the forecast capital expenditure amount, as the regulated entity would keep the benefit of any underspend (that is, the forecast return on that forecast expenditure amount) until the commencement of the following regulatory control period. In making the rule to provide for ex post review of capital expenditure where the service provider had overspent the regulatory allowance, the AEMC noted that this ex ante incentive may not be sufficient to ensure that only prudent and efficient capital expenditure is recovered: The Commission took the view in the draft rule determination that reviews of efficiency of past capex are the most direct way of addressing the lack of supervision problem since they give the regulator the chance to check that the capex to be recovered is efficient. In addition, the risk of an inability to recover for inefficient expenditure would provide an incentive for NSPs to avoid inefficient capex. Ex ante incentives may not always provide adequate assurance that capex is efficient. A further check that what is rolled into the RAB is efficient would therefore be in the long term interests of consumers. The review of efficiency of past capex should also assist the AER in determining an appropriate ex ante allowance by permitting it to better understand how efficient a NSP has been in the previous period and what projects it has undertaken. It should also improve understanding of the reasons for any overspends.131

Therefore, the NER now provide that where a service provider has overspent the forecast capital expenditure allowance and the AER determines that some or all of the overspend amount is not prudent and 131 AEMC, Economic Regulation of Network Service Providers, and Price and Revenue Regulation of Gas Services, Final Position Paper, 29 November 2012, 122.

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efficient (or, more precisely, does not reasonably reflect the capital expenditure criteria: see [8.310]), the relevant amount will not be added to the regulatory asset base.132 The consequence is that the service provider will not earn a return on, or of, that expenditure. In making a determination that such expenditure does not reasonably reflect the capital expenditure criteria, the AER is only permitted to take into account information and analysis that the service provider could reasonably be expected to have considered or undertaken at the time that it undertook the relevant capital expenditure.133

[8.300]

Past capital expenditure that would otherwise have increased the regulatory asset base may be disallowed where either of the “margin requirement” or the “capitalisation requirement” is satisfied.134 The margin requirement is satisfied where the capital expenditure includes expenditure that represents a margin paid by the service provider in circumstances where the margin is referable to arrangements the AER considers do not reflect arm’s-length terms.135 The capitalisation requirement is satisfied where the capital expenditure includes expenditure that, under the service provider’s capitalisation policy, should have been treated as operating expenditure.136 The NER require the AER to publish “Capital Expenditure Incentive Guidelines” that set out, among other things, the manner in which the AER proposes to make determinations as to whether the overspending requirement, the margin requirement, and the capitalisation requirement are satisfied.137 The Capital Expenditure Incentive Guidelines are required to set out how the AER’s proposed approach is consistent with the capital expenditure incentive objective, which is: to ensure that, where the value of a regulatory asset base is subject to adjustment in accordance with the Rules, then the only capital expenditure that is included in an adjustment that increases the value of that regulatory asset base is capital expenditure that reasonably reflects the capital expenditure criteria.138 Once the value of the regulatory asset base at the commencement of the relevant regulatory control period has been established, this value can then 132 NER, Ch 6, cl S6.2.2A(b), (c), (f), (g) and (h) (distribution); Ch 6A, cl S6A.2.2A(b), (c), (f), (g) and (h) (transmission). 133 NER, Ch 6, cl S6.2.2A(h)(2) (distribution); Ch 6A, cl S6A.2.2A(h)(2) (transmission). 134 NER, Ch 6, cl S6.2.2A(a) and (b) (distribution); Ch 6A, cl S6A.2.2A(a) and (b) (transmission). 135 NER, Ch 6, cl S6.2.2A(d) (distribution); Ch 6A, cl S6A.2.2A(d) (transmission). 136 NER, Ch 6, cl S6.2.2A(e) (distribution); Ch 6A, cl S6A.2.2A(e) (transmission). 137 NER, Ch 6, cl 6.4A(b)(2), (4) and (5) (distribution); Ch 6A, cl S6A.5A(b)(2), (4) and (5) (transmission). 138 NER, Ch 6, cl 6.4A(a) (distribution); Ch 6A, cl 6A.5A(a) (transmission) (emphasis in original).

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be rolled forward between the years of the regulatory control period based on forecasts of inflation and depreciation, and forecast capital expenditure to be incurred over the period. The AER’s current approach to forecasting inflation is to take an average of the Reserve Bank of Australia (“RBA”) short-term inflation forecasts and the mid-point of the RBA inflation targeting band.139

[8.310]

In relation to forecast capital expenditure, the approved forecast amounts are added to the regulatory asset base each year, underpinned by a timing assumption that capital expenditure on average takes place halfway through each regulatory year.140

The primary rule relating to forecast capital expenditure is NER, Ch 6, cl 6.5.7 (distribution)/Ch 6A, cl 6A.6.7 (transmission). It provides that a building block proposal must include the total forecast capital expenditure for the relevant regulatory control period that the service provider considers is required in order to achieve the “capital expenditure objectives”.141 These objectives include: • to meet or manage expected demand the regulatory control period; • to comply with all applicable regulatory obligations or requirements; and • to maintain the safety of the distribution system/transmission system.142 In making a final decision, the AER must accept the forecast of capital expenditure put forward by a service provider in its building block proposal if it is satisfied that the total of the forecast reasonably reflects the “capital expenditure criteria”,143 which are: • the efficient costs of achieving the capital expenditure objectives; • the costs that a prudent operator would require to achieve the capital expenditure objectives; and • a realistic expectation of the demand forecast and cost inputs required to achieve the capital expenditure objectives.144 Where the AER is not satisfied that the forecast capital expenditure put forward by the service provider reasonably reflects the capital expenditure criteria, the NER provide that the AER must not accept the forecast.145 In 139 See, for example, AER, Ausgrid Final Decision 2015–19, Attachment 3 (Rate of Return), April 2015, 3–217. 140 AER, Roll Forward Model Handbook: Electricity Distribution Network Service Providers, June 2008, 12. 141 NER, Ch 6, cl 6.5.7(a) (distribution); Ch 6A, cl 6A.6.7(a) (transmission). 142 NER, Ch 6, cl 6.5.7(a)(1), (2) and (4) (distribution); Ch 6A, cl 6A.6.7(a)(1), (2) and (4) (transmission). 143 NER, Ch 6, cl 6.5.7(c) (distribution); Ch 6A, cl 6A.6.7(c) (transmission). 144 NER, Ch 6, cl 6.5.7(c)(1) – (3) (distribution); Ch 6A, cl 6A.6.7(c)(1) – (3) (transmission). 145 NER, Ch 6, cl 6.5.7(d) (distribution); Ch 6A, cl 6A.6.7(d) (transmission).

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this case, the AER must determine an estimate of capital expenditure for the regulatory control period that it is satisfied reasonably reflects the capital expenditure criteria, taking into account the capital expenditure factors.146 In deciding whether it is satisfied that the service provider’s forecast reasonably reflects each of the capital expenditure criteria, the AER is required to have regard to a number of matters, including: • the most recent annual benchmarking report published by the AER, and the benchmark capital expenditure that would be incurred by an efficient DNSP/TNSP over the relevant regulatory control period; • the actual and expected capital expenditure of the service provider during any preceding regulatory control periods; • the extent to which the forecast includes expenditure to address the concerns of electricity consumers as identified by the service provider in the course of its engagement with electricity consumers; • the relative prices of operating and capital inputs; • the substitution possibilities between operating and capital expenditure; • the extent to which the forecast is referable to arrangements with a person other than the service provider that, in the opinion of the AER, do not reflect arm’s length terms; and • the extent to which the service provider has considered, and made provision for, efficient and prudent non-network alternatives.147 Indexation of the regulatory asset base

[8.320]

As the NER explain, the indexation building block is a negative adjustment to the revenue requirement.148 The adjustment is equal to the amount by which the regulatory asset base is increased for inflation.149 This negative adjustment is necessary to avoid double-counting the effects of inflation. Since the NER require both use of a nominal (rather than real) rate of return150 and adjustment of the regulatory base for inflation,151 without this adjustment the service provider would be compensated twice for the effect of inflation. The effect of the adjustment is to “net off” the benefit associated with indexation of the regulatory asset base from the revenue requirement. Return on capital

[8.330]

The return on capital for each regulatory year of a regulatory control period is calculated by applying the rate of return to the value of

146 NER, Ch 6, cl 6.12.1(3)(ii) (distribution); Ch 6A, cl 6A.14.1(2)(ii) (transmission). 147 NER, Ch 6, cl 6.5.7(e) (distribution); Ch 6A, cl 6A.6.7(e) (transmission). 148 NER, Ch 6, cl 6.4.3(b)(1)(ii) (distribution); Ch 6A, cl 6A.5.4(b)(1)(ii) (transmission). 149 NER, Ch 6, cl 6.4.3(b)(1)(ii) and S6.2.3(c)(4) (distribution); Ch 6A, cl 6A.5.4(b)(1) and S6A.2.4(c)(4) (transmission). 150 NER, Ch 6, cl 6.5.2(d)(2) (distribution); Ch 6A, cl 6A.6.2(d)(2) (transmission). 151 NER, Ch 6, cl S6.2.3(c)(4) (distribution); Ch 6A, cl S6A.2.4(c)(4) (transmission).

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the regulatory asset base for the relevant distribution system as at the beginning of that regulatory year.152 For example, the return on capital building block for regulatory year N (“RYN”) is calculated as: Rate of return for RYN × Regulatory base for RYN = Return on capital for RYN

The allowed rate of return comprises a weighted average of the return on equity for the regulatory control period and the return on debt for that regulatory year.153 The weighting typically applied is a ratio of 60:40 debt to equity. This is equivalent to an assumption that 60 per cent of the regulatory asset base is funded by debt and 40 per cent by equity. It is sometimes also referred to as “leverage” or “gearing”. The rate of return is determined on a nominal post-tax basis.154 The rate of return is required to be determined such that it achieves the allowed rate of return objective, being: The allowed rate of return objective is that the rate of return for a [Distribution Network Service Provider/Transmission Network Service Provider] is to be commensurate with the efficient financing costs of a benchmark efficient entity with a similar degree of risk as that which applies to the [Distribution Network Service Provider/Transmission Network Service Provider] in respect of the provision of [standard control services/prescribed transmission services] (the allowed rate of return objective).155

In determining the rate of return, the NER provide that regard must be had to: • relevant estimation methods, financial models, market data and other evidence; • the desirability of using an approach that leads to the consistent application of any estimates of financial parameters that are relevant to the estimates of, and that are common to, the return on equity and the return on debt; and • any interrelationships between estimates of financial parameters that are relevant to the estimates of the return on equity and the return on debt.156 152 NER, Ch 6, cl 6.5.2(a) (distribution); Ch 6A, cl 6A.6.2(a) (transmission). 153 NER, Ch 6, cl 6.5.2(d)(1) (distribution); Ch 6A, cl 6A.6.2(d)(1) (transmission). 154 NER, Ch 6, cl 6.5.2(d)(2) (distribution); Ch 6A, cl 6A.6.2(d)(2) (transmission). The NER refer to the allowed rate of return being determined on a “nominal vanilla” basis. This is understood to be a post-tax nominal rate of return. Where a “vanilla” rate of return is used, there is no adjustment to the post-tax cost of equity to account for likely corporate tax liabilities. Rather, an allowance for these liabilities is provided as a cash flow item (under the NER this is the building block item for corporate income tax). Where a pre-tax rate of return is used, typically a factor is applied to the cost of equity to account for likely corporate tax liabilities. 155 NER, Ch 6, cl 6.5.2(c) (distribution); Ch 6A, cl 6A.6.2(c) (transmission) (emphasis in original). 156 NER, Ch 6, cl 6.5.2(e) (distribution); Ch 6A, cl 6A.6.2(e) (transmission).

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Both the return on equity and the return on debt are required to be estimated such that they contribute to the achievement of the allowed rate of return objective.157 In estimating the return on equity there is an additional requirement that regard be had to the prevailing conditions in the market for equity funds.158

[8.340]

The NER require the AER to publish Rate of Return Guidelines that set out the methodologies the AER proposes to use in estimating the rate of return, and the estimation methods, financial models, market data and other evidence the AER proposes to take into account in estimating the return on equity, the return on debt, and the value of imputation credits.159 The Rate of Return Guidelines are required to be reviewed at intervals not exceeding three years.160 The most recent Rate of Return Guideline was published in December 2013.161 In the current Rate of Return Guideline, the AER proposes to use the Sharpe–Lintner Capital Asset Pricing Model (“SL–CAPM”) as a foundation model in estimating the return on equity.162 The AER proposes to draw upon other models (such as the Black CAPM and the Dividend Growth Model) and information (for example, survey material on the market risk premium, brokers’ return on equity estimates, estimates of other regulators, and takeover/valuation reports) to determine the value of the inputs into the Sharpe–Lintner CAPM and the final return on equity point estimate.163 The return on debt may be estimated using a methodology that either results in the value for the return on debt being the same for each regulatory year of the regulatory control period or results in the return on debt being, or potentially being, different in each regulatory year of that period.164 Where the methodology used results in the return on debt potentially varying over the course of the regulatory control period, the overall rate of return will accordingly vary over that period, but the return on equity component will remain constant. Subject to the requirement that the return on debt be estimated such that it contributes to the achievement of the allowed rate of return objective, the NER do not limit the methodologies that may be used to estimate the return on debt. The NER indicates that, without limitation, the methodology adopted to estimate the return on debt may be designed to result in the return on debt reflecting: 157 NER, Ch 6, cl 6.5.2(f) and (h) (distribution); Ch 6A, cl 6A.6.2(f) and (h) (transmission). 158 NER, Ch 6, cl 6.5.2(g) (distribution); Ch 6A, cl 6A.6.2(g) (transmission). 159 NER, Ch 6, cl 6.5.2(m) and (n) (distribution); Ch 6A, cl 6A.6.2(m) and (n) (transmission). 160 NER, Ch 6, cl 6.5.2(p) (distribution); Ch 6A, cl 6A.6.2(p) (transmission). 161 AER, Rate of Return Guideline, December 2013. 162 AER, Rate of Return Guideline, December 2013, 13. 163 AER, Rate of Return Guideline, December 2013, 13–14. 164 NER, Ch 6, cl 6.5.2(i) (distribution); Ch 6A, cl 6A.6.2(i) (transmission).

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• the return that would be required by debt investors in a benchmark efficient entity if it raised debt at the time or shortly before the making of the distribution determination for the regulatory control period; • the average return that would have been required by debt investors in a benchmark efficient entity if it raised debt over an historical period prior to the commencement of a regulatory year in the regulatory control period; or • some combination of the returns referred to in the two points above.165 Electricity regulators have historically adopted a methodology for estimating the return on debt that is considered to reflect the return that would be required if the service provider raised debt at the time of, or shortly before, the making of the determination. This approach is known as the “on-the-day” approach. This approach estimates a return on debt that would be faced by a regulated entity if, during a period prior to the determination commencing, the service provider entered into debt instruments equivalent to 60 per cent of its regulatory asset base; that is, as if the service provider refinanced its entire debt portfolio shortly before the beginning of each regulatory control period.

[8.350]

There has been a recent move away from estimating the return on debt using the on-the-day approach, because that approach does not generally reflect how businesses (regulated or not) would raise debt. A debt management strategy pursuant to which significant quantities of debt would be required to be raised in short periods of time gives rise to a number of risks. These risks include: • refinancing risk – that during the short window of time in which the debt had to be raised, it may not be possible to raise the required amount, or the required amount at an acceptable price; and • interest rate risk – that during the period in which the debt was required to be raised, interest rates are relatively high, resulting in a relatively high overall cost of debt. The NER were amended in November 2012 to explicitly permit a methodology for estimating the return on debt that better reflected how infrastructure operators actually raised debt, which, in general terms, is to stagger the raising of debt using relatively longer-term debt instruments. Raising debt in this manner manages both refinancing risk, as large tranches of debt are not required to be refinanced at any one time, and interest rate risk, as the times at which debt is raised are spread out over many years. The methodology used to estimate the return on debt in this way is referred to as a “trailing average” approach, and reflects the average return that would have been required by debt investors in an entity if that entity had raised debt over a historical period prior to the commencement of a regulatory year in the regulatory control period. In the Rate of Return Guideline, the AER has indicated that (subject to a period of transition) it

165 NER, Ch 6, cl 6.5.2(j) (distribution); Ch 6A, cl 6A.6.2(j) (transmission).

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proposes to estimate the return on debt using a trailing average approach. The AER’s approach is based on a benchmark assumption that a regulated entity raises one-tenth of its debt requirements in each year by way of ten-year debt instruments.166 As such, the cost of debt that a benchmark entity faces in any particular year comprises an average of the cost associated with debt instruments it has entered into over the previous ten years. In regulatory determinations made by the AER in 2015 the AER applied the approach set out in the Rate of Return Guidelines for estimating the return on equity and the return on debt. A number of electricity distributors have sought merits review and judicial review of these regulatory determinations, raising grounds for review in relation to the return on equity and debt, and a consumer group sought merits review of several determinations in relation to the return on debt.167 The Tribunal has made determinations in respect of seven of these applications which relate to distribution determinations made by the AER for the New South Wales and Australian Capital Territory electricity distribution network service providers (Ausgrid, Essential Energy, Endeavour Energy and ActewAGL Distribution). In relation to the AER’s approach to the return on equity, the Tribunal found that no grounds for review had been established – that is, the Tribunal effectively found that the applications had not established any error in the AER’s approach to estimating the return on equity.168 In relation to the return on debt (and specifically in relation to the AER’s method of transitioning to the new trailing average estimation approach), the Tribunal found that grounds for review had been established, in particular those that alleged that the AER was in error in finding that the “benchmark efficient entity” referred to in the rate of return objective was a regulated

166 AER, Rate of Return Guideline, December 2013, 18–22. 167 Merits review applications made in 2015 that raise grounds for review in relation to the rate of return include: Application by Public Interest Advocacy Centre (Ausgrid), File Number ACT 1 of 2015, filed 21 May 2015; Application by Public Interest Advocacy Centre (Endeavour Energy), File Number ACT 2 of 2015, filed 21 May 2015; Application by Public Interest Advocacy Centre (Essential Energy), File Number ACT 3 of 2015, filed 21 May 2015; Application by Ausgrid, File Number ACT 4 of 2015, filed 21 May 2015; Application by ActewAGL Distribution, File Number ACT 5 of 2015, filed 21 May 2015; Application by Endeavour Energy, File Number ACT 6 of 2015, filed 21 May 2015; Application by Essential Energy, File Number ACT 7 of 2015, filed 21 May 2015; Application by SA Power Networks, File Number ACT 11 of 2015, filed 19 November 2015. Judicial review applications that raise grounds for review in relation to the rate of return include Federal Court file numbers NSD 609 (Ausgrid), 610 (Essential Energy), 611 (Endeavour Energy), 1507 (SA Power Networks) of 2015 and VID 277/2015 (ActewAGL). On 30 March 2016, the Federal Court ordered that the judicial review applications made by the New South Wales and Australian Capital Territory electricity distributors be stood over to a date to the fixed following the conclusion of the AER’s judicial review applications of the Tribunal’s determinations relating to those distributors. 168 Applications by Public Interest Advocacy Centre Ltd and Ausgrid [2016] ACompT 1, [813].

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entity, as opposed to an unregulated entity.169 The Tribunal considered that using the concept of a regulated efficient entity as the base comparator would “divert the AER from the role of fixing the terms of supply of services on a proxy basis compared to those likely to obtain in a competitive market”.170 The Tribunal made determinations in each of the applications made by the network service providers setting aside the distribution determinations and remitting them back to the AER to make the determinations again with directions to make the constituent decision on the return on debt in relation to the introduction of the trailing average approach in accordance with the Tribunal’s reasons for decision.171 On 24 March 2016, the AER applied to the Federal Court for judicial review of the Tribunal’s determinations seeking orders that the Tribunal’s decision be set aside and the matters referred back to the Tribunal for further consideration including on the basis that the Tribunal should have found that it was open to the AER to characterise the benchmark efficient entity as being a regulated entity and that the AER had made no reviewable error in this respect.172 At the time of writing those judicial review applications had not been heard or determined. Depreciation

[8.360]

Depreciation for each regulatory year is calculated on the value of the assets in the regulatory asset base as at the beginning of that regulatory year.173 It is calculated using depreciation schedules that apply to each asset or category of assets.174 The depreciation schedules are required to conform with the following requirements: • the schedules must depreciate assets using a profile that reflects the nature of the assets or category of assets over the economic life of that asset or category of assets; • the sum of the real value of the depreciation attributable to any asset or category of assets over the economic life of that asset or category of assets must be equivalent to the value at which that asset or category of assets was first included in the regulatory asset base; and 169 Applications by Public Interest Advocacy Centre Ltd and Ausgrid [2016] ACompT 1, [907], [914]. 170 Applications by Public Interest Advocacy Centre Ltd and Ausgrid [2016] ACompT 1, [914]. 171 Applications by Public Interest Advocacy Centre Ltd and Ausgrid [2016] ACompT 1; Applications by Public Interest Advocacy Centre Ltd and Endeavour Energy [2016] ACompT 2; Applications by Public Interest Advocacy Centre Ltd and Essential Energy [2016] ACompT 3; Application by ActewAGL Distribution [2016] ACompT 6. 172 Federal Court file numbers NSD 415 (Ausgrid), 416 (Essential Energy), 418 (Endeavour Energy), 419 (ActewAGL Distribution) of 2016. See also AER media release: AER, “AER Appeals Against Electricity and Gas Price Decisions” (Media Release, NR 05/16, 24 March 2016). 173 NER, Ch 6, cl 6.5.5(a)(1) (distribution); Ch 6A, cl 6A.6.3(a)(1) (transmission). 174 NER, Ch 6, cl 6.5.5(a)(2) (distribution); Ch 6A, cl 6A.6.3(a)(2) (transmission).

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• the economic life of the relevant assets and the depreciation methods and rates used to calculate depreciation for a particular regulatory control period must be consistent over different regulatory control periods.175 The service provider is required to propose the relevant depreciation schedules in its building block proposal. If those depreciation schedules conform with the requirements set out above, depreciation is to be calculated in accordance with the service provider’s proposed schedules.176 If the service provider’s proposed schedules do not conform with the relevant requirements, depreciation is calculated using the depreciation schedules determined by the AER.177 Straight-line depreciation is typically applied in electricity determinations and the AER’s post-tax revenue model (which is used to derive annual revenue requirements) is configured to use the straight-line method as the default position for calculating depreciation.178 However, the NER do not require that straight-line depreciation is used, and it would be open to the service provider to propose an alternative depreciation method (for example, accelerated depreciation, front-end loaded depreciation or backend loaded depreciation), and for the AER to either accept an alternative depreciation method or to determine that an alternative method is to be adopted. Estimated cost of corporate income tax

[8.370]

Treatment of taxation is discussed at [5.140].

In the NER, the building block for the estimated cost of corporate income tax (“ETCt”) is estimated in accordance with the following formula:179 ETCt = (ETIt × tt)(1-y) ETCt is an estimate of the taxable income for the relevant regulatory year that would be earned by a benchmark entity as a result of providing standard control services if such a benchmark entity, as opposed to the actual DNSP/TNSP, operated the businesses of the DNSP/TNSP. This estimate is multiplied by the expected statutory income tax rate for that regulatory year (rt). This gives an estimate of the income tax liability of the benchmark entity for the regulatory year. The income tax liability estimate is then reduced to reflect the value that shareholders of the benchmark entity are assumed to place on imputation 175 NER, Ch 6, cl 6.5.5(b) (distribution); Ch 6A, cl 6A.6.3(b) (transmission). 176 NER, Ch 6, cl 6.5.5(a)(2)(i) (distribution); Ch 6A, cl 6A.6.3(a)(2)(i) (transmission). 177 NER, Ch 6, cl 6.5.5(a)(2)(ii) (distribution); Ch 6A, cl 6A.6.3(a)(2)(ii) (transmission). 178 AER, Electricity Distribution Network Service Providers Post-Tax Revenue Model Handbook: Final Decision, 29 January 2015, 12. 179 NER, Ch 6, cl 6.5.3 (distribution); Ch 6A, cl 6A.6.4 (transmission).

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credits that the benchmark entity distributes when distributing franked dividends to these shareholders. As shareholders are assumed to place some value on these imputation credits, the overall return required by equity holders can be reduced to reflect the fact that some of the required return comes from the value they place on imputation credits. This adjustment could be made in a number of ways, and in the NER it is done via the building block for corporate income tax. If the adjustment were not made, and assuming that the various building blocks had been correctly estimated, the benchmark entity would be “over-compensated” insofar as its shareholders would receive both the required return on equity through the rate of return building block, as well as an additional return by way of the value placed on imputation credits.

[8.380]

In its Rate of Return Guideline, the AER has indicated that it proposes to estimate the value of imputation credits as the product of a payout ratio and a utilisation rate (referred to as “theta”). The AER proposes to estimate the payout ratio using Australian Tax Office (“ATO”) statistics to calculate the proportion of imputation credits generated (via tax payments) that have been distributed by companies generally since the commencement of the imputation system.180 The AER proposes to estimate the utilisation rate using a number of approaches, including: • the equity ownership approach: this looks at the proportion of domestic investment in Australian equity, which the AER considers to be a good proxy for the value-weighted average investor’s ability to utilise franking credits because domestic owners of equity can redeem franking credits whereas foreign investors of Australian equity cannot; • tax statistic estimates: these are estimates based on ATO data of the amount of tax reduced, or refunded, through the use of imputation credits – to the extent the tax statistics are reliable, they represent the actual quantum of dollars of tax reduced or refunded through the redemption of imputation credits; and • implied market value studies: these are studies that estimate a value for imputation credits by examining the price of a share before a dividend is distributed and the price of that share after a dividend is distributed.181 In the Rate of Return Guideline, the AER indicates that its proposed approach results in an estimate of 0.5 for the value of imputation credits, which is based on a payout ratio of 0.7 and a utilisation rate of 0.7.182 The 180 AER, Rate of Return Guideline, December 2013, 23. 181 AER, Rate of Return Guideline, December 2013, 24; AER, Rate of Return Guideline: Explanatory Statement, 158–177. In the Rate of Return Guideline and the Explanatory Statement, the AER proposes to use a fourth approach to estimate the utilisation rate: the “conceptual goalposts approach” (Rate of Return Guideline, 24). In recent decisions the AER has determined that it would depart from the Rate of Return Guideline by not relying on this approach: see, for example, AER, Ausgrid Distribution Determination 2015–16 to 2018–19: Final Decision, (Attachment 4 – Value of Imputation Credits), April 2015, 4–23. 182 AER, Rate of Return Guideline, December 2013, 23.

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value of imputation credits adopted by the AER in determinations made in 2015 was 0.4.183 The departure from the guideline value primarily arises from a closer examination by the AER of data relating to equity ownership, which implied a lower utilisation rate based on this approach than the rate determined from this approach in the guideline.184 A number of electricity distributors have sought merits and judicial review of distribution determinations made by the AER in 2015 in which the AER adopted a value for imputation credits of 0.4.185 The Tribunal has made determinations in four of these applications which relate to distribution determinations made by the AER for the New South Wales and Australian Capital Territory electricity distribution network service providers (Ausgrid, Essential Energy, Endeavour Energy and ActewAGL Distribution). The Tribunal found that the applicants had established a number of grounds for review with respect to the value to be adopted for imputation credits. The Tribunal found that the equity ownership approach overstates the redemption rate and that tax statistics can only provide an upper bound on the estimate of theta.186 The Tribunal concluded that as two of the three approaches adopted by the AER are considered no better than upper bounds, it follows that the assessment of theta must rely on market studies.187 Further, the Tribunal found that market studies are “best placed to capture the considerations that investors make in determining the worth of imputation credits to them”.188 The Tribunal made determinations in each of the applications made by the network service providers setting aside the distribution determinations and remitting them back to the AER to make the determinations again with directions to make the constituent 183 See, for example, AER, Ausgrid Distribution Determination 2015–16 to 2018–19: Final Decision, (Attachment 4 – Value of Imputation Credits), April 2015, 4–7. 184 See, for example, AER, Ausgrid Distribution Determination 2015–16 to 2018–19: Final Decision, (Attachment 4 – Value of Imputation Credits), April 2015, 4–24. 185 Merits review applications made in 2015 that raise grounds for review in relation to the value of imputation credits include: Application by Ausgrid, File Number ACT 4 of 2015, filed 21 May 2015; Application by ActewAGL Distribution, File Number ACT 5 of 2015, filed 21 May 2015; Application by Endeavour Energy, File Number ACT 6 of 2015, filed 21 May 2015; Application by Essential Energy, File Number ACT 7 of 2015, filed 21 May 2015; Application by SA Power Networks, File Number ACT 11 of 2015, filed 19 November 2015. Judicial review applications that raise grounds for review in relation to the rate of return include Federal Court file numbers NSD 609 (Ausgrid), 610 (Essential Energy), 611 (Endeavour Energy), 1507 (SA Power Networks) of 2015, and VID 277/2015 (ActewAGL). On 30 March 2016, the Federal Court ordered that the judicial review applications made by the New South Wales and Australian Capital Territory electricity distributors be stood over to a date to the fixed following the conclusion of the AER’s judicial review applications of the Tribunal’s determinations relating to those distributors. 186 Applications by Public Interest Advocacy Centre Ltd and Ausgrid [2016] ACompT 1, [1048], [1093]. 187 Applications by Public Interest Advocacy Centre Ltd and Ausgrid [2016] ACompT 1, [1096]. 188 Applications by Public Interest Advocacy Centre Ltd and Ausgrid [2016] ACompT 1, [1096].

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decision on the estimated cost of corporate income tax in accordance with its reasons for decision, including by reference to an estimated cost of corporate income based on a value of imputation credits of 0.25.189 On 24 March 2016, the AER applied to the Federal Court for judicial review of the Tribunal’s determinations seeking orders that the Tribunal’s decision be set aside and the matters referred back to the Tribunal for further consideration.190 At the time of writing those judicial review applications had not been heard or determined. Revenue increments or decrements arising from an incentive scheme

[8.390]

The NER provides for incentive schemes to be developed for: operating and capital expenditure; service standards; demand management and embedded generation connection; and small-scale incentive schemes. The rewards or penalties provided under these schemes form a separate building block within the service provider’s revenue allowance. The AER must decide in the individual determinations it makes for each service provider how any of these schemes are to apply to the service provider.191

Operating expenditure incentive schemes

[8.400]

The NER requires the AER to develop and publish an incentive scheme or schemes that provide for a fair sharing between service providers and users of efficiency gains and efficiency losses relating to operating expenditure.192 These schemes are referred to as “efficiency benefit sharing schemes” (“EBSSs”). An efficiency gain is considered to arise where the operating expenditure of the service provider is less than the forecast operating expenditure set out in a determination. Conversely, an efficiency loss is considered to arise where the operating expenditure of the service provider is greater than forecast operating expenditure.193

189 Applications by Public Interest Advocacy Centre Ltd and Ausgrid [2016] ACompT 1; Applications by Public Interest Advocacy Centre Ltd and Endeavour Energy [2016] ACompT 2; Applications by Public Interest Advocacy Centre Ltd and Essential Energy [2016] ACompT 3; Application by ActewAGL Distribution [2016] ACompT 6. 190 Federal Court file numbers NSD 415 (Ausgrid), 416 (Essential Energy), 418 (Endeavour Energy), 419 (ActewAGL Distribution) of 2016. See also AER media release: AER, “AER Appeals Against Electricity and Gas Price Decisions” (Media Release, NR 05/16, 24 March 2016). 191 NER, Ch 6, cl 6.12.1(9) (distribution); Ch 6A, cl 6A.14.1(1) (transmission). 192 NER, Ch 6, cl 6.5.8(a) (distribution); Ch 6A, cl 6A.6.5(a) (transmission). 193 NER, Ch 6, cl 6.5.8(a) (distribution); Ch 6A, cl 6A.6.5(a) (transmission).

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On 29 November 2013, the AER published its most recently developed EBSS, which is relevant to both DNSPs and TNSPs.194 A description of how the EBSS works is set out in Box 8.4. Box 8.4: Operation of the Efficiency Benefit Sharing Scheme The EBSS works as follows: • The regulatory regime provides for ex ante operating expenditure forecasts. With limited exceptions, these forecasts are “set and forget”, and the network service provider keeps the benefit (or wears the cost) of incurring lower (higher) actual operating expenditure than forecast operating expenditure in each year of the relevant regulatory control period. • In order to provide a continuous incentive to service providers to find efficiencies in each year of the regulatory control period, the EBSS carries forward a service provider’s incremental efficiency gains for the length of the carryover period – which is typically five years. If the efficiency gains were not carried over in this manner, the service provider would have a strong incentive to find efficiencies early in a regulatory control period (because it keeps the benefits of these efficiencies in each year of the regulatory control period), and a lesser incentive towards the end of the regulatory control period, where it keeps the benefits of the efficiencies for fewer years. • In calculating the efficiency gain in each regulatory year, it is important to note that it is the incremental efficiency gain in that year that is important. For example, assume forecast operating expenditure in each regulatory year of a five-year regulatory control period is $50 million. In the first year, the service provider does not make an efficiency gain. In the second year, the service provider makes an efficiency gain of $5 million – that is, the service provider incurs operating expenditure of $45 million. In the third year, the service provider does not make any further efficiency gain, and incurs operating expenditure of $45 million. The incremental gain in the third year is $0. It is the incremental gains that are carried over for the carryover period; thus, it is the $5 million efficiency gain from the second year that is carried over for five years. The service provider receives the benefit of this gain in years 2 to 5 of the regulatory control period, and year 1 of the following regulatory control period. • The carryover amounts are added as an additional building block when calculating the service provider’s regulated 194 AER, Efficiency Benefit Sharing Scheme for Electricity Network Service Providers, November 2013.

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revenue for the following regulatory control period, and the actual operating expenditure incurred in the base year is used as the starting point for forecasting operating expenditure for this period. That base year will reflect the efficiency gains made in the relevant regulatory control period. To take the above example, of an efficiency gain of $5 million in the second year of a regulatory control period, an amount of $5 million would be added to regulated revenue in the first year of the following regulatory control period, giving the service provider the benefit of the efficiency gain for five years (years 2 to 5 of the first regulatory control period, and year 1 of the following period). • The AER estimates that, under this approach, the benefits of any increase or decrease in operating expenditure is shared approximately 30:70 between service providers and consumers.195

Capital expenditure incentive schemes

[8.410]

The NER provide that the AER may develop capital expenditure incentive schemes that provide NSPs with an incentive to undertake efficient capital expenditure.196 In November 2013, the AER published a guideline detailing its capital expenditure sharing scheme (“CESS”).197 In broad terms, the CESS operates by calculating the difference between the capital expenditure allowance approved by the AER for each year of the relevant regulatory control period and the capital expenditure actually incurred by the service provider in each year. Where the service provider has underspent (or overspent) the allowance, this is considered to be an efficiency gain (or loss).198 The total efficiency gain or loss is calculated for the regulatory control period and a “sharing factor” of 30 per cent is then applied to the underspend or overspend amount. This results in the service provider being rewarded (penalised) by retaining (bearing) 30 per cent of the underspend (or overspend) amount. The CESS operates so that a service provider will bear all of the costs associated with any overspend amount that the AER considers to be

195 AER, Efficiency Benefit Sharing Scheme for Electricity Network Service Providers, November 2013, 5. 196 NER, Ch 6, cl 6.5.8A(a) and (b) (distribution); Ch 6A, cl 6A.6.5A(a) and (b) (transmission). 197 AER, Capital Expenditure Incentive Guideline for Electricity Network Service Providers, November 2013. 198 AER, Capital Expenditure Incentive Guideline for Electricity Network Service Providers, November 2013, 6.

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inefficient.199 Where an overspend amount is considered to be efficiently incurred, the service provider will be penalised for that overspend amount (bearing 30 per cent of the overspend amount);200 however, the capital expenditure is rolled into the regulatory asset base so that the service provider earns a return on and of the remaining 70 per cent. Service target performance incentive scheme

[8.420]

The NER require the AER to develop an incentive scheme or schemes (service target performance incentive schemes, or “STPIS”) to provide incentives for:201

• DNSPs to maintain and improve performance; and • TNSPs to provide greater/reliability of the transmission system at all times when users place greatest value on the reliability of the system and improve those elements of the transmission system that are most important to determining the market price for electricity.202 The STPIS applicable to DNSPs was most recently amended by the AER in 2009.203 The scheme has a number of components, including: • reliability of supply component: the application of this component either rewards or punishes a DNSP where reliability exceeds or fails the specified targets for unplanned interruptions; • customer service component: similarly to the reliability of supply component, the customer service component either rewards or punishes a DNSP where customer service levels either exceed or fail the specified targets (for example, the percentage of total calls to the fault line answered in 30 seconds); • guaranteed service level component: this component essentially provides for the DNSP to make a payment to an effected customer where a relevant parameter is exceeded (for example, where an interruption is greater than 20 hours, or the DNSP fails to give more than four days’ notice of a planned interruption). 199 AER, Capital Expenditure Incentive Guideline for Electricity Network Service Providers: Explanatory Statement, November 2013, 10. 200 AER, Capital Expenditure Incentive Guideline for Electricity Network Service Providers: Explanatory Statement, November 2013, 10. 201 NER, Ch 6, cl 6.6.2(a). 202 NER, Ch 6A, cl 6A.7.4. The “spot price” is the price for electricity in a trading interval at a node or connection point. Where there are no constraints operating in the NEM, the price for electricity is the same across the NEM. Where constraints are present, such that electricity cannot freely flow across the NEM, differences in pricing between regions may occur. In order to assist in minimising constraints from arising it is therefore relevant to provide TNSPs with an incentive to improve the reliability of those parts of the transmission system that are particularly important to determining spot prices. 203 AER, Service Target Performance Incentive Scheme: Electricity Distribution Network Service Providers, November 2009.

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The STPIS applicable to TNSPs was most recently amended by the AER in September 2015.204 The scheme has three components, being: • service component: the application of which either rewards or punishes a TNSP where parameters specified for matters such as circuit outage rate or loss of supply are exceeded or not met; • market impact component: which assesses the impact that an outage on a TNSP’s network has on electricity prices and rewards (penalises) the TNSP for reductions (increases) in this impact, with the target set using historical performance figures; and • network capability component: which measures improvements in transmission assets achieved through operating expenditure and minor capital expenditure, resulting in improved capability of the elements of the system most important to determining market prices for electricity or improved capability of the system at times when users place greatest value of the reliability of the system. The STPIS provides that (subject to an overall limit) a TNSP may be rewarded through an increase to the regulated revenues the TNSP is permitted to earn for undertaking projects directed at improving the capability of the system in this manner. Demand management and embedded generation connection incentive scheme (distribution only)

[8.430]

The NER provide that the AER may develop an incentive scheme to incentivise DNSPs to implement efficient non-network alternatives, or to manage the expected demand for standard control services in some other way, or to efficiently connect embedded generators.205

The AER has published a number of demand management incentive schemes (“DMIS”) that apply to various DNSPs. These schemes typically provide an ex ante demand management innovation allowance (“DMIA”), which is provided as a fixed amount of revenue at the commencement of each regulatory year in the relevant regulatory control period. The DMIA is capped and is provided on a “use-it-or-lose-it” basis. These schemes also have a foregone revenue component that allows a DNSP to recover foregone revenue as a result of a successful demand management initiative where that initiative results in lower energy throughout (and therefore, lost revenue) for the DNSP. The AER has described the DMIS in the following way: The DMIS is designed to supplement a DNSP’s approved capital and operating expenditure, to facilitate investigation and implementation of demand 204 AER, Electricity Transmission Network Service Providers Service Target Performance Incentive Scheme: Final Decision, September 2015. After publishing the final STPIS on 17 September 2015, the AER identified an error in the drafting and published a corrected version of the final STPIS on 1 October 2015: AER, Service Target Performance Incentive Scheme: Electricity Transmission Network Service Providers, version 5, October 2015. 205 NER, Ch 6, cl 6.6.3(a) (distribution).

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management strategies. The development of reliable and viable strategies will allow DNSPs to implement non-network alternatives where efficient, and to manage the expected demand for standard control services by means other than network augmentation. The DMIS aims to provide incentives for DNSPs to investigate and conduct broad-based and/or peak demand management projects throughout the regulatory control period. It aims to increase the current stock of knowledge and experience with network demand management, to encourage greater consideration of non-network alternatives to augmentation in the decision making process of DNSPs. The DMIS also aims to provide incentives for DNSPs to conduct research and investigation into innovative techniques for managing demand so that, in the future, demand management projects may be increasingly identified as viable alternatives to network augmentation and reflected in a DNSP’s main expenditure proposals.206

A carryover amount is calculated under the scheme to account for: • any amount of the DMIA unspent or not approved over the regulatory control period; • the time value of money accrued/lost as a result of the expenditure profile selected by the DNSP; and • if a foregone revenue component applies to the DNSP, the amount of foregone revenue arising from approved demand management initiatives.207 The final carryover amount is deducted from, or added to, as relevant, allowed revenues in the second regulatory year of the subsequent regulatory control period. The NER relating to demand management schemes have been amended with effect from 1 December 2016. These rules were amended by the AEMC in light of concerns that the existing scheme does not provide sufficient incentives for DNSPs to undertake demand management projects that deliver a net benefit to consumers.208 The amended rules separately deal with demand management incentive schemes and demand management innovation allowances and introduce objectives for both of these, together with principles that are designed to guide the AER in developing and applying the incentive scheme and the innovation allowance to meet their respective objectives. These objectives are: • demand management incentive scheme – the objective of the incentive scheme is to provide distribution businesses with an incentive to undertake efficient expenditure on relevant non-network options relating 206 AER, Demand Management and Embedded Generation Incentive Scheme: Jemena, Citipower, Powercor, AusNet Services and United Energy 2016–2020, 21 November 2014, 7. 207 AER, Demand Management Incentive Scheme: Energex, Ergon Energy and ETSA Utilities 2010–15, October 2008, Appendix A, 17–24. 208 AEMC, Demand Management Incentive Scheme, Rule Determination, 20 August 2015, 5.

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to demand management. The scheme will reward distribution businesses for implementing relevant non-network options that deliver net cost savings to retail customers.209 • demand management innovation allowance – the objective of the innovation allowance is to provide distribution businesses with funding for research and development in demand management projects that have the potential to reduce long term network costs. The allowance will be used to fund innovative projects that have the potential to deliver ongoing reductions in demand or peak demand.210 Under the transitional rules made by the AEMC the AER is required to develop and publish the incentive scheme and innovation allowance in accordance with the distribution consultation procedures by 1 December 2016, so that the scheme will apply to the next round of regulatory determinations, which will start being prepared in 2017.211 Small scale incentive scheme

[8.440]

The NER provide that the AER may develop small-scale incentive schemes that provide service providers with incentives to provide standard control services in a manner that contributes to the achievement of the national electricity objective.212 At the time of writing, the AER has not developed a small-scale incentive scheme. Forecast operating expenditure

[8.450]

Clause 6.5.6 (distribution)/cl 6A.6.6 (transmission) of the NER deal with forecast operating expenditure and follow a relatively similar structure to that of forecast capital expenditure discussed at [8.310]. Service providers are required to include in their building block proposals the total forecast operating expenditure for the relevant regulatory control period that the service provider considers is required in order to achieve the “operating expenditure objectives”. The operating expenditure objectives mirror the capital expenditure objectives, and include: • to meet or manage the expected demand for standard control services over the regulatory control period; • to comply with all applicable regulatory obligations or requirements associated with the provision of standard control services; and • to maintain the safety of the distribution system through the supply of standard control services.213

209 NER, Ch 6, cl 6.6.3 (distribution) (with effect from 1 December 2016). 210 NER, Ch 6, cl 6.6.3A (distribution) (with effect from 1 December 2016). 211 NER, Ch 11, cl 11.82.2; AEMC, New Rules for a Demand Management Incentive Scheme: Fact Sheet, 20 August 2015, 1. 212 NER, Ch 6, cl 6.6.4(a) (distribution); Ch 6A, cl 6A.7.5 (transmission). 213 NER, Ch 6, cl 6.5.6(a)(1), (2), and (4) (distribution); Ch 6A, cl 6A.6.6(a)(1), (2) and (4) (transmission).

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The AER is required to accept the forecast of operating expenditure proposed by the service provider if it is satisfied that this forecast reasonably reflects the “operating expenditure criteria”. Again, the operating expenditure criteria mirror the capital expenditure criteria, and are: • the efficient costs of achieving the operating expenditure objectives; and • the costs that a prudent operator would require to achieve the operating expenditure objectives; and • a realistic expectation of the demand forecast and cost inputs required to achieve the operating expenditure objectives.214 Where the AER is not satisfied that the forecast operating expenditure put forward by the DNSP reasonably reflects the operating expenditure criteria, the NER provides that the AER must not accept the forecast.215 In this case, the AER must go on to determine an estimate of operating expenditure for the regulatory control period that the AER is satisfied reasonably reflects the operating expenditure criteria, taking into account the operating expenditure factors.216

[8.460]

In deciding whether it is satisfied that the service provider’s forecast reasonably reflects each of the operating expenditure criteria, the AER is required to have regard to a number of matters, including: • the most recent annual benchmarking report that has been published by the AER, and the benchmark operating expenditure that would be incurred by an efficient NSP over the relevant regulatory control period; • the actual and expected operating expenditure of the NSP during any preceding regulatory control periods; • the extent to which the forecast includes expenditure to address the concerns of electricity consumers as identified by the NSP in the course of its engagement with electricity consumers; • the relative prices of operating and capital inputs; • the substitution possibilities between operating and capital expenditure; and • the extent the forecast is referable to arrangements with a person other than the DNSP that, in the opinion of the AER, do not reflect arm’s-length terms.217

The practice that had been typically adopted by service providers and regulators to forecast operating expenditure was to identify a base year (usually the fourth year of a five-year regulatory control period) and use the actual operating expenditure incurred in that year as the best estimate of forecast operating expenditure that was likely to be incurred over the 214 NER, Ch 6, cl 6.5.6(c) (distribution); Ch 6A, cl 6A.6.6(c) (transmission). 215 NER, Ch 6, cl 6.5.6(d) (distribution); Ch 6A, cl 6A.6.6(d) (transmission). 216 NER, Ch 6, cl 6.12.1(4)(ii) (distribution); Ch 6A, cl 6A.14.1(3)(ii) (transmission). 217 NER, Ch 6, cl 6.5.6(e) (distribution); Ch 6A, cl 6A.6.7(3) (transmission).

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relevant regulatory control period. This relied on an assumption that operating expenditure is reasonably recurrent in nature and so, if the service provider could operate the network for a given amount of operating expenditure in one year, it could be expected to be able to continue to operate the network on the basis of a similar operating expenditure allowance in the future. In light of the incentives in the regime to only incur efficient operating expenditure (see [8.400]), it could also be assumed that the actual operating expenditure incurred in the base year was efficient. Recognising that various factors may cause operating expenditure in the future to differ from that incurred in the past, the base year operating expenditure would usually be adjusted to reflect those factors in the forecast. For example, if regulatory obligations had increased (or decreased) since the base year (for example, where there are obligations to undertake more frequent inspections of electricity lines in bushfire-prone areas), the forecast operating expenditure may be adjusted upwards (or downwards) to reflect the changes in regulatory obligations. Similarly, escalators may be applied to labour costs so that the actual costs incurred in the base year are updated for current and expected costs over the relevant regulatory period. This approach has been referred to as the “base-step-trend” approach. It starts with a base year amount and then adjusts this for step changes (to account for changes in regulatory obligations or other factors) and trends in input costs such as labour.

[8.470]

In its Expenditure Forecast Assessment Guidelines published in 2013, the AER sets out the assessment techniques that it may use to assess a service provider’s forecast, including: • benchmarking: this includes both economic benchmarking (benchmarking using multilateral total factor productivity, data envelope analysis; and econometric modelling) and category level benchmarking (benchmarking across categories, such as total capital expenditure and operating expenditure, unit costs and unit volumes); • methodology review: assessment of the methodology the service provider uses to derive its expenditure forecasts, including assumptions, inputs and models; • governance and policy review: review of processes including governance, strategic planning, risk management, asset management and prioritisation; • predictive modelling: use of statistical and econometric modelling to assist in determining the expected efficient costs over the regulatory control period; • trend analysis: forecasting future expenditure levels on the basis of historical information; • cost benefit analysis: review of whether forecast expenditure is expected to be the lowest cost option relative to other options in net present value terms; and

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• detailed project review: review of certain project and program expenditure.218 The AER’s preference is for a “base-step-trend” approach to assessing most forecast operating expenditure categories.219 However, the AER has indicated in a number of determinations made in 2015 that it may only apply the “base-step-trend” approach to forecast operating expenditure where it is satisfied that the service provider has responded to the incentives in the regime to incur efficient levels of expenditure and that expenditure in the base year is not materially inefficient.220 Where it is not so satisfied, it will develop a substitute forecast that predominately rests upon the findings of benchmarking analysis.221 This approach to some extent still rests in part on the actual operating expenditure incurred in the selected base year; however, the actual operating expenditure amount is adjusted by reference to the results of benchmarking analysis undertaken by the AER.222 The AER has explained its approach in the following way: As we explain in the Guideline, our preference is to rely on revealed expenditure as an appropriate basis for forecasting efficient, prudent and realistic opex when service providers are appropriately responding to the incentive framework. Therefore, rather than adjusting all service providers below the most efficient performer (the frontier) the Guideline approach is to adjust revealed opex when our analysis demonstrates it is materially inefficient.223

The AER’s approach to forecast operating expenditure in distribution determinations made for the Australian Capital Territory and New South Wales distribution networks in 2015 resulted in significant adjustments to the base year operating expenditure amounts, and correspondingly large reductions in the forecast operating expenditure amounts substituted by the AER relative to those proposed by the relevant distributors. The AER’s approach in these determinations relied heavily on benchmarking. Table 8.2 sets out the relevant adjustments made to base year operating expenditure and the differences between forecast operating expenditure proposed by the relevant distributors in their revised proposals, and the forecast 218 AER, Expenditure Forecast Assessment Guideline for Electricity Distribution, November 2013, 11–15; AER, Expenditure Forecast Assessment Guideline for Electricity Transmission, November 2013, 12–15. 219 AER, Expenditure Forecast Assessment Guideline for Electricity Distribution, November 2013, 22; AER, Expenditure Forecast Assessment Guideline for Electricity Transmission, November 2013, 22. 220 See, for example, AER, Ausgrid Distribution Determination 2015–16 to 2018–19: Final Decision (Attachment 7 – Operating Expenditure), April 2015, 7-24, 7-271. 221 See, for example, AER, Ausgrid Distribution Determination 2015–16 to 2018–19: Final Decision (Attachment 7 – Operating Expenditure), April 2015, 7-27 to 7-28. 222 See, for example, AER, Ausgrid Distribution Determination 2015–16 to 2018–19: Final Decision (Attachment 7 – Operating Expenditure), April 2015, 7-27 to 7-28. 223 See, for example, AER, Ausgrid Distribution Determination 2015–16 to 2018–19: Final Decision (Attachment 7 – Operating Expenditure), April 2015, 7-271 (emphasis in original).

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operating expenditure amounts substituted by the AER in the final determinations. Table 8.2 AER adjustments to base year operating expenditure in distribution determinations for Ausgrid, Essential Energy and ActewAGL (2013–14) Actual base year opex $492.2 m Ausgrid224 Essential $418.0 m Energy225 ActewAGL226 $67.2 m

AER adjusted base year opex $374.2 m $308.2 m

Difference

$45.1 m

AER substitute opex (2014–19) $1992.9 m $1615.3 m

Difference

24.0% 26.3%

Revised proposal opex (2014–19) $2679.3 m $2306.6 m

32.8%

$371.2 m

$246.6 m

33.6%

25.6% 30.0%

Ausgrid, Essential Energy and ActewAGL each sought merits review and judicial review of the AER’s determinations and the applications included grounds for review in relation to forecast operating expenditure allowances, and in particular the AER’s reliance on the benchmarking model used to assess operating expenditure requirements.227 The Tribunal found that the AER’s undue reliance on the benchmarking model as a determinative factor in estimating required operating expenditure had the consequence that the AER had not properly discharged its function under cl 6.5.6 of the NER. The Tribunal found that the AER had placed reliance on the benchmarking model notwithstanding the AER’s recognition that the model had “limitations with respect to the specification of outputs and inputs, data imperfections, and other uncertainties in a context where economic benchmarking is being used for the first time to set opex allowances”.228 The Tribunal made a determination that the distribution determinations be set aside and remitted to the AER to make the decisions again with a direction that the AER make the decision on operating expenditure in accordance with the Tribunal’s reasons for decision and using a broader range of modelling and benchmarking against Australian 224 AER, Ausgrid Distribution Determination 2015–16 to 2018–19: Final Decision – Overview, April 2015, 37–41. 225 AER, Essential Energy Distribution Determination 2015–16 to 2018–19: Final Decision – Overview, April 2015, 37–43. 226 AER, ActewAGL Distribution Determination 2015–16 to 2018–19: Final Decision – Overview, April 2015, 36–41. 227 Application by Ausgrid, File Number ACT 4 of 2015, filed 21 May 2015; Application by ActewAGL Distribution, File Number ACT 5 of 2015, filed 21 May 2015; Application by Essential Energy, File Number ACT 7 of 2015, filed 21 May 2015. Judicial review applications include Federal Court file numbers NSD 609 (Ausgrid), 610 (Essential Energy) of 2015, and VID 277/2015 (ActewAGL). On 30 March 2016, the Federal Court ordered that the judicial review applications made by the New South Wales and Australian Capital Territory electricity distributors be stood over to a date to the fixed following the conclusion of the AER’s judicial review applications of the Tribunal’s determinations relating to those distributors. 228 Applications by Public Interest Advocacy Centre Ltd and Ausgrid [2016] ACompT 1, [496].

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businesses and including a “bottom up” review of the service provider’s forecast operating expenditure.229 On 24 March 2016, the AER applied to the Federal Court for judicial review of the Tribunal’s determinations seeking orders that the Tribunal’s determinations be set aside and the matters referred back to the Tribunal for further consideration, including on the basis that the Tribunal was in error in concluding that the AER placed too much weight on the outcome of the benchmarking model in estimating forecast operating expenditure.230 At the time of writing those judicial review applications had not been heard or determined.

Procedure for making distribution and transmission determinations [8.480]

Table 8.3 sets out the key procedural steps in the making of distribution and transmission determinations. The process for making a determination starts around two-and-a-half years before the commencement of the regulatory control period to which that determination will apply. As regulatory control periods are usually five years long, the process for making the determination to apply in the following regulatory control period commences approximately two-and-a-half years after the conclusion of the previous determination process, with the result that regulated businesses, the AER and other stakeholders are in an ongoing cycle of either preparing for, or going through, a determination process. Table 8.3 Key procedural transmission determinations

steps:

Step Service provider may request the AER to make an amended or replacement framework and approach paper (see description of framework and approach paper below)231 AER publishes a notice inviting submissions on whether it is necessary or desirable to amend or replace the framework and approach paper232

Electricity

distribution

and

Timing No later than 32 months before the end of the regulatory control period

No later than 31 months before the end of the regulatory control period

229 Applications by Public Interest Advocacy Centre Ltd and Ausgrid [2016] ACompT 1; Applications by Public Interest Advocacy Centre Ltd and Essential Energy [2016] ACompT 3; Application by ActewAGL Distribution [2016] ACompT 6. 230 Federal Court file numbers NSD 415 (Ausgrid), 416 (Essential Energy), 418 (Endeavour Energy), 419 (ActewAGL Distribution) of 2016. See also AER media release: AER, “AER Appeals Against Electricity and Gas Price Decisions” (Media Release, NR 05/16, 24 March 2016). 231 NER, Ch 6, cl 6.8.1(c)(1) (distribution); Ch 6A, cl 6A.10.1A(c)(1) (transmission). 232 NER, Ch 6, cl 6.8.1(c)(2) (distribution); Ch 6A, cl 6A.10.1A(c)(2) (transmission).

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Step AER publishes a notice stating it will make an amended or replacement framework and approach paper in respect of the matters which the service provider has requested (if any) and states whether it will make an amended or replacement framework and approach paper in respect of any other matter233 Service provider informs the AER of the methodology it proposes to use to prepare the forecasts of operating expenditure and capital expenditure that form part of its regulatory proposal234 AER publishes framework and approach paper235 Service provider submits regulatory proposal (see description of regulatory proposal below)236 AER conducts preliminary examination of proposal to consider if it complies with requirements of NEL and NER and may notify service provider that it requires resubmission of proposal237 Resubmission of proposal by service provider if notice given by the AER that the proposal does not comply with a requirement of the NEL or the NER238 AER publishes proposal and invites written submissions on proposal239 AER publishes: issues paper identifying preliminary issues the AER considers are likely to be relevant to its assessment of the proposal; invitation for written submissions on issues paper; and invitation to attend a public forum on issues paper240 Submissions on proposal or issues paper accepted241

233 234 235 236 237 238 239 240 241

NER, NER, NER, NER, NER, NER, NER, NER, NER,

Ch Ch Ch Ch Ch Ch Ch Ch Ch

6, 6, 6, 6, 6, 6, 6, 6, 6,

cl cl cl cl cl cl cl cl cl

Timing No later than 30 months before the end of the regulatory control period

At least 24 months before the expiry of the distribution determination (or if no determination applies to the service provider, within three months after being required to do so by the AER) 23 months before the end of the current regulatory control period At least 17 months before the expiry of a determination (or if no determination applies to the service provider, within three months after being required to do so by the AER) AER must give notice as soon as practicable

Within 20 business days of receiving AER notice (distribution) Within one month of receiving AER notice (transmission) No specified timeframe – publication of the proposal is after the AER decides that the proposal complies with requirements of NEL and NER Not more than 40 business days after submission of proposal Public forum to be held not more than 10 business days after publication of issues paper By the time specified in the invitations to make submissions on proposal or issues paper, which must not be earlier than 30 business days after the publication of the issues paper

6.8.1(c)(3) (distribution); Ch 6A, cl 6A.10.1A(c)(3) (transmission). 6.8.1A (distribution); Ch 6A, cl 6A.10.1B (transmission). 6.8.1(e) (distribution); Ch 6A, cl 6A.10.1A(e) (transmission). 6.8.2(b) (distribution); Ch 6A, cl 6A.10.1(a) (transmission). 6.9.1 (distribution); Ch 6A, cl 6A.11.1 (transmission). 6.9.2(a) (distribution); Ch 6A, cl 6A.11.2 (transmission). 6.9.3(a) (distribution); Ch 6A, cl 6A.11.3(a) (transmission). 6.9.3(b) (distribution); Ch 6A, cl 6A.11.3(b) (transmission). 6.9.3(c) (distribution); Ch 6A, cl 6A.11.3(c) (transmission).

8 Electricity Step AER makes and publishes a draft determination, and a notice of a predetermination conference and an invitation for written submissions on the draft determination242 Submissions on draft determination accepted243 Service provider may submit revised proposal (not mandatory) (see further detail on revised proposal below)244 AER invites submissions on revised proposal (not mandatory)245 Submissions on submissions to the revised proposal (not mandatory)246

AER publishes any analysis undertaken by or for it on which it proposes to rely, or to which it proposes to refer, for the purposes of the determination247 AER makes final determination248

223

Timing As soon as practicable after the submission of the proposal by the service provider By the time specified in the invitation to make submissions on the draft, which must not be earlier than 45 business days after the making of the draft determination Not more than 45 business days after the publication of the draft determination No time specified Invitation to make submissions on submissions to the revised proposal must specify the time for making submissions, which must not be earlier than 15 business days after date invitation was published AER must use best endeavours to publish any such material a reasonable time prior to the making of the determination No specified timing for making of final determination, but see timing of next step As soon as practicable, but not later than two months before the commencement of the relevant regulatory control period

AER publishes notice of the making of the final determination, the final determination, and the reasons for making the determination in its final form249 Following the AER’s final determination, a Service provider (or other affected party) may seek merits review or judicial review of service provider (or other affected party) may seek merits review of the final the AER’s decision determination (or particular decisions made in the final determination) pursuant to s 71B of the NEL. Appendix A also provides information on the merits review proceedings that have been considered by the Australian Competition Tribunal to date. A service provider or other aggrieved party may also be able to apply for judicial review of the AER’s final determination under the Administrative Decisions (Judicial Review) Act 1977 (Cth) (“ADJR Act”) or under s 39B of the Judiciary Act 1903 (Cth)

242 NER, Ch 6, cl 6.10.1(a) and 6.10.2(a) (distribution); Ch 6A, cll 6A.12.1(a) and 6A.12.2(a) (transmission). 243 NER, Ch 6, cl 6.10.2(c) (distribution); Ch 6A, cl 6A.12.2(c) (transmission). 244 NER, Ch 6, cl 6.10.3(a) (distribution); Ch 6A, cl 6A.12.3(a) (transmission). 245 NER, Ch 6, cl 6.10.3(e) (distribution); Ch 6A, cl 6A.12.3(g) (transmission). 246 NER, Ch 6, cl 6.10.4 (distribution); Ch 6A, cl 6A.12.4 (transmission). 247 NER, Ch 6, cl 6.11.1(c) (distribution); Ch 6A, cl 6A.13.1(a2) (transmission). 248 NER, Ch 6, cl 6.11.1 (distribution); Ch 6A, cl 6A.13.1 (transmission). 249 NER, Ch 6, cl 6.11.2 (distribution); Ch 6A, cl 6A.13.2A (transmission).

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Framework and approach paper

[8.490]

A framework and approach paper is designed to provide an early indication to a service provider as to the approach the AER is likely to take on certain matters. This is to assist the service provider in preparing its proposal.

For distribution determinations, the framework and approach paper is required to, among other things, set out the AER’s decision on the form (or forms) of the control mechanism.250 It is also required to set out the approach the AER proposes to take to certain matters in the forthcoming distribution determination, including: • the classification of distribution services; • the application to the DNSP of the various incentive schemes; • the application to the DNSP of the Expenditure Forecast Assessment Guidelines.251 For transmission determinations, the primary role of the framework and approach paper is to set out the AER’s proposed approach in the forthcoming determination to the application to the TNSPs of any incentive schemes and the Expenditure Forecast Assessment Guidelines.252 The framework and approach paper process does not need to be followed where there is already a framework and approach paper in place with respect to a relevant matter and it is not proposed to amend or replace that framework and approach paper in respect of that matter.253 Regulatory/revenue proposals

[8.500]

Regulatory proposals for DNSPs and revenue proposals for TNSPs are required to contain the information specified in the NER. This includes details of forecast capital and operating expenditure amounts and the methods used to forecast these amounts. The NER require the service provider to set out the key assumptions underlying the forecasts and provide a certification of the reasonableness of these assumptions by the directors of the service provider.254

A regulatory proposal for a DNSP is also required to contain: • a classification proposal that sets out how the DNSP considers the distribution services provided by the DNSP should be classified; and 250 NER, Ch 6, cl 6.8.1(b). 251 NER, Ch 6, cl 6.8.1(b)(2). 252 NER, Ch 6A, cl 6A.10.1A(b). 253 NER, Ch 6, cl 6.8.1(a) (distribution); Ch 6A, cl 6A.10.1A(a) (transmission). 254 NER, Ch 6, cll 6.3.1(c), 6.8.2(c) and S6.1 (distribution); Ch 6A, cl 6A.4.1(b) and S6A.1.

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• indicative prices for direct control services for each year of the regulatory control period.255 Revised proposal

[8.510]

A service provider is not required to submit a revised proposal following the draft decision. However, if the service provider does submit a revised proposal, the service provider may only make revisions to incorporate the substance of any changes required by the draft or to address matters raised in the draft.256

Rights of review

[8.520]

Following the AER’s publication of the final determination, a service provider (or another affected or interested person or body) may seek merits review of the final determination (or particular decisions made in the final determination) pursuant to s 71B(1) of the NEL. All of the relevant issues related to merits review, including the requirements for obtaining leave, the grounds of review and the requirements that must be addressed in an application, are set out in Ch 12. Appendix A sets out details of the merits reviews that have been taken of final determinations.

A service provider or other aggrieved party may also be able to apply for judicial review of the AER’s final determination under the ADJR Act or under s 39B of the Judiciary Act 1903 (Cth). The relevant issues related to judicial review are also set out in Ch 12.

Access disputes [8.530]

If a prospective network service user or network service user is unable to agree with a network service provider about one or more aspects of access to an electricity network service, the user or prospective user or the network service provider may notify the AER that an access dispute exists.257

Where the access dispute has been notified by a user or prospective user, the AER is required to notify the network service provider of the access dispute.258 Where the dispute has been notified by the network service provider, the AER is required to notify the user or prospective user of the access dispute.259 The parties to an access dispute are the user (or prospective user) and the network service provider.260 If the AER considers that resolution of the 255 NER, Ch 6, cl 6.8.2(c) (distribution). 256 NER, Ch 6, cl 6.10.3(b) (distribution); Ch 6A, cl 6A.12.3(b) (transmission). 257 NEL, s 125(1). 258 NEL, s 125(3)(a). 259 NEL, s 125(3)(b). 260 NEL, s 127(a) and (b).

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access dispute may involve requiring another person to do something, that other person will also be a party to the dispute.261 A person who applies in writing to be a party and who is accepted by the AER as having a sufficient interest will also be a party to an access dispute.262 Unless the AER terminates an access dispute, the AER must make a determination on access by the user or prospective user.263 The circumstances in which the AER may terminate an access dispute include if the AER considers that: • the notification of the access dispute was vexatious; • the subject matter of the dispute is trivial, misconceived or lacking in substance; • the party who notified the access dispute had, but did not avail itself of, an opportunity to engage in negotiations in good faith with the other party before notifying the dispute.264 The AER may also terminate an access dispute if it considers that the aspect of access about which there is a dispute is expressly or impliedly dealt with under an access agreement between the user or prospective user, and the network service provider.265 It is required to terminate an access dispute, without making an access determination, if it considers that the service the subject of the dispute could be provided on a genuinely competitive basis by a person other than the network service provider, or an associate of the provider.266 In making an access determination, the AER must give effect to a network revenue or pricing determination that applies to the services provided (or to be provided) that are the subject of dispute, and that is in effect at the time the determination is made.267 A party to an access dispute in respect of which an access determination is made must comply with the access determination.268 Upon receiving a notification of an access dispute, the AER may require the parties to mediate, conciliate or engage in another alternative dispute resolution process for the purpose of resolving the access dispute.269 261 NEL, s 127(c). 262 NEL, s 127(d). 263 NEL, s 128(1). 264 NEL, s 131(1)(a), (b) and (c). 265 NEL, s 131(2). 266 NEL, s 132. The term “associate” is defined in the NEL (s 2) to have the same meaning it would have under Div 2 of Pt 1.2 of the Corporations Act 2001 (Cth) if ss 13, 16(2) and 17 did not form part of that Act. 267 NEL, s 130. 268 NEL, s 136. 269 NEL, s 129(1).

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A dispute hearing is private, unless the parties agree to a dispute hearing, or part thereof, being conducted in public.270

SUMMARY [8.540]

The provision of electricity services in Australia over the past 20 years has been the subject of relatively rapid and ongoing change. Significant structural changes were made in the 1990s to separate out the monopoly elements of electricity supply chain (transmission and distribution) from the potentially competitive elements (generation and distribution) and an access code was developed to regulate the terms and conditions of access to transmission and distribution networks. In the 2000s, the institutional framework applying to network regulation was reformed with the introduction of an independent regulator responsible for the economic regulation of electricity networks (the AER in states and territories other than Western Australia and the Northern Territory), and a body responsible for making the rules covering the economic regulation of electricity networks (the AEMC). At the centre of the economic regulation of electricity networks is the building block model. The key determinations that are made in implementing this model include: the value of the assets comprising the network (the regulatory asset base); the rate of return; and forecast operating and capital expenditure over the relevant regulatory period. Incentive schemes have a key role in the economic regulation of electricity networks and are directed at balancing efficient expenditure, service quality, and innovation. In light of concerns about electricity prices, and the contribution that electricity network charges make to those prices, the economic framework and relevant regulatory institution have come under increasing scrutiny. Significant amendments were made to the NER and to elements of the broader regulatory framework in 2012 and 2013, and it is expected that the regulatory framework will continue to develp over time.

270 NEL, s 137(1) and (2).

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Questions for Discussion 1. Reflecting on the policy discussions and the commitments of the participating jurisdictions to reform of the electricity industry, how successfully has the reform agenda been implemented, and what may have contributed to its success/failure? 2. What are the various building block components relevant to determining regulated revenues? 3. How is the AER required to assess a service provider’s building block proposal? 4. What are the benefits/detriments to a highly detailed access regime? 5. If you were the regulator, how would you give effect to the national electricity objective in making a regulatory determination?

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[9.10] OVERVIEW ........................................................................................................................................ 229 [9.20] THE GAS SUPPLY CHAIN ............................................................................................................. 230 [9.20] Overview ............................................................................................................................................ 230 [9.30] HISTORY OF ACCESS REGULATION IN THE GAS SECTOR ............................................... 233 [9.40] 1990s reform ahead of the GPAL ................................................................................................... 233 [9.100] 2000s reform ahead of the NGL and NGR and beyond .......................................................... 241 [9.110] CURRENT REGULATORY FRAMEWORK AND ROLE OF THE REGULATOR ............... 243 [9.110] Scope of regulation .......................................................................................................................... 243 [9.120] Full regulation .................................................................................................................................. 245 [9.240] Light regulation ............................................................................................................................... 259 [9.270] No regulation ................................................................................................................................... 262 [9.280] CURRENT REGULATORY LANDSCAPE .................................................................................. 263 [9.280] What gas assets are currently regulated? ................................................................................... 263 [9.290] Recent issues .................................................................................................................................... 265 [9.340] SUMMARY ....................................................................................................................................... 270

OVERVIEW [9.10] In Australia, the regulatory framework that applies to gas transmission and distribution pipelines is set out in the National Gas Law (“NGL”)1 and the National Gas Rules (“NGR”), as applied in each of the states and territories. The regulatory framework provides for varying degrees of regulatory intervention (full regulation, light regulation and no regulation) depending on the degree of market power the pipeline possesses and the extent to which that market power may be constrained (for example, by direct competition from another pipeline, by competition from alternative energy sources or by the countervailing power of users). This chapter explores the concepts and issues related to access regulation as it applies to gas pipelines. Commencing with an overview of the gas supply chain, the chapter then outlines the policy and legislative history of gas pipeline access regulation. The history can be divided into two stages: 1. the reviews and reforms carried out in the 1990s, which ultimately led to the introduction of the first gas access regime – this comprised the arrangements set out in the Gas Pipelines Access Law (Sch 1 to the Gas Pipeline Access (South Australia) Act 1997 (SA) (repealed) as implemented 1 The NGL is contained in the Schedule to the National Gas (South Australia) Act 2008 (SA).

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in participating jurisdictions2) (“GPAL”) and the National Third Party Access Code for Natural Gas Pipeline Systems (“Gas Code”) (together, the “Previous Gas Access Regime”), which was introduced in 1997; and 2. the reviews and reforms carried out in the early 2000s, which ultimately led to the introduction of the current regulatory framework on 1 July 2008 (the NGL and the NGR; together, the “Gas Access Regime”), as implemented by each of the states and territories.3 The chapter then sets out in detail how access regulation is currently applied to “covered” pipelines, with particular emphasis placed on: • how pipelines can become “covered” and subject to either full or light regulation; • the role that the regulator (the Economic Regulation Authority (“ERA”) in Western Australia4 and the Australian Energy Regulator (“AER”) in all other jurisdictions) plays in assessing the price and non-price terms and conditions of access to pipelines that are subject to full regulation; and • the key differences between the Gas Access Regime and the regulatory regime that is applied in electricity. The chapter closes with a discussion of the gas pipelines currently subject to access regulation and recent policy developments in this area.

THE GAS SUPPLY CHAIN Overview [9.20] The gas supply chain is depicted in Figure 9.1. 2 The Application Acts, which applied the GPAL as a law in the participating jurisdictions were the Gas Pipeline Access (Commonwealth) Act 1998 (Cth), Gas Pipelines Access Act (Australian Capital Territory) 1998 (ACT), Gas Pipelines Access (New South Wales) Act 1998 (NSW), Gas Pipelines Access (Northern Territory) Act (NT), Gas Pipelines Access (Queensland) Act 1998 (Qld), Gas Pipelines Access (Tasmania) Act 2000 (Tas), Gas Pipelines Access (Victoria) Act 1998 (Vic), Gas Pipelines Access (Western Australia) Act 1998 (WA). 3 The Application Acts, which applied the NGL as a law in the relevant state or territory, were passed in all states but Western Australia by 1 July 2008: , National Gas (New South Wales) Act 2008 (NSW), s 7, National Gas (Victoria) Act 2008 (Vic), s 7, National Gas (Queensland) Act 2008 (Qld), s 7, National Gas (Tasmania) Act 2008 (Tas), s 7, National Gas (ACT) Act 2008 (ACT), s 8, National Gas (Northern Territory) Act 2008 (NT), s 7. The Application Act in Western Australia received Royal Assent on 1 September 2009 with the provisions enacting the NGL as law in Western Australia commencing on 1 January 2010: National Gas Access (Western Australia) Act 2009 (WA). 4 At the time of writing, the Western Australian Department of Finance – Public Utilities Office was undertaking the Transfer of Regulatory Functions Project to, among other things, develop and implement legislative changes to the National Gas Access (WA) Act 2009 (WA) to transfer regulatory functions for regulating Western Australian gas pipelines from the ERA to the AER: see, Government of Western Australia Department of Finance, Transfer of Regulatory Functions Project (27 November 2015) .

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Figure 9.1 Gas supply chain

The first stage of the supply chain encompasses both the exploration and production phases. Natural gas5 in Australia is extracted from underground wells in both offshore and onshore fields and then processed into pipeline-quality gas for domestic markets or liquefied natural gas (“LNG”) for export. The gas is processed at appropriate processing facilities, such as the gas processing plant at Longford, Victoria. There are many companies that explore and produce natural gas in Australia, including international majors (such as BP, Esso, BHP Billiton, BG, and Chevron), and Australian majors (such as Santos, Origin Energy, and Woodside Petroleum) and juniors (such as Beach Energy).6

5 “Natural gas”, or simply “gas”, is the term commonly used to describe methane gas sourced from naturally occurring geological formations in the earth. 6 AER, State of the Energy Market 2014, 88.

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The second stage of the supply chain involves the transportation of gas along transmission pipelines7 from processing or storage facilities to the entry point of distribution networks or to end-users or facilities connected to the transmission pipeline (for example, gas fired generators, LNG facilities, mining companies or large industrial customers). Transmission pipelines are typically wider in diameter than distribution pipelines and operate under high pressure to optimise shipping capacity. In order to minimise damage and ensure continued, uninterruptible services, transmission pipelines are typically placed underground.8 The third stage of the supply chain involves the distribution of gas9 through gas distribution networks. These networks typically reticulate natural gas from transmission pipelines to smaller industrial and retail customers. Gas distribution networks tend to comprise high-, medium- and low-pressure pipelines. The high- and medium-pressure pipelines service high-demand population areas and provide the “backbone” of the system (such as transporting gas between population concentrations within a distribution area). The low-pressure pipelines supply gas to end customers.10 The fourth stage of the supply chain involves the retail supply of gas. For residential and smaller industrial customers, gas retailers represent the interface between producers and pipeline owners and consumers. Retailers purchase gas from producers and transportation services from pipeline operators and sell gas on a delivered basis to retail customers. Following reforms over the past few years, there is now full retail contestability of gas supply in all Australian states.11 The transmission pipelines and distribution networks in Australia – the elements of the gas supply chain that are subject to access regulation – are discussed at [9.280].

7 The NGL, s 2 defines “transmission pipeline” as “a pipeline that is classified in accordance with this Law or the Rules as a transmission pipeline and includes any extension to, or expansion of the capacity of, such a pipeline when it is a covered pipeline that, by operation of an applicable access arrangement or under this Law, is to be treated as part of the pipeline.” 8 AER, State of the Energy Market 2014, 110–113. 9 The NGL, s 2 defines “distribution pipeline” as “a pipeline that is classified in accordance with this Law or the Rules as a distribution pipeline and includes any extension to, or expansion of the capacity of, such a pipeline when it is a covered pipeline that, by operation of an applicable access arrangement or under this Law, is to be treated as part of the pipeline”. 10 AER, State of the Energy Market 2014,110–113. 11 The Australian Energy Market Operator (“AEMO”) provides the necessary infrastructure so that gas consumers can contract with their retailer of choice: see AEMO, Retail Gas Markets .

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HISTORY OF ACCESS REGULATION IN THE GAS SECTOR [9.30] The access regime that currently applies to “covered” pipelines is set out in the Gas Access Regime, which, as noted at [9.10], comprises the NGL and the NGR as implemented in each of the states and territories. The Gas Access Regime was introduced on 1 July 2008 with the South Australian Government acting as the lead legislator – it passed the Act that contained the National Gas Law as a Schedule to an Act (the National Gas (South Australia) Act 2008 (SA)). With the exception of Western Australia, state and territory governments passed Application Acts adopting the Gas Access Regime in their particular jurisdictions with effect from 1 July 2008.12 In Western Australia, a varied form of the NGL commenced with effect from 1 January 2010.13 Prior to 1 July 2008, “covered” pipelines were regulated pursuant to the GPAL, which was introduced in 1997. For an overview of the reviews and reforms that led to the implementation of the GPAL see [9.40] and of the NGL see [9.100]. 1990s reform ahead of the GPAL [9.40] In the early 1990s, the Commonwealth Government asked the Industry Commission (the predecessor to the Productivity Commission) to report on, among other things, “the scope for improving the efficiency of electricity generation, transmission and distribution, and gas transmission and distribution”.14 The Industry Commission’s Energy Distribution and Generation Report released on 17 May 1991 was the first detailed review of the reforms required in the gas sector.15 The Industry Commission found that, in the gas sector in Australia, there was a: lack of competition [that] reflects the natural monopoly characteristics of transmission and distribution, the dedicated nature of existing supply systems, and the limited extent of interstate trade in natural gas. This latter feature is a result of the highly dispersed nature of gas fields relative to available markets and the high costs of connection, together with institutional factors which have constrained, and continue to constrain, gas trading between states. Vertical integration between transmission and distribution in some states (e.g. Victoria 12 New South Wales – National Gas (New South Wales) Act 2008 (NSW), s 7; Victoria – National Gas (Victoria) Act 2008 (Vic), s 7; Queensland – National Gas (Queensland) Act 2008 (Qld), s 7; Tasmania – National Gas (Tasmania) Act 2008 (Tas), s 7; Australian Capital Territory – National Gas (ACT) Act 2008 (ACT), s 8; Northern Territory – National Gas (Northern Territory) Act 2008 (NT), s 7. 13 The Explanatory Memorandum stated that Western Australia had unique circumstances such that, while there were benefits to participation in a national access regime, “the different nature of Western Australia’s energy market means that it would be inappropriate to commit to broader national regulation at this stage”: see Explanatory Memorandum, National Gas Access (Western Australia) Bill 2008 (WA), 2. See, also, National Gas Access (WA) Act 2009 (WA), Sch 1. 14 Industry Commission, Energy Generation and Distribution, Report No 11, 1991, Canberra. 15 Industry Commission, Energy Generation and Distribution, Report No 11, 1991, Canberra.

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and Western Australia) and contractual arrangements between these industry segments in other states also limit opportunities for competition. As a result, the natural gas market is relatively “thin”, with a single seller facing a single buyer in most states/territories.16

These findings led the Industry Commission to recommend the following reforms to promote competition in the gas industry: • government-owned gas assets should be privatised and vertically integrated transmission and distribution assets separated; • transmission and distribution pipeline operators should provide open access to the services provided by their pipelines; and • other legislative barriers and constraints on the free trade of gas should be removed. A National Strategy for the Natural Gas Industry – a discussion paper released in July 1991 – set out a number of questions for stakeholders to consider, including whether a third party access regime is required to encourage a competitive market for gas.17

[9.50] Following consultation on the discussion paper A National Strategy for the Natural Gas Industry, in 1992, the Council of Australian Governments (“COAG”) noted that there were “barriers to trade in natural gas which could inhibit the development of the gas industry and discourage exploitation and commercial development of gas markets and related infrastructure”18 and asked the Australian and New Zealand Minerals and Energy Council19 (“ANZMEC”) to explore these issues more thoroughly. Specifically, COAG asked ANZMEC to provide a report that: • identified and reviewed existing legislative or other governmentimposed impediments and barriers to free and fair trade in natural gas, within and between jurisdictions; • recommended action to remove impediments and barriers to free and fair trade in natural gas, within and between jurisdictions; 16 Industry Commission, Energy Generation and Distribution, Report No 11, 1991, Canberra, 139. 17 Department of Primary Industries and Energy, A National Strategy for the Natural Gas Industry, A Discussion Paper (1991, Australian Government Printing Service, Canberra). 18 See COAG Communiqué of 7 December 1992, . 19 The ANZMEC was a COAG Ministerial Council comprising the Commonwealth Minister for Industry, Science and Resources, the State and Territory Ministers with responsibility for minerals and energy, and the New Zealand Minister for Energy. Pursuant to a COAG Communiqué of 8 June 2001, the energy component of the ANZMEC was subsumed by a new COAG council, the Ministerial Council on Energy. Further reform of the COAG councils in February 2011 saw the functions of the Ministerial Council on Energy subsumed by the new Standing Council on Energy and Resources. Following further streamlining of the council structure in December 2013, the COAG Energy Council was created and now has responsibility for pursuing national energy reforms: see COAG Communiqués of 8 June 2001, 13 February 2011 (Attachment C), and 13 December 2013.

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• outlined the work required to move toward a more uniform pipeline approvals process between states and territories for pipeline development, including the recommended basis for third party access to gas transmission pipelines; and • achieved COAG’s objective of free and fair trade in gas.20 While ANZMEC was preparing its report for COAG, the Energy Board of Review (a review board established by the Government of Western Australia in February 1992) was also considering the benefits of restructuring the gas and electricity industries in Western Australia. The Energy Board of Review’s report, The Energy Challenge for the 21st Century (also referred to as the “Carnegie Report”, after the Chairman of the Energy Board of Review, Roderick Carnegie), was published in April 1993 and set out recommendations related to the electricity and gas industries in Western Australia.21 After analysing the gas industry in detail, the Energy Board of Review concluded that the State Energy Commission of Western Australia (“SECWA”) (the then vertically integrated energy provider in Western Australia) was performing poorly despite charging “high” prices as a consequence of limited competitive pressure. To facilitate greater competition in the gas industry, the Energy Board of Review recommended that: • SECWA’s energy businesses be structurally and vertically separated;22 • open access to Western Australia’s gas transmission pipelines be provided by the separate gas transmission provider;23 and • the gas transmission provider be given a clear obligation to increase throughput capacity and extend its transmission system as required by the gas market on a commercial basis.24 The ANZMEC report was provided to COAG in June 1993. The report’s conclusions and recommendations for the broader Australian context were similar to those in the Carnegie Report. Following consideration of the ANZMEC report in June 1993, COAG agreed to develop reforms for the gas sector. At the same time, the Hilmer Committee was considering a broader reform agenda across many sectors of the Australian economy (see Ch 3 for further discussion of the Hilmer Report25). 20 See COAG Communiqué of 7 December 1992, . 21 Energy Board of Review (WA), The Energy Challenge for the 21st Century, April 1993 (“Carnegie Report”). 22 Carnegie Report, 22. 23 Carnegie Report, 53. 24 Carnegie Report, 52. 25 Frederick Hilmer (Chair), Mark Rayner, and Geoff Taperell, National Competition Policy – Report by the Independent Committee of Inquiry (25 August 1993, Australian Government Publishing Service, Canberra).

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[9.60] Following a COAG report that gave further consideration to the ways in which the regulatory framework for the natural gas industry could achieve greater competition both within and between states and territories, and the Hilmer Report, COAG agreed on 25 February 1994 to (among other things): • remove legislative and regulatory barriers to gas trade; • implement third party access legislation; • corporatise gas utilities; and • vertically separate publicly owned transmission and distribution businesses and introduce legislation to ring-fence these businesses in the private sector.26 On 11 April 1995, three intergovernmental agreements were signed by COAG: • The Competition Principles Agreement – which established principles for the structural reform of public monopolies, competitive neutrality between the public and private sectors, prices oversight of governmenttrading enterprises, access to essential facilities, and a review of legislation restricting or limiting competition. • The Conduct Code Agreement – which sought to extend the coverage of the then Trade Practices Act 1974 (Cth) (“TPA”) (now the Competition and Consumer Act 2010 (Cth) (“CCA”)) to unincorporated businesses and government-trading enterprises. It started the process for modifying the TPA and other relevant law, and the appointment of the Australian Competition and Consumer Commission (“ACCC”). It also committed states and territories to enact legislation to give effect to the Australian Government’s new TPA and other relevant competition legislation. • The Agreement to Implement the NCP and Related Reforms – which provided for payments by the Australian Government to the state and territory governments. In return, the state and territory governments agreed to obligations under the agreement, the Conduct Code Agreement and reform commitments in electricity, gas, water and road transport.27 Clause 6 of the Competition Principles Agreement establishes the framework for third party access under both Pt IIIA of the CCA and state and territory access regimes.

[9.70] Despite the Hilmer recommendations not to regulate each industry specifically, COAG decided to implement industry-specific access legislation for gas (see Box 9.1 for further details on why an industryspecific regime was adopted). To this end, COAG established the Gas Reform Taskforce in June 1995 to accelerate the development of a national 26 COAG, Communiqué, Attachment B – Free and Fair Trade in Gas, 25 February 1994, . 27 COAG, Meeting Minutes, 11 April 1995, .

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framework for implementing reforms for the gas industry. The main focus of the Taskforce was the development of a third party access code to enable effective access to pipeline facilities. The Taskforce included representatives from the Australian Government, state and territory governments, the Australian Gas Association, the Australian Pipeline Industry Association, the Australian Petroleum Production and Exploration Association, the Business Council of Australia, the National Competition Council (“NCC”) and the ACCC. The Taskforce released a scoping study in December 1995, a draft Code in July 1996, and a revised version of the Code in November 1996. In February 1997, the Taskforce was replaced by the Gas Reform Implementation Group. Box 9.1: Why did COAG prefer an industry-specific gas access regime? In implementing industry-specific legislation, the Australian Government considered that a gas access regime would enhance certainty, uniformity and consistency compared with implementing a Pt IIIA regime: Compared to relying on the Part IIIA [of the TPA] regime, this approach will enhance certainty, uniformity and consistency – outcomes which will assist the expansion of the market for gas and encourage investment in pipelines. The scheme to be applied involves a balance between flexibility, required to deal with the individual circumstances of pipelines and customers, and a level of prescription to ensure consistency of treatment … In the absence of a national approach (the do nothing approach), the alternative is to leave it to each pipeline owner to develop an access arrangement as a specific undertaking to be approved by the [ACCC], or for each jurisdiction to pass specific gas pipeline access legislation. Either course would result in a proliferation of differing regulatory arrangements with the potential to create “rail gauge” problems, damaging development of a national market for gas, with adverse consequences for economic growth and Australia’s international competitiveness. A proliferation of individual regimes involving regulatory arrangements and institutions of varying quality was already occurring.28

An industry-specific gas access regime was expected to bring a range of benefits, including: • increased security of supply through a competitive system; • increased competition between alternative fuels and consumer price competition; • lower unit gas supply costs; • more cost-effective gas pricing to end users (from an economic point of view) as cross subsidies were phased out; 28 Explanatory Memorandum, Gas Pipelines Access (Commonwealth) Bill 1997 (Cth), [32]–[33].

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• lower greenhouse gas emissions and pollutants generally; and • gains in microeconomic activity, through investment, higher production and enhanced employment opportunities.29

[9.80] The Natural Gas Pipelines Access Agreement was signed by COAG on 7 November 1997. This agreement was the precursor to the GPAL. By signing the Agreement, each state and territory government agreed to enact the Gas Code as a law of its state or territory. South Australia introduced lead legislation establishing the third party access regime for gas pipelines (the GPAL) and other states and territories (except Western Australia30) introduced Application Acts, which enacted the relevant parts of the South Australian Act comprising the GPAL as law in that jurisdiction.31 Under cl 2 of the Agreement, the objectives of the Gas Code were to: 1 facilitate the development and operation of a national market for natural gas; 2 prevent abuse of monopoly power; 3 promote a competitive market for natural gas in which customers may choose suppliers, including producers, retailers and traders; 4 provide rights of access to natural gas pipelines on conditions that are fair and reasonable for both service providers and users; and 5 provide for resolution of disputes. The Gas Code was certified by the NCC as an effective access regime under Pt IIIA of the TPA in 1997.32 An important feature of the Gas Code was that it only applied to “covered” pipelines (or particular parts of the pipeline that were covered).33 Owners 29 Bills Digest No 126, Gas Pipelines Access (Commonwealth) Bill 1997 (Cth), . 30 In Western Australia, the government passed legislation enacting a Western Australian regime that did not expressly refer to the GPAL but reflected the principles embodied in it. 31 NSW: Gas Pipelines Access (New South Wales) Act 1998 (NSW), s 7; Vic: Gas Pipelines Access (Victoria) Act 1998 (Vic), s 7; Qld: Gas Pipelines Access (Queensland) Act 1988 (Qld), s 8; Tas: Gas Pipelines Access (Tasmania) Act 2000 (Tas), s 7; ACT: Gas Pipelines Access Act 1998 (ACT), s 6; NT: Gas Pipelines Access (Northern Territory) Act (NT), s 7; and Commonwealth: Gas Pipeline Access (Commonwealth) Act 1998 (Cth), s 8. 32 NCC, National Gas Access Regime, September 1997. In the period between 1998 and 2006, the Australian Government (on the advice of the NCC) also progressively certified the South Australian, New South Wales, Australian Capital Territory, Tasmanian, Victorian, Northern Territory and Western Australian access regimes as effective for a period of 15 years. The regime in Queensland was not certified because it was found not to be effective (as it differed in a number of material respects from the Gas Code). 33 Section 3.16(a) of the Gas Code states that an access arrangement must include an extensions/expansions policy that sets out a “method to be applied to determine whether

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of pipelines that were not covered were not subject to any of the provisions in the Gas Code (other than the provisions dealing with how pipelines can become covered). Instead, these businesses were subject only to the general anticompetitive conduct provisions, such as s 46 (misuse of market power) of the CCA. The Gas Code enabled the coverage status of a pipeline to change over time. For instance, owners of covered pipelines could apply to the NCC for coverage to be revoked if they thought the pipeline no longer satisfied the coverage criteria. Similarly, users (or prospective users) of uncovered pipelines could apply to the NCC to have the pipeline covered if they thought the pipeline satisfied the coverage criteria.

[9.90] The key features of the Gas Code, including the four ways in which a pipeline could be covered, are set out in Table 9.1. Table 9.1 Key features of the Gas Code Element of regime Coverage

Explanation Under the Gas Code, a Pipeline34 could become “Covered”35 in four ways: 1. it was listed in Sch A to the Gas Code, in which case it was Covered from the commencement date of the Gas Code; 2. through an application to the NCC that the Pipeline become Covered and a decision by the Relevant Minister36 that the Pipeline satisfied all the criteria for Coverage37; 3. a Service Provider38 could voluntarily propose an Access Arrangement39 to apply to a Pipeline that was not Covered to the Relevant Regulator40 and, if the Access Arrangement was approved, the Pipeline became a Covered Pipeline until the expiry of that Access Arrangement; and 4. any person wanting to build a pipeline could apply to the Relevant Regulator to approve a competitive tender process and, if approved, the Pipeline became Covered.

any extension to, or expansion of the Capacity of, the Covered Pipeline: (i) should be treated as part of the Covered Pipeline for all purposes under the Code; or (ii) should not be treated as part of the Covered Pipeline for any purpose under the Code”. 34 Schedule 2 – National Third Party Access Code for Natural Gas Pipeline Systems to the Gas Pipelines Access (South Australia) Act 1997 (SA) (as introduced) (“Gas Code”), s 10.8. 35 36 37 38 39 40

Gas Gas Gas Gas Gas Gas

Code, Code, Code, Code, Code, Code,

s s s s s s

10.8. 10.8. 1.9. 10.8. 10.8. 10.8.

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Element of regime

Explanation Under the second option, all four criteria for Coverage had to be satisfied before a Pipeline could become Covered. When initially introduced, the coverage criteria in s 1.9 of the Gas Code were as follows: • that access (or increased access) to Services41 provided by means of the Pipeline would promote competition in at least one market (whether or not in Australia), other than the market for the Services provided by means of the Pipeline; • that it would be uneconomic for anyone to develop another Pipeline to provide the Services provided by means of the Pipeline; • that access (or increased access) to the Services provided by means of the Pipeline can be provided without undue risk to human health or safety; and • that access (or increased access) to the Services provided by means of the Pipeline would not be contrary to the public interest.42

Access arrangement

Under the Gas Code, the owner or operator of a Covered Pipeline43 was required to lodge an Access Arrangement with the Relevant Regulator and have that Access Arrangement approved by the Relevant Regulator. Among other things, the Access Arrangement had to set out the terms and conditions of access to a Reference Service(s),44 including the proposed Reference Tariff(s).45 It also had to include the following: • a Services Policy46 – explaining the Services that were to be offered to Users47 on the Covered Pipeline; • a Capacity Management Policy;48 • a Trading Policy49 – a mechanism for a User to transfer Capacity;50 • a Queuing Policy51 – determining the priority that Prospective Users52 have to negotiate for specific capacity;

41 42 43 44 45 46 47 48 49 50 51 52

Gas Gas Gas Gas Gas Gas Gas Gas Gas Gas Gas Gas

Code, Code, Code, Code, Code, Code, Code, Code, Code, Code, Code, Code,

s s s s s s s s s s s s

10.8. 1.9. 10.8. 10.8. 10.8. 3.1. 10.8. 3.7. 3.9. 10.8. 3.12. 10.8.

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Dispute resolution provisions

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Explanation • an Extensions/Expansions Policy53 – setting out a method for determining whether an extension or expansion was to be treated as part of the Covered Pipeline; and • review date – a date by which revisions had to be submitted and a date on which the revised Access Arrangement was intended to commence. While Reference Tariffs had to be approved by the Relevant Regulator, the Gas Code allowed Service Providers and Users and Prospective Users to agree to terms and conditions (including the tariff) that differed from those set out in the Access Arrangement.54 The Reference Tariff was therefore seen as a benchmark for access negotiations, particularly on Contract Carriage55 transmission Pipelines. While the Gas Code explicitly recognised that Users and Service Providers could agree to alternative terms and conditions (including tariffs) to those specified in the Access Arrangement, the dispute resolution provisions required the Arbitrator56 to apply the provisions of the Access Arrangement in the event of a dispute about access, or the terms and conditions of access.

2000s reform ahead of the NGL and NGR and beyond [9.100]

In the early 2000s, the energy reforms of the 1990s had become the subject of criticism. This was, in part, due to the far-reaching nature of the changes. It was also because, in some areas (such as South Australia), the reforms led “to what were considered to be unwarranted energy price rises because of … market power, and because of the large increase that occurred in many network asset values which significantly increased network prices”.57 This led COAG to request a review of the energy sector.

In 2002, COAG published the final report of the Parer Review,58 which found that Australia’s energy sector had “confused governance arrangements and excessive regulation” and that further reform was

53 Gas Code, s 3.16. 54 Gas Code, s 2.50(c). This point was highlighted in the following statement made by the Productivity Commission in its 2003–04 review into the Gas Access Regime: A service provider and access seeker are free to agree on terms and conditions that differ from those in the access arrangement. However, if an access dispute about a reference service arises, the arbitrator (relevant regulator or nominee) is required to impose the default terms and conditions set out in the access arrangement (for example, price will be set to the relevant reference service tariff). See Productivity Commission, Review of the Gas Access Regime, Inquiry Report No 31 (2004, Canberra), XXIV. 55 Gas Code, s 10.8. 56 Gas Code, s 10.8. 57 COAG, Towards a Truly National and Efficient Energy Market – Final Report of the Council of Australia Governments’ Independent Review of Energy Market Directions, December 2002 (“Parer Report”), 7. 58 Parer Report.

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required.59 The Parer Report highlighted that these problems have a large cost. It was noted that: “The confusion and excessive regulation increases uncertainty and may see participants decline to invest or apply a larger discount rate to their investments and decisions than otherwise. This results in higher costs to the community.”60 The Parer Report ultimately recommended a review of the Gas Code, which was undertaken by the Productivity Commission in 2003–04 (see Box 9.2 for key findings of the Productivity Commission’s inquiry). Box 9.2: Productivity Commission’s inquiry into the Gas Access Regime: Summary of recommendations The Productivity Commission’s final inquiry report on the Gas Access Regime, released on 11 June 2004, made a number of recommendations aimed at addressing concerns that the Gas Access Regime had the potential to distort investment in its then form. The Productivity Commission’s recommendations included:61 • the introduction of a “light-handed” regulatory option into the regime in circumstances where the potential for the exercise of market power was somewhat constrained; • the introduction of an overarching objects clause with a focus on promoting efficiency and removing inappropriate and conflicting objectives scattered through the regime; • revising the test for coverage so that coverage would only be applied in circumstances where coverage would be likely to materially increase competition in at least one market (and therefore bringing the first limb in the coverage criteria in line with the general declaration provisions in Pt IIIA of the CCA);62 • replacing the current guidelines for approving reference tariffs with a clear set of pricing principles; and • the introduction of a binding 15-year “no coverage” ruling for greenfields pipelines to reduce the “potential chilling effect” on investment.

59 Parer Report, 10. 60 Parer Report, 11. 61 Productivity Commission, Review of the Gas Access Regime, Inquiry Report No 31, 2004, Canberra, xxii. 62 CCA s 44G(2)(a).

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Following the Parer Review, COAG signed the Australian Energy Market Agreement, an intergovernmental agreement, on 30 June 2004.63 This agreement established the AER as the national economic regulator and the body responsible for monitoring and enforcing national energy legislation, and the Australian Energy Market Commission (“AEMC”) as a rulemaking and energy market development body.64 The Australian Energy Market Agreement also required the development and implementation of a national legislative framework for energy, leading to the introduction of the National Electricity Law and National Electricity Rules in 2005 (discussed in Ch 8) and the NGL and NGR in 2008.

CURRENT REGULATORY FRAMEWORK AND ROLE OF THE REGULATOR Scope of regulation [9.110]

The NGL is set out in the Schedule to the National Gas (South Australia) Act 2008 (SA) and came into effect on 1 July 2008. Similar to the GPAL, it is applied as a law of South Australia by that Act and in other jurisdictions by Application Acts.65 The NGL, together with the NGR, replaced the GPAL and the Gas Code. The objective of the NGL, as set out in s 23 of the NGL, is to promote efficient investment in, and efficient operation and use of, natural gas services for the long-term interests of consumers of natural gas with respect to price, quality, safety, reliability and security of supply of natural gas (the national gas objective). All pipelines that were covered under the Gas Code at the time of the transfer were deemed to be covered pipelines under the NGL.66 The Second Reading Speech highlights that the NGL retains the Gas Code structure in that economic regulation is only applied to covered pipelines that exhibit a level of market power and where the benefits of regulation 63 COAG, Australian Energy Market Agreement, 30 June 2004, . 64 Five years later, in 2009, the Australian Energy Market Operator (AEMO) was established to manage the National Electricity Market (NEM) and gas markets. In terms of its gas functions, the AEMO established and now oversees a short term trading market and the Victorian wholesale gas market. 65 NSW: National Gas (New South Wales) Act 2008 (NSW), s 7; Vic: National Gas (Victoria) Act 2008 (Vic), s 7; Qld: National Gas (Queensland) Act 2008 (Qld), s 7; Tas: National Gas (Tasmania) Act 2008 (Tas), s 7; ACT: National Gas (ACT) Act 2008 (ACT), s 8; NT: National Gas (Northern Territory) Act (NT), s 7. Note that a varied form of the Act commenced in Western Australia on 1 January 2010, the National Gas Access (Western Australia) Act 2009 (WA): see [9.30]. 66 NGL, Sch 3, Pt 3, cll 6 – 7.

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outweigh the costs.67 However, the NGL further distinguishes between the levels of market power a pipeline may possess by allowing pipelines that are to some extent constrained in their ability to exercise market power to be subject to “light” regulation. The NGL therefore has three tiers of regulation: 1. Full regulation – An owner of a pipeline that is subject to full regulation is required to periodically submit an access arrangement to the regulator for approval (typically the AER, but in Western Australian, the ERA). An access arrangement sets out the price and non-price terms and conditions of access to “reference services” provided by the pipeline to a third party. A reference service is a service likely to be sought by a significant part of the market, and an access arrangement must specify at least one reference service.68 The regulator is required to assess the proposed access arrangement in accordance with the price and revenue regulation provisions in the NGR. The NGL requires the regulator to perform or exercise its functions and powers with respect to the assessment of access arrangements in a manner that will or is likely to contribute to the national gas objective, and to take into account the revenue and pricing principles set out in s 24 of the NGL when exercising a discretion in approving or making those parts of an access arrangement relating to a reference tariff. See [9.120] for discussion of full regulation. 2. Light regulation – An owner of a pipeline that is subject to light regulation can determine its own tariffs but must publish these tariffs and other terms and conditions on its website. The owner of such a pipeline must also comply with the facilitation of, and request for, access rules in the NGR and report to the AER on access negotiations. While light regulation places greater emphasis on commercial negotiation and information disclosure, users or prospective users are accorded some degree of protection in negotiations through the following safeguards: • the dispute resolution mechanism in the NGL and NGR; • s 136 of the NGL, which prohibits a service provider of light regulation services from engaging in price discrimination, unless it is efficient to do so; and • ss 133 and 137 – 148 of the NGL, which are designed to prevent service providers from engaging in conduct that may adversely affect third party access or competition in other markets. See [9.240] for further detail on light regulation. 3. No regulation – An owner of a pipeline that is not covered is free (subject to the general operation of the CCA) to determine whether it will provide third party access to services provided by the pipeline and, if so, the terms and conditions on which it will provide access. If commercial 67 South Australia, Parliamentary Debates, House of Assembly, 9 April 2008, 2889 (Patrick Conlon). 68 NGR, r 101(1)(a).

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negotiations are unsuccessful, the user or prospective user will have no recourse to any of the safeguards in the NGL and NGR (subject to the ability of the user or prospective user to apply for a determination that the pipeline become a covered pipeline69). A pipeline may become unregulated where: • it was built after the commencement of the Gas Code (post-November 1997) and has not been the subject of a coverage determination; • coverage has been revoked by the relevant Minister under ss 102–108 of the NGL; or • the pipeline is a greenfields pipeline and subject to a 15-year no-coverage determination under s 151 of the NGL. See [9.270] for further discussion of unregulated pipelines.

Full regulation [9.120]

Revenue regulation applies only to covered pipelines that are subject to full regulation. Similar to the Gas Code, a pipeline can become covered in four ways under the NGL: 1 pipelines that were covered pipelines at the time the NGL and NGR came into effect were deemed to be covered pipelines under the NGL (with some exceptions);70 2 by way of a decision of the relevant Minister to cover the pipeline by applying the coverage criteria and having regard to a recommendation from the NCC (any person may apply to the NCC for coverage of a particular pipeline under s 92 of the NGL); 3 where a service provider has been awarded a tender to construct and operate a pipeline as a result of a tender approval process approved under the NGR (s 126 of the NGL); or 4 where a service provider voluntarily submits a full access arrangement to the regulator and that access arrangement takes effect (s 127 of the NGL). The pipeline ceases to be a covered pipeline on the expiry of the access arrangement.71 Coverage determination under s 92 of the NGL

[9.130]

Section 15 of the NGL sets out the coverage criteria. As with the Gas Code, there are four limbs that must all be satisfied before the NCC can recommend to the Minister, and the Minister may make a determination, that a pipeline be covered. The limbs and the considerations that the NCC has regard to under each limb are outlined below. As will be seen, the NGL coverage criteria substantially overlap with the declaration criteria under the National Access Regime (see Ch 7), and therefore similar issues arise as in relation to declaration decisions under Pt IIIA of the CCA. 69 NGL, s 92. 70 NGL, Sch 3, Pt 3, cll 6 – 7. 71 NGL, s 127(3).

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The coverage status of a pipeline can change over time. A pipeline that has previously been covered could have its coverage revoked by the Minister (following a recommendation by the NCC) if one of the four coverage criteria were no longer satisfied. Similarly, a previously uncovered pipeline could become covered if all four coverage criteria were satisfied. Below is a discussion of how each criterion has been interpreted and applied in practice. Note that all references below to the NCC should be read as the NCC/the Minister. Criterion (a) – would access (or increased access) to pipeline services provided by means of the pipeline promote a material increase in competition in at least one market (whether or not in Australia), other than the market for the pipeline services provided by means of the pipeline? Similar to the assessment of the corresponding declaration criterion in ss 44G(2)(a) and 44H(4)(a) of the CCA (Pt IIIA), to assess whether criterion (a) is satisfied, the NCC: (1) identifies the relevant dependent (upstream or downstream) markets; (2) considers whether each identified dependent market is separate from the market for the pipeline service to which access is sought; and (3) assesses whether access (or increased access) would be likely to promote a materially more competitive environment in the dependent market(s).72 This approach is consistent with the decision of the Australian Competition Tribunal in Re Duke Eastern Gas Pipeline Pty Ltd [2001] ACompT 2: Whether competition will be promoted by coverage is critically dependent on whether EGP has power in the market for gas transmission which could be used to adversely affect competition in the upstream or downstream markets. There is no simple formula or mechanism for determining whether a market participant will have sufficient power to hinder competition. What is required is consideration of industry and market structure followed by a judgment on their effects on the promotion of competition.73

As discussed in Ch 7, there is ongoing debate as to the appropriate approach to criterion (a) as it appears in the Pt IIIA declaration criteria. In Sydney Airport Corporation Limited v Australian Competition Tribunal (2006) 155 FCR 124, the Full Court held that criterion (a) requires the application of the “with” and “without” [access to the service] test, comparing the two future states of the world to determine if competition in a dependent market is likely to be materially different.74 The Court found that the criterion required consideration of whether any use of the facility would promote competition in dependent markets (that is, access in the ordinary meaning of the word) and it was irrelevant to consider whether access to the facility was already available (known as the with/without access 72 NCC Gas Guide, 29. 73 Re Duke Eastern Gas Pipeline [2001] ACompT 2, [116]. 74 Sydney Airport Corporation Limited v Australian Competition Tribunal (2006) 155 FCR 124, [83].

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test).75 However, until recently, the courts and the NCC have considered “access” in criterion (a) as “access on such reasonable terms and conditions as may be determined in the second stage of the Pt IIIA process”76 (known as the with/without declaration test). At the time of writing, the Australian Competition Tribunal had just handed down a decision in respect of Glencore’s application for declaration of a shipping channel service at the Port of Newcastle.77 The decision is significant as it essentially lowers the bar for declaration by reverting to the with/without access test, as applied in the Sydney Airport decision. This decision may have flow on impacts for coverage decisions under the NGL. Criterion (b) – would it be uneconomic for anyone to develop another pipeline to provide the pipeline services provided by means of the pipeline? The interpretation of this criterion is also controversial (see Box 7.1 in Ch 7 for further discussion). Prior to the High Court’s decision addressing the equivalent Part IIIA declaration criterion (its 2012 decision in relation to applications for declaration of certain Pilbara rail lines),78 the NCC and Australian Competition Tribunal applied a natural monopoly test (which was: could a single pipeline meet the expected future demand at a lower cost than two or more pipelines?). In Re Duke Eastern Gas Pipeline Pty Ltd, for instance, the Tribunal stated that the test for criterion (b) was “whether for a likely range of reasonably foreseeable demand for the services provided by means of the pipeline, it would be more efficient, in terms of costs and benefits to the community as a whole, for one pipeline to provide those services rather than more than one”.79 The majority judgment in the recent High Court decision in the Pilbara Case disagreed with the Tribunal’s interpretation of criterion (b) and the test to be applied in determining whether it was satisfied.80 In particular, the High Court (with a 6:1 majority) held that a private profitability test,81 75 Sydney Airport Corporation Limited v Australian Competition Tribunal (2006) 155 FCR 124, [81], [83]–[84]. 76 Pilbara Infrastructure Pty Ltd v Australian Competition Tribunal (2011) 193 FCR 57, [112]. 77 Application by Glencore Coal Pty Ltd [2016] ACompT 6. 78 The Pilbara Infrastructure Pty Ltd v Australian Competition Tribunal (2012) 246 CLR 379. 79 Re Duke Eastern Gas Pipeline [2001] ACompT 2, [137]. 80 Essentially the High Court affirmed the Federal Court’s position that s 44G(2)(b) of the CCA, the uneconomic for anyone to duplicate the facility criterion, was to be interpreted as a private profitability test, not a natural monopoly test or a net social benefit test. This interpretation casts doubt on the previously held view that the objective of the Pt IIIA access regime was socially efficient use of infrastructure that had natural monopoly characteristics: see The Pilbara Infrastructure Pty Ltd v Australian Competition Tribunal (2012) 246 CLR 379, 411–412. 81 The High Court majority outlined the private profitability test as follows: it would be uneconomical to develop another facility if “there is not anyone for whom it would be profitable to develop another facility”: The Pilbara Infrastructure Pty Ltd v Australian Competition Tribunal (2012) 246 CLR 379, 411.

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and not a net social benefit test82 or natural monopoly test,83 should be applied in considering criterion (b) of the declaration criteria in s 44G(2) (being the Pt IIIA equivalent of this criterion).84 After considering the Hilmer Report and other background materials to Pt IIIA, French CJ, Gummow, Hayne, Crennan, Kiefel and Bell JJ concluded that: It would not be economical, in the sense of profitable, for someone to develop another facility to provide the service in respect of which the making of a declaration is being considered unless that person could reasonably expect to obtain a sufficient return on the capital that would be employed in developing that facility. Deciding the level of that expected return will require close consideration of the market under examination. What is a sufficient rate of return will necessarily vary according to the nature of the facility and the industry concerned. And if there is a person who could develop the alternative facility as part of a larger project it would be necessary to consider the whole project in deciding whether the development of the alternative facility, as part of that larger project, would provide a sufficient rate of return. But the inquiry required by criterion (b) should be whether there is anyone who could profitably develop an alternative facility. … [W]hether it would be economically feasible to develop an alternative facility – is a question that bankers and investors must ask and answer in relation to any investment in infrastructure. Indeed, it may properly be described as the question that lies at the heart of every decision to invest in infrastructure, whether that decision is to be made by the entrepreneur or a financier of the venture. If the Minister is satisfied that it would be uneconomical (in the sense of not profitable) for anyone to develop an alternative facility, criterion (b) is met.85

Thus, the current approach, in line with the majority view in the Pilbara Case, is to apply a “private profitability” test under criterion (b). However as noted in Ch 7, the Australian Government has expressed a preference for a reversion to the “natural monopoly” test at least under Pt IIIA, and therefore there may be changes to this criterion in future. 82 The High Court majority outlined the net social benefit test as follows: it would be uneconomical to develop another facility “for a likely range of reasonably foreseeable demand for the services provided by means of the facility, it would be more efficient, in terms of costs and benefits to the community as a whole, for one facility to provide those services rather than more than one”: The Pilbara Infrastructure Pty Ltd v Australian Competition Tribunal (2012) 246 CLR 379, 412. 83 The High Court majority outlined the natural monopoly test as follows: it would be uneconomical to develop another facility if “the facility in question can provide society’s reasonably foreseeable demand for the relevant service at a lower total cost than if it were to be met by providing two or more facilities”: The Pilbara Infrastructure Pty Ltd v Australian Competition Tribunal (2012) 246 CLR 379, 411. 84 The declaration criteria in Pt IIIA is discussed further in Ch 6. 85 The Pilbara Infrastructure Pty Ltd v Australian Competition Tribunal (2012) 246 CLR 379, 420–421.

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The NCC Gas Guide86 sets out the information it will need to make the relevant assessment under this criterion. Essentially, the party seeking coverage will need to demonstrate that there is no business case for a competing pipeline.87 Criterion (c) – can access (or increased access) to the pipeline services provided by means of the pipeline be provided without undue risk to human health or safety? The NCC’s approach to this criterion is to presume that provisions within the regulatory regime will provide “effective mechanisms to preserve human health and safety”.88 The onus is therefore on any party that disagrees with this presumption to demonstrate how coverage would result in undue risk to human health or safety. Criterion (d) – would access (or increased access) to the pipeline services provided by means of the pipeline not be contrary to the public interest? In the The Pilbara Infrastructure Pty Ltd v Australian Competition Tribunal, the High Court found the matters the NCC may have regard to are “very wide indeed” and may include consideration of “matters of broad judgment of a generally political kind” as distinct from the other criteria, which are of a “more technical kind”.89 In the NCC Gas Guide, the NCC has stated that its preferable approach under criterion (d) is to “identify any matter that could mean access (or increased access) might be contrary to the public interest and then assess whether the likelihood and consequences of that matter lead to a conclusion that access is contrary to the public interest”.90 Regulatory framework that applies to pipelines subject to full regulation

[9.140]

The regulatory framework primarily regulates tariffs and revenues for pipeline services provided by service providers on a “fully regulated” pipeline. A service provider of a pipeline that is subject to full regulation is required to submit a “full access arrangement” to the AER (or the ERA in Western Australia) (s 132 of the NGL) and obtain approval for: • the proposed price and non-price terms and conditions of access to the reference service(s) provided by the pipeline; and

86 NCC, Gas Guide – A Guide to the Functions and the Powers of the National Competition Council under the National Gas Law, October 2013 (“NCC Gas Guide”). 87 NCC Gas Guide, 42. 88 NCC Gas Guide, 46. 89 The Pilbara Infrastructure Pty Ltd v Australian Competition Tribunal (2012) 246 CLR 379, 401. 90 NCC Gas Guide, 48.

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• the pipeline’s queuing policy, capacity trading policy, extensions and expansions policy and the terms on which receipt/delivery points may be changed, among other things (see r 48 of the NGR). Key regulatory issues include: • the AER’s role in assessing access arrangement proposals (see [9.160]); • how the AER applies the building block approach (see [9.150]); • some key differences between the access frameworks applying to electricity and gas (see [9.220]); and • the steps involved in the regulatory process (see [9.230]). The AER’s role in assessing access arrangement proposals

[9.150]

Under s 27(1) of the NGL, the AER has a number of functions and powers. The most important one for the purposes of this discussion is in s 27(1)(e) – AER economic regulatory functions or powers. Section 2 of the NGL relevantly provides: AER economic regulatory function or power means a function or power performed or exercised by the AER under this Law or the Rules that relates to the economic regulation of pipeline services provided by a service provider– (a) by means of; or (b) in connection with, a scheme pipeline and includes a function or power performed or exercised by the AER under this Law or the Rules that relates to– (c) the preparation of a service provider performance report; (d) a ring fencing decision; (e) an applicable access arrangement decision; (f) an access determination (if the AER is the dispute resolution body);

Similar to the situation with electricity, when the AER is performing or exercising an AER economic regulatory function or power, the NGL requires the AER to perform or exercise those functions or powers in a particular way. Importantly, the AER is required to perform or exercise those functions or powers in a manner that will or is likely to contribute to the achievement of the national gas objective (see [9.110]).91 When exercising a discretion in approving or making those parts of an access arrangement relating to a reference tariff, the AER must take into account the revenue and pricing principles set out in s 24 of the NGL (see Box 9.3). These principles include, among others, that a services provider should be provided with a reasonable opportunity to recover at least the efficient costs the service provider incurs in (a) providing reference services; and (b) complying with a regulatory obligation or requirement or making a regulatory payment.92 91 NGL, s 28(1)(a). 92 NGL, s 24(2).

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Certain access arrangement decisions are “designated reviewable regulatory decisions”.93 The AER is subject to additional requirements when making designated reviewable regulatory decisions. These include: • the AER must specify the manner in which the constituent components of the decision relate to each other and the manner in which that interrelationship has been taken into account in the making of the decision;94 and • if there are two or more possible designated reviewable regulatory decisions that will, or are likely to, contribute to the achievement of the national gas objective, to make the decision that the AER is satisfied will or is likely to contribute to the achievement of the national gas objective to the greatest degree (being the preferable designated reviewable regulatory decision) and specify the reasons as to the basis on which the AER is satisfied that the decision is the preferable designated reviewable regulatory decision.95 Box 9.3: Revenue and pricing principles – s 24 of the NGL 24–Revenue and pricing principles (1) The revenue and pricing principles are the principles set out in subsections (2) to (7). (2) A service provider should be provided with a reasonable opportunity to recover at least the efficient costs the service provider incurs in– (a) providing reference services; and (b) complying with a regulatory obligation or requirement or making a regulatory payment. (3) A service provider should be provided with effective incentives in order to promote economic efficiency with respect to reference services the service provider provides. The economic efficiency that should be promoted includes– (a) efficient investment in, or in connection with, a pipeline with which the service provider provides reference services; and (b) the efficient provision of pipeline services; and (c) the efficient use of the pipeline. (4) Regard should be had to the capital base with respect to a pipeline adopted– (a) in any previous– 93 Specifically, a designated reviewable regulatory decision means a full access arrangement decision or a limited access arrangement decision, other than a full access arrangement decision that does not approve a full access arrangement: NGL, s 2. 94 NGL, s 28(1)(b)(ii). 95 NGL, s 28(1)(b)(iii).

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(i) full access arrangement decision; or (ii) decision of a relevant Regulator under section 2 of the Gas Code; or (b) in the Rules. (5) A reference tariff should allow for a return commensurate with the regulatory and commercial risks involved in providing the reference service to which that tariff relates. (6) Regard should be had to the economic costs and risks of the potential for under and over investment by a service provider in a pipeline with which the service provider provides pipeline services. (7) Regard should be had to the economic costs and risks of the potential for under and over utilisation of a pipeline with which a service provider provides pipeline services.

How the AER applies the building block model

[9.160] The NGR provide that a service provider’s total revenue is to be determined for each regulatory year of the access arrangement period using the building block approach in which the building blocks are: (a) a return on the projected capital base for the year …; and (b) depreciation on the projected capital base for the year …; and (c) the estimated cost of corporate income tax for the year …; and (d) increments or decrements for the year resulting from the operation of an incentive mechanism to encourage gains in efficiency …; and (e) a forecast of operating expenditure for the year ...96 The building block approach in gas is, by and large, very similar to that applied in electricity (which is discussed in detail in Ch 8). For some building blocks, such as the return on the projected capital base (but not the calculation of the capital base itself) and the estimated cost of corporate income tax, there is effectively no material difference between the approach in gas and electricity. For other building blocks, such as depreciation and operating expenditure, there are some differences. The building blocks (a), (b), (d) and (e) are discussed at [9.170], [9.180], [9.190] and [9.200] respectively. As there is no material difference between the approach in gas and the approach in electricity, for further information on building block (c) see [8.370]. (1) Return on the projected capital base

[9.170] Similar to the return on capital building block in electricity (see [8.330]), the return on the projected capital base building block in gas is calculated by applying the rate of return to the value of the capital base as 96 NGR, r 76.

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at the beginning of that regulatory year.97 For example, the return on capital building block for regulatory year N (RYN) is calculated as: Rate of return for RYN × regulatory asset base for RYN = return on capital for RYN

As with electricity, the allowed rate of return comprises a weighted average of the return on equity for the access arrangement period and the return on debt for that regulatory year.98 The weighting that is typically applied is a ratio of 60:40 debt-to-equity. This is equivalent to an assumption that 60 per cent of the regulatory asset base of a pipeline is funded by debt, and 40 per cent by equity (which is referred to as “leverage” or “gearing”). The rate of return is determined on a nominal vanilla basis.99 Further, similarly to electricity distribution and transmission networks, the rate of return for gas pipelines must be determined in a way that achieves the allowed rate of return objective. The allowed rate of return objective is that “the rate of return for a service provider is to be commensurate with the efficient financing costs of a benchmark efficient entity with a similar degree of risk as that which applies to the service provider in respect of the provision of reference services”.100 However, there are some differences between gas and electricity in the rules for determining the value of the capital base to which the rate of return is applied. For gas pipelines, the projected capital base is calculated for a particular period by: taking the opening capital base; adding “conforming capital expenditure”; and subtracting depreciation and asset disposals.101 For pipelines that were commissioned after the NGR came into effect in 2008, the opening capital base is: • for pipelines that were not previously regulated: the cost of construction of the pipeline and pipeline assets incurred before commissioning of the pipeline (including the cost of acquiring easements and other interests in land necessary for the establishment and operation of the pipeline) plus the amount of capital expenditure since the commissioning of the pipeline less depreciation and the value of pipeline assets disposed of since the commissioning of the pipeline for a particular period;102 or • for pipelines that were subject to an access arrangement in the last access arrangement period: the opening capital base as at the commencement of the earlier access arrangement period adjusted for any difference between estimated and actual capital expenditure included in that opening capital base – this adjustment must also remove any benefit or penalty associated with any difference between the estimated and actual 97 NGR, r 87. 98 NGR, r 87(4)(a). 99 NGR, r 87(4)(b). 100 NGR, r 87(2). 101 NGR, r 78. 102 NGR, r 77.

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capital expenditure – plus conforming capital expenditure made, or to be made, during the earlier access arrangement period and any amounts to be added to the capital base due to capital contributions by a user,103 previously non-conforming expenditure that is now compliant with the new capital expenditure criteria,104 and the re-use of redundant assets105 less depreciation, the value of assets disposed and any redundant assets. One notable difference between the approach in gas compared with electricity is what capital expenditure can form part of the capital base. For example, in gas, non-conforming capital expenditure may, in the future, become compliant and form part of the capital base. In contrast, in electricity, if expenditure does not comply with the relevant requirements, it cannot form part of the regulatory asset base in the future. Rule 84 of the NGR provides that a full access arrangement may provide that the amount of non-conforming capital expenditure, to the extent that it is not to be recovered through a surcharge on users or a capital contribution, is to be added to a notional fund (the speculative capital expenditure account). The balance of this account increases annually at a rate determined at the AER’s discretion. In the future, if the type or volume of services changes so that previously non-conforming capital expenditure becomes compliant, the relevant portion of the speculative capital expenditure account (including the return referable to that portion of the account) is to be withdrawn from the account and rolled into the regulatory asset base. Another difference lies in the capital redundancy provisions in the NGR (rr 85 and 86). The NGR provide that a full access arrangement may include (and the AER may require it to include) a mechanism to ensure that assets that cease to contribute in any way to the delivery of pipeline services (redundant assets) be removed from the capital base. The NGR further provide that, where assets have previously been identified as redundant and removed from the capital base in accordance with a capital redundancy mechanism, they may later be added to the capital base if they contribute to the delivery of pipeline services. There are no equivalent provisions in relation to redundant assets in the NER. (2) Depreciation

[9.180]

There are different depreciation criteria for gas compared with electricity. The depreciation criteria to be applied when assessing a gas access arrangement proposal are: 89 Depreciation criteria (1) The depreciation schedule should be designed: (a) so that reference tariffs will vary, over time, in a way that promotes efficient growth in the market for reference services; and

103 NGR, r 82. 104 NGR, r 84. 105 NGR, r 86.

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(b) so that each asset or group of assets is depreciated over the economic life of that asset or group of assets; and (c) so as to allow, as far as reasonably practicable, for adjustment reflecting changes in the expected economic life of a particular asset, or a particular group of assets; and (d) so that (subject to the rules about capital redundancy), an asset is depreciated only once (ie that the amount by which the asset is depreciated over its economic life does not exceed the value of the asset at the time of its inclusion in the capital base (adjusted, if the accounting method approved by the AER permits, for inflation)); and (e) so as to allow for the service provider’s reasonable needs for cash flow to meet financing, non-capital and other costs.106

The NGR (unlike the NER) also expressly contemplate that compliance with these criteria may involve deferral of a substantial proportion of depreciation, particularly where the market for pipeline services is relatively immature, reference tariffs have been calculated on the assumption of significant market growth and the pipeline has been designed and constructed so as to accommodate future growth in demand.107 Despite this difference in criteria, both the AER and the ERA have generally not approved revisions to access arrangements that have sought to apply depreciation methods other than straight-line depreciation, which is the method typically adopted in electricity.108 (3) Incentive mechanisms

[9.190]

The NGR provides that incentive mechanisms may be included in a full access arrangement. Unlike in electricity, the AER is not required to publish efficiency incentive mechanisms that apply to gas pipeline operators. However, the AER may require an incentive mechanism to be included in an access arrangement. Rule 98 in the NGR provides that: 98 Incentive mechanisms (1) A full access arrangement may include (and the AER may require it to include) one or more incentive mechanisms to encourage efficiency in the provision of services by the service provider. (2) An incentive mechanism may provide for carrying over increments for efficiency gains and decrements for losses of efficiency from one access arrangement period to the next. (3) An incentive mechanism must be consistent with the revenue and pricing principles.

106 NGR, r 89. 107 NGR, r 89(2). 108 See, for example, AER, APA GasNet Australia (Operations) Pty Ltd 2013–17, March 2013, Part 2 (Attachments), 98–116; ERA, Final Decision on Proposed Revisions to the Access Arrangement for the Mid-West and South-West Gas Distribution Systems, 30 June 2015 (as amended on 10 September 2015), 416–438.

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(4) Operating expenditure

[9.200]

The building block for operating expenditure also has different criteria in gas compared with the equivalent building block in electricity. Rule 91 of the NGR provides: 91 Criteria governing operating expenditure (1) Operating expenditure must be such as would be incurred by a prudent service provider acting efficiently, in accordance with accepted good industry practice, to achieve the lowest sustainable cost of delivering pipeline services.

These criteria are less detailed than the criteria applied in electricity as, in the NER, service providers must also meet “operating expenditure objectives” (see [8.450] for a discussion of these objectives). (5) Total revenue and reference tariffs

[9.210]

Once the building block model is applied, the total revenue for each year of the access arrangement period is calculated. From there, reference tariffs – the prices that service providers can charge users and prospective users for the reference service – are also calculated.

Any changes to the reference tariff within the access arrangement period are in accordance with either a schedule of fixed tariffs, a formula or changed in line with any trigger event provisions109 set out in the access arrangement.110 Outside of this, there is little scope for reference tariffs to change over time and they will typically only change as a result of a cost pass through event or where there is an extension or expansion of the pipeline (see [9.220]). Cost pass through events usually relate to changes in uncontrollable costs (for example, taxes). For instance, the repeal of the carbon tax in 2014 led to service providers of pipelines subject to full regulation applying for a (negative) cost pass through event with the AER.111 As was the case under the Gas Code,112 service providers and users or prospective users may enter into agreements about access to services provided by means of a covered pipeline that are different from the access arrangement that applies to that pipeline.113 This may be contrasted to the position in electricity, where regulated network service providers must 109 Trigger events tend to involve significant changes (for example, a significant extension or interconnection, a competing source of gas becomes available) that may require the access arrangement to be revised. 110 NGR, r 97. 111 See, for example, AER, Jemena Gas Networks Carbon Price Repeal – Negative Cost Pass Through, January 2015. 112 Gas Code s 2.50(c) and discussed in Table 9.1. 113 NGL, s 322.

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comply with network revenue and pricing determinations.114 This difference essentially recognises that investment in gas pipelines has historically been underwritten by long-term bilateral gas supply agreements,115 which may bear little (or no) relation to the access arrangements that may apply to a pipeline and which are revised on a frequent basis (generally, every five years). Other key differences between electricity and gas

[9.220]

The Gas Access Regime allows for varying degrees of regulatory intervention (full regulation, light regulation and no regulation) depending on the degree of market power the pipeline possesses and the extent to which that market power may be constrained (for example, by direct competition from another pipeline, by competition from alternative energy sources or by the countervailing power of users). In contrast to the Gas Access Regime, the access regime that applies to electricity transmission and distribution networks only has one main form of regulation. This broad difference in the two regulatory frameworks is demonstrated through key elements of the Gas Access Regime. Perhaps the most notable element is the requirement for an access arrangement to contain extension and expansion requirements. Pursuant to the operation of the extension and expansion requirements in an access arrangement, access regulation will not necessarily apply to the entire capacity of a pipeline. In electricity, there is no similar mechanism; any expansion or extension of the (network) asset is automatically subject to regulation. Rule 48 in the NGR provides that service providers are required to include extension and expansion requirements in their access arrangements. The policy is required to specify, among other things: 1. the circumstances in which an extension or expansion is to become part of the covered pipeline; and 2. whether an extension or expansion of the covered pipeline will affect a reference tariff and, if so, the effect on the reference tariff (s 2 of the NGL). The services provided by an extension or expansion of the covered pipeline are termed “incremental services” in the NGR. Pursuant to NGR, r 104, if, under the extensions and expansions policy in an access arrangement, the access arrangement is to apply to incremental services, then it also must deal with the effect of the extension or expansion on tariffs.

Access arrangement process for pipelines subject to full regulation

[9.230]

As a matter of process, service providers generally submit an access arrangement – or revisions to an access arrangement already in place

114 NEL, ss 14A – 14B. 115 AEMC, East Coast Wholesale Gas Market and Pipeline Frameworks Review: Stage 1 Final Report, 23 July 2015, 21.

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– for the covered pipeline to the AER (or the ERA in Western Australia) around 12 months ahead of the intended commencement date of the (revised) access arrangement. The phases in the regulatory review process are summarised in Table 9.2. Table 9.2 Key steps in the regulatory review process for gas pipelines Phases Phase 1 – preproposal submission process

Steps involved in each phase A “pre-submission conference” may be held with the regulator ahead of the service provider submitting its full access arrangement proposal (NGR, r 57(1)). The pre-submission process may be undertaken as: • pre-submission conferences, meetings or discussions; and • provision of background documentation, models and information about any aspects of the proposal.116

Phase 2 – proposal submission and consultation process

Once the service provider submits its proposal, the regulator is required to form a view as to whether the proposal complies with the requirements. An access arrangement proposal submission may include the access arrangement proposal itself, access arrangement information, supporting information provided by a service provider with its access arrangement proposal, and other information provided by the service provider during the assessment process. The rules imply that certain information provided may include confidential information. Following receipt of the proposal, the regulator will assess whether it is sufficient to be published (see NGR, r 58). If it considers it is sufficient, it will publish the proposal on its website and call for submissions from interested parties (see NGR, r 58(1)). Interested parties will then make submissions on the proposal. After considering submissions on the proposal and other relevant information, such as advice from consultants, the regulator will make a draft decision (NGR, r 59(1)). The draft decision indicates whether or the regulator is prepared to approve the submitted proposal. If the draft decision indicates that the regulator will not approve the proposal, then the regulator will indicate in its draft decision the nature of the amendments the service provider is required to make to the proposal (NGR, r 59(2)) and conduct a consultation on the draft decision (NGR, r 59(5)). If the draft decision indicates that the regulator will approve the proposal, the regulator will also conduct a consultation on the draft decision (NGR, r 59(c)(iii)). Following consideration of submissions and any revised access arrangement proposal provided within relevant periods, the regulator will then make a final decision on the proposal (NGR, r 62(4)). The final decision will be made for either the proposal as first submitted by the service provider or a revised proposal submitted in response to the draft decision (NGR, r 62(3)). If the regulator’s final decision is to approve the proposal, the access arrangement takes effect on the date set in the regulator’s final decision or, where no date has been specified, ten business days after the date of the final decision (NGR, r 62(6)).

Phase 3 – Draft decision

Phase 4 – Final decision

116 AER, Access Arrangement Guideline, Final, March 2009, 14.

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Phase 5 – Merits or judicial review

259

Steps involved in each phase If the regulator’s final decision is to refuse to accept the proposal, the regulator must make an access arrangement proposal (or propose its own revisions to the access arrangement in the event there is an existing access arrangement that applies to the pipeline) and then make a decision to give effect to its proposal within two months of the final decision (NGR, r 64(4)). Following the regulator’s publication of the final decision, a service provider (or another affected party) may seek merits review of the final determination pursuant to s 245 of the NGL. All of the relevant issues related to merits review, including the requirements for obtaining leave, the grounds of review and the matters that must be addressed in an application, are set out in Ch 12. Appendix A also provides information on the merits review proceedings that have been considered by the Australian Competition Tribunal to date. A service provider or other aggrieved party may also be able to apply for judicial review of the AER’s final decision under the Administrative Decisions (Judicial Review) Act 1977 (Cth) (“ADJR Act”) or under s 39B of the Judiciary Act 1903 (Cth). The relevant issues related to judicial review are also set out in Ch 12.

Light regulation [9.240]

The Productivity Commission’s final report into the Gas Access Regime proposed that a form of “light-handed” regulation should apply in circumstances where the exercise of market power is somewhat constrained (see Box 9.2). The light regulation option was also supported by the Expert Panel on Energy Access Pricing: The Panel’s overall conclusion is that direct price or revenue controls should be applied principally to services supplied under conditions of natural monopoly and substantial market power. These conditions can be identified by having regard to the presence of economies of scale and scope, network externalities and other market characteristics which give rise to the presence of high barriers to entry by potential rivals. Less intrusive forms of regulation or no regulation at all are warranted where there is evidence of potential or actual competition sufficient to discipline the conduct of incumbent service providers and the barriers to entry are modest or low.117

The Second Reading Speech for the NGL reflects this policy intent, as it states that light regulation should be applied in circumstances where it can reduce the costs of regulation (compared with the application of full regulation) while still providing an effective check on a service provider’s market power.118 Some pipelines are “designated” pipelines – either classified by the National Gas Regulations or designated in the Application Act of a participating jurisdiction – that cannot be subject to light regulation. Pipelines that are currently designated include Australian Gas Networks’ 117 Expert Panel on Energy Access Pricing, Report to the Ministerial Council on Energy, April 2006, 51. 118 South Australia, Parliamentary Debates, House of Assembly, 9 April 2008, 2889 (Patrick Conlon).

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South Australian distribution network, the Western Australian gas distribution system and the three Victorian gas distribution systems.119 Determination that a pipeline will be subject to light regulation

[9.250]

There are two ways that covered pipelines can become subject to light regulation. The NCC can decide the form of regulation for a pipeline, either in conjunction with its recommendation on a coverage application or, in respect of a covered pipeline that is subject to full regulation, following an application by a service provider for a light regulation determination. In making a light coverage determination under s 122 of the NGL, the NCC must have regard to:120

• the likely effectiveness of full and light regulation in promoting access to the services provided by the pipeline that is the subject of the application; • the effect of full and light regulation on the likely costs that may be incurred by an efficient service provider, users and prospective users and, in turn, end users; • the national gas objective in s 23 of the NGL; and • the form of regulation factors in s 16 of the NGL, which requires consideration to be given to: – the presence and extent of any barriers to entry in a market for pipeline services; – the presence and extent of any network externalities (that is, interdependencies) between a natural gas service provided by a service provider and any other natural gas service provided by the service provider; – the presence and extent of any network externalities (that is, interdependencies) between a natural gas service provided by a service provider and any other service provided by the service provider in any other market; – the extent to which any market power possessed by a service provider is, or is likely to be, mitigated by any countervailing market power possessed by a user or prospective user; – the presence and extent of any substitute, and the elasticity of demand, in a market for a pipeline service in which a service provider provides that service; – the presence and extent of any substitute for, and the elasticity of demand in a market for, electricity or gas (as the case may be); and – the extent to which there is information available to a prospective user or user, and whether that information is adequate, to enable 119 See National Gas (South Australia) Regulations 2009 (SA); National Gas Access (WA) (Part 3) Regulations 2009 (WA), Sch 1; Victorian Government Gazette No S222, 30 June 2009, 50–51. 120 See NCC Gas Guide, 76–93.

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the prospective user or user to negotiate on an informed basis with a service provider for the provision of a pipeline service to them by the service provider. The NCC Gas Guide explains the rationale for light regulation as follows: Providing for light regulation under the NGL involves regulatory methods that emphasise commercial negotiation and information transparency, with regulatory intervention through the right to have disputes arbitrated by the regulator, being retained as a default. Such ex post regulation may be appropriate where the market power exercised by the provider is less substantial and there is the potential for contestability for the services to emerge. It may also be appropriate where the number of access seekers is relatively small and these parties can themselves exercise some countervailing market power in the course of commercial negotiations. Further, light regulation may be an appropriate option for regulation where particular assets are in transition towards effective competition.121

Regulatory framework applying to pipelines subject to light regulation

[9.260]

Light regulation imposes very few requirements on service providers. However, there are a small number of safeguards for users and prospective users, including: • access to a dispute resolution mechanism (see NGL, Ch 6; NGR, Pt 12). In the event that commercial agreement cannot be reached on terms and conditions of access, the user or prospective user may notify in writing the AER (or the ERA in Western Australia). Generally, the AER will then make an access determination setting out the terms and conditions of access (NGL, s 184). As the AER has an in-depth understanding of the relevant costs of operating gas transmission and distribution pipelines through its role in regulating full regulation pipelines as well as established methodologies for determining prices of services, an access determination is an avenue that affords users and prospective users with considerable protection; • the prohibitions on service providers engaging in: – conduct that prevents or hinders access to services (see s 133 of the NGL); and – price discrimination unless it is efficient to do so (see s 136 of the NGL); and • the ring-fencing provisions in NGL, Ch 4 (ss 137 – 148). Among other things, these provisions require service providers to keep separate accounts for pipeline services; prevent them from carrying on a related business; and prevent them from conferring an unfair advantage on an associate that takes part in a related business.

121 NCC Gas Guide, 67.

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For pipelines subject to light regulation, the NGR requires the service provider to: • publish the price and non-price terms and conditions of access to light regulation services on its website (r 36); and • report to the AER on access negotiations (at least annually) in the manner and form determined or approved by the AER and state the result of the negotiations and other information required by the AER (r 37). The service provider may also choose to submit a “limited access arrangement” to the AER for approval. A limited access arrangement only needs to set out the non-price terms of access to the pipeline (see NGL, s 116). Given it is not required, a service provider may submit a limited access arrangement in circumstances where it would achieve efficiencies from the application of the same non-price terms of access to all users and prospective users and/or obtaining regulatory approval would decrease the likelihood that there would be protracted disputes with users and prospective users over these terms.

No regulation [9.270]

As the name suggests, unregulated pipelines are not subject to full regulation or light regulation and therefore they are not required to comply with any access requirements set out in the NGL or the NGR.122

Unregulated pipelines include: • previously covered pipelines in respect of which coverage has been revoked by the relevant Minister under ss 102 – 108 of the NGL (for example, the Dawson Valley Pipeline, which had coverage revoked in 2014); • greenfields pipelines that have been granted a 15-year exemption from coverage by the relevant Minister under s 156 of the NGL123 (for example, the Comet Ridge to Wallumbilla Pipeline (“CRWPL”) was granted an exemption in 2015);124 and • a pipeline that was built after 1997 (when the Code was introduced) for which there has been no application for coverage. 122 Note, however, that there are a small number of provisions that require some owners of unregulated pipelines to provide certain information: see, for example, s 223 of the NGL, which requires certain information to be provided to AEMO for publication. 123 A 15-year exemption from coverage is a decision that is typically made when one or more of the coverage criteria are found not to be satisfied. 124 See, for example, NCC, Application for 15 Year No-coverage Determination – Comet Ridge to Wallumbilla Pipeline Loop (CRWPL), . Note also that the pipelines to be built by GLNG Operations Pty Ltd, QCLNG Pipeline Pty Ltd and Australia Pacific LNG Gladstone Pipeline Pty Limited in Queensland have been granted 15-year exemptions.

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CURRENT REGULATORY LANDSCAPE What gas assets are currently regulated? [9.280]

At present, there are a total of 21 gas transmission pipelines and distribution networks in Australia that are subject to either full or light regulation. The location of the pipelines and whether they are subject to full or light regulation are set out in Table 9.3.

There are six transmission pipelines currently subject to full regulation in Australia: the Amadeus Gas Pipeline, the Central Ranges Pipeline, the Dampier to Bunbury Pipeline, the Goldfields Gas Pipeline,125 the Roma to Brisbane Pipeline, and the Victorian Transmission System. The remaining four transmission pipelines are subject to light regulation, with one pipeline, the Moomba to Sydney Pipeline, only partially subject to light regulation. With a total of 70 major transmission pipelines in Australia,126 the percentage of pipelines currently regulated is not significant.

125 Although the Goldfields Gas Pipeline is subject to full regulation, there is also some capacity on the pipeline that is uncovered. 126 As sourced from the AEMC Gas Scheme Register and Geoscience Australia’s Major Pipelines Map 2014, in addition to the gas transmission pipelines in Table 9.3, the other major transmission pipelines in Australia are: Angaston to Mildura Pipeline, APLNG Pipeline, Beharra Springs Pipeline, Berwyndale to Wallumbilla Pipeline, Bonaparte Pipeline, Braemar 1 Pipeline, Braemar 2 Pipeline, Brooklyn to Corio Pipeline, Cannington Lateral Pipeline, Carisbrook to Horsham Pipeline, Cheepie Barcaldine Gas Pipeline, Comet Ridge to Wallumbilla Loop, Comet Ridge to Wallumbilla Pipeline, Daly Waters to McArthur River Pipeline, Darling Downs Pipeline, Darwin city gate to Berrimah Pipeline, Dawson Valley Pipeline, Eastern Gas Pipeline, Eastern Goldfields Pipeline, Fairview to Wallumbilla Pipeline, Fortescue River Gas Pipeline, GGP to Kalgoorlie Power Station, GLNG Pipeline, Interconnect Pipeline Culcairn - Wodonga, Interconnect Pipeline Wagga Wagga – Culcairn, Jaguar Lateral, Kambalda to Esperance Pipeline, Karratha to Cape Lambert Pipeline, Kincora to Wallumbilla Pipeline, Lara to Iona Pipeline, Longford to Dandenong Pipeline, Midwest Pipeline, Moomba to Adelaide Pipeline System, Mortlake Pipeline, Neerabup Pipeline, Nifty Pipeline, North Queensland Gas Pipeline, Palm Valley to Alice Springs Pipeline, Parmelia Pipeline, Peabody Mitsui Gas Pipeline, Pilbara Pipeline System, Queensland Curtis LNG Pipeline, Queensland Gas Pipeline, Riverland Pipeline, SEA Gas Pipeline, SESA Pipeline, South East Pipeline System, Silver Springs to Wallumbilla Pipeline, South Gippsland Pipeline, South West Queensland Pipeline/QSN Link, Spring Gully to Wallumbilla Pipeline, Tasmanian Gas Pipeline, Telfer Pipeline, Tubridgi Pipeline System, Vic-NSW Interconnect, Wallumbilla to Darling Downs Pipeline, Wallumbilla to Gladstone Pipeline, West Angelas Pipeline, Wickham Point Pipeline, Wide Bay Pipeline, Wodgina Lateral Pipeline, and WMC Laterals.

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Table 9.3 Gas pipelines in Australia subject to full or light regulation Pipeline Transmission pipelines Amadeus Gas Pipeline Carpentaria Gas Pipeline Central Ranges Pipeline

State/Territory

Owner

Regulatory status

NT

APA Group

Full

Qld

APA Group

Light

NSW

APA Group

Full (through competitive tender coverage limb) Light Full

Central West Pipeline NSW Dampier to Bunbury WA Natural Gas Pipeline

Goldfields Gas Pipeline

WA

APA Group DBP (ultimately owned by DUET Group (80 per cent) and Alcoa Australia (20 per cent)) APA Group

Kalgoorlie to Kambalda Pipeline Moomba to Sydney Pipeline

WA

APA Group

NSW

APA Group

Roma to Brisbane Pipeline Victorian Transmission System (includes Victorian side of Vic–NSW interconnector) Distribution networks ActewAGL

Qld

APA Group

Unregulated between Moomba and Marsden and subject to light regulation on the remainder of the pipeline Full

Vic

APA Group

Full

ACT

ACTEW Corporation 50%; Jemena 50% APA Group 20%, Marubeni 40%, RREEF 40% AusNet Services Cheung Kong Infrastructure

Full

SA

Cheung Kong Infrastructure

Light

Vic

Cheung Kong Infrastructure

Full

Vic

Cheung Kong Infrastructure

Full

NSW

APA Group

Full

NSW

Jemena

Full

APT Allgas Energy Network

Qld

AusNet Services Australian Gas Networks – gas distribution network Australian Gas Networks – gas distribution network Australian Gas Networks – gas distribution network Australian Gas Networks (Albury) – gas distribution network Central Ranges Network Jemena Gas

Vic Qld

Full (although there is some uncovered capacity on the pipeline) Light

Light Full Light

9 Gas Pipeline Mid-West and South-West Gas Distribution Systems (WA Gas Networks) Multinet Gas

State/Territory WA

Owner ATCO Gas Australia

Regulatory status Full

Vic

DUET Group

Full

265

In relation to distribution networks, Table 9.3 shows that there are 11 distribution networks that are regulated, with eight subject to full regulation and three subject to light regulation. With a total of 19 distribution networks in Australia,127 the percentage of networks currently covered is significant.

Recent issues Harper Review

[9.290]

Issues in the gas sector were recently considered in the Harper Review128 – the “root and branch” review of competition law and competition policy. In the final report released on 31 March 2015, the Panel recommended that the AER’s (the ERA’s) and the NCC’s regulatory functions in relation to gas be transferred to a new regulatory body to be named the Access and Pricing Regulator (“APR”).129 The Panel recommended that the APR also be responsible for regulating access and pricing in other sectors, including electricity and telecommunications. Under this recommendation, the NCC would cease to exist and the ACCC/AER/ERA would be relieved of some of their core responsibilities. On 24 November 2015, the Australian Government released its response to the Harper Review.130 The Government announced that it “remains open” to establishing this new regulatory body and it will continue discussions with the states and territories about how a new national regulator could be developed.131 The Harper Review also recommended a detailed review of competition in the gas sector.132 Following the release of the final report, the relevant 127 As sourced from the AEMC Gas Scheme Register in addition to the distribution networks in Table 9.3, the other distribution networks that are not covered are: the Alice Springs Distribution Network, the Dalby Distribution System, the East Gippsland System, the Loddon Murray Region System, the Mildura Distribution System, the Roma Distribution System, the Tasmanian Gas Network and the Envestra (Wagga Wagga) gas distribution network. 128 Ian Harper, Peter Anderson, Su McCluskey and Michael O’Bryan, Competition Policy Review, Final Report, March 2015 (“Harper Review”). 129 Harper Review, 472. 130 Australian Government, Australian Government Response to the Competition Policy Review, 24 November 2015. 131 Australian Government, Australian Government Response to the Competition Policy Review, 24 November 2015, 38. 132 Harper Review, 201.

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Minister directed the ACCC to hold an inquiry into the competitiveness of the east coast gas market (discussed at [9.310] below).133 Finally, in relation to the National Access Regime in Pt IIIA of the CCA, the Harper Review Panel made a number of recommendations regarding the declaration criteria (which are similar to the coverage criteria in the NGL).134 The Panel concluded that the declaration criteria should be revised and, in particular, that criterion (a) be revised to require that access on reasonable terms and conditions through declaration promote a substantial increase in competition in a dependent market that is nationally significant.135

[9.300]

As set out in detail in Ch 7, the Australian Government announced that it will revise the declaration criteria, but has chosen to adopt the recommendations of the Productivity Commission rather than those of the Harper Review. The Productivity Commission recommended a number of changes to the declaration criteria in Pt IIIA of the CCA, including that: • criterion (a) be amended so that it is satisfied if access to a service on reasonable terms and conditions through declaration (rather than access per se) would promote a material increase in competition in a dependent market; and • criterion (b) be amended so that it is satisfied where total foreseeable market demand for the service over the declaration period could be met at least cost by the facility; and • criterion (f) be amended so that it is satisfied if access on reasonable terms and conditions through declaration would promote the public interest.136

It is not yet known whether these changes will flow through to similar changes to the coverage criteria in the NGL (see Table 9.2). ACCC inquiry

[9.310]

The ACCC’s inquiry into the east coast gas market commenced on 13 April 2015. The inquiry was conducted under s 95H(1) of the CCA. On 22 April 2016, the ACCC released the report of its inquiry. In its report, the ACCC makes 13 recommendations to government and notes two areas of future work for the ACCC, which may result in formal investigations.

133 ACCC, “ACCC Inquiry into Eastern and Southern Australian Wholesale Gas Prices”, Media release, 13 April 2015. 134 Harper Review, 74. 135 Harper Review, 74. 136 Productivity Commission, National Access Regime, Inquiry Report No 66, 25 October 2013, 31.

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The recommendation that has the potential to have the most significant impact on gas markets is recommendation 3.137 Recommendation 3 calls for the COAG Energy Council to replace the coverage criteria with a new test. The ACCC contends that the coverage criteria do not allow regulators to effectively constrain monopoly pricing by non-vertically integrated gas pipelines. For this reason, it suggests a new test for regulatory coverage of gas pipelines which would be linked to a finding by the relevant Minister that a pipeline owner has substantial market power and is likely to maintain that market power in the medium term.138 The ACCC’s report explains that the existing test is deficient as it is: not posing an effective constraint on the behaviour of pipeline operators, because it is not designed to be triggered by market power that results in monopoly pricing and economic inefficiencies but has little to no effect on competition in upstream or downstream markets.139

The ACCC recognise that a new test for the coverage criteria would mean that those criteria no longer align with the declaration criteria in Pt IIIA. The ACCC considers that it is time to break this “nexus” as it is: consistent with what has occurred in other industry specific regimes. It is also in keeping with the distinction the Hilmer Committee drew between the regulatory measures to employ when dealing with a natural monopoly that has vertical interests (that is, access regulation) and one that does not (that is, price based regulation).140

AEMC review

[9.320]

In December 2014, the COAG Energy Council asked the AEMC to review the role and objectives of the facilitated gas markets currently in operation in eastern Australia.141 The scope of the review is broad and requires the AEMC to consider: • the appropriate structure, type and number of facilitated markets on the east coast, including options to enhance transparency and price discovery and to reduce barriers to entry; • opportunities to improve effective risk management, including via liquid and competitive wholesale spot and forward markets, which provide tools to price and hedge risk; and 137 ACCC, Inquiry into the east coast gas market, April 2016, 9-10. 138 The ACCC additionally proposed that the Minister should be satisfied that coverage will or will be likely to contribute to the national gas objective in the NGL. See, ACCC, Inquiry into the east coast gas market, April 2016, 20. 139 ACCC, Inquiry into the east coast gas market, April 2016, 138. 140 ACCC, Inquiry into the east coast gas market, April 2016, 134. 141 See AEMC, East Coast Wholesale Gas Market and Pipeline Frameworks Review, .

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• changes to strengthen signals and incentives for efficient access to, use of and investment in pipeline capacity.142 Under the terms of reference for the review, the AEMC is also required to develop specific actions that can be implemented to strengthen the structure and competitiveness of the east coast gas market, and make recommendations for immediate implementation, where possible.143 As part of its review, the AEMC asked economic consultants to assess the appropriateness of the coverage criteria under the Gas Access Regime.144 In its report to the AEMC, Incenta Economic Consulting considered that the coverage criteria, to date, have led to pipelines with substantial market power being covered.145 Incenta concluded that there is no pressing need to change the coverage criteria to match the proposed changes to the declaration criteria as the purposes of the Gas Access Regime and the National Access Regime are different: [W]e consider that the regime under Part IIIA is focused on addressing a different economic problem to the one that emerges from substantial market power held by gas pipelines, it follows that we do not think there is a pressing need for the continued alignment between this regime and the one for gas access coverage. As demonstrated by the Hilmer Review, the national access regime was never intended to provide a regime for price regulation in instances of market power. By continuing to apply a form of test focused on providing regulated access to a circumstance where regulation should focus more on price, there is an increased risk that regulation is not applied in circumstances where it would otherwise be justified.146

In Incenta’s view, amending the coverage criteria to align with the declaration criteria (as set out in [9.300] above) would increase the risk of under-regulation.147 Incenta considered that: where a pipeline is vertically separated, then the pipeline already has the incentive to maximise competition in related market [under criterion (a)] …, and so the imposition of access regulation would not be expected to improve the prospects for competition in those markets.148 142 See AEMC, East Coast Wholesale Gas Market and Pipeline Frameworks Review, . 143 See AEMC, East Coast Wholesale Gas Market and Pipeline Frameworks Review, . 144 Incenta Economic Consulting, Assessment of the Coverage Criteria for the Gas Pipeline Access Regime, report prepared for the AEMC, September 2015 (“Incenta Report”). 145 Incenta Report, 3. 146 Incenta Report, 30. 147 Incenta noted that, if amended, the “coverage criteria [would be] less likely to cover all pipelines for which price regulation for monopoly regulation purposes would be justifiable”: Incenta Report, 4. 148 Incenta Report, 3.

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Ultimately Incenta concluded that: the potential risks of under or over-regulation that arise under the current regime for gas coverage can be addressed by asking a more straightforward question, namely: do the costs of regulation outweigh its benefits. In this case, this question can largely be answered by asking whether a gas pipeline owner possesses, and is able to apply, substantial and enduring market power.149

[9.330]

The AEMC’s discussion paper on pipeline regulation and capacity trading asks for market feedback on whether it appropriate to revise the coverage criteria and the Gas Access Regime more generally, so the regime may better addresses the market failures that arise in the gas sector. The AEMC consider that the market failures: could be addressed by a regulatory regime that more directly considers whether a pipeline owner is, or could be, exercising market power in the provision of capacity. This might also improve the credibility of the threat of regulation on other pipeline owners. Additional changes may also be warranted to the nature of economic regulation once this is applied to a pipeline. For example, currently, price regulation is typically only applied to a limited number of services (known as ’reference services’) on covered pipelines. Expanding the number of services that price regulation applies to, so that non-firm services are also reference services for example, may better constrain pipeline owners’ market power. Furthermore, the economic regulation of prices may increase competitive tension between pipeline owners and shippers, reducing shippers’ ability to hoard capacity. As noted in section 2.2.4, hoarding is facilitated by the pipeline owner having the ability, conferred by market power, to price capacity at monopoly prices, and hence not effectively compete with the shipper. Shippers engaged in hoarding may no longer be able to limit their competitors from entering upstream or downstream markets, as those competitors would be able to buy capacity at a regulated price.150

In its discussion paper, the AEMC noted that it: is particularly interested in stakeholder views on its analysis of the coverage test, which implies that changes should be considered so that the regulatory regime is more directly targeted at the potential sources of market failure in the gas transmission sector. Even if such a change resulted in no variation to pipelines’ current regulatory status, this would reduce the potential for market power issues arising in the future. The Commission welcomes feedback on whether it would be appropriate to further progress work in this area regardless of any market power currently being exercised in the sector.151

The AEMC is expected to conclude its review into these issues in mid 2016. 149 Incenta Report, 30. 150 AEMC, “Pipeline Regulation and Capacity Trading Discussion Paper – East Coast Wholesale Gas Market and Pipeline Frameworks Review”, 18 September 2015, 47. 151 AEMC, “Pipeline Regulation and Capacity Trading Discussion Paper – East Coast Wholesale Gas Market and Pipeline Frameworks Review”, 18 September 2015, iv.

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Where do the reviews leave us? The ACCC in its inquiry and Incenta in its report prepared for the AEMC review, both concluded that the coverage criteria should be revised to a much simpler test that is focused on asking whether a gas pipeline owner can exercise enduring market power. Both the ACCC and Incenta found that it was appropriate for the coverage criteria to differ from the declaration criteria given that the regimes are designed to address different economic problems. Interestingly, the ACCC’s and Incenta’s views about it being appropriate for the coverage criteria to diverge from the declaration criteria differ from the NCC’s views. For instance, in its recent consideration of whether to revoke coverage of the Dawson Valley Pipeline in 2014 the NCC concluded that there was no basis to distinguish between the declaration criterion (b) and coverage criterion (b) because “Part IIIA of the CCA and the NGL share a similar genesis, as do the declaration and coverage processes and criteria contained in each”.152 At this stage, it is not yet known whether the COAG Energy Council will endorse the ACCC’s recommendation for change to the coverage criteria or whether the AEMC will ultimately propose a similar change as part of its review. Any changes to the coverage criteria will likely to be the subject of a further round of consultation by the AEMC.

SUMMARY [9.340]

The Gas Access Regime, principally the NGL and the NGR, was introduced in the 2000s. The current regime replaced the Previous Gas Access Regime, which was in effect from 1997. Key aspects of the current regulatory framework include: • the way pipelines come to be “covered” and the form of regulation that can be applied; • the role of the regulators in considering access arrangement proposals of service providers under the NGL and NGR; and • the key aspects of the Gas Access Regime that differ from the regulatory regime that applies in the electricity sector. The current regulatory landscape shows that the majority of transmission pipelines in Australia are not “covered”. Of the 21 pipelines that are covered, only 14 are subject to full regulation. Following recent reviews, it is possible that the coverage criteria will change in the foreseeable future.

Questions for discussion 1. What parts of the gas supply chain are subject to access regulation? Why are some parts of the gas supply chain not regulated? 152 NCC, Dawson Valley Pipeline – Application for Revocation of Coverage – Final Recommendation, 4 August 2014, 17.

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2. Describe the rationale for the Gas Access Regime. 3. How are reference tariffs calculated for reference services on a pipeline that is fully regulated? 4. Discuss one key difference between the access regulation that is applied in gas compared with electricity. 5. Considering the principles set out in Ch 3, why is there scope for a 15-year no coverage exemption for a pipeline?

10

Telecommunications [10.10] OVERVIEW ...................................................................................................................................... 273 [10.30] BACKGROUND .............................................................................................................................. 275 [10.160] HISTORY OF ACCESS REGULATION IN THE TELECOMMUNICATIONS SECTOR .. 285 [10.160] Introduction of the telecommunications-specific access regime ........................................... 285 [10.180] Abolition of the negotiate/arbitrate model .............................................................................. 288 [10.190] Amendments to accommodate the NBN .................................................................................. 289 [10.240] KEY CONCEPTS ........................................................................................................................... 297 [10.260] CURRENT REGULATORY FRAMEWORK AND ROLE OF THE REGULATOR ............. 298 [10.260] Scope of regulation ....................................................................................................................... 298 [10.390] Determination of terms and conditions of access ................................................................... 316 [10.510] Hierarchy of telecommunications access instruments ............................................................ 330 [10.520] RECENT ISSUES ........................................................................................................................... 331 [10.560] SUMMARY ..................................................................................................................................... 336

OVERVIEW [10.10]

In Australia, the access regime that applies to telecommunications services is primarily contained in Pt XIC of the Competition and Consumer Act 2010 (Cth) (“CCA”). As the Constitution provides a head of power with respect to telecommunications, the Federal Government may make laws with respect to this area of trade and commerce. Therefore, the consistent regulation of telecommunications across Australia does not require the states and territories to take a cooperative approach. This avoids the need for the “lead legislator” model of electricity and gas discussed in Chs 8 and 9, in which South Australia is the lead legislating state, with other states and territories (where relevant) passing legislation to enact the appropriate parts of the South Australian law as law in their respective jurisdictions. The fact that telecommunications is regulated at the federal level has also avoided the “patchwork” of approaches to access regulation taken by individual states and territories with respect to other infrastructure industries, such as port and rail, which is discussed in Ch 11. Part XIC of the CCA provides for services to be “declared”. A declared service is one that is subject to regulation under Pt XIC. Essentially, an access provider must provide access to a declared service if access seekers request access to that service. The terms and conditions of access to a declared service (including price) are either agreed between the access provider and access seeker or are otherwise determined through a range of

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instruments, including access undertakings, binding rules of conduct and access determinations. Services that are not declared are not subject to access regulation under Pt XIC. Services are more likely to be declared where there are fewer than two or three networks providing services in competition with each other. When networks provide competing services, it is sometimes referred to as “infrastructure-based competition”. It is not necessary that the networks use the same technology to provide the services; what is important is that, from the end-user perspective, the services provided by the networks are substitutable. In Australia, infrastructure-based competition exists in the provision of (most) mobile services, because there are three competing networks: Telstra, Optus, and Vodafone Hutchison. Infrastructure-based competition is also present in the provision of fixed line voice and data services in many business districts, where it is economic for multiple service providers to install their own infrastructure over which to provide their own services, directly to end-users and/or as a wholesaler of services to other service providers. There is also some infrastructure-based competition in residential areas where Optus has rolled out its cable network, which may provide services in competition with Telstra’s fixed line copper and cable networks. Where there is no infrastructure-based competition, or the degree of competition is limited for some reason, services are more likely to be declared, which may then facilitate some competition in the provision of those services. This competition may be at a “facility” level, where the access seeker uses facilities of its own in conjunction with access to one or more declared services in order to provide services to end-users. An example of facilities-based competition is where access seekers put racks of their own digital subscriber line access multiplexers (“DSLAMs”) into Telstra’s telephone exchange buildings. By connecting the end-user’s copper line (unbundled from the Telstra network) to its DSLAM, an access provider can provide high-speed internet services to end-users. The provision of some services by access seekers to end-users does not involve the access seeker installing any facilities at all – this is referred to as “access-based competition”. Here, the access provider is effectively a wholesaler of services to access seekers, which enables access seekers to compete in downstream retail markets.

[10.20]

This chapter explores the concepts and issues related to access regulation as it applies to telecommunications services. It commences with some background on the infrastructure used to provide telecommunications services in Australia and a brief description of some of the services that are currently declared. Next, it provides an overview of the history of telecommunications access regulation. This history can be divided into three separate stages: • the creation of the telecommunications-specific access regime that was enacted in 1997 and which was primarily a “negotiate/arbitrate” model

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in which access seekers and access providers would first attempt to commercially negotiate terms and conditions of access, with bilateral arbitration by the regulator as a backstop where agreement could not be reached; • the replacement of the negotiate/arbitrate model with a “consider/ determine” model, in which regulated terms and conditions of access are determined upfront by the regulator and are not contingent upon the existence of a dispute between an access seeker and access provider; and • amendments to the regime in order to accommodate the rollout of the National Broadband Network (“NBN”) by the Government-owned NBN Co Limited (“NBN Co”). The chapter provides a brief introduction to some key concepts such as “carrier”, “carriage services” and “facilities” before examining the current regulatory framework, with particular emphasis on: • how telecommunications services become declared services; • the obligations that apply to a service once it becomes a declared service; and • the ways in which the terms and conditions of access to declared services may be determined.

BACKGROUND [10.30]

In order to understand how the telecommunications access regime applies in practice, it is necessary to have at least a high-level understanding of the infrastructure that is used to supply communications services and the different levels at which access seekers may seek access. When a service is declared (discussed in detail at [10.310] – [10.380]), the declaration is typically “technology neutral”, which means that access to the service is declared, as opposed to access to any particular infrastructure. Because it is the service that is declared, the declaration will, subject to any exemptions, apply to any party who supplies the declared service to third parties or to itself as an input for its own downstream services. In broad terms, the infrastructure used to provide telecommunications services may be divided into “fixed line” infrastructure (see [10.40]) and “wireless” infrastructure (see [10.110]).

Fixed line infrastructure and services

[10.40]

Fixed line infrastructure includes copper networks (such as the Telstra network that, until the rollout of the NBN commenced, connected almost every residential and business premises in Australia) and hybrid fibre coaxial (“HFC”) cable networks (such as the Telstra and Optus cable networks and some parts of the NBN). Fixed line networks tend to comprise multiple “local access networks”, which are connected by transmission networks.

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In Australia, both fixed line copper networks and HFC networks are used to provide voice and internet services. HFC networks are also used to provide Pay TV services. Telstra’s customer access network is currently the largest local access network in Australia. This network typically uses copper-based local loops to connect end-users to local exchanges across Australia. Figure 10.1 depicts a basic local access network. Figure 10.1 Basic local access network

[10.50]

Figure 10.2 illustrates the various levels of the supply chain involved in the provision of telecommunications services using fixed line facilities. Access seekers can compete at the “facility” level by installing their own infrastructure in exchanges to provide fixed line services, or they can compete at the retail level by purchasing wholesale inputs in order to assemble a package of services they can supply to end-users.

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Figure 10.2 Telecommunications (fixed) supply chain

Fixed line services that have been declared include: • unconditioned local loop service (“ULLS”) (see [10.60]); • line sharing service (“LSS”) (see [10.60]); • wholesale line rental (“WLR”) (see [10.70]); • local carriage service (“LCS”) (see [10.70]); • fixed originating access service (“FOAS”) (see [10.70]); • fixed terminating access service (“FTAS”) (see [10.80]); and • wholesale asymmetric digital subscriber line (“ADSL”) service (see [10.90]).

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These declared services are primarily supplied on Telstra’s fixed copper network.

[10.60]

The ULLS enables an access seeker to provide voice and/or data services to end-users by essentially taking the copper wire that connects the end-user premises to the exchange and connecting that copper wire to equipment that the access seeker has installed at the exchange. The wire is “unconditioned” in the sense that the access provider (which in almost all cases is Telstra) provides no services over that copper wire. In basic terms, when providing the ULLS, Telstra physically unplugs the copper wire from Telstra equipment in the exchange and plugs (or “jumpers”) it into the access seeker’s equipment. This provides the access seeker with access to both the high and low frequency parts of the copper line, which allows access seekers to provide voice (over the low frequency part) and/or broadband services (using the high frequency part) to end-users.

The LSS is a variation of the ULLS. It allows for a copper line to be shared by two parties, with access provided to the high frequency part of the copper line only.1 The access seeker is able to provide data (broadband) services to the end-user, with voice services being supplied by another service provider (usually Telstra).2 Where an access seeker takes the ULLS or the LSS, and subject to any technological limitations, the access seeker can provide high-speed data services to end-users where it has installed equipment (typically a DSLAM) in the relevant Telstra exchange. This enables the provision of “xDSL” services, which may take the form of high-speed digital subscriber line services that are asymmetric (known as ADSL, providing higher download speeds relative to upload speeds), or symmetric (known as SDSL).

[10.70]

The WLR, the LCS and the FOAS are wholesale voice services that, if taken together, enable an access seeker to provide an end-user with voice services (local, long-distance, international and fixed-to-mobile calls) without having to install equipment in exchanges.3 When taking the WLR, the access seeker in effect “rents” the Telstra telephone line connection over the copper line from Telstra in order to provide services to end-users. The access seeker may then purchase from Telstra (or the relevant access provider) the LCS, which enables the access seeker to resell local calls to end-users. In order for end-users to make long-distance, international and fixed-to-mobile calls, it must also purchase the FOAS. This service provides for the carriage of telephone calls to a “point of interconnect”4 from which the access provider may have its own transmission network over which a 1 Australian Competition and Consumer Commission (“ACCC”), Public Inquiry into the Fixed Line Services Declarations: Final Report, April 2014, 67. 2 ACCC, Public Inquiry into the Fixed Line Services Declarations: Final Report, April 2014, 11. 3 ACCC, Public Inquiry into the Fixed Line Services Declarations: Final Report, April 2014, 13. 4 ACCC, Public Inquiry into the Fixed Line Services Declarations: Final Report, April 2014, 70.

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call is carried or may acquire another service from a different infrastructure provider or providers to then carry the call to its intended recipient. The FOAS was formerly referred to as the “public switched telephone network originating access service”, or PSTN OA.

[10.80]

The FTAS is the opposite of the FOAS. It is a service for the carriage of telephone calls from a point of interconnect to an end-user.5 The service provides for voice calls from other networks to be carried (and “terminated”) on the network of the carrier providing the service. If this service was not provided, end-users on one network could not call end-users on another network. This service used to be referred to as the “public switched telephone network terminating access service”, or PSTN TA.

[10.90]

The wholesale ADSL service enables access seekers to resell ADSL broadband services to end-users. An access seeker acquires this service where it wishes to provide broadband services to end-users but does not want to (or cannot) install infrastructure in an exchange building. For example, a service provider may not be able to install facilities (or further facilities) in an exchange building where the exchange has been “capped” (see Box 10.1). The wholesale ADSL service comprises a local access component (essentially a charge for services provided by the copper wire connecting the end-user to the exchange) and a backhaul component (representing transmission from the exchange to the access seeker’s network). The access seeker provides its own global internet access service over the wholesale ADSL service. The ACCC declared a wholesale ADSL service in 2012.6

[10.100] There are a number of HFC networks in Australia. The largest HFC networks are owned by Telstra and Optus, who use them to provide voice, internet and Pay TV services to end-users. Telstra and Optus do not offer other service providers access to their HFC networks, and services supplied by these networks are not currently declared under Pt XIC of the CCA. It is intended that, as the NBN rolls out, NBN Co will progressively take ownership of the copper and HFC networks owned by Telstra and the HFC network owned by Optus (see Box 10.3). Wireless infrastructure and services

[10.110] Wireless infrastructure includes mobile (including “fixed wireless” networks) and satellite networks, both of which allow for the provision of voice and data services. 5 ACCC, Public Inquiry into the Fixed Line Services Declarations: Final Report, April 2014, 75. 6 ACCC, Declaration of the Wholesale ADSL Service under Part XIC of the Competition and Consumer Act 2010: Final Decision, February 2012.

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Similar to the discussion on fixed line services at [10.40], service providers may seek to operate at different levels of the supply chain. Service providers can engage in competition at an infrastructure level (such as Telstra, Optus and Vodafone Hutchison, who each own their own mobile networks) or at a non-infrastructure level as a “virtual” mobile network operator, purchasing wholesale services from mobile network operators and then packaging up these services for sale to end-users (such as Virgin Mobile, iiNet, and Macquarie Telecom). Figure 10.3 illustrates the mobile supply chain. Figure 10.3 Telecommunications (mobile) supply chain

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The key declared service in relation to the mobile network is the “mobile terminating access service” (“MTAS”).7 Similarly to the FTAS (see [10.80]), the MTAS is a service for terminating voice calls and short messaging services (“SMS”) on the network of the mobile carrier from which the service is acquired. Access to mobile services for both voice and data is important to millions of Australians. The Australian Bureau of Statistics (“ABS”) reports that, at 30 June 2015, there were approximately 21 million mobile handset subscribers in Australia.8 Relative to a population of 24 million, the importance of access to mobile services in Australia is clear. Internet services using fixed and wireless infrastructure

[10.120] Different technologies may provide similar services, but with very different characteristics or qualities. For example, broadband services may be provided via a copper network using ADSL or by an HFC network. However, the maximum download speed likely to be achieved using ADSL2+ technology is less than 25 megabits per second (“Mbps”), whereas speeds of up to 100 Mbps may be obtained on existing HFC networks. Networks that provide a download transmission speed that is usually higher than 25 Mbps are considered “superfast” broadband networks.9 Access to internet access services may be considered an “essential” service for the majority of individuals and businesses. As at the end of June 2015, the ABS reported that there were approximately 12.8 million internet subscribers in Australia.10 The majority of these connections were mobile and fixed wireless connections (47.6 per cent), followed by DSL (40 per cent), then cable, fibre, satellite and other (11.7 per cent), and finally dial-up (0.8 per cent).11 The ABS reported that almost all internet connections were “broadband”, which the ABS defines as an internet connection of above 256 kilobits per second (“kbps”). Facilities access

[10.130] This chapter focuses on access to telecommunications services, as opposed to access to telecommunications facilities (for example, access to 7 Whether the MTAS should be a declared service was most recently considered by the ACCC in 2014. The ACCC decided to extend the declaration of the MTAS for a further five-year period, and to vary the service description to include SMS termination services: see ACCC, Domestic Mobile Terminating Access Service: Declaration Inquiry: Final Decision, June 2014. 8 ABS, Internet Activity, Australia (2015) . 9 Telecommunications Act 1997 (Cth), s 141(10). 10 ABS, Internet Activity, Australia (2015) . 11 ABS, Internet Activity, Australia (2015) .

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telecommunications towers and exchange buildings). However, facilities access is mentioned briefly here because it is a crucial element in enabling facilities-based competition in the provision of services. In order to provide some services to end-users, an access seeker may need both access to the service declared under Pt XIC and access to a telecommunications facility. For example, in order to provide ADSL services using its own equipment, an access seeker will need access to the ULLS (or LSS) and access to relevant Telstra exchange buildings to install its DSLAMs. Facilities access is dealt with in Pts 3 (access to supplementary facilities) and 5 (access to telecommunications transmission towers and to underground facilities) of Sch 1 to the Telecommunications Act 1997 (Cth) (“Telecommunications Act”). In short: • Pt 3 of Sch 1 requires carriers to provide other carriers with access to facilities for the purpose of enabling the other carriers to provide competitive facilities and competitive carriage services or to establish their own facilities;12 and • Pt 5 of Sch 1 requires carriers to provide other carriers with access to telecommunications transmission towers, the sites of these towers, and to underground facilities that are designed to hold lines.13 It is a condition of a carrier licence that the holder of the licence complies with the provisions of Sch 1 to the Telecommunications Act.14 The terms and conditions of access are as agreed between the parties or, failing agreement, determined by an arbitrator appointed by the parties.15 If the parties are unable to agree on the appointment of an arbitrator, the ACCC is the arbitrator. The relevant Minister may make determinations setting out the principles dealing with price-related terms and conditions of access to facilities.16

[10.140] The requirement in Sch 1 to the Telecommunications Act for a carrier to provide access to another carrier to facilities the first carrier owns or operates may overlap with the requirement in s 152AR(4) of the CCA that, in respect of declared services, an access provider permit interconnection of its facilities with those of an access seeker so that the access seeker can provide services to end-users. Where facilities access is required to permit interconnection of facilities, the requirements in the Telecommunications Act and the CCA will overlap. The potential dual

12 Telecommunications Act, Sch 1, Pt 3, cl 17. 13 Telecommunications Act, Sch 1, Pt 5, cll 33, 34 and 35. 14 Telecommunications Act, s 61. 15 Telecommunications Act, Sch 1, Pt 3, cl 18(1). 16 Telecommunications Act, Sch 1, Pt 3, cl 19.

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operation of these provisions is illustrated by a case taken by the ACCC in relation to “exchange capping”, discussed in Box 10.1. Box 10.1: Access to facilities – Australian Competition and Consumer Commission v Telstra Corporation Limited (2010) 188 FCR 238 The case of Australian Competition and Consumer Commission v Telstra Corporation Limited related to access to Telstra exchange buildings. The relevant services that had been declared under CCA, Pt XIC were the ULLS and the LSS. Access seekers acquiring the ULLS and the LSS required access to Telstra exchange buildings (and to facilities located in those buildings) in order to provide services to end-users using the ULLS and LSS. Access seeker equipment (typically DSLAMs) must be installed in or adjacent to the relevant exchange building and the access seeker must run an interconnect cable from its equipment to the Main Distribution Frame (“MDF”) in the exchange building. The MDF is essentially a long rack on which the individual copper lines terminate and from which they then interconnect with the equipment of Telstra or an access seeker. The copper wires are terminated on “termination blocks”, which run in vertical columns along the MDF. The access seeker’s interconnection cables are run from the termination blocks to the access seeker’s equipment. There are physical constraints on Telstra exchange buildings relevant to the installation of access seeker equipment. First, there must be room in (or adjacent to) the exchange for the access seeker to install its DSLAMs. Second, there must be block positions available on the MDF so that the access seeker can install termination blocks and run interconnect cables from its DSLAM to the termination blocks. The case involved the rejection of requests made to Telstra by access seekers for interconnection of their facilities with facilities of Telstra at seven exchanges, and the publication by Telstra of notices containing representations that there was no capacity on the MDF at these seven exchanges that could be made available for use by access seekers to interconnect their facilities. The Court found that at each of the seven exchanges there were block positions on the MDF that were available to satisfy the requests of the access seekers and that Telstra had engaged in misleading or deceptive conduct, or conduct that was likely to mislead or deceive, by publishing notices that there was no longer space on the MDF available to access

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seekers. The Court found that Telstra contravened both Pt XIC of the CCA and Pt 3 of Sch 1 to the Telecommunications Act in rejecting the requests of the access seekers, as well as contravening the misleading and deceptive conduct provisions of the (then) Trade Practices Act 1974 (Cth). The Court imposed a penalty of A$18,550,000, which reflected a 30 per cent discount in light of Telstra’s cooperation and acceptance of responsibility. In March 2016, the House of Representatives passed a Bill17 with provisions designed to remove the possibility of access to particular facilities being governed by overlapping access regimes under the Telecommunications Act and the CCA. Essentially, the Bill provided that where access to a particular facility has been declared by the ACCC following a public inquiry held pursuant to Pt XIC of the CCA, access to that facility is governed by the CCA, and the obligation to provide access pursuant to the Telecommunications Act ceases.18 The Bill was introduced to the Senate on 16 March 2016 but lapsed following the prorogation19 of the 44th session of the Australian Parliament.

[10.150] Also relevant to access to facilities (and access to services more generally) are the powers of the ACCC under Pt XIB of the CCA. Part XIB sets out the telecommunications-specific anti-competitive conduct regime. Part XIB provides for the ACCC to make “record-keeping rules” that require service providers to keep and retain particular records and to provide reports to the ACCC.20 Access to Telstra exchange buildings is monitored by the ACCC via record-keeping rules issued under Pt XIB of the CCA.21 As noted at [10.130], Pt 5 of Sch 1 to the Telecommunications Act deals specifically with access to telecommunications transmission towers and underground facilities. The Act provides that the ACCC may make a Code setting out conditions to be complied with in relation to the provision of 17 Telecommunications Legislation Amendment (Access Regime and NBN Companies) Bill 2016 (Cth). 18 Telecommunications Legislation Amendment (Access Regime and NBN Companies) Bill 2016 (Cth), Sch 1, Pt 1, items 1 and 2. 19 On 21 March 2016, the Governor-General made a proclamation proroguing the 44th session of the Australian Parliament from 5pm on 15 April 2016 to 9.30am on 18 April 2016. The effect of a prorogation is to bring to an end a session of Parliament without dissolving the House of Representatives, or both Houses. See: Harry Evans and Rosemary Laing (eds), Odgers’ Australian Senate Practice (Department of the Senate, 13th ed, 2012) 178. 20 CCA, s 151BU. 21 ACCC, Access to Telstra Exchange Facilities: Record Keeping and Reporting Rules, issued pursuant to s 151BU(1) of the CCA, 14 July 2014.

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access under Pt 5.22 The ACCC first published a Code of access to telecommunications transmission towers, sites of towers and underground facilities in October 1999. The Code was amended in 2013.23

HISTORY OF ACCESS REGULATION IN THE TELECOMMUNICATIONS SECTOR Introduction of the telecommunications-specific access regime [10.160] Part XIC was inserted into the (then) Trade Practices Act 1974 (Cth) (now the CCA) by the Trade Practices Amendment (Telecommunications) Act 1997 (Cth). This was part of a wider suite of reforms directed at opening telecommunications markets to competition. Importantly, the other reforms included removing limits on the number of carrier licences that could be issued and the abolition of “reserved rights” of particular carriers to install certain telecommunications infrastructure or to be the primary suppliers of certain services. In its first incarnation, Pt XIC enabled declaration of services by the ACCC following the recommendation of an industry body (called the Telecommunications Access Forum) or after a public inquiry by the ACCC. The consequence of declaration was that service providers were under an obligation to supply the declared services to access seekers unless otherwise exempt. The terms and conditions of access could be determined by any one, or a combination, of three methods, being: • commercial negotiation; • application of an access undertaking submitted by an individual carrier and accepted by the ACCC; or • if a commercial agreement could not be reached, and there was no relevant access undertaking in place – arbitration of bilateral disputes conducted by the ACCC. It was also possible for the industry to develop and submit for approval access codes that set out model terms and conditions for access to particular declared services. Carriers and carriage service providers could then adopt those model terms and conditions in access undertakings given to the ACCC. In June 2000, the (then) Treasurer referred the issue of telecommunicationsspecific competition regulation for inquiry to the Productivity Commission.

22 Telecommunications Act, Sch 1, Pt 5, cl 37. 23 ACCC, Facilities Access Code Final Decision: An ACCC Decision to Vary “A Code of Access to Telecommunications Transmission Towers, Sites of Towers and Underground Facilities (October 1999)”, September 2013.

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The Productivity Commission was asked to examine and report on, among other things, the operation of Pt XIC of the CCA.24 The Productivity Commission published a draft report in March 2001. It identified a number of problems with the regime, including the time taken to resolve access disputes via access arbitrations undertaken by the ACCC and the sheer volume of access arbitrations. In light of the “time-critical nature of the problem”, the Government determined that a package of solutions should be developed and implemented in advance of the Productivity Commission releasing its final report.25 The Explanatory Memorandum accompanying the amendments explained the issues as follows: Although the intention of the telecommunications access regime is to promote commercial negotiation, in practice, there has been a substantial reliance on Commission arbitration to resolve significant disputes involving major carriers. As at May 2001, of the 44 cases notified to the Commission, 14 disputes had been resolved commercially (and withdrawn) and six finalised. Of the 24 disputes outstanding, interim determinations applied to 11, enabling commercial operations to progress on a reasonable basis while a final determination is being prepared. These access disputes have not been resolved within the expected timeframes, in part due to the need to consider threshold issues, develop complex network Pricing Principles and regulatory gaming by parties. There is some evidence to indicate that as the significant threshold issues have been considered and principles developed, there is scope to achieve quicker resolution of disputes. The time taken to resolve some disputes is a matter of concern to large parts of the telecommunications industry. Undue delay in the resolution of telecommunications access disputes is likely to impede competition in the telecommunications industry, and thereby adversely affect the quality and price of telecommunications services offered to customers.26

The amendments made to Pt XIC by the Trade Practices Amendment (Telecommunications) Act 2001 (Cth) included: • a requirement for the ACCC to determine principles relating to the price of access to a declared service at the time of declaring a service or as soon as practicable thereafter;27 • enabling the ACCC to publish an arbitration determination and the reasons for making the determination;28 24 Productivity Commission, Telecommunications Competition Regulation: Inquiry Report, 20 September 2001, v. 25 Explanatory Memorandum, Trade Practices Amendment (Telecommunications) Bill 2001 (Cth), 15. 26 Explanatory Memorandum, Trade Practices Amendment (Telecommunications) Bill 2001 (Cth), 3. 27 Trade Practices Amendment (Telecommunications) Act 2001 (Cth), Sch 1, item 1. 28 Trade Practices Amendment (Telecommunications) Act 2001 (Cth), Sch 1, item 7.

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• enabling the use of information from an arbitration in other arbitrations;29 and • providing for joint arbitrations where disputes dealt with common matters.30

[10.170] On 21 December 2001, the Productivity Commission published its final inquiry report. The Productivity Commission noted the intensive use of the telecommunications-specific access regime in Trade Practices Act 1974 (Cth), Pt XIC compared to the general National Access Regime in CCA, Pt IIIA: When compared to the use of Part IIIA of the TPA, Part XIC has been used relatively intensively by participants in the industry. Thirteen services have been declared, four undertakings submitted, and 43 disputes on terms and conditions notified. In comparison, under the generic access provisions in Part IIIA of the TPA, which apply to all industries, only nine declarations have been recommended by the National Competition Council (NCC) (and fewer have been accepted by the relevant Minister), nine regimes have been certified by the NCC as effective, and one undertaking has been accepted by the ACCC.31

The Productivity Commission noted the complaints of many participants regarding unnecessary delays in regulatory decision-making.32 The Productivity Commission considered that the processes for determining conditions for access were “cumbersome, resource-intensive and tardy”, which reflected the failure of access undertakings as a mechanism for providing access and the “extensive resort to regulatory gaming and the predominance of lengthy bilateral arbitrations”.33 The Productivity Commission made a number of recommendations directed at addressing those issues34 and found that the Telecommunications Access Forum had failed in its intended role of developing access conditions and should therefore be abolished.35 The Federal Government agreed with the Productivity Commission that changes should be made to improve the operation of the regime, including changes directed at facilitating efficient investment and providing greater 29 Trade Practices Amendment (Telecommunications) Act 2001 (Cth), Sch 1, item 14. 30 Trade Practices Amendment (Telecommunications) Act 2001 (Cth), Sch 1, item 15. 31 Productivity Commission, Telecommunications Competition Regulation: Inquiry Report, 20 September 2001, 242. 32 Productivity Commission, Telecommunications Competition Regulation: Inquiry Report, 20 September 2001, 242. 33 Productivity Commission, Telecommunications Competition Regulation: Inquiry Report, 20 September 2001, 303. 34 Productivity Commission, Telecommunications Competition Regulation: Inquiry Report, 20 September 2001, 303. 35 Productivity Commission, Telecommunications Competition Regulation: Inquiry Report, 20 September 2001, 303.

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certainty and more timely access to services.36 A number of the recommendations had already been given effect by the Trade Practices Amendment (Telecommunications) Act 2001 (Cth). Additional amendments to Pt XIC to implement these reforms were contained in the Telecommunications Competition Act 2002 (Cth) and included: • a requirement for the ACCC to make a written determination setting out model terms and conditions relating to access to core services;37 • removal of the ability to seek merits review by the Australian Competition Tribunal of final determinations made by the ACCC in arbitrating an access dispute;38 • provisions allowing the ACCC to make anticipatory class exemptions from the standard access obligations and anticipatory individual exemptions from the standard access obligations in the event that a service becomes a declared service;39 and • provisions permitting persons to give special access undertakings to the ACCC.40 The Explanatory Memorandum accompanying the amendments noted that the introduction of the requirement for the ACCC to publish model terms and conditions of access would assist parties to reach commercial agreement on fair terms and conditions of access. It was considered that removal of merits review by the Australian Competition Tribunal of final determinations made by the ACCC would improve the certainty and timeliness of access.41 Other changes made were designed to facilitate investment in new telecommunications infrastructure.42 Part XIC of the CCA then remained broadly in the same form between 2002 to 2010, when significant amendments were made to alter the regime from a negotiate/arbitrate regime to one in which terms and conditions of access would be established upfront as part of the declaration of a service, and to accommodate the rollout of the NBN.

Abolition of the negotiate/arbitrate model [10.180] Amendments to CCA, Pt XIC, which took effect from 1 January 2011, replaced the negotiate/arbitrate regime with a consider/determine model (see discussion in Ch 6, [6.230]) under which, at the time or shortly after a service is declared, the ACCC makes access determinations that set 36 Government Response to Productivity Commission Report on the Review of Telecommunications Competition Regulation, 2 . 37 Telecommunications Competition Act 2002 (Cth), Sch 2, item 2. 38 Telecommunications Competition Act 2002 (Cth), Sch 2, item 8. 39 Telecommunications Competition Act 2002 (Cth), Sch 2, items 60 and 62. 40 Telecommunications Competition Act 2002 (Cth), Sch 2, Pt 12. 41 Explanatory Memorandum, Telecommunications Competition Bill 2002 (Cth). 42 Explanatory Memorandum, Telecommunications Competition Bill 2002 (Cth).

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out the terms and conditions of access.43 For services already declared at the time of the amendments, the ACCC was required to undertake an inquiry into making an access determination shortly after the amendments commenced.44 The Explanatory Memorandum to the Bill amending Pt XIC stated that it was “clear that the ‘negotiate-arbitrate’ model is not producing effective outcomes for industry or consumers”.45 Under the new regulatory framework, parties can still negotiate different terms and conditions of access from those set by the ACCC in an access determination, but the price and non-price terms and conditions of access determined by the ACCC provide parties with a fall back in the event of failed negotiations. The amendments to CCA, Pt XIC also provide for the ACCC to make binding rules of conduct for the supply of declared services, which apply either in addition to, or as a variation of, an access determination.46 Binding rules of conduct are to be used as a temporary measure to deal with urgent matters until an access determination can be made with respect to the particular issue. Access determinations and binding rules of conduct are discussed in detail at [10.400] – [10.470] and [10.500].

Amendments to accommodate the NBN [10.190] On 7 April 2009, the Australian Government announced that it would establish a new company that would invest up to $43 billion over eight years to build and operate the NBN, which would deliver superfast broadband to Australian homes and businesses.47 NBN Co is required to operate as a wholesale-only provider and the NBN is to be open access (that is, available to all persons seeking access to services provided by the NBN). By operating in this way, the Government considered that NBN Co would “solve the current structural issues in the telecommunications sector where the vertically integrated incumbent owns the only ubiquitous fixed-line network in Australia, and competes against its wholesale customers in downstream retail markets”.48

43 CCA, s 152BCI(1) and s 152BCK(1). 44 CCA, s 152BCI(2). 45 Explanatory Memorandum, Telecommunications Legislation Amendment (Competition and Consumer Safeguards) Bill 2010 (Cth), 4. 46 Telecommunications Legislation Amendment (Competition and Consumer Safeguards) Act 2010 (Cth), Sch 1, item 160. 47 Wayne Swan (Deputy Prime Minister and Treasurer, 3 December 2007 to 27 June 2013), “New National Broadband Network” (Media Release 036, 7 April 2009). 48 Explanatory Memorandum, Telecommunications Legislation Amendment (Competition and Consumer Safeguards) Bill 2010 (Cth), 9.

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NBN Co was established by the National Broadband Network Companies Act 2011 (Cth). The objects of this Act are set out in Box 10.2. Box 10.2: Objects of the National Broadband Network Companies Act 2011 (Cth) The National Broadband Network Companies Act 2011 (Cth) provides that the main objects of the Act, when read together with Pt XIC of the CCA, are as follows: • to provide a regulatory framework for NBN corporations that promotes the long-term interests of end-users (“LTIE”) of carriage services or of services provided by means of carriage services; • to ensure that NBN Co remains in Commonwealth ownership until a number of events have occurred, including: – the Productivity Minister has tabled a report of an inquiry by the Productivity Commission; – the Parliamentary Joint Committee on the Ownership of NBN Co has examined the Productivity Commission’s report; – the Finance Minister has declared that conditions are suitable for the entering into and carrying out of an NBN Co sale scheme; • to provide a framework for restrictions on private ownership or control of NBN Co.49 The other objects of the Act, when read in conjunction with Pt XIC of the CCA, include: • ensuring the supply of an eligible service by an NBN corporation is on a wholesale basis; • providing a framework for the functional separation of NBN corporations; • providing a framework for the divestiture of assets of NBN corporations; • ensuring that an NBN corporation provides open access to eligible services on a non-discriminatory basis.50 The NBN was originally intended to be primarily a “fibre to the premises” (“FTTP”) model, which would deliver broadband speeds of up to 100 Mbps to 90 per cent of Australian premises.51 However, on 8 April 2014, the 49 National Broadband Network Companies Act 2011 (Cth), s 3(1). 50 National Broadband Network Companies Act 2011 (Cth), s 3(2). 51 The Statement of Expectations provided by the (then) Labor Government to NBN Co provided: “The Government expects that NBN Co will design, build and operate a new

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Government issued NBN Co with a new Statement of Expectations, which provided that the NBN rollout should transition from a primarily FTTP model to an “optimised multi-technology mix” model.52 This followed a strategic review of the NBN, conducted by NBN Co, which was initiated after the change in Government from the Australian Labor Party (which had established the NBN) to the Liberal–National Coalition in 2013. The outcome of the strategic review was a recommendation by NBN Co that an optimised multi-technology approach be adopted to rolling out the NBN that would provide speeds of at least 50 Mbps to approximately 90 per cent of the fixed line footprint and 100 Mbps to 65–75 per cent of Australian premises by the end of 2019.53 The “multi-technology mix” comprises: FTTP to around 20–26 per cent of premises; “fibre to the node” (“FTTN”) (or distribution point) to around 44–50 per cent of premises; and HFC cable to around 30 per cent.54 The FTTP and FTTN technologies may be collectively referred to as “FTTx”.

[10.200] In light of the NBN, Pt XIC of the CCA was significantly reformed. These reforms were made by the Telecommunications Legislation Amendment (Competition and Consumer Safeguards) Act 2010 (Cth) and included: • insertion of a new Pt 33 in the Telecommunications Act, providing for Telstra to voluntarily structurally separate, which could take the form of the creation of a new company by Telstra and the transfer of its fixed line assets to the new company, or for Telstra to progressively migrate its fixed line traffic to the NBN over an agreed period of time and sell or cease to use its fixed line assets on an agreed basis; • a requirement that if Telstra does not voluntarily implement structural separation, Telstra must be functionally separated, which would require Telstra to, among other things, conduct its network operations and wholesale functions at arm’s length from the rest of Telstra and to provide the same information and access to regulated services on equivalent price and non-price terms to its retail business and nonTelstra wholesale customers; and • incentives for Telstra to structurally separate, including prohibiting Telstra from acquiring specified bands of spectrum, which could be used for advanced wireless broadband services, unless Telstra structurally NBN to provide access to high speed broadband to all Australian premises. The Government’s objective for NBN Co is to connect 93 per cent of Australian homes, schools and businesses with fibre-to-the-premises technology providing broadband speeds of up to 100 megabits per second, with a minimum fibre coverage obligation of 90 per cent of Australian premises. All remaining premises will be served by a combination of next-generation fixed wireless and satellite technologies providing peak speeds of at least 12 megabits per second.” 52 Letter from The Hon M Turnbull (Minister for Communications) to Dr Z Switkowski (Executive Chairman, NBN Co Limited), 8 April 2014. 53 NBN Co, Strategic Review, December 2013, 18. 54 NBN Co, Strategic Review, December 2013, 18–19.

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separates, divests its HFC network and its interests in Foxtel, with scope for the Minister to remove the requirements around the cable network and Foxtel if the Minister is satisfied that Telstra’s structural separation undertaking is sufficient to address concerns about the degree of Telstra’s power in telecommunications markets. Section 577A of the Telecommunications Act provides that the ACCC may accept a written undertaking from Telstra in connection with structural separation (an “SSU”), which provides that at all times after the “designated day” (being 1 July 2018, or such other day as specified by the Minister): • Telstra will not supply fixed line carriage services to retail customers in Australia using a telecommunications network over which Telstra is in a position to exercise control; and • Telstra will not be in a position to exercise control of a company that supplies fixed line carriage services to retail customers in Australia using a telecommunications network over which Telstra is in a position to exercise control. The ACCC is prevented from accepting an undertaking under s 577A unless it is satisfied that the undertaking provides for transparency and equivalence in relation to the supply by Telstra of regulated services to Telstra’s wholesale customers and Telstra’s retail business units during the period commencing when the undertaking comes into force and ending at the start of the “designated day”, which is the anticipated date the NBN rollout will be completed (and hence Telstra will be structurally separated in accordance with the SSU given by Telstra, discussed at [10.210]). In connection with giving a SSU, Telstra may give the ACCC a draft migration plan after the SSU has come into force.55 A migration plan is required to specify the action to be taken by Telstra to cease to supply fixed line carriage services to customers using a telecommunications network over which Telstra is in a position to exercise control and to commence supplying fixed line carriage services to customers using the NBN. Structural separation of Telstra and the Definitive Agreements with NBN Co

[10.210] Telstra gave the ACCC a SSU and a draft migration plan on 29 July 2011.56 Telstra provided a revised draft migration plan to the ACCC on 24 August 2011, and a revised SSU on 9 December 2011.57 The migration plan provides for the structural separation of Telstra to be implemented by 55 Telecommunications Act, s 577BC(2). 56 ACCC, Assessment of Telstra’s Structural Separation Undertaking and draft Migration Plan: Final Decision, February 2012, 4. 57 ACCC, Assessment of Telstra’s Structural Separation Undertaking and draft Migration Plan: Final Decision, February 2012, 4.

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the migration of Telstra’s fixed line customers from its copper and HFC networks to the NBN. The SSU and the draft migration plan were accepted by the ACCC in February 2012.58 On 23 June 2011, Telstra signed “Definitive Agreements” with NBN Co and the Commonwealth in respect of Telstra’s participation in the rollout of the NBN.59 The Definitive Agreements were amended on 14 December 2014 in light of the NBN moving from a primarily FTTP model to the multitechnology mix model (see [10.190]).60 The Definitive Agreements are confidential, but summaries of the agreements have been released publicly. The key components of the Definitive Agreements are set out in Box 10.3. Box 10.3: Key components of the Definitive Agreements The key components of the Definitive Agreements include: • As NBN Co rolls out the NBN to each rollout region (comprising approximately 3000 premises per region), Telstra will disconnect standard copper-based Customer Access Network services and broadband services on its HFC cable network that are provided to premises in the NBN fibre footprint in that rollout region. Mandatory disconnection is required to commence within 18 months of NBN Co declaring the rollout region to be ready for service, although customers may voluntarily move during the 18 months, either as Telstra customers or customers of a competing service provider on the NBN. Telstra is not permitted to use those disconnected networks to provide services except in very limited circumstances. • Where NBN Co uses the copper and HFC networks to deliver an NBN service, Telstra will progressively transfer ownership of, and operational and maintenance responsibilities for, the relevant copper and HFC assets to NBN Co. The agreements provide for Telstra to maintain continuity of the active services that it provides to wholesale and retail customers over those assets following the transfer of the assets to NBN Co and until the services provided by those assets are migrated to the NBN (or until Telstra otherwise ceases providing those services). Telstra will continue to deliver Foxtel Pay TV services through continued access to the HFC network negotiated with NBN Co.

58 ACCC, Assessment of Telstra’s Structural Separation Undertaking and draft Migration Plan: Final Decision, February 2012. 59 Telstra, “Telstra Signs NBN Definitive Agreements” (Media Release, 23 June 2011). 60 Telstra, “Telstra Signs Revised NBN Definitive Agreements” (Media Release, 14 December 2014).

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• For 20 years from the commencement date, Telstra must exclusively use the NBN as the fixed line connection to premises in the NBN fibre footprint, subject to some limited exceptions. • Telstra is prevented from promoting wireless services as a substitute for fibre-based services for 20 years from the commencement date, but is otherwise free to compete in the market for the supply of wireless services. • Telstra will receive payments for disconnecting premises in rollout regions, with the payment received dependent on a number of criteria, including the number of lines to the premises that have been disconnected and whether or not commercial services were provided on those lines. These payments, together with payments associated with the sale of lead-in conduits, are approximately $4 billion (post-tax, net present value). • Telstra will provide NBN Co with access to certain infrastructure – dark fibre, exchange space, lead-in conduits and ducts – at prices based on committed large volume levels of usage and availability. Telstra retains ownership of all infrastructure assets, except for lead-in-conduits used by NBN Co, which will become NBN Co property once used. The payments for access to Telstra infrastructure are worth approximately $5 billion (which is assumed to be received across an average period of 30 years). • Commitments by NBN Co to supply to Telstra NBN Co’s Basic Service Offering in respect of premises that are serviceable by NBN Co, in respect of which NBN Co must not charge Telstra more than $24 (excluding applicable taxes) or make any submission to the ACCC seeking, or include in a special access undertaking, a price that is more than $24 (excluding applicable taxes). Sources: Telstra, “Telstra Signs NBN Definitive Agreements” (Media Release, 23 June 2011); Telstra, “Telstra Signs Revised NBN Definitive Agreements” (Media Release, 14 December 2014).

The Definitive Agreements contain a number of aspects that could raise issues under the anti-competitive conduct provisions in Pt IV of the CCA. To deal with this issue, s 577BA of the Telecommunications Act provides that if Telstra enters into a contract, arrangement or understanding with an NBN corporation and the operative provisions of the contract, arrangement or understanding are subject to a condition precedent that a SSU under s 577A has come into force, then the entering into of the contract, arrangement or understanding is authorised for the purposes of s 51(1) of the CCA. The effect of this authorisation is that the entering into the

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Definitive Agreements (which is subject to a number of conditions, including ACCC acceptance of Telstra’s SSU) is exempt from the application of Pt IV of the CCA.

[10.220] In 2011, amendments were made to Pt XIC of the CCA as part of the broader legislative package relating to the creation of NBN Co. The amendments were made by the Telecommunications Legislation Amendment (National Broadband Network Measures – Access Arrangements) Act 2011 (Cth) and included: • insertion of provisions covering the circumstances in which services supplied by an NBN corporation are declared services; • the division of the standard access obligations into “category A standard access obligations” and “category B standard access obligations”, where the latter apply to an NBN corporation when supplying a declared service; • a requirement for an NBN corporation to provide access on a non-discriminatory basis and to carry on related activities (such as the development of a new service, or the enhancement of a service) on a non-discriminatory basis; • a requirement that an NBN corporation report to the ACCC on differences between the terms and conditions set out in an access agreement entered into with an access seeker for a service and: – the standard form of access agreement for that service; – any special access undertakings in operation relating to that service; – any access determination relating to that service. Significantly, the Telecommunications Act was also amended to provide that where a telecommunications network (other than the NBN) comes into existence, or is altered or upgraded, after 1 January 2011 in order to supply or be capable of supplying a superfast carriage service to customers (other than individual government or corporate end-users), that network must offer a Layer 2 bitstream service.61 The Revised Explanatory Memorandum accompanying the amendments explains that: these requirements will mean that mass market fixed-line access networks which supply superfast carriage services with a download transmission speed normally of more than 25 Mbps, must offer a Layer 2 bitstream service. The supply of this service is then subject to the key access, non-discrimination and transparency obligations set out in the Access Bill. Furthermore, once the appropriate codes and standards are in place, carriers will be required to build and operate FTTP networks so they are consistent with NBN technical specifications. Together these amendments should ensure that end-users have access to the same high-quality superfast broadband services, regardless of the network 61 Telecommunications Legislation Amendment (National Broadband Network Measures – Access Arrangements) Act 2011 (Cth), Sch 1, items 86 – 88.

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provider, and assist the NBN in meeting its objectives nationally by ensuring it operates on a more level regulatory playing field.62

Therefore, under Pt 7 of the Telecommunications Act, a controller of a superfast broadband network is required to offer a Layer 2 bitstream service (a wholesale service) to carriers and service providers.63 Further, the ACCC, under CCA, Pt XIC is required to declare a Layer 2 bitstream service.64 The combined effect of these legislative provisions is that services provided on those networks are open access (that is, available to all access seekers). Under Pt 8 of the Telecommunications Act, a controller of a superfast broadband network is prevented from providing a retail service on its network. Together, these two requirements mean that superfast telecommunications networks must be operated on an open-access and wholesale-only basis (unless a relevant exemption applies). See [10.540] in relation to proposed amendments to Pts 7 and 8 of the Telecommunications Act. Review of the operation of the amended Pt XIC

[10.230] As part of the amendments made to CCA, Pt XIC in 2010, s 152EOA was inserted and provided that before 30 June 2014 the Minister must conduct a review of the operation of Pt XIC.65 The terms of reference for the review were published in late 2013, and not only included the matters that were required by statute to be reviewed, but also directed that a cost-benefit analysis be undertaken to analyse the economic and social costs and benefits arising from the availability of broadband via different technologies. Further, the terms of reference required that the report address the optimal long-term ownership and regulatory arrangements for NBN Co and give consideration to the issues associated with infrastructure-based competition and the economic benefit of alternatives. The terms of reference sought recommendations on the structure of the Australian wholesale broadband market, including regulatory arrangements.66 The outcomes of this review, and the interim Government response, are discussed at [10.520]. 62 Revised Explanatory Memorandum, National Broadband Network Companies Bill 2010 (Cth), Telecommunications Legislation Amendment (National Broadband Network Measures – Access Arrangements) Bill 2011 (Cth), 14. 63 Telecommunications Act, s 141. 64 Telecommunications Legislation Amendment (National Broadband Network Measures – Access Arrangements) Act 2011 (Cth), Sch 1, item 94 (CCA, s 152AL(3C). In February 2012, the ACCC issued a final report declaring the Layer 2 bitstream service: ACCC, Layer 2 Bitstream Service Declaration: Final Report, February 2012. 65 CCA, s 152EOA(1)(a). 66 M Turnbull (then Minister for Communications), Panel of Experts to Conduct Cost-Benefit Analysis of Broadband & Review NBN Regulation (News release, 12 December 2013)

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KEY CONCEPTS [10.240] In order to understand the mechanics of the current regulatory framework in Pt XIC, it is necessary to comprehend some key concepts. Many of the terms used in Pt XIC are defined by reference to the definitions given to those terms in the Telecommunications Act. The access obligations in Pt XIC apply to “carriers” and “carriage service providers”. A carrier is the holder of a carrier licence.67 The owner of a network unit that is used to supply carriage services to the public is required to hold a carrier licence.68 A carriage service provider is a person who supplies, or proposes to supply, a listed carriage service to the public using a network unit owned by one or more carriers or a network unit in relation to which a nominated carrier declaration is in force.69 A carriage service is defined broadly as a service for carrying communications by means of guided and/or unguided electromagnetic energy.70 The term communications is also defined very broadly and includes any communication whether: between persons and persons, things and things, or persons and things; in the form of speech, music or other sounds; in the form of data or text; in the form of visual images; in the form of signals; or any other form or combination of forms.71 In general terms, a carrier tends to be a person who owns infrastructure that is used to provide communications services. A carriage service provider tends to be a person who supplies communications services over infrastructure typically owned by carriers.

[10.250] In broad terms, there are four types of network unit: • a single line link connecting distinct places in Australia, where the line link meets certain minimum distance requirements; . 67 Telecommunications Act, s 7, definition of “carrier”. 68 Telecommunications Act, s 42. There are a number of exemptions from the requirement to hold a carrier licence, including: where the sole use of the network unit is use by, or on behalf of, a defence organisation to carry communications necessary or desirable for defence purposes (s 45); where the network unit is used wholly or principally by the Australian Secret Intelligence Service or by the Australian Security Intelligence Organisation (s 46); where the Minister has determined that s 42 does not apply to a specified network unit, or a specified person, or a specified use of a network unit (s 51). 69 Telecommunications Act, s 87. A nominated carrier declaration may be made by ACMA on the application of the carrier that owns the relevant network unit: Telecommunications Act, s 77. The Telecommunications Act then applies to the nominated carrier in relation to the network units as if they were owned or operated by the nominated carrier: Telecommunications Act, s 81A. 70 Telecommunications Act s 7, definition of “carriage service”. 71 Telecommunications Act s 7, definition of “communications”.

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• multiple line links connecting distinct places in Australia, where the line links meet certain minimum distance requirements; • designated radiocommunications facilities (for example, base stations used to supply public mobile telecommunications services, or satellitebased facilities);72 and • facilities specified in a Ministerial determination.73 The term “line”, which appears in the first two categories of network unit, is defined to mean “a wire, cable, optical fibre, tube, conduit, waveguide or other physical medium used, or for use, as a continuous artificial guide for or in connection with carrying communications by means of guided electromagnetic energy”.74 The definition of “line” is very broad and captures most fixed line networks (as opposed to mobile or wireless networks). The definition of “designated radiocommunications facility” is similarly broad and includes most wireless networks. The term “facility” is also defined very widely and means any part of the infrastructure of a telecommunications network, or any line, equipment, apparatus, tower, mast, antenna, tunnel, duct, hole, pit, pole or other structure or thing used, or for use in, or in connection with, a telecommunications network.75

CURRENT REGULATORY FRAMEWORK AND ROLE OF THE REGULATOR Scope of regulation [10.260] The telecommunications access regime in CCA, Pt XIC applies to “declared services”. Services that may be declared are “eligible services”, and “eligible services” are “listed carriage services” or services that facilitate the supply of listed carriage services. As noted above, a “carriage service” is very broadly defined as a service for carrying communications by means of guided and/or unguided electromagnetic energy (see [10.240]).76 There are two ways in which either a non-NBN service or an NBN service may become a declared service: 1. the ACCC declares the service to be a declared service; or 2. a carrier or carriage service provider (or NBN Co) supplies the service and there is a special access undertaking in operation in relation to the supply of that service, given by that carrier or carriage service provider (or NBN Co). 72 Telecommunications Act, ss 28, 31. 73 Telecommunications Act, s 29. 74 Telecommunications Act, s 7, definition of “line”. 75 Telecommunications Act, s 7, definition of “facility”. 76 CCA, s 152AL(1); Telecommunications Act, s 7, definition of “carriage service”.

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There is a third way an NBN service may become a declared service: where the NBN corporation has formulated a standard form of access agreement that relates to access to the service and published it on its website. An NBN corporation is prohibited from supplying an eligible service unless the service is a declared service; that is, before an NBN corporation may supply an eligible service, the service must: • have been declared by the ACCC specifically as a declared service relating to the NBN corporation (declarations of eligible services that are not specific to the NBN corporation do not apply to services supplied or capable of being supplied by an NBN corporation) (see [10.320]); or • be the subject of a special access undertaking given by the NBN corporation, and which is in operation (see [10.370]); or • be the subject of a standard form of access agreement that is available on the NBN corporation’s website (see [10.380]).77 Consequence of a service being a declared service under CCA, Pt XIC (non-NBN services)

[10.270] A carrier or carriage service provider that supplies declared services (the access provider) is subject to the category A standard access obligations when supplying declared services (termed active declared services). Box 10.4 sets out the category A standard access obligations. Box 10.4: Category A standard access obligations The category A standard access obligations apply where a service provider requests an access provider to supply it with an active declared service. These obligations are: • supply: the access provider must supply the active declared service to a service provider;78 • equivalence of technical and operational quality: the access provider must take all reasonable steps to provide the service to the access seeker with the same technical and operational quality as that which the access provider provides to itself;79 • equivalence of fault detection, handling and rectification: the access provider must take all reasonable steps to provide the access seeker with the same quality and timing of fault detection, handling and rectification as that which the access provider provides to itself;80

77 CCA, s 152CJA(1). 78 CCA, s 152AR(3)(a). 79 CCA, s 152AR(3)(b). Ordering and provisioning are taken to be aspects of technical and operational quality: CCA, s 152AR(4A). 80 CCA, s 152AR(3)(c).

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• interconnection of facilities: the access provider must permit interconnection of its facilities with the service provider’s facilities.81 The access provider must also take all reasonable steps to ensure that the technical and operational quality and timing of the interconnection, and fault detection, handling and rectification associated with the interconnection, is equivalent to that which the access provider provides to itself;82 • provision of billing information: if requested to do so by the service provider, the access provider must give the service provider billing information in connection with matters associated with, or incidental to, the supply of the active declared services;83 • conditional access equipment: where the access provider supplies an active declared service by means of conditionalaccess customer equipment, the access provider must supply to the service provider any service necessary to enable the service provider to supply carriage services and/or content services by means of the active declared service and using the conditional-access customer equipment.84 Additional obligations apply where the active declared service being supplied is a Layer 2 bitstream service supplied on a designated superfast telecommunications network. In these circumstances, the access provider, in complying with the category A standard access obligations, must not discriminate between access seekers and must not discriminate in favour of itself.85 Related activities, such as the development or enhancement of services, and providing information to service providers about these activities, must also be carried out on a non-discriminatory basis.86 In March 2016, the House of Representatives passed a Bill87 with provisions that would amend the category A standard access obligations to place a further obligation on an access provider who: is required to supply an active declared service; owns or otherwise controls physical access to customer cabling; and uses that cabling and a network to 81 CCA, s 152AR(5)(c). 82 CCA, s 152AR(5)(d) and (e). 83 CCA, s 152AR(6) and (7). 84 CCA, s 152AR(8). 85 CCA, s 152ARA(1) and (7). 86 CCA, s 152ARB(2). 87 Telecommunications Legislation Amendment (Access Regime and NBN Companies) Bill 2016 (Cth).

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supply the active declared service. In these circumstances, if requested, the access provider would be required to provide the service provider with access to that cabling for the purpose of the service provider supplying carriage services and/or content services.88 The amendment was directed at ensuring that an access provider’s control of in-building cabling cannot be used to prevent access seekers from obtaining end-to-end access for the purpose of supplying carriage or content services to end-users.89 The Bill was introduced to the Senate on 16 March 2016 but lapsed without being passed by the Senate (see [10.140]).

[10.280] There are some exceptions to the category A standard access obligations set out in Box 10.4. These include that the obligation to supply an active declared service does not apply to the extent to which the obligation would have any of the following effects: • preventing a service provider who already has access to the declared service from obtaining a sufficient amount of the service to meet that service provider’s reasonably anticipated requirements;90 • preventing the access seeker from obtaining a sufficient amount of the service to be able to meet the access seeker’s reasonably anticipated requirements;91 • preventing Telstra from complying with an undertaking in force under the following sections of the Telecommunications Act: s 577A (structural separation undertaking); s 577C (undertaking in relation to HFC networks); or s 577E (undertaking in relation to subscription television broadcasting licences);92 • if a final migration plan is in force, requiring Telstra to engage in conduct in connection with matters covered by the final migration plan.93 Further, the category A standard access obligations do not impose an obligation on an access provider if there are reasonable grounds to believe that: • the access seeker would fail to comply with terms and conditions in respect of which the access provider complies or would be likely to comply; or 88 Telecommunications Legislation Amendment (Access Regime and NBN Companies) Bill 2016 (Cth), Sch 1, Pt 2, item 5. 89 Revised Explanatory Memorandum, Telecommunications Legislation Amendment (Access Regime and NBN Companies) Bill 2016 (Cth) 3. 90 CCA, s 152AR(4)(a). 91 CCA, s 152AR(4)(b). 92 CCA, s 152AR(4)(e). 93 CCA, s 152AR(4)(f).

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• the access seeker would fail to protect the integrity of the network or the safety of individuals working on, or using services supplied by means of, the telecommunications network or a facility.94 The CCA provides two examples of where there may be reasonable grounds to believe that the access seeker would fail to comply with terms and conditions in respect of which the access provider would comply or would be likely to comply: • evidence that the access seeker is not creditworthy; and • repeated failures by the access seeker to comply with the terms and conditions on which the same or similar access has been provided.95

[10.290] It is also possible to seek an exemption from the category A standard access obligations. Such exemptions may only be made on an anticipatory basis; that is, the relevant service or proposed service in respect of which the exemption is given cannot be a declared service at the time the ACCC makes the exemption determination.96 Exemptions may be given in respect of a class of carrier or carriage service provider, or in respect of an individual.97 The ACCC must not make an exemption determination unless the ACCC is satisfied that the making of the determination will promote the LTIE of carriage services or of services supplied by means of carriage services (the LTIE criterion is discussed at [10.320]).98 An exemption determination may be subject to conditions or limitations.99 Prior to amendment of Pt XIC in 2010, the ACCC had been able to make exemption determinations for services that were declared at the time the exemption determination was made. These were referred to as “ordinary exemptions”.100 Following the introduction of the access determination provisions in 2010, the provisions relating to ordinary exemptions were removed. The Explanatory Memorandum explains that provision for ordinary exemptions was no longer required because the ACCC could provide in an access determination that any or all of the category A standard access obligations are not applicable to a carrier or carriage 94 CCA, s 152AR(9)(a) and (b). Note the definition of facility in s 7 of the Telecommunications Act: (a) any part of the infrastructure of a telecommunications network; or (b) any line, equipment, apparatus, tower, mast, antenna, tunnel, duct, hole, pit, pole or other structure or thing used, or for use, in or in connection with a telecommunications network. 95 CCA, s 152AR(10). 96 CCA, s 152ASA(1A) (class exemption), s 152ATA(3A) (individual exemption). 97 CCA, s 152ASA(1) (class exemption), s 152ATA(1) (individual exemption). 98 CCA, s 152ASA(4) (class exemption), s 152ATA(6) (individual exemption). 99 CCA, s 152ASA(2) (class exemption), s 152ATA(4) (individual exemption). 100 CCA, s 152AS (ordinary class exemptions), s 152AT (ordinary individual exemptions), repealed by Telecommunications Legislation Amendment (Competition and Consumer Safeguards) Act 2010 (Cth), s 3 and Sch 1, [137], [138].

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service provider, or otherwise restrict or limit the application of these obligations to a carrier or carriage service provider.101 Consequence of a service being a declared service (NBN services)

[10.300] The category B standard access obligations apply to declared services supplied by an NBN corporation. The differences between the category A standard access obligations (which apply to carriers and carriage service providers other than an NBN corporation) and the category B standard access obligations reflect the fact that an NBN corporation may only engage in wholesale activities. As such, a number of the category A standard access obligations, which refer to the access provider providing the access seeker with a service that is equivalent to the service the access provider gives to itself, are not appropriate. The category B standard access obligations are set out in Box 10.5. Box 10.5: Category B standard access obligations The category B standard access obligations apply to an NBN corporation. These obligations are: • supply: where an NBN corporation supplies a declared service, the NBN corporation must, if requested to do so by a service provider, supply the service to the service provider so that the service provider can provide carriage services and/or content services;102 • interconnection of facilities: if an NBN corporation is a carrier or carriage service provider and the NBN corporation owns or controls a facility, or is a nominated carrier in relation to a facility, the NBN corporation must permit interconnection of those facilities with the facilities of a service provider for the purpose of enabling the service provider to be supplied with declared services in order that the service provider can provide carriage services and/or content services;103 • conditional access equipment: if an NBN corporation is a carrier or carriage service provider and the NBN corporation supplies a declared service by means of conditional-access customer equipment, the NBN corporation must supply to the service provider who has requested supply of a declared service from an NBN corporation, any service that is necessary to enable the service provider to supply carriage services and/or content

101 Explanatory Memorandum, Telecommunications Legislation Amendment (Competition and Consumer Safeguards) Bill 2010 (Cth), 108. 102 CCA, s 152AXB(2). 103 CCA, s 152AXB(4).

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services by means of the declared service and using the conditional-access customer equipment.104 Similarly to the note made in connection with the category A standard access obligations set out in Box 10.4, in March 2016, the House of Representatives passed a Bill105 with provisions that would add a further obligation where the NBN corporation: is required to supply a declared service; owns or otherwise controls physical access to customer cabling; and uses that cabling to supply the declared service. In these circumstances, if requested, an NBN corporation would be required to give the service provider access to the customer cabling for the purpose of the service provider supplying carriage services and/or content services.106 The Bill was introduced to the Senate on 16 March 2016 but lapsed without being passed by the Senate (see [10.140]). Importantly, an NBN corporation is subject to a non-discrimination obligation in complying with the category B standard access obligations; that is, an NBN corporation must not discriminate between access seekers.107 Discrimination against an access seeker is permitted where an NBN corporation has reasonable grounds to believe that the access seeker would fail, to a material extent, to comply with the terms and conditions on which the NBN corporation complies, or is reasonably likely to comply, with the relevant obligation.108 Examples include evidence that the access seeker is not creditworthy and repeated failures by the access seeker to comply with the terms and conditions on which the same or similar access has been provided.109 An NBN corporation must also not discriminate in favour of itself in relation to the supply of a declared service.110 Finally, an NBN corporation must carry on “related activities” on a non-discriminatory basis.111 Related activities include the development and enhancement of services and providing information to service providers about such activities.

[10.310] As with the category A standard access obligations (see [10.280]), there are some exceptions to the category B standard access 104 CCA, s 152AXB(5). 105 Telecommunications Legislation Amendment (Access Regime and NBN Companies) Bill 2016 (Cth). 106 Telecommunications Legislation Amendment (Access Regime and NBN Companies) Bill 2016 (Cth), Sch 1, Pt 2, item 6. 107 CCA, s 152AXC(1). 108 CCA, s 152AXC(2). 109 CCA, s 152AXC(3). 110 CCA, s 152AXC(7). 111 CCA, s 152AXD(1).

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obligations. The category B standard access obligations do not impose an obligation on an NBN corporation if there are reasonable grounds to believe that: • the access seeker would fail to comply with terms and conditions in respect of which the NBN corporation complies or would be likely to comply; or • the access seeker would fail to protect the integrity of the network or the safety of individuals working on, or using services supplied by means of, the telecommunications network or a facility.112 ACCC declaration of services (non-NBN and NBN services)

[10.320] Before declaring a service, the ACCC must hold a public inquiry and prepare a report.113 The ACCC may only declare a service where it is satisfied that the making of the declaration will promote the LTIE of carriage services or of services provided by means of carriage services. Box 10.6 sets out the factors to be considered when determining whether declaring a service would promote the LTIE. Box 10.6: Promotion of the LTIE The object of CCA, Pt XIC is to promote the LTIE of carriage services or of services provided by means of carriage services.114 In determining whether declaration of a service would promote the LTIE, regard must be had to the extent to which declaration is likely to result in the achievement of the following objectives: • promoting competition in markets for listed services (being carriage services and services supplied by means of carriage services); • achieving any-to-any connectivity in relation to carriage services that involve communication between end-users; • encouraging economically efficient use of, and economically efficient investment in, the infrastructure by which listed

112 CCA, s 152AXB(6). 113 CCA, s 152AL(3)(a) and (b), s 152AL(8A)(a) and (b). The public inquiry is held under Pt 25 of the Telecommunications Act and the report is prepared under s 505 of that Act. Part 25 of the Telecommunications Act essentially governs the manner in which the ACCC may conduct public inquiries, including that the ACCC: must inform the public that the inquiry is being held (s 498); may publish a discussion paper in relation to the subject matter of the inquiry (s 499); must provide a reasonable opportunity for any member of the public to make a written submission in relation to the inquiry (s 500); may hold public hearings (s 501); and must prepare a report setting out its findings as a result of the inquiry (s 505). 114 CCA, s 152AB(1).

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services are supplied and any other infrastructure by which listed services are, or are likely to become, capable of being supplied.115 In determining whether declaration will promote competition, regard must be had to the extent to which declaration will remove obstacles to end-users of listed services gaining access to listed services.116 In determining whether declaration will encourage the economically efficient use of, and investment in, infrastructure by which listed services are supplied and any other infrastructure by which listed services are, or are likely to become, capable of being supplied, regard must be had to: • whether it is, or is likely to become technically feasible for the services to be supplied and charged for, having regard to: the technology that is in use, available or likely to become available; whether the costs that would be involved in supplying, and charging for, the services are reasonable or likely to become reasonable; and the effects, or likely effects, that supplying and charging for the services would have on the operation or performance of telecommunications networks; • the legitimate commercial interests of the supplier or suppliers of the services, including their ability to exploit economies of scale and scope; and • the incentives for investment in the infrastructure by which the services are supplied and any other infrastructure by which the services are, or are likely to become, capable of being supplied.117 In considering the incentives for investment, regard must be had to the risks involved in making the investment.118 In relation to the any-to-any connectivity objective, the communication of end-users on different networks, not just on the same network, is relevant.119

[10.330] Box 10.7 provides an example of the declaration of a service by the ACCC. The service discussed in Box 10.7, the domestic transmission capacity service, is of particular interest because it is a service that is the subject of very different competitive dynamics depending on the geographic 115 CCA, s 152AB(2). 116 CCA, s 152AB(4). 117 CCA, s 152AB(6). 118 CCA, s 152AB(7A). 119 CCA, s 152AB(8).

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area in which it is provided. The methodology used by the ACCC to set prices for access to the service, which uses the prices charged on the competitive routes as a reference point, is also interesting and is considered in Box 10.15. Box 10.7: ACCC domestic transmission capacity service access determination The domestic transmission capacity service (“DTCS”) is a high-capacity transmission service. Transmission services are provided by high-capacity data links that carry large volumes of communications traffic over long distances. Communications traffic from a particular area or region will usually be aggregated for transport using transmission services. The declared DTCS is a wholesale input to the provision of other services and is not a resale service. This means that the DTCS must be used in combination with other infrastructure in order to provide services to end-users. The service is a “point-to-point” service, meaning that it is a service that delivers communication traffic between specific locations. The access seeker delivers its communications traffic to a point of interconnection with the access provider’s transmission infrastructure (Point A), the communications traffic is then transmitted over that infrastructure (to Point B), and the access seeker must organise for the further distribution of that communications traffic from that point. There are a number of different types of transmission services, including: • inter-capital transmission – transmission mainly between call charge areas in different mainland capital cities excluding Darwin and Hobart (a call charge area is the area in which the cost of a call between end-users is charged as a local call); • “other” transmission – transmission between different call charge areas other than inter-capital transmission (includes capital-regional routes); The ACCC considers the DTCS to be an enduring bottleneck on particular geographic routes in light of the large sunk costs associated with transmission networks. These costs may make it economically inefficient for competitors to duplicate existing transmission network infrastructure in certain geographic markets. The ACCC considers that transmission networks underlie virtually every telecommunication service and, as such, are a critical input for the supply of all other

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downstream retail and wholesale telecommunications services, particularly on those geographic routes that are considered to be natural monopolies or which are otherwise uncompetitive. Not all DCTS are declared. The ACCC uses criteria to assess the state of competition in exchange service areas (“ESAs”) and on transmission routes. The competition assessment methodology applied by the ACCC in its March 2014 declaration requires, as a starting point, that there are a minimum of three independent fibre providers at, or within a very close proximity to, a Telstra exchange. The ACCC then examines a range of additional quantitative and qualitative factors to assess the level of competition on the various routes. After application of the competition assessment methodology, the ACCC reviews the results on a case-by-case basis to assess whether there are: any routes that should be removed from regulation even though they did not satisfy the relevant criteria set out in the methodology; and any routes that should remain subject to regulation even though they satisfied the criteria. The ACCC refers to the example of Mudgeeraba in Queensland that failed to meet the starting point criterion that there are at least three independent fibre providers at, or within close proximity to, the relevant exchange. However, the ACCC notes that even though there is only one alternative fibre provider, there are a total of five fibre competitors within a 150 m radius of the exchange and Mudgeeraba is on a major fibre corridor to Brisbane. The ACCC therefore concluded that removing Mudgeeraba from the scope of regulation would not be detrimental to competition. The application of the ACCC’s competition assessment resulted in 200 metropolitan ESAs being excluded from regulation, together with 27 capital-regional routes. Source: ACCC, Domestic Transmission Capacity Service: An ACCC Final Report on the Review of the Declaration for the Domestic Transmission Capacity Service, March 2014.

Services covered by special access undertakings (non-NBN services)

[10.340] In addition to declaration of a service by the ACCC, the other way in which a non-NBN service becomes a declared service is where: • a person gives the ACCC a special access undertaking in relation to a service or a proposed service; • the undertaking is in operation; and

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• the person supplies the service or proposed service, either to itself or to other persons.120 A service that is the subject of a special access undertaking accepted by the ACCC is a declared service only in respect of its supply by the person who gave the special access undertaking to the ACCC. That is, the service is not a declared service (and therefore the category A standard access obligations listed in Box 10.4 do not apply) to any other person who supplies that service, unless the ACCC has also accepted a special access undertaking given by that person to the ACCC with respect to that service. A special access undertaking may only be given to the ACCC where the service is not already a declared service.121 The undertaking is an avenue through which a service provider can obtain regulatory certainty as to the terms and conditions of access that will apply to a service the person supplies or expects to supply, which may be important to future investment decisions. As is discussed in greater detail at [10.510], if a special access undertaking is in operation, and the ACCC subsequently declares the service and makes an access determination with respect to that service, that access determination will not have any effect to the extent it is inconsistent with that special access undertaking.122 A further motivation for a service provider to give the ACCC a special access undertaking is that, where the service provider anticipates that the ACCC may declare a service, the service provider is “on the front foot” in proposing the terms and conditions of access for the ACCC’s consideration. Where the ACCC declares a service, this “first mover” advantage will typically be lost as the responsibility to formulate the terms and conditions of access to apply to the declared service rests with the ACCC.123 The special access undertaking must state that, in the event the person supplies the service, whether to itself or to other persons, the person agrees to be bound by the standard access obligations to the extent those obligations would apply to the person in relation to the service if the service was treated as an active declared service.124 Where the special access undertaking sets out terms and conditions in relation to the standard access obligations, the undertaking must also state that the person undertakes to comply with those terms and conditions.125 The undertaking may be subject to limitations that are specified in the undertaking.126 120 CCA, s 152AL(7). 121 CCA, s 152CBA(1)(a). 122 CCA, s 152CBIA. 123 CCA, ss 152BCI(1), 152BCK. 124 CCA, s 152CBA(3)(a). 125 CCA, s 152CBA(3)(b). 126 CCA, s 152CBA(5).

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A special access undertaking must contain an expiry time.127 The expiry time may be expressed in a number of ways, including by reference to the end of a period which commences when the undertaking comes into operation or when the person begins to supply the service.128 The undertaking may also provide for the person giving the undertaking to extend, or further extend, the expiry time of the undertaking, provided that the extension is approved by the ACCC and the undertaking sets out the criteria to be applied by the ACCC in deciding whether to approve the extension.129 A special access undertaking may provide that a term or condition specified in the undertaking is a “fixed principles term or condition”.130 The effect of a term or condition being a fixed principles term or condition is that if the person gives the ACCC another special access undertaking, or gives the ACCC a variation of the undertaking, which contains a fixed principles term or condition that is the same as the original fixed principles term or condition, the ACCC cannot reject the other undertaking, or variation, for a reason that concerns the fixed principles term or condition.131 Providing for fixed principles is a way of permitting particular terms and conditions to span more than one special access undertaking and thus providing greater certainty as to the terms and conditions of access over a longer period of time.

[10.350] The ACCC must either accept or reject a special access undertaking given to it.132 As the giving of a special access undertaking is voluntary and the services in respect of which the undertaking is given are not declared services, the ACCC does not have the power to revise the access undertaking and then accept the access undertaking as revised. However, the ACCC may give the person who submitted the undertaking a notice stating that if the person makes the variations to the undertaking specified in the notice and gives the varied undertaking to the ACCC within a specified time, the ACCC will consider the varied undertaking as if it had been given to the ACCC, not the original undertaking. The ACCC does not have a duty to consider whether to give a notice.133 The CCA does not provide that if the special access undertaking is varied in accordance with the notice the ACCC must accept the special access undertaking. Rather, the purpose of these provisions is to prevent the person from having to resubmit its special access undertaking and, in turn, the ACCC from conducting a separate assessment process with respect to 127 CCA, s 152CBA(6). 128 CCA, s 152CBA(7). 129 CCA, s 152CBA(9). 130 CCA, s 152CBAA(1). 131 CCA, s 152CBAA(5). 132 CCA, s 152CBC(2). 133 CCA, s 152CBDA(4).

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those variations. In this regard, the Explanatory Memorandum noted: Proposed section 152CBDA enables the ACCC to suggest to a person who has given it a special access undertaking that the person make specified variations to the undertaking. This provision is designed to avoid a situation where the ACCC has to reject a special access undertaking, resulting in the person who lodged it having to start the whole process again by lodging a new undertaking, and instead allows the ACCC to propose variations to an access undertaking it is given. If the ACCC decides to give a notice to a person who has submitted an undertaking, inviting the person to make specified variations to the undertaking, the ACCC must nominate a period for the person to provide a varied undertaking. If the person provides the varied undertaking to the ACCC within the specified period, the ACCC must then consider the varied undertaking under section 152CBC.134

The ACCC must publish a special access undertaking that has been given to it and invite submissions on the undertaking. The ACCC must consider any submissions that it receives within the time limit provided for submissions to be made.135 The ACCC must not accept a special access undertaking unless it is satisfied: • that the terms and conditions on which the person undertakes to comply with the category A standard access obligations are consistent with those obligations; • the terms and conditions are reasonable; and • the undertaking is consistent with any Ministerial pricing determination.136

[10.360] Box 10.8 sets out the matters to be considered in determining whether terms and conditions are reasonable. Box 10.8: Matters relevant to determining reasonable terms and conditions Section 152AH of the CCA provides that, for the purpose of Pt XIC, in determining whether particular terms and conditions are reasonable, regard must be had to: • whether the terms and conditions promote the LTIE of carriage services or of services supplied by means of carriage services; • the legitimate business interests of the carrier or carriage service provider concerned, and the carrier’s or provider’s investment in facilities used to supply the declared service concerned; 134 Explanatory Memorandum, Telecommunications Legislation Amendment (Competition and Consumer Safeguards) Bill 2010 (Cth), 208. 135 CCA, s 152CBD(2)(d). 136 CCA, s 152CBD(2)(a), (c).

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• the interests of persons who have rights to use the declared service concerned; • the direct costs of providing access to the declared service concerned; • the operational and technical requirements necessary for the safe and reliable operation of a carriage service, a telecommunications network or a facility; and • the economically efficient operation of a carriage service, a telecommunications network or a facility. If the ACCC does not make a decision to accept or reject the special access undertaking within six months after receiving the undertaking, the ACCC is taken to have made a decision to accept the undertaking.137 In calculating the six-month period, various periods are to be disregarded, including, if the ACCC has requested further information about the undertaking, any day in which any part of the request was unfulfilled.138 Special access undertakings, once accepted by the ACCC and in operation, may be varied where the ACCC accepts the variation.139 A special access undertaking in operation may also be withdrawn by the person who gave the undertaking if: • the service to which the undertaking relates is a declared service when the notice to withdraw the undertaking is given; or • both: – the service to which the undertaking relates is not a declared service when the notice to withdraw the undertaking is given; and – the person gave the ACCC at least 12 months’ notice of the proposed withdrawal of the undertaking.140 Services covered by special access undertakings (NBN services)

[10.370] Similarly to special access undertakings given by service providers other than an NBN corporation, a service supplied by an NBN corporation will be a declared service where: • the NBN corporation gives the ACCC a special access undertaking in relation to the service or a proposed service; and • the undertaking is in operation; and • the NBN corporation supplies the service or proposed service, either to itself or to other persons.141 137 CCA, s 152CBC(5). 138 CCA, s 152CBC(6). 139 CCA, s 152CBG. 140 CCA, s 152CBI. 141 CCA, s 152AL(8E).

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The circumstances in which an NBN corporation can give a special access undertaking to the ACCC are different from those where the carrier or carriage service provider is not an NBN corporation. As noted at [10.340], a person other than an NBN corporation cannot give an access undertaking where the service is a declared service. An NBN corporation cannot give an access undertaking where the service has been declared by the ACCC, but can give an access undertaking where the service is a declared service because there is a standard form of agreement (see [10.380]) that relates to access to the service, so long as there is no access determination that applies in relation to the service.142 The provisions that relate to special access undertakings given by persons other than an NBN corporation apply equally to special access undertakings given by an NBN corporation, with one exception. A special access undertaking given by an NBN corporation may also provide that the NBN corporation will engage in specified conduct in relation to related activities, including the development and enhancement of new services and giving information to service providers about these activities.143 In December 2013, the ACCC accepted a special access undertaking from NBN Co in respect of the “NBN access service” (a Layer 2 bitstream service), “ancillary services” and the “facilities access service”.144 A brief description of the NBN Co SAU is set out in Box 10.9. Box 10.9: NBN Co Special Access Undertaking The NBN Co SAU sets out the principles for the regulation of access to services provided over the NBN until June 2040. The NBN Co SAU comprises three “modules”: • Module 0: applies from 2013–2040. Module 0 describes the services to which the SAU relates; requires NBN Co to publish and maintain Standard Form of Access Agreements (“SFAA”), which may form the basis of commercially agreed access agreements; and establishes a number of fixed principles terms and conditions relating to NBN Co’s long-term cost recovery. • Module 1: applies from 2013–2023. Module 1 contains the terms and conditions that will operate from the commencement of the SAU until June 2023 (termed the “initial regulatory period”). Module 1 includes commitments by NBN Co to develop SFAAs through a multilateral SFAA forum, and to develop a suite of initial offers for supply of the NBN service. It also contains the 142 CCA, s 152CBA(1)(b). 143 CCA, s 152CBA(3C). 144 ACCC, NBN Co Special Access Undertaking: Final Decision, 13 December 2013.

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initial prices for NBN offers and methods for changing prices over time (including a price cap) and the methodology for determining NBN Co’s required revenue to cover its actual prudent and efficient costs. • Module 2: applies from the expiry of Module 1 (being 2023) to 2040. This module sets out the long-term arrangement for determining NBN Co’s required revenue for the 2023 to 2040 period (termed the “subsequent regulatory period”). During this module, NBN Co’s annual revenue requirement will be based on forecast costs, rather than actual costs, and requires NBN Co to submit replacement module applications to operate for three to five years each, which are required to be approved by the ACCC. Initial prices in the SAU are set at levels similar to 2013 prices for copper and HFC services.145 There is then a limit on how much prices can change each year. During the operation of the NBN Co SAU, in general terms, prices for NBN offers are subject to an individual price increase limit of CPI minus 1.5 per cent. For the period that module 1 is in operation the ACCC is required to make an annual “long term revenue constraint methodology” (“LTRCM”) determination. In the determination the ACCC calculates NBN Co’s regulatory asset base, the annual revenue requirement (given by an annual building block revenue requirement), and any revenue shortfall that goes into the “initial cost recovery account” (“ICRA”). The ICRA is a mechanism that provides for the capitalisation and deferred recovery of initial revenue shortfalls. It is expected that, given the level of initial prices and number of services provided on the NBN, NBN Co will not earn sufficient revenues to recover the annual revenue requirement in the early years of its operation. These shortfalls are placed in the ICRA and will start to be recovered by NBN Co when prices/demand are such that NBN Co is able to earn the annual revenue requirement amounts. In the ACCC’s LTRCM determination for 2013–14, the ACCC determined an annual revenue requirement of approximately $1.68 billion.146 NBN Co earned about $61 million, which resulted in an amount of approximately $1.62 million being added to the ICRA for 145 ACCC, NBN Co Special Access Undertaking: Final Decision, 13 December 2013, 11. 146 ACCC, NBN Co Special Access Undertaking: Long Term Revenue Constraint Methodology 2013–14 Final Determination and Compliance Reporting 2013–14, June 2015, 16. Dollars are in nominal amounts.

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2013–14.147 The total amount in the ICRA at 30 June 2014 (which represents amounts added to the ICRA since 2008–09) is close to $4 billion.148 Until the ICRA is extinguished (which may not be for many years), prices for services supplied by the NBN will not actually reflect the annual building block revenue requirements determined by the ACCC.

Standard form of access agreement (NBN services)

[10.380] The third and final way in which a service supplied by an NBN corporation may become a declared service is where the NBN corporation has formulated a standard form of access agreement (“SFAA”) that relates to access to the service.149 Where an SFAA is in place, an access seeker may request the NBN corporation to enter into an access agreement that sets out terms and conditions that are the same as those in the SFAA, and the NBN corporation is required to comply with that request.150 Where an NBN corporation is supplying declared services in respect of which there is a SFAA and the NBN corporation enters into an access agreement with an access seeker that is different from the SFAA, the NBN corporation must provide a statement to the ACCC that sets out those differences.151 NBN Co has published a number of SFAAs, including: • a wholesale broadband agreement, which sets out the terms and conditions of access to the primary service provided by the NBN, being the ethernet bitstream service supplied over fibre, FTTB, FTTN and wireless technologies. Among other things, the agreement sets out the applicable service levels (connection and fault rectification times, and network availability) and prices for the various components of the services; and • a satellite wholesale broadband agreement, which contains the terms and conditions pursuant to which NBN Co will supply interim products and services via satellite to wholesale customers.152 147 ACCC, NBN Co Special Access Undertaking: Long Term Revenue Constraint Methodology 2013–14 Final Determination and Compliance Reporting 2013–14, June 2015, 17. Dollars are in nominal amounts. 148 ACCC, NBN Co Special Access Undertaking: Long Term Revenue Constraint Methodology 2013–14 Final Determination and Compliance Reporting 2013–14, June 2015, 17. Dollars are in nominal amounts. 149 CCA, s 152AL(8D). 150 CCA, s 152CJA(2). 151 CCA, s 152BEBA(1). 152 See NBN Co, Supply Agreements (7 December 2015) .

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Determination of terms and conditions of access [10.390] Where a service becomes a declared service via the avenues discussed at [10.320]–[10.380], there are various instruments that may deal with the terms and conditions of access to those services. These are: 1. access agreements: written access agreements between access seekers and access providers (see [10.480]); 2. Ministerial pricing determinations: determinations by the Minister that set out price-related terms and conditions relating to the standard access obligations (see [10.490]); 3. special access undertakings: undertakings that may be given by a carrier or carriage service provider (including an NBN corporation) to the ACCC and which contain terms and conditions of access relating to the service. A special access undertaking may only be given for a service that has not been declared by the ACCC. Declaration is a consequence of a special access undertaking being given, not a precursor (see [10.340]–[10.380]); 4. binding rules of conduct (“BROCs”): written rules made by the ACCC that may specify the terms and conditions on which, or the manner in which, a carrier or carriage service provider is to comply with any applicable standard access obligations. The ACCC may make BROCs where it considers that there is an urgent need to do so (see [10.500]); and 5. access determinations: determinations made by the ACCC that may, among other things, specify the terms and conditions on which, or the manner in which, a carrier or carriage service provider is to comply with any applicable standard access obligations. These are the primary instrument through which terms and conditions of access to declared services are regulated (see [10.400]). Access determinations

[10.400] As part of the fundamental reforms made to CCA, Pt XIC which took effect from 1 January 2011, the telecommunications access regime moved from a negotiate/arbitrate model to one in which the ACCC was required to set upfront the terms and conditions of access to a declared service. Therefore, Pt XIC contains provisions designed to ensure that where a service has been declared, there will be an access determination in place with respect to that service. As set out in Box 10.10, an access determination may deal with a wide range of matters.

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Box 10.10: Scope of access determination under CCA, Pt XIC An access determination may, among other things: • specify any or all of the terms and conditions on which a carrier or carriage service provider is to comply with any or all of the applicable standard access obligations; • specify any other terms and conditions of access; • require a carrier or carriage service provider to comply with any or all of the applicable standard access obligations in a manner specified in the determination; • require a carrier or carriage service provider to extend or enhance the capability of a facility by means of which the declared service is supplied; • require access seekers to accept, and pay for, access to the declared service; • provide that any or all of the standard access obligations are not applicable to a carrier or carriage service provider, either unconditionally or subject to conditions or limitations; • restrict or limit the application of the standard access obligations to a carrier or carriage service provider; • deal with any other matter relating to access to the declared service.153 Where an access determination specifies terms and conditions under which a carrier or carriage service provider is to comply with any or all of the applicable standard access obligations or specifies any other terms and conditions of access, the access determination must include terms and conditions relating to price or a method of ascertaining price.154 Access determinations will only apply to the supply of a declared service by an NBN corporation where the access determination is expressed to be an NBN-specific access determination.155 An access determination does not have to treat all carriers or carriage service providers, or access seekers, similarly – it can make different 153 CCA, s 152BC(3). An access determination that relates to a declared service that is a Layer 2 bitstream service supplied using a designated superfast telecommunications network may not provide that any or all of the standard access obligations are not applicable to a carrier or carriage service provider, or restrict or limit the application to a carrier or carriage service provider of any or all of the standard access obligations. 154 CCA, s 152BC(8). 155 CCA, s 152BC(4B).

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provision with respect to different carriers or carriage service providers, or access seekers, or different classes of carriers or carriage service providers, or access seekers.156

[10.410] The ACCC is required to take into account a number of matters in making an access determination (which also relate to BROCs, discussed at [10.500]). These are set out in Box 10.11. Box 10.11: Matters the ACCC considers when making an access determination (and BROCs) When making an access determination, the ACCC must take into account the following matters: • LTIE: whether the determination will promote the LTIE of carriage services or of services supplied by means of carriage services; • legitimate business interests of carrier or carriage service provider: the legitimate business interests of a carrier or carriage service provider who supplies, or is capable of supplying, the declared service, and the carrier’s or carriage service provider’s investment in facilities used to supply the declared service; • interests of other persons: the interests of all persons who have rights to use the declared service; • costs of providing access: the direct costs of providing access to the declared service; • value of extensions or enhancements: the value to a person of extensions, or enhancement of capability, whose cost is borne by someone else; • safety and reliability: the operational and technical requirements necessary for the safe and reliable operation of a carriage service, a telecommunications network or a facility; • economic efficiency: the economically efficient operation of a carriage service, a telecommunications network or a facility.157 Where a carrier or carriage service provider who supplies, or is capable of supplying, the declared service supplies one or more other eligible services, in making an access determination that is applicable to the carrier or carriage

156 CCA, s 152BC(5). 157 CCA, s 152BCA(1)(a) – (g).

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service provider the ACCC may take into account the characteristics, costs, revenues and demand of those other services.158 The ACCC is permitted to take into account any other matters it considers relevant.159

[10.420] There are important restrictions on making access determinations (which also relate to BROCs, discussed at [10.500]). The most relevant restrictions are noted in Box 10.12. Box 10.12: Restrictions on access determinations (and BROCs) The ACCC is prevented from making an access determination that would have particular effects, including: • preventing an access provider that already has access to the declared service from obtaining a sufficient amount of the service to be able to meet the service provider’s reasonably anticipated requirements; • preventing a carrier or carriage service provider from obtaining a sufficient amount of the service to be able to meet the carrier’s or carriage service provider’s reasonably anticipated requirements; • resulting in an access seeker becoming the owner (or one of the owners) of any part of a facility without the consent of the owner of the facility; • requiring a person (other than an access seeker) to bear an unreasonable amount of the costs of extending or enhancing the capability of a facility, or maintaining extensions to or enhancements of the capability of a facility; • requiring a carrier or carriage service provider to provide an access seeker with access to a declared service if there are reasonable grounds to consider that: – the access seeker would fail, to a material extent, to comply with the terms and conditions of access on which the carrier or carriage service provider provides, or is reasonably likely to provide, that access; or – the access seeker would fail, in connection with that access, to protect the integrity of a telecommunications network or the safety of individuals working on, or

158 CCA, s 152BCA(2). 159 CCA, s 152BCA(3).

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using services supplied by means telecommunications network or facility.160

of,

a

Other restrictions include that the ACCC must not make an access determination that: • is inconsistent with any of the applicable standard access obligations;161 • would have the effect of requiring Telstra to engage in conduct in connection with matters covered by a final migration plan that is in force;162 • relates to any of the category B standard access obligations applicable to an NBN corporation and has the effect of discriminating between access seekers.163 Similar to the fixed principles that may be included in special access undertakings, access determinations may include a provision that is specified to be a fixed principles provision.164 A fixed principles provision must have a nominal termination date.165 The effect of including a fixed principles provision is that where the access determination is replaced by a later access determination, and the nominal termination date is later than the date on which the replacement access determination comes into force, that replacement access determination must include a provision in the same terms as the fixed principles provision.166 This is a way of including provisions in an access determination that may span the operation of more than one access determination. The relevant Explanatory Memorandum explained that the intention behind the fixed principles provisions is to provide for greater regulatory certainty: By enabling the ACCC to lock in provisions contained in an access determination for a specified period (which may be longer than the duration of the access determination in which the provisions are contained), proposed section 152BCD 160 CCA, s 152BCB(1)(a) – (g). 161 CCA, s 152BCB(3). 162 CCA, s 152BCB(3A). 163 CCA, s 152BCB(4A). This subsection does not prevent discrimination against an access seeker if the ACCC has reasonable grounds to believe that the access seeker would fail, to a material extent, to comply with the terms and conditions on which the NBN corporation complies or on which the NBN corporation is reasonably likely to comply with the relevant obligation: s 152BCB(4B). Examples include evidence that the access seeker is not creditworthy and repeated failures by the access seeker to comply with the terms and conditions on which the same or similar access has been provided: CCA, s 152BCB(4C). 164 CCA, s 152BCD(1). 165 CCA, s 152BCD(2). 166 CCA, s 152BCD(3).

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will enable the ACCC to provide greater regulatory certainty in certain circumstances. For example, where the ACCC adopts a utility pricing model for setting the access price for a declared service – with all price determinations during the economic life of the relevant facility based on a regulated asset base – the ACCC will be able to lock in a regulated asset base for the requisite period.167

[10.430] Access determinations may be backdated, although where an access determination replaces a previous access determination (that is not an interim determination), the new access determination cannot come into force until the first day after the expiry of the previous access determination.168 Access determinations must specify an expiry date.169 In specifying an expiry date where the service is one that has been declared by the ACCC pursuant to CCA, s 152AL, the ACCC is required to have regard to the principle that the expiry date for the access determination should be the same as the expiry date for the declaration, unless there are circumstances that justify a different expiry date.170 The ACCC may extend the expiry date for an access determination where: • an access determination (the “original access determination”) relating to access to a declared service is in force; • the ACCC has commenced a public inquiry into whether to make another access determination in relation to access to the service; and • the ACCC considers that it will make the other access determination, but not before the expiry date for the original access determination. In these circumstances, the ACCC may declare that the expiry date for the original access determination is taken to be the day immediately before the day on which the other access determination comes into force.171

[10.440] Consistent with the legislative intent that once a service is declared, an access determination is in place with respect to that service, Pt XIC allows the ACCC to make an interim access determination where the ACCC declares a service and the declaration is not a fresh declaration that replaces a previous declaration.172 The ACCC must make an interim access determination in two circumstances. First, where it has commenced to hold a public inquiry about a proposal to make an access determination in relation to access to the service and the ACCC considers that it is 167 Explanatory Memorandum, Telecommunications Legislation Amendment (Competition and Consumer Safeguards) Bill 2010 (Cth), 180. 168 CCA, s 152BCF(1), (2), (4). 169 CCA, s 152BCF(5). 170 CCA, s 152BCF(5). 171 CCA, s 152BCF(10) 172 CCA, s 152BCG(1).

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unlikely that a final access determination will be made in six months.173 Secondly, where the ACCC considers there is an urgent need to make an access determination before completion of the public inquiry.174 The ACCC is not required to observe any requirements of procedural fairness in making the interim access determination.175

[10.450] Boxes 10.13, 10.14 and 10.15 provide examples of three access determinations made by the ACCC using different methodologies to determine regulated prices for access to the relevant declared services. Box 10.13 examines the access determination relating to fixed line services. For fixed line services, the ACCC has used a building block methodology to determine access prices (see Ch 5). Box 10.13: ACCC fixed line services access determination The ACCC’s fixed line services access determination, published on 9 October 2015, sets out the terms and conditions of access to the seven declared fixed line services supplied by Telstra on its copper PSTN and DSL networks for the period 1 November 2015 to 30 June 2019. These are the: ULLS; LSS; WLR; LCS; FOAS; FTAS; and wholesale ADSL. A short description of these services is set out at [10.60] – [10.90]. In the 2015 fixed line services access determination, the ACCC used a building block model pricing methodology to determine prices. The building block methodology was adopted in the 2011 fixed line services access determination, which included a set of fixed principles giving form to the building block framework to apply for a ten-year period with a nominal termination date of 30 June 2021.176 The building block model is implemented through the fixed line services model (“FLSM”). The FLSM calculates a price for each declared service pursuant to three main steps: 1. Determination of annual revenue requirements for each asset class: Each of the 22 asset classes are assigned a regulatory asset base (“RAB”), which is rolled forward on an annual basis. Capital expenditure on asset classes is added to the RAB each year, and depreciation and asset disposals are subtracted. A revenue requirement for each class is then 173 CCA, s 152BCG(d)(i). 174 CCA, s 152BCG(1)(d)(ii). 175 CCA, s 152BCG(4). 176 ACCC, Inquiry to make Final Access Determinations for the Declared Fixed Line Services: Final Report, July 2011, Appendix C (Final Access Determination instruments for the declared fixed line services), cl 6, 5-6.

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determined, the four components of which are: operating expenditure; return on capital (RAB x weighted average cost of capital); depreciation; and an allowance for taxation payments. The resulting revenue requirement for each asset class represents the annualised cost of investing in and operating the assets in that asset class for the relevant period. 2. Costs of the assets are allocated to declared services: As most assets are used to provide a number of different services (including unregulated services), in order to determine the costs associated with providing a particular declared service, the revenue requirements for each asset class are allocated to declared services and other regulated and unregulated services using cost allocation factors. However, the ACCC adjusts the cost allocation factors with the intention that users of the fixed line network do not bear higher unit costs associated with the loss of economies of scale that will occur as a result of the migration of services to the NBN. Higher unit costs arise because, as services are disconnected from the fixed line network and migrated to the NBN, unit costs of services that continue to use the fixed line assets might be expected to rise as costs are spread over a decreasing number of services (the number of services provided is in effect the denominator by which the revenue requirement is divided). The ACCC considered that higher unit costs associated with the loss of economies of scale as a result of NBN migration should not be reflected in regulated revenues and borne by users of the fixed line network. The ACCC did not consider that such users were causing higher unit costs and considered that Telstra had been provided with an opportunity to ensure that it was compensated for such costs under the Definitive Agreements (see Box 10.3). The ACCC treated the disconnection payments under the Definitive Agreements as providing “replacement revenues which represent an avenue for the recovery of these costs”. Telstra opposed the NBN-related adjustment to the cost allocation factors, including on the basis that the adjustment would deprive Telstra of the opportunity to recover efficient costs and that Telstra had not had an opportunity to recover costs associated with NBN-induced loss of economies of scale and was not able to achieve an outcome that fully compensated it for all of the impacts of the NBN rollout. 3. Prices are determined from allocated costs/revenue requirements: The asset class costs allocated to each declared service for each year are added together to arrive at a service-specific revenue requirement for those services. The FLSM then

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calculates the uniform price change required across the seven services to provide for recovery of the revenue requirements for those services across forecast demand. Within the pool of declared services, costs may be moved around so that any price change is uniform across the seven services. This means that the price for each service is not simply the individual revenue requirement for that service divided by demand. Rather, prices are calculated so as to provide for recovery of the aggregate of the allocated revenue requirements across the seven services (rather than individually for each service), while maintaining existing price relativities between those seven services. On 5 November 2015, Telstra applied to the Federal Court for judicial review of the fixed line services access determination.177 The application was heard on 3 and 4 March 2016 and as at the date of writing was awaiting judgment. Source: ACCC, Public Inquiry into Final Access Determinations for Fixed Line Services: Final Decision, October 2015.

[10.460] Box 10.14 considers the access determination concerning mobile services. For mobile services, the ACCC adopted a total service long run incremental cost (“TSLRIC”) methodology, which incorporated the outcomes of the application of this methodology by overseas regulators to comparator mobile networks. Box 10.14: ACCC mobile terminating access service final access determination The ACCC published the mobile terminating access service final access determination in August 2015. The access determination provides, for the period 1 January 2016 to 30 June 2019, a price for mobile voice termination of 1.7 cents per minute, and a price for SMS termination of 0.03 cents per SMS. These terminating services are collectively referred to as mobile terminating access services, or MTAS. The ACCC uses a TSLRIC methodology to estimate the cost of MTAS. As discussed in Ch 4, a TSLRIC methodology involves estimating the revenue that would be required by the service provider to recover the incremental costs of providing the “total service” over the long run. The ACCC uses a TSLRIC+ methodology, where the “+” represents a share of the joint/common costs of providing the relevant services. 177 File number: NSD1338/2015; title: Telstra Corporation Limited ACN 051 775 556 v Australian Competition and Consumer Commission & Ors.

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A key feature of TSLRIC methodologies is that they are (typically) forward looking, and so use the costs and characteristics of “modern equivalent assets”. This means that the costs are generally not based on any particular network, but rather a hypothetical network that has been “optimised” using the latest best-in-use technology. This approach can be distinguished from a building block approach, which (typically) does not involve any revaluation of the asset base for changes in technology. The ACCC had previously explained that it prefers to establish access prices for services such as the MTAS using a TSLRIC approach because it considers that such an approach, among other things: encourages competition in telecommunications markets by promoting efficient entry and exit in dependent markets; and provides incentives for access providers to minimise the costs of providing access by using the most efficient technology commercially available today and best-in-use technology compatible with the existing network design.178 The ACCC has explained that it does not consider a building block methodology to be appropriate in the case of the mobile industry, where the pace of technological change is more rapid than, for example, the fixed line services market. The ACCC also considered that the use of a building block methodology would require use of the historical costs of the actual carriers and also require the ACCC to develop three building block models, one for each of the mobile network operators. The ACCC concluded that this process would result in the prolonged application of the MTAS price determined in 2011, which was likely to no longer be efficient.179 The ACCC recognised that the most direct way to implement a TSLRIC+ pricing framework would be to develop a cost model. However, for the purposes of making the access determination to apply from 1 January 2016, the ACCC concluded that an international benchmarking approach was the most appropriate approach to be adopted (this approach made use of estimated termination costs in countries that had used similar cost models). This was because the application of a cost model by the ACCC would have required the 178 ACCC, Draft MTAS Pricing Principles Determination and Indicative Prices for the period 1 January 2009 to 31 December 2011, November 2008, 12. 179 ACCC, Mobile Terminating Access Service: Final Access Determination: Draft Decision, May 2015, 10–11.

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development of a new cost model (as the cost model previously used no longer reflected current network technology or consumer usage patterns), which would take some time while the MTAS rates determined in 2011 to apply after 1 July 2013 would continue to apply. The ACCC considered that developing a new cost model was likely to lead to an MTAS rate that is no longer efficient applying for a significantly longer period than if international benchmarking were used. The ACCC did not consider that this outcome would promote the LTIE.180 The ACCC concluded that the benefits of obtaining a more accurate estimate using a new cost model were outweighed by the detriment arising from the delay in setting new MTAS prices. The ACCC also considered that other benefits would arise from the benchmarking approach, including that it would be less resource-intensive and therefore place a lesser regulatory burden on industry relative to developing a new cost model.181 Source: ACCC, Mobile Terminating Access Service Final Access Determination – Final Decision, August 2015.

[10.470] Box 10.15 analyses the access determination relating to the domestic transmission capacity service. For the DTCS, the ACCC adopted a benchmarking methodology. Box 10.15: ACCC domestic transmission capacity service access determination Box 10.7 discussed the ACCC’s declaration of the DTCS. As noted in that discussion, the DTCS can be subject to very different competitive dynamics depending on the geographic area in which it is provided. As a result, the DTCS is a declared service only in respect of particular ESAs or routes, with many metropolitan ESAs and a number of capitalregional routes not subject to regulation. In the 2016 access determination for DTCS, the ACCC adopted a domestic benchmarking approach that uses prices of transmission services in competitive routes and areas to

180 ACCC, Mobile Terminating Access Service: Final Access Determination: Draft Decision, May 2015, 9. 181 ACCC, Mobile Terminating Access Service: Final Access Determination: Draft Decision, May 2015, 10.

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derive annual prices for declared DTCS, so that these prices mimic or reflect cost efficiencies achieved on competitive routes. The ACCC considered that a domestic benchmarking pricing approach is appropriate because: • there are a sufficient number of competitive routes or areas within Australia; • the competitive prices on the competitive routes and areas can be used as benchmarks for the prices that would apply in the uncompetitive (regulated) routes and areas if those routes were competitive; and • prices in competitive areas and on competitive routes will reflect the costs of supplying efficient services. The ACCC obtained commercial pricing information on both regulated and unregulated routes from a range of transmission providers in order to develop the benchmarks. This information was then analysed to determine the variables that are most likely to impact on price. The primary determinants of price were found to be capacity and distance, with other significant drivers including route type (inter-capital, metropolitan, or regional) and throughput (scale economies). A pricing model uses the variables identified as having a significant impact on price to determine the price to apply to regulated routes. The user of the model can enter in the relevant characteristics of the regulated route into the model (capacity, distance, etc), and the model provides the price for that route based on the relationship that has been found to exist between the identified variables and price on unregulated routes. A specific uplift of 140 per cent is provided for routes to Tasmania to account for the higher maintenance and repair costs associated with the undersea cable between Tasmania and the mainland used to provide transmission services. Source: ACCC, Public Inquiry to make a Final Access Determination for the Domestic Transmission Capacity Service: Draft Decision, 4 September 2015; and ACCC, Public Inquiry to make a Final Access Determination for the Domestic Transmission Capacity Service: Final Report, 21 April 2016.

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Access agreements

[10.480] An access agreement is an agreement between an access provider and an access seeker, which relates to a declared service and is in writing and legally enforceable.182 In order for an agreement to be an access agreement, the agreement must deal with one or more matters relating to access, which may include: • any or all of the terms and conditions on which the carrier or carriage service provider is to comply with any or all of the applicable standard access obligations;183 • where an access determination imposes requirements on a carrier or carriage service provider in relation to access to the declared service, the terms and conditions on which the carrier or carriage service provider is to comply with any or all of those requirements;184 • any other terms and conditions of the access seeker’s access to the declared service;185 • provisions requiring the carrier or carriage service provider to comply with any or all of the applicable standard access obligations in a manner specified in the agreement;186 • providing that any or all of the standard access obligations are not applicable, or restricting or limiting the application of the category A standard access obligations.187 Carriers and carriage service providers who supply, or propose to supply, declared services, are required to provide written statements to the ACCC on the details of access agreements concerning those services. The written statements must be given to the ACCC quarterly and apply to access agreements that were in force at any time during the relevant quarter.188 The details that must be addressed in the written statement include: the parties to the agreement; the service to which the agreement relates; the date the agreement was entered into; the term of the agreement; and any other information as specified by the ACCC.189 The ACCC may require a 182 CCA, s 152BE(1)(a) – (d). 183 CCA, s 152BE(1)(e)(i). 184 CCA, s 152BE(1)(e)(ii). 185 CCA, s 152BE(1)(e)(iii). 186 CCA, s 152BE(1)(e)(iv). 187 CCA, s 152BE(1)(e)(ix), (x). Note that the requirement that the agreement is legally enforceable does not apply to the agreement to the extent to which the agreement deals with these matters: s 152BE(1A). These subparagraphs also do not apply to an agreement that relates to a declared service that is a Layer 2 bitstream service supplied using a designated superfast telecommunications network: s 152BE(1B). 188 CCA, s 152BEA(1). 189 CCA, s 152BEA(2).

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carrier or carriage service provider to provide copies of access agreements and variations to access agreements.190 Ministerial pricing determinations

[10.490] The relevant Minister may make pricing determinations setting out principles dealing with price-related terms and conditions.191 At the time of writing, no Ministerial pricing determinations have been made under the CCA. Binding rules of conduct

[10.500] Binding rules of conduct are written rules made by the ACCC. They may either: • specify any or all of the terms and conditions on which a carrier or carriage service provider is to comply with any or all of the standard access obligations; or • require a carrier or carriage service provider to comply with any or all of the standard access obligations in a manner specified in the BROC.192 Binding rules of conduct may apply generally (that is, to all carriers or carriage service providers, or access seekers) or may be of limited application (that is, applying to particular classes of carriers or carriage service providers, or access seekers; or applying to particular carriers or carriage service providers, or access seekers).193 They may also be expressed to be NBN-specific.194 A BROC will not apply to a service supplied, or capable of being supplied, by an NBN corporation unless the BROC is expressed to be an NBN-specific BROC.195 The ACCC may only make a BROC if it considers there is an urgent need to do so.196 In making a BROC, the ACCC is not required to observe any requirements of procedural fairness.197 Consistent with the intention that BROCs are a temporary or “stop-gap” measure designed to address issues urgently until an access determination (or varied access determination) can be put in place, BROCs must expire within 12 months from when they are made.198 The relevant Explanatory Memorandum explains why the BROC provisions 190 CCA, s 152BEB(1). 191 CCA, s 152CH(1). 192 CCA, s 152BD(1). 193 CCA, s 152BD(3), (4). 194 CCA, s 152BD(4A). 195 CCA, s 152BD(4B). 196 CCA, s 152BD(1). 197 CCA, s 152BD(6) 198 CCA, s 152BDC(3).

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were inserted into the CCA:199 Binding rules of conduct are intended to enable the ACCC to urgently address problems relating to the terms on which a declared service is supplied, and/or problems relating to the way an access provider is complying with the standard access obligations in relation to a declared service. Where an access determination is in place, binding rules of conduct will override it (to the extent of any inconsistency). Binding rules of conduct can be made more quickly than an access determination or a variation to an access determination. There are additional limitations on the scope and duration of binding rules of conduct, compared to the scope and duration of access determinations. The ACCC may only make binding rules of conduct if it considers there is an urgent need to do so, where it considers that there is insufficient time to go through the processes set out in Division 4 for varying or making an access determination. Binding rules of conduct permit the ACCC to move quickly to adjust the terms and conditions that apply to access to a declared service, on a temporary basis, while the ACCC goes about the process of conducting an inquiry with a view to putting in place or varying replacing the relevant access determination.

The ACCC is required to take a number of matters into account in making BROCs unless it is not reasonably practicable for the ACCC to do so, having regard to the urgent need to make the BROC.200 These matters are the same as those set out in Box 10.11 that apply to the making of access determinations.201 The restrictions that apply when the ACCC makes an access determination in terms of the effects that an access determination must not have, discussed in Box 10.12, also apply when the ACCC makes BROCs.202

Hierarchy of telecommunications access instruments [10.510] There are a number of potential overlaps between the various regulatory instruments that may set out terms and conditions of access to declared services. Access agreements trump all other instruments and the standard access obligations. If there is an access agreement between the access provider and the access seeker that deals with a particular matter, the terms and conditions relating to that matter are as set out in the access agreement.203 199 Explanatory Memorandum, Telecommunications Legislation Amendment (Competition and Consumer Safeguards) Bill 2010 (Cth), 191. 200 CCA, s 152BDAA(1), (2), (4). 201 The relevant provisions for BROCs are set out in CCA, s 152BDAA(1)(a) – (g) (matters the ACCC must take into account) and s 152BDAA(2) and (3) (matters the ACCC may take into account). 202 CCA, s 152BDA. 203 CCA, s 152CBIC: a special access undertaking has no effect to the extent to which it is inconsistent with an access agreement.

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This reflects the fact that the regulatory framework, despite no longer being a negotiate/arbitrate model, gives primacy to commercial negotiations over a regulated outcome. If there is no access agreement between the access provider and the access seeker, but there is a Ministerial pricing determination in place that covers the particular matter (remembering that Ministerial pricing determinations may only deal with price-related terms and conditions), the price-related terms and conditions are as set out in the Ministerial pricing determination.204 If there is no relevant Ministerial pricing determination in place, but there is a special access undertaking given by the access provider that is in force that applies to the relevant matter, the terms and conditions are as set out in the special access undertaking.205 If there is no special access undertaking, but there are BROCs that specify terms and conditions relating to that matter, the terms and conditions relating to that matter are as set out in the BROC.206 If there are no BROCs in operation in relation to that matter, the terms and conditions are as set out in an access determination relating to that matter. Where terms and conditions relating to a matter are not currently dealt with in an access agreement, a special access undertaking, binding rules of conduct or an access determination, the relevant terms and conditions will need to be addressed via one of those mechanisms. That is, in the absence of the parties agreeing, the terms and conditions will need to be set out in new BROCs (if urgent) or in a varied access determination.

RECENT ISSUES [10.520] A review of CCA, Pt XIC, together with a cost-benefit analysis of the availability of broadband via different technologies and the optimal long-term ownership and regulatory arrangements for NBN Co, was conducted pursuant to terms of reference issued by the (then) Minister for Communications, The Hon Malcolm Turnbull MP, in December 2013.207 The review was conducted by a panel of experts and chaired by Dr Michael Vertigan AC.

204 CCA, s 152CI: if a provision of an access undertaking is inconsistent with any Ministerial pricing determination, the provision has no effect to the extent of the inconsistency; if a provision of an access determination is inconsistent with any Ministerial pricing determination, the provision has no effect to the extent of any inconsistency; if a provision of a BROC is inconsistent with any Ministerial pricing determination, the provision has no effect to the extent of the inconsistency. 205 CCA, s 152CBIA: an access determination has no effect to the extent to which it is inconsistent with a special access undertaking that is in operation. 206 CCA, s 152CBIB: binding rules of conduct have no effect to the extent to which they are inconsistent with a special access undertaking that is in operation. 207 M Turnbull, Panel of Experts to Conduct Cost-Benefit Analysis of Broadband & Review NBN

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The Vertigan Review comprises two documents: • Statutory Review under Section 152EOA of the Competition and Consumer Act 2010, which addresses the matters that were required by s 152EOA of the CCA to be reviewed, most relevantly the operation of Pt XIC (published in June 2014);208 and • a document comprising two volumes (published in August 2014): – Volume I, “Market and Regulatory Report”, which examines and makes recommendations on the most appropriate overall structure and regulatory framework for Australia’s future broadband market; and – Volume II, “Cost Benefit Analysis”, which sets out the costs and benefits of alternative approaches to the deployment of high-speed broadband (published in August 2014).209 The Vertigan Review on the matters required to be reviewed by CCA, s 152EOA made 34 recommendations in respect of the current regulatory framework. In summary, the expert panel considered that Pt XIC was generally appropriate and should be retained, subject to important modifications including as to NBN Co’s non-discrimination obligations, regulatory recourse to the ACCC in relation NBN Co access agreements, and oversight of ACCC decision-making via the reintroduction of merits review.210 Of most relevance to the matters addressed in this chapter, the recommendations included that:211 • consistent with best regulatory practice, the ACCC should, as part of any declaration decision, specifically address why it considers the benefits of a declaration exceed its costs; • arrangements should be put in place to enable carriers and service providers to have effective recourse to the ACCC for a specified period in relation to the terms and conditions of an access agreement they are entering into with NBN Co and which they consider are unreasonable; • ss 152AXC and 152AXD of the CCA, which apply to NBN Co alone and prohibit an NBN corporation from discriminating between access seekers in complying with the category B standard access obligations Regulation (News release, 12 December 2013) . 208 Michael Vertigan (Chair), Alison Deans, Henry Ergas and Tony Shaw, Independent Cost-Benefit Analysis of Broadband and Review of Regulation: Statutory Review under section 152EOA of the Competition and Consumer Act 2010, June 2014 (“Vertigan Statutory Review”). 209 Michael Vertigan (Chair), Alison Deans, Henry Ergas and Tony Shaw, Independent Cost-Benefit Analysis of Broadband and Review of Regulation, August 2014 (“Vertigan Market and Regulatory Report”) and (“Vertigan Cost Benefit Analysis”. 210 Vertigan Statutory Review, 6. 211 Vertigan Statutory Review, 7–12.

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and in carrying on other specified activities, should be replaced by provisions that allow discrimination by NBN Co where it aids efficiency or is otherwise authorised by the ACCC; • NBN Co should be required to publish and lodge with the ACCC a statement of difference where a proposed agreement differs from its standard form of access agreement in anything other than an insubstantial way, and the ACCC should be able to reject the agreement on the basis that it has reason to believe the discrimination is not based on demonstrable efficiency benefits or is otherwise contrary to the long term interests of end-users; • if, in the longer term, NBN Co faces effective competition, the non-discrimination provisions should be removed altogether on the basis that competitive tensions will be sufficient to prevent NBN Co from disadvantaging certain customers; • when the ACCC makes decisions of enduring impact, these should be subject to regulatory oversight – decisions in relation to access determinations, anticipatory exemptions and special access undertakings should be subject to full and effective merits review, subject only to limitations to prevent unnecessary delays to regulatory decisions; • if the Government does not proceed with reintroducing full and effective merits review, then it should: – introduce pricing principles into Pt XIC including a general requirement to adopt a building block approach to price determination; – reintroduce ordinary exemptions and ordinary access undertakings, which would allow access providers to secure certainty over terms and conditions of access; and – introduce a legislative requirement for the ACCC’s discharge of its responsibilities to be subject to review, at least every five years, by the Productivity Commission.

[10.530] The “Market and Regulatory Report” volume of the Vertigan Review made 19 recommendations concerning the overall structure and regulatory framework for the future broadband market.212 In setting out the context for the expert panel’s report and its recommendations, the expert panel noted the rather retrograde step of establishing a government owned monopoly, NBN Co, to own and operate the infrastructure to be used to provide internet services to residential and small business customers.213 The expert panel noted:214 Australia’s telecommunications policy has been characterised by dramatic shifts in direction and persistent disagreement on crucial issues. While the rise of the internet opened up vast opportunities, it also gave rise to a lengthy, at times ill-informed and often unproductive debate about how those opportunities could 212 Vertigan Market and Regulatory Report, 25–30. 213 Vertigan Market and Regulatory Report, 9–10. 214 Vertigan Market and Regulatory Report, 9–10.

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be best exploited. After many twists and turns, that debate has resulted in the current market structure, centred on a government-owned NBN Co with primary responsibility for deploying and operating a high-speed broadband network on a wholesale-only basis. Compared with countries that have income levels and population geographies similar to Australia’s, that structure is highly unusual in creating a de facto, structurally separated, network monopoly and in reverting to government ownership and taxpayer funding of telecommunications infrastructure. It is not the purpose of this report to assess whether that decision was or was not correct. Moreover, the panel recognised from the outset that … it was neither possible nor desirable to assess future telecommunications regulation starting with a clean slate. Rather, NBN Co has been established and, although it has experienced considerable difficulties, it now has a fibre rollout underway, has myriad contractual arrangements in place and is proceeding to implement a new strategy. Other market participants have fashioned their own strategies and business arrangements on understandings about how the wholesale broadband market is expected to develop. Telstra has committed to a structural separation process which can only be implemented if its customers can be migrated to a national broadband network.

[10.540] The conclusions of the Vertigan Review that are of most relevance to the matters discussed in this chapter include that:215 • upgrading the broadband network can deliver substantial economic benefits, and the most efficient way to deploy high-speed services that would reach up to 93 per cent of premises is through a multi-technology approach, using a mix of copper and fibre-based technologies, along with HFC; • in light of the scale of the investment being made by Australian taxpayers in high-speed broadband, it is crucial that services are provided efficiently. However, relying on NBN Co as an integrated entity to be the principal means of delivering those services is “deeply problematic” as the current model, in which NBN Co controls the full spectrum of technologies, inhibits the development of competition and is difficult to effectively regulate; • the current situation creates important opportunities for a transition to effective competition – specifically, if NBN Co were disaggregated into competing business units, initially structured according to its existing and planned network technologies, this would create roughly equally matched networks. This would, for the first time in Australia, provide a market structure where similarly sized networks would compete, and this would provide the most effective platform from which competition could develop.

215 Vertigan Market and Regulatory Report, 10–12.

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For the purposes of the matters canvassed in this chapter, the key recommendations of the expert panel relating to the structure of the future broadband market and the applicable regulatory framework include that:216 • infrastructure competition be the guiding policy for the delivery of wholesale broadband services; • the basis for a competitive wholesale broadband market structure be created through the disaggregation of NBN Co, which should be given effect by the disaggregation and divestment of NBN Co’s transit, satellite and fixed wireless business units and putting in place arrangements with the aim of having the HFC network owned and managed by a non-NBN Co-operator; • Pt 7 of the Telecommunications Act and associated provisions of the CCA be repealed (see [10.220] for a description of Pt 7 of the Telecommunications Act); • Pt 8 of the Telecommunications Act be amended to, among other things, allow for an undertaking process under which superfast network undertakings, if accepted by the ACCC, replace the Pt 8 provisions that require supply of superfast broadband carriage services on a wholesaleonly structurally separated basis (see [10.220] for a description of Pt 8 of the Telecommunications Act); • the current telecommunications-specific functions of the ACCC, with the exception of those related to Pt XIB of the CCA, be transferred to a “networks regulator” with responsibility for access regulation for all infrastructure industries.

[10.550] The Government published its response to the Vertigan Review in December 2014.217 On the important issue of the structure of NBN Co and the future possibility of infrastructure-based competition through disaggregation of NBN Co, the Government stated that it did not support near-term disaggregation of NBN Co into business units based on access technologies. This was because of the perceived high costs associated with disaggregation, the likelihood that disaggregation would delay the rollout of the network, and the distraction that it could create for NBN Co’s management. The Government considered that the option for future restructuring or disaggregation should be retained and, to this end, NBN Co would be required to maintain separate accounts for its satellite, fixed wireless, FTTx, HFC and transit networks.218 In relation to repeal of Pt 7 of the Telecommunications Act and amendment of Pt 8 of that Act (the effect of which would essentially be to allow the 216 Vertigan Market and Regulatory Report, 25–30. 217 Australian Government, Telecommunications Regulatory and Structural Reform, December 2014. 218 Australian Government, Telecommunications Regulatory and Structural Reform, December 2014, 6.

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operator of a superfast broadband network to supply retail services to residential and small business customers on that network), the Government responded that it would introduce legislation to repeal Pt 7 with intended effect from 1 January 2017 and to require new networks targeting residential customers and offering high-speed broadband to be structurally separated as a default and offer non-discriminatory access. The Government response also indicated that the legislation would also provide for the ACCC to authorise functional separation arrangements, subject to undertakings from carriers detailing arrangements for access and equivalence to minimise anti-competitive effects.219 The recommendation of the expert panel to transfer the telecommunications-specific functions of the ACCC (other than those under CCA, Pt XIB) to a new “networks regulator” was considered by the Government as part of its response to the competition policy review, undertaken by a panel led by Professor Ian Harper, which published its report in March 2015.220 The Harper Review had recommended the establishment of a national dedicated regulator, separate from the ACCC (the “Access and Pricing Regulator”). The Harper Review proposed that this new body would subsume the access and pricing functions of the ACCC, including those under Pt XIC of the CCA, access arbitration functions under Pt IIIA of the CCA, and the functions of the Australian Energy Regulator.221 The Government has stated that it “remains open” to this recommendation and has indicated that it will continue discussions with states and territories on how a new national framework could be developed to promote economic growth and the most appropriate institutional arrangements to support reform.222

SUMMARY [10.560] The telecommunications-specific access regime commenced in 1997 and is set out in Pt XIC of the CCA. The regime initially operated as a negotiate/arbitrate model where terms and conditions of access were only set by the ACCC in the event an access seeker and access provider were unable to agree on terms and conditions of access. In light of the sheer number of access disputes notified to the ACCC and the time taken to deal with these disputes, the telecommunications-specific access regime was substantially reformed in 2011 and the negotiate/arbitrate model was replaced with a consider/determine model. Pursuant to the consider/ determine model the ACCC is required to determine regulated term and 219 Australian Government, Telecommunications Regulatory and Structural Reform, December 2014, 10. 220 Ian Harper (Chair), Peter Anderson, Su McCluskey and Michael O’Bryan, Competition Policy Review, March 2015 (“Harper Review”). 221 Harper Review, 80–81, 470–477. 222 Australian Government, Australian Government Response to the Competition Policy Review, 24 November 2015, 38.

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conditions of access to services following declaration of those services by the ACCC. The access regime has also been substantially amended to accommodate the introduction of the NBN. Access obligations under Part XIC of the CCA attach to declared services. Telecommunications services may become declared services in a number of different ways. The ACCC may declare services where it is satisfied that to do so will promote the LTIE. A service will also become a declared service where it is covered by a special access undertaking accepted by the ACCC. Finally, and only in respect of services provided by an NBN Corporation, a service will become a declared service where the NBN Corporation has in place a standard form of access agreement that relates to access to the service. In setting terms and conditions of access the ACCC applies a number of different approaches, which reflects the range of technologies that provide declared services and the differing competitive dynamics of the various markets in which such services are provided.

Questions for discussion 1. What are the differences between the negotiate/arbitrate and the consider/determine models of regulation as applied in the telecommunications-specific access regime over time? 2. What are some of the key differences and similarities between access regulation in the telecommunications sector, and the regulatory frameworks that apply to the electricity and gas sectors? 3. How do you view the success of telecommunications regulation to date and what do you think about the changes to the regulatory regime that have been made over time? Does your view change as you consider different services (fixed/mobile) and/or customer segments (residential consumers/business)? 4. Discuss the decision to rollout the NBN and the way in which NBN Co has been structured. 5. What types of cost models are used to determine prices for services provided by telecommunications infrastructure? What characteristics of the infrastructure or service might be relevant in determining appropriate cost model(s) for a particular service and why?

11

Port and Rail [11.10] OVERVIEW ....................................................................................................................................... 339 [11.20] BACKGROUND ............................................................................................................................... 340 [11.40] Ownership of port and rail infrastructure .................................................................................. 342 [11.60] Vertical integration .......................................................................................................................... 343 [11.70] PORT ACCESS REGULATION ..................................................................................................... 343 [11.80] National framework for regulation of access to bulk wheat ports ........................................ 344 [11.110] Price monitoring under Pt VIIA of the CCA ............................................................................ 347 [11.120] Economic regulation at South Australian Ports ....................................................................... 347 [11.160] Economic regulation at New South Wales ports ..................................................................... 350 [11.190] Economic regulation at Queensland ports ................................................................................ 353 [11.220] Economic regulation at Victorian ports ..................................................................................... 354 [11.260] Economic regulation at Western Australian ports ................................................................... 358 [11.270] Economic regulation at Tasmanian ports .................................................................................. 358 [11.280] Economic regulation at Northern Territory ports ................................................................... 359 [11.290] RAIL ACCESS REGULATION .................................................................................................... 360 [11.300] Economic regulation of interstate rail infrastructure .............................................................. 361 [11.320] Economic regulation of rail in Queensland .............................................................................. 362 [11.340] Economic regulation of rail in New South Wales ................................................................... 364 [11.360] Economic regulation of rail in Victoria ..................................................................................... 365 [11.380] Economic regulation of rail in South Australia ....................................................................... 367 [11.410] Economic regulation of rail in Western Australia ................................................................... 368 [11.480] Economic regulation of rail in Tasmania .................................................................................. 373 [11.490] Economic regulation of rail in Northern Territory .................................................................. 374 [11.500] SUMMARY ..................................................................................................................................... 374

OVERVIEW [11.10]

Unlike the electricity, gas and telecommunications sectors, there is no sector-specific national access regime for either port or rail infrastructure. Rather, port and rail access regulation is based on a combination of state-based regimes, application of the general National Access Regime and, for one limited class of port access service, a specific national framework. As a result, the form of access regulation applied to port and rail infrastructure varies between states and, in some cases, between different facilities within the same state. Most port and rail infrastructure is subject to a more “light-handed” form of regulation compared to services provided by electricity, gas and telecommunications infrastructure. The most common form of regulation

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applied to ports is price monitoring, while rail operators are most commonly subject to a negotiate/arbitrate framework and/or voluntary access undertakings. However, some port and rail infrastructure is subject to more “heavy-handed” regulation. The clearest example of this is in Victoria, where regulated rail network operators are required to submit access arrangements for regulatory approval. In some cases, there is no sector-specific economic regulation of port or rail operators at all. Examples of this include certain ports and rail lines in Western Australia. This chapter provides an overview of the various access regimes and access arrangements that apply to port and rail infrastructure.

BACKGROUND [11.20] This chapter focuses on access regulation of two types of transport infrastructure: rail lines and seaports. Airports are beyond the scope of this chapter. Services provided by port and rail infrastructure are discussed together in this chapter because of two common or unifying features: 1. Port infrastructure and rail infrastructure are often used in complementary ways. In many cases, rail lines are used to transport commodities to ports for export; therefore, exporters often require access to both port and rail infrastructure. Where there is such complementarity, efficiency may be enhanced where the port and rail access arrangements are aligned. 2. Unlike electricity, gas and telecommunications, there is no specific access regime for either port or rail infrastructure that operates across the various states and territories (or a majority of them) besides the general National Access Regime in Pt IIIA of the Competition and Consumer Act 2010 (Cth) (“CCA”). Instead, port and rail access regulation is based on a combination of state-specific regimes, application of the general National Access Regime and, for one limited class of port access service, a specific national framework. In the case of some port and rail infrastructure, there is either no access regulation or there is only light-handed regulation. Despite these unifying features, port and rail access regulation varies markedly between states and, in some cases, between different ports and rail lines within the same state. A typical export supply chain involving the use of port and rail infrastructure is depicted in Figure 11.1, which shows how port and rail infrastructure can be used in a complementary fashion, along with other inputs. Access regulation is typically focused on two parts of this supply chain where an economic “bottleneck” may arise: below-rail services and port access services. Other elements of the supply chain – such as production, above-rail services and shipping – are not typically subject to access regulation. Port and rail infrastructure can also be used in other

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types of supply chains. For example, ports may be used in conjunction with road freight, and rail infrastructure may be used other than for transport of commodities or goods to seaports. Figure 11.1 Typical export supply chain

[11.30] Port infrastructure is not homogenous. Ports can vary markedly in terms of: • size and capacity; • uses (for example, bulk commodity export and/or containerised freight movement); • ownership; and • user characteristics (for example, whether it is a single-user or multi-user port, and the bargaining position of users relative to the port owner). The particular characteristics of a port may influence, to some extent, how it is regulated.

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Ownership of port and rail infrastructure [11.40] Australia’s port and rail infrastructure includes a mixture of private and government-owned assets. Historically, many of these assets were government owned. However, in recent years a number of existing assets have been privatised and some new assets have been built by private operators. Most notably, in relation to rail infrastructure: • Queensland freight rail operator QR National (now Aurizon) was privatised in 2010. The privatised entity acquired a 99-year lease of the central Queensland coal rail network and certain network control responsibilities; • most rail infrastructure in Western Australia (west of Kalgoorlie) was privatised in 2000 and is now owned by Brookfield Rail. Like Aurizon, Brookfield operates the rail network under a long-term lease from the Western Australian Government; and • a number of privately owned rail lines have been built in Western Australia, mostly for the transportation of iron ore from the Pilbara region to the major seaports at Dampier and Port Hedland. However, the main interstate rail network (along with some intrastate networks) is government owned. Australian seaports operate under various ownership structures, with some fully privatised and others still owned by state governments. Over the past two decades, a number of previously government-owned ports have been privatised (see Table 11.1). Table 11.1 Port privatisations Port/asset Port of Fremantle (WA) Port of Melbourne (Vic) Port of Darwin (NT) Port of Newcastle (NSW) Port Kembla (NSW) Port Botany (NSW) Abbot Point Coal Terminal (Qld) Port of Brisbane (Qld) Port of Adelaide (SA) Dalrymple Bay Coal Terminal (Qld) Port of Geelong (Vic) Port of Portland (Vic)

Date of privatisation Under consideration at time of writing 2015 2014 2013 2013 2011 2010 2001 2001 1996 1996

[11.50] The trend towards private ownership of port and rail infrastructure has sharpened the focus on the requirement for appropriate regulatory arrangements. In some cases, regulatory arrangements have been pre-emptively put in place at the time of privatisation, reflecting a concern that the private operator may seek to exercise market power in a way that the government owner may not have had an incentive to do. For example, as part of the privatisation process for the Dalrymple Bay Coal

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Terminal, the Queensland Government declared coal handling services under Pt 5 of the Queensland Competition Authority Act 1997 (Qld) (“QCA Act”), and the new owner was required to consult with users when preparing a draft access undertaking and to lodge the undertaking for regulatory approval.1 In other cases, the actions of asset owners just prior to or following privatisation have led to users seeking greater recourse to existing regulatory remedies. For example, following the 2014 privatisation of the Port of Newcastle, a major user of that facility (Glencore) has sought declaration of shipping channel services at the port under Pt IIIA of the CCA. It appears that the trigger for this action was a decision by the new private operator of the port to increase prices for coal ships entering the port by approximately 60% for some vessel types, with no change in the nature of services provided to coal exporters.2

Vertical integration [11.60] Rail and port operators are often (but not always) separated from other parts of the supply chain, via either: • legal separation (for example, the rail track operator is a legally separate entity to operators of upstream and downstream businesses); or • where there is no legal separation, behavioural rules. For example, in the case of a rail operator, there may be behavioural rules directed at maintaining some separation between below-rail and above-rail activities. There are some limited examples of vertically integrated rail and port operators. These are mostly where rail and port infrastructure has been privately built for a specific purpose and is operated in an integrated way (for example, the integrated rail and port operations established by the BHP Billiton Iron Ore, Rio Tinto Iron Ore and Fortescue Metals Group in the Pilbara region of Western Australia). From an economic perspective, there are benefits and drawbacks associated with vertical integration of port and rail infrastructure. Given the complementary nature of port and rail infrastructure, vertical integration can provide for greater supply chain coordination and stronger incentives for efficient investment. However, vertical integration may give rise to incentives to deny access (either actively or constructively) to bottleneck infrastructure.

PORT ACCESS REGULATION [11.70] As noted at [11.10], there is no uniform national access regime for ports. Australia-wide port regulation has three main sources: 1 Queensland Competition Authority, Final Decision: Dalrymple Bay Coal Terminal Draft Access Undertaking, April 2005, 1-2. 2 Glencore Coal Pty Ltd, Application for a Declaration Recommendation in Relation to the Port of Newcastle, May 2015, 2.

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• a specific national access regime for wheat export terminals (see [11.80]–[11.100]); • the CCA, which provides for declaration and regulation of port facilities where the relevant criteria are met (Pt IIIA) and prices surveillance under the direction of the Commonwealth Minister (Pt VIIA) (see [11.110]); and • various state-based access regimes (see [11.120]–[11.280]). Among state-based regimes, there has been a drive for greater consistency (at least in terms of the general principles that are applied) since the Competition and Infrastructure Reform Agreement (“CIRA”) of 2006. The CIRA is intended to achieve a simple and consistent national approach to the economic regulation of significant infrastructure, covering a range of different types of infrastructure. For ports, the CIRA sets out a framework for ensuring that government-owned ports are operated on a competitively neutral basis. However, it is left up to individual states to determine how they regulate access to their ports. In relation to port access regulation, the CIRA states that: • ports should only be subject to economic regulation where a clear need exists in the promotion of competition in upstream or downstream markets or to prevent the misuse of market power; • wherever possible, third party access to port services should be provided on the basis of terms and conditions negotiated with the operator; • commercial outcomes should be promoted by establishing competitive market frameworks that allow competition in, and entry to, port and related infrastructure services, including stevedoring, in preference to economic regulation, and • where access regimes are required, and to maximise consistency, those regimes should be certified under Pt IIIA of the CCA.3 As discussed at [11.120]–[11.280], these general principles have been applied differently in each state, leading to varying approaches to port access regulation across Australia.

National framework for regulation of access to bulk wheat ports [11.80] Access to bulk wheat terminals at Australian ports is subject to a specific national access regime. The fact that port access for one particular commodity is subject to a specific access regime may seem unusual. However, as discussed at [11.90], this is largely due to the history of wheat export in Australia and is the product of attempts to address issues associated with vertical integration. 3 Competition and Infrastructure Reform Agreement, 10 February 2006, cl 4.1.

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Brief history of the Australian wheat export industry

[11.90] Regulatory arrangements for access to bulk wheat terminals were first established in 2008, following deregulation of the wheat export industry. Prior to 2008, Australian wheat exports had been managed through a “single desk”. The single desk system was introduced by the Commonwealth Government during World Wars I and II, but was extended in peacetime to shelter growers from volatile wheat prices. The single desk system initially applied to all wheat production in Australia, but through deregulation measures in the 1970s and 1980s it was limited to managing wheat exports. In 1999, the Australian Wheat Board (“AWB”), the manager of the single desk system, was privatised, and the single desk export privilege was transferred to AWB subsidiary AWBI, which was also granted the power to veto bulk wheat exports by other exporters. In 2008, the single desk system was abolished. The single desk system was replaced with an accreditation scheme under the Wheat Export Marketing Act 2008 (Cth) (“WEM Act”). The accreditation scheme was designed to promote competition in the bulk wheat export industry by allowing growers to choose from a number of accredited exporters, rather than requiring export through the single desk.4 The WEM Act also included new regulatory arrangements to apply to wheat export terminals. The WEM Act required that in order to be accredited, wheat exporters who also owned and/or operated wheat port terminal facilities needed to pass an “access test” as follows: • before 1 October 2009, it was a condition of accreditation that either an “effective” access regime was in place for access to the relevant port facilities (that is, a regime that has been certified as effective under Pt IIIA of the CCA) or the relevant exporter had published a statement on its website outlining the terms and conditions under which it would allow other accredited exporters access to its port terminal facilities; and • from 1 October 2009 onwards, it was a condition of accreditation that either an “effective” access regime was in place for access to the relevant port facilities (a regime that certified as effective under Pt IIIA of the CCA) or the relevant exporter had a formal access undertaking accepted by the Australian Competition and Consumer Commission (“ACCC”) under Pt IIIA of the CCA.5 The access test was intended to limit the ability of vertically integrated wheat exporters (those who also owned or operated port facilities) to restrict competitors from accessing those port facilities on reasonable terms. The Explanatory Memorandum to the WEM Bill explains: This clause is intended to ensure that accredited exporters that own, operate or control port terminal facilities provide fair and transparent access to their 4 Explanatory Memorandum, Wheat Export Marketing Bill 2008 (Cth) (“WEM Bill”). 5 Wheat Export Marketing Act 2008 (Cth), s 24.

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facilities to other accredited exporters. The test aims to avoid regional monopolies unfairly controlling infrastructure necessary to export wheat in bulk quantities, to the detriment of other accredited exporters. All accredited exporters should have access to these facilities while allowing the operators of the facility to function in a commercial environment.6

The ACCC accepted undertakings from four wheat export terminal operators – CBH, Emerald, GrainCorp and Viterra – under the access regime in the WEM Act. Undertakings were originally accepted by the ACCC in 2009, with subsequent undertakings accepted in 2011 and 2013. Current regulatory framework for the export of bulk wheat

[11.100]

On 19 September 2014, the Minister for Agriculture announced the introduction of Port Terminal Access (Bulk Wheat) Code of Conduct (“Bulk Wheat Code”), a mandatory code prescribed under the CCA. The Bulk Wheat Code commenced on 30 September 2014 and regulates the conduct of bulk wheat port terminal operators. It replaced the previous wheat port access regime under the WEM Act. The Bulk Wheat Code has a broader application than its predecessor WEM Act regime. Where the WEM Act only applied to wheat exporters seeking accreditation who also owned and/or operated port facilities, the Bulk Wheat Code applies more broadly to any provider of services supplied via port facilities that are capable of handling bulk wheat. The Bulk Wheat Code prescribes:

• an obligation on all port terminal operators to negotiate in good faith with wheat exporters for access to port terminal services;7 • certain disclosure obligations, including a requirement to publish loading schedules, policies, procedures for managing demand, and current standard terms and reference prices;8 • obligations on port terminal operators not to discriminate or hinder access in the provision of port terminal services;9 • the ability for wheat exporters to seek mediation or binding arbitration on terms of access in the event of a dispute;10 and • obligations relating to publishing and approval of port loading protocols for managing demand for port terminal services.11 Port operators may be exempted from some of these requirements.12 Several exemptions have been granted, including to Newcastle Agri 6 Explanatory Memorandum, WEM Bill. 7 Bulk Wheat Code, cl 6. 8 Bulk Wheat Code, cll 7-9. 9 Bulk Wheat Code, cl 10. 10 Bulk Wheat Code, Pt 3, Div 2. 11 Bulk Wheat Code, Pt 4. 12 Bulk Wheat Code, cl 5.

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Terminal Pty Ltd and Qube Holdings Limited in respect of their bulk wheat port terminal facilities at the Port of Newcastle.13

Price monitoring under Pt VIIA of the CCA [11.110] Under Pt VIIA of the CCA, the ACCC monitors prices, costs and profits of container stevedoring operators located in the ports of Adelaide, Brisbane, Burnie, Fremantle, Melbourne and Sydney. Pursuant to a direction made by the Commonwealth Treasurer in January 1999, the ACCC is required to report on its monitoring activities annually.14 In recent reports, the ACCC has observed that increased competition in stevedoring since the waterfront reforms of 1998 has led to improved productivity and falling average prices for stevedoring services at monitored ports.15 Economic regulation at South Australian Ports [11.120]

The Maritime Services (Access) Act 2000 (SA) (“MSA Act”) establishes an access regime for access to “regulated services” at South Australian ports and provides for the price regulation of “essential maritime services”. It applies to those persons (regulated operators) who carry on a business of providing maritime services at a “proclaimed port” that are declared by proclamation to be “regulated services”.16

In accordance with s 5 of the MSA Act, the following ports were proclaimed on 25 October 2001 to be subject to the MSA Act access regime: • Port Adelaide; • Port Giles; • Wallaroo; • Port Pirie; • Port Lincoln; • Thevenard; and • Ardrossan. The first six remain proclaimed ports and are operated by Flinders Ports, a private operator. Ardrossan was removed from the coverage of the access regime following a ports pricing and access review in 2007.17

[11.130]

The MSA Act provides for certain functions and powers to be exercised by Essential Services Commission of South Australia (“ESCOSA”), including monitoring and enforcing compliance with the MSA Act. The

13 ACCC, Final Determinations: Newcastle Agri Terminal Pty Ltd and Qube Holdings Limited at the Port of Newcastle: Exemption Assessments of Bulk Wheat Port Terminal Facilities under the Port Terminal Access (Bulk Wheat) Code of Conduct, 30 July 2015. 14 Ministerial Direction No 17, January 1999. 15 ACCC, Container Stevedoring Monitoring Report No 16, October 2014. 16 MSA Act, s 10. 17 ESCOSA, 2007 Ports Pricing and Access Review: Final Report, September 2007.

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MSA Act provides that “essential maritime industries” are regulated industries for the purposes of the Essential Services Commission Act 2002 (SA) (“ESC Act”) and authorises ESCOSA to make price determinations relating to essential maritime industries.18 The MSA Act defines an “essential maritime industry” as an industry providing “essential maritime services”, which consist of: • providing or allowing for access of vessels to a “proclaimed port”; • providing port facilities for loading or unloading vessels at a proclaimed port; and • providing berths for vessels at a proclaimed port.19 ESCOSA considers that the term “essential maritime services” encompasses: • navigational aids; • harbour control (but not pilotage20 or towage); • channels, berths and wharves; • cargo loading and unloading (marshalling) areas (but not loading or unloading itself); • jetties, berth pockets, fenders, and mooring structures; and • mooring and unmooring and provisioning connections (but not provisioning).21 A similar set of services is also classified as “regulated services”. As noted at [11.120], regulated services are maritime services falling within the scope of the port access regime. These currently include:22 • channels; • common user berths; • bulk handling facilities as defined in the South Australian Ports (Bulk Handling Facilities) Act 1996 (SA) (operated by Viterra), but only in relation to conveyor belts (storage areas are not included); • berths adjacent to bulk handling facilities; • land providing access to maritime services; and • the Outer Harbour bulk loader at Port Adelaide. The Governor may, by proclamation, declare another maritime service to be a regulated service. 18 MSA Act, s 6. 19 MSA Act, s 4. 20 “Pilotage” refers to the provision of a pilot to guide vessels in and out of the port area. At many Australian ports, pilotage is compulsory. 21 ESCOSA, 2012 Ports Pricing and Access Review: Final Report, October 2012, 2. 22 ESCOSA, 2012 Ports Pricing and Access Review: Final Report, October 2012, 3.

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Price monitoring by ESCOSA

[11.140]

Under Pt 3 of the ESC Act, ESCOSA may make determinations regulating prices for goods and services in a regulated industry if authorised to do so.23 As noted at [11.130], the MSA Act provides authorisation for ESCOSA to make price determinations relating to essential maritime services. ESCOSA has a wide discretion to make such determinations, which may include:24 • • • •

fixing a price or the rate of increase of a price; fixing a maximum price or maximum rate of increase of a price; fixing an average price for a bundle of goods or services; specifying an amount determined by reference to a general price index; or • monitoring price levels. The form of regulation currently adopted by ESCOSA for regulated ports in South Australia is price monitoring. The current price monitoring determination was made in October 2012 and has a term of five years. This determination requires each regulated service provider to:25 • set and publish on a readily accessible part of its website a comprehensive list of prices for the provision of essential maritime services for the period in which the determination has effect; • provide a copy of the list of prices to ESCOSA within 10 business days of the list of prices being set and published; • inform ESCOSA of any changes to its published prices by providing a copy of the changed list of prices to ESCOSA within 10 business days of the changed list being set and published; and • inform and give relevant details to ESCOSA of any agreements for the provision of essential maritime services at a price that differs from the published list price. The current price determination also provides that ESCOSA may (but is not required to) publish reports on prices charged for essential maritime services by regulated service providers. The 2012 price monitoring determination was made following a review of the access regime by ESCOSA. Following its review, ESCOSA concluded that although there is the potential for market power to be exercised by port operators in respect of the pricing of essential maritime services, there was no evidence to suggest that port operators are exercising such market 23 ESC Act, s 25. 24 ESC Act, s 25. 25 ESCOSA, 2012 Ports Price Determination, October 2012, cl 2.

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power.26 ESCOSA therefore concluded that the existing form of price regulation (price monitoring) was appropriate and should be maintained for a further five year regulatory period.27 Negotiate/arbitrate framework for access to regulated services

[11.150]

The MSA Act also establishes a negotiate/arbitrate framework for access to “regulated services”. The key features of this framework are: • access to regulated services must be provided on terms that are agreed between the port operator and the customer or, failing agreement, on fair commercial terms determined by arbitration. A price term will be regarded as a fair commercial term if the price is regulated by a determination made by ESCOSA and the term is consistent with that determination;28

• the port operator must negotiate in good faith with any person seeking access to a regulated service;29 and • if a commercial agreement cannot be reached, a dispute can be referred to ESCOSA, with the MSA Act providing for conciliation (by ESCOSA) and arbitration (by an independent arbitrator) of unresolved disputes.30 In July 2011, the South Australian port access regime was certified as an effective regime under Pt IIIA of the CCA, pursuant to a recommendation of the National Competition Council (“NCC”) made in May 2011.31

Economic regulation at New South Wales ports [11.160]

Under the Ports and Maritime Administration Act 1995 (NSW) (“PMA Act”), a price monitoring regime applies to the following NSW seaports: • Botany Bay; • Sydney Harbour; • Port Kembla; • Port of Newcastle; • Port of Eden; and • Port of Yamba.32 26 ESCOSA, 2012 Ports Pricing and Access Review: Final Report, October 2012, vi. 27 ESCOSA, 2012 Ports Pricing and Access Review: Final Report, October 2012, vii. 28 MSA Act, s 11. 29 MSA Act, s 14. 30 MSA Act, ss 15, 16, 18. 31 NCC, South Australian Ports Access Regime Application for Certification as an Effective Access Regime – Section 44M of the Trade Practices Act 1974 (Cth): Final Recommendation, 10 March 2011. 32 PMA Act, Pt 6.

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Notably, the price monitoring regime under Pt 6 of the PMA Act is administered by the Minister for Roads and Ports and not the state-based independent economic regulator, the Independent Pricing and Regulatory Tribunal (“IPART”). Other than price monitoring by the Minister, there is no other access regulation applicable to New South Wales ports under the PMA Act. There is no power for the Minister or IPART to determine prices or to arbitrate access disputes. Price monitoring by the Minister

[11.170]

The PMA Act requires the owner of each of the ports covered by the price monitoring scheme (see [11.160]) to publish service charges for the port.33 These charges exclude rent and other amounts payable under a lease, as well as charges made under an agreement, but include navigation and pilotage34 charges, site occupation, wharfage35 and port infrastructure charges. The operator must also notify the Minister for Roads and Ports before implementing any proposed change in the port service charges and must publish any proposed change on its website prior to that change occurring.36 If a new charge is to be levied, the port operator must publish information about the basis of the charge, the calculation of the amount of the charge and to whom the charge applies.37 For new port infrastructure charges, the port operator must publish details about the charge, the basis for the amount of the charge, who must pay the charge and the period of time the charge is proposed to apply. The operator of a port covered by the monitoring scheme also has an obligation to report annually to the Minister in respect of the previous financial year: • a list of the types of service charges charged by the port operator; • the revenue received by the operator from service charges (showing the amount received for each separate charge); • the total number of units charged for where applicable (where a service charge is based on the number of chargeable units, such as vessel gross tonnage); and 33 PMA Act, s 79. 34 “Pilotage” refers to the provision of a pilot to guide vessels in and out of the port area. At many Australian ports, pilotage is compulsory. 35 “Wharfage” refers to the use of wharves to load or unload cargo. 36 PMA Act, s 80. 37 PMA Act, s 80.

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• if the amount of a charge was varied during the financial year, the amount of variation and reason for it.38 The Minister also has the power to require information relating to port service charges from the port operator, where the Minister is reasonably satisfied that this is necessary to achieve the scheme objective and the likely cost to the port operator of complying is not disproportionate to the benefit.39 The PMA Act provides for the Minister to publish reports and statements about the charges at a port from time to time. Application for declaration under Pt IIIA of services at Port of Newcastle

[11.180]

As noted at [11.50], a declaration application has recently been made under Pt IIIA of the CCA in respect of a shipping channel service at the Port of Newcastle. It appears that one trigger for this application was a decision by the new private operator of the port to increase prices for coal ships using the shipping channels to enter the port by approximately 60% for some vessel types, with no change in the nature of services provided to coal exporters.40

In making its application for a recommendation that the shipping channel service at the Port of Newcastle be declared, Glencore observed that there is currently no effective access regime in place in respect of that service. In its application, Glencore noted that the PMA Act price monitoring regime has not been certified as an effective access regime under Pt IIIA of the CCA. Glencore also identified several limitations of the PMA Act regime, including that it does not provide for an independent body to determine access disputes.41 On 6 January 2016, the Acting Treasurer (as the designated Minister) issued a decision in respect of Glencore’s application for declaration of a shipping channel service at the Port of Newcastle. The decision was not to declare the service as the Acting Treasurer did not consider that declaration criterion (a) had been satisfied, adopting the NCC’s final recommendation (criterion (a) requires that access or increased access to a service would promote a material increase in competition in at least one other market).42 On review, the Australian Competition Tribunal decided that the shipping 38 PMA Act, s 81. 39 PMA Act, s 82. 40 Glencore Coal Pty Ltd, Application for a Declaration Recommendation in Relation to the Port of Newcastle, May 2015, 2. 41 Glencore Coal Pty Ltd, Application for a Declaration Recommendation in Relation to the Port of Newcastle, May 2015, 31-32. 42 Acting Treasurer Mathias Cormann, Decision and Statement of Reasons Concerning Glencore Coal Pty Ltd’s Application for Declaration of the Shipping Channel Service at the Port of Newcastle, 8 January 2016.

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channel service should be declared, on the basis that all relevant criteria (including criterion (a)) were satisfied. The considerations of the NCC and the Australian Competition Tribunal are discussed further in Ch 7. The port owner applied for judicial review of the Australian Competition Tribunal’s decision on 14 July 2016.43

Economic regulation at Queensland ports [11.190]

There is no port-specific access regime applicable in Queensland. Rather, port access in Queensland is regulated only under the general state access regime in Pt 5 of the Queensland Competition Authority Act 1997 (Qld) (“QCA Act)”.

Application of the general state-based access regime to ports

[11.200]

Part 5 of the QCA Act establishes an access regime that can be applied in relation to significant infrastructure services, including port infrastructure. Where a service is “declared” under the QCA Act, the access regime in Pt 5 will apply. Key features of the access regime include: • the Queensland Competition Authority (“QCA”) can recommend that a service be declared by the relevant Ministers, and the Ministers can declare a service if certain criteria are satisfied;44

• a person may ask the QCA to recommend that a particular service be declared by the Ministers, and the Ministers may ask the QCA to consider whether a particular service should be declared;45 • once a service is declared, a provider of that service becomes subject to certain obligations, including an obligation to negotiate terms of access with access seekers;46 • where parties are unable to negotiate terms of access to a declared service, the QCA can arbitrate access disputes; • a provider of a declared service may provide (and may be required by the QCA to provide) an access undertaking for approval by the QCA. Only one Queensland port facility – the Dalrymple Bay Coal Terminal (“DBCT”) at the Port of Hay Point – is subject to declaration and economic regulation under Pt 5 of the QCA Act. As part of the privatisation process for DBCT, the Queensland Government declared coal handling services under Pt 5 of the QCA Act, and the new owner was required to consult 43 Notice of Filing and Hearing, Port of Newcastle Operations Pty Ltd v The Australian Competition Tribunal & Anor, NSD 1147/2016, 14 July 2016. 44 QCA Act, s 76. 45 QCA Act, s 77. 46 QCA Act, s 99.

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with users in the preparation of a draft access undertaking and to lodge the undertaking for regulatory approval.47 There is currently an access undertaking in force for coal handling services at DBCT. This undertaking, accepted by the QCA in 2010, covers a range of matters, including: • access prices and pricing methodology (a building block method is specified); • non-price terms and conditions of access; • obligations on the terminal operator to undertake capacity expansions in certain circumstances; and • dispute resolution mechanisms.48 At the time of writing, the QCA was assessing a new draft access undertaking to replace the 2010 undertaking. Prices oversight

[11.210]

The QCA has the power under Pt 3 of the QCA Act to investigate and report on pricing practices relating to monopoly business activities. This power could potentially be used to monitor pricing at other ports in Queensland, besides DBCT. However, to date, no port operator has been declared for a price monitoring investigation.

Economic regulation at Victorian ports [11.220] The Port Management Act 1995 (Vic) (“PM Act”) and the Essential Services Commission Act 2001 (Vic) (“ESC Act (Vic)”) together establish the regulatory framework that applies to Victoria’s seaports. The PM Act provides that, for the purposes of Pt 3 of the ESC Act (Vic): • the port industry in a commercial trading port is a regulated industry; • the prices charged for the provision of, or in connection with, prescribed services in respect of the regulated industry (other than prescribed prices for certain grain handling services) are prescribed prices; and • the following are prescribed services: – the provision of channels for use by shipping in the Port of Melbourne, including shared channels used by ships bound for either the Port of Melbourne or the Port of Geelong; – the provision of berths, buoys or dolphins in connection with the berthing of vessels carrying container or motor vehicle cargoes in the Port of Melbourne; and 47 QCA, Final Decision: Dalrymple Bay Coal Terminal Draft Access Undertaking, April 2005, 1-2. 48 Dalrymple Bay Coal Terminal Access Undertaking (accepted by the QCA on 27 September 2013).

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– the provision of short-term storage or cargo marshalling facilities in connection with the loading or unloading of vessels carrying container or motor vehicle cargoes in the Port of Melbourne.49 The ESC Act (Vic) establishes the Essential Services Commission of Victoria’s (“ESCV’s”) regulatory powers in respect of prices charged for the provision of, or in connection with, the prescribed services. The ESCV’s power to make a price determination under the ESC Act (Vic) is broad, and could potentially be used to apply a number of different forms of access regulation, from price monitoring through to ex ante price determination. The ESC Act (Vic) provides that a price determination by the ESCV may regulate a prescribed price for prescribed goods and services in any manner the ESCV considers appropriate, including inter alia fixing the price or the rate of increase or decrease in the price, or monitoring price levels.50 The ESCV has chosen to apply a price monitoring form of regulation to the prescribed port access services specified in the PM Act. This is given effect through Price Monitoring Determinations made by the ESCV (see [11.230]). The PM Act requires the ESCV to conduct a review of port regulation every five years and make a recommendation to the relevant Minister as to whether the prescribed services should continue to be subject to price regulation and, if so, the form of that price regulation.51 In its 2014 review of the Victorian access regime for ports, the ESCV recommended no change to the list of prescribed services as set out in the PM Act.52 The ESCV also considered that continuation of a “light-handed” form of economic regulation, namely price monitoring, was appropriate.53 However, the ESCV recommended further refinements to the price monitoring regime, which are discussed at [11.240]. Price Monitoring Determination 2015

[11.230]

The Price Monitoring Determination (“PMD”) is the key regulatory instrument that imposes obligations on Port of Melbourne Corporation (“PoMC”) in relation to the pricing and financial reporting of its prescribed services. The current PMD applies for the five-year period from 1 July 2015 to 30 June 2020, unless it is amended or revoked by the ESCV, or until such time as a new economic regulatory framework is established through amendments to the PM Act and ESC Act (Vic). The main elements of the price monitoring framework are:

49 PM Act, s 49. 50 ESC Act (Vic), s 33. 51 PM Act, s 53. 52 Essential Services Commission of Victoria, Review of Victorian Ports Regulation: Final Report, June 2014. 53 ESCV, Review of Victorian Ports Regulation: Final Report, June 2014, xxii.

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• a set of pricing principles intended to provide a guide for pricing of prescribed services;54 • a requirement for PoMC to prepare and seek the ESCV’s approval of a Pricing Policy Statement (“PPS”) and place the approved PPS on its website.55 The PPS is to set out how PoMC will set prices for port services over the five-year period covered by the PMD; • a requirement for PoMC to annually publish a schedule of reference tariffs, and to distinguish between its prescribed and non-prescribed services in the reference tariff schedule;56 • a requirement for PoMC to annually publish certain service quality and profitability indicators on its website;57 and • the ESCV may (but is not required to) publish annual monitoring reports based on the information reported by PoMC.58 Move towards more “light-handed” regulation

[11.240]

There has been a general trend towards more “light-handed” regulation of the Victorian ports sector over the past two decades. This has involved both a reduction in the scope of services subject to regulation, and a change in the form of regulation. Prior to 2005, a price cap form of regulation applied to Victorian ports. However, in its 2004 review of port access regulation, the ESCV recommended that the price cap regime be replaced with price monitoring. This change in the form of regulation was driven by a concern that “heavy-handed” price cap regulation, which had driven down port access charges, may have been inhibiting investment in port infrastructure. Further changes to the regulatory framework were recommended in the ESCV’s 2009 review of port access regulation. In particular, the ESCV recommended two important changes: 1. that the scope of services subject to regulation be reduced, focusing on a more limited set of port services at a smaller number of ports.59 The ESCV recommended that only certain services at Port of Melbourne be subject to regulation, meaning that the regional ports of Geelong and Portland (which were previously subject to regulation) would no longer be regulated. Services at the Port of Melbourne for non-containerised and non-motor vehicle cargoes were also deregulated; and

54 Essential Services Commission, Price Monitoring Determination for Victorian Ports 2015, June 2015, cl 5. 55 ESCV, Price Monitoring Determination for Victorian Ports 2015, June 2015, cl 6. 56 ESCV, Price Monitoring Determination for Victorian Ports 2015, June 2015, cl 2. 57 ESCV, Price Monitoring Determination for Victorian Ports 2015, June 2015, cl 2, cl 3. 58 ESCV, Price Monitoring Determination for Victorian Ports 2015, June 2015, cl 4. 59 ESCV, Review of Victorian Ports Regulation: Final Report, June 2009, 20.

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2. while the ESCV recommended that the price monitoring framework be retained, it recommended that its powers to impose more “heavyhanded” regulation within the period of a price monitoring determination be removed.60 As noted at [11.220], in its 2014 review of the ports regulatory framework, the ESCV made further refinements to its price monitoring framework for PoMC. In particular, the ESCV opted for greater focus on “self-reporting” by PoMC, instead of requiring reporting to the ESCV. These proposed changes are designed to ensure the price monitoring framework is effective, while minimising the regulatory burden on PoMC.61 Recent developments

[11.250]

At the time of writing, the Victorian Government was planning privatisation of the Port of Melbourne through a long-term lease arrangement.

Shortly after the Government’s privatisation plans were announced, PoMC advised port users of a very large increase in port usage charges. PoMC advised user DP World in March 2015 that its rent would increase from $16 per square metre to around $120 per square metre.62 While PoMC subsequently backed down on its proposed rent increase,63 the fact that PoMC considered itself able to impose such a significant price increase may call into question the effectiveness of the “light-handed” regulatory regime. As part of the package of legislation to facilitate privatisation the Victorian Government has proposed amending the framework for access regulation at the Port of Melbourne, as set out in the PM Act. Proposed amendments to the PM Act include:64 • expanding the scope of prescribed services to include most services at the Port of Melbourne, except for leasing of space and facilities; • a more clearly defined framework for setting access prices, including a requirement for the Port of Melbourne leaseholder to comply with pricing and cost allocation principles utilising a building block methodology; and • establishing an opening asset base for Port of Melbourne’s channel and wharf assets, to be used in applying the building block methodology. 60 ESCV, Review of Victorian Ports Regulation: Final Report, June 2009, 21. 61 ESCV, Review of Victorian Ports Regulation: Final Report, June 2014, xxiii. 62 Mathew Dunckley and Jenny Wiggins, “Stevedore DP World it with 800 per cent rent increase as Port of Melbourne sale looms”, The Sydney Morning Herald, 3 March 2015, . 63 Jenny Wiggins and Michael Smith, “DP World wins rent battle with Port of Melbourne”, The Australian Financial Review, 3 August 2015, . 64 Delivering Victorian Infrastructure (Port of Melbourne Lease Transaction) Bill 2015 (Vic), Pt 8, Div 2.

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Under the proposed legislative amendments, the ESCV would continue in its monitoring role, albeit with a broader scope of services under review and a more tightly defined pricing framework.

Economic regulation at Western Australian ports [11.260]

Key seaports in Western Australia continue to be government owned and are not currently subject to specific access regulation.

The Port Authorities Act 1999 (WA) (“PA Act”) establishes eight governmentowned port authorities: Fremantle Port Authority; Albany; Broome; Bunbury; Esperance; Geraldton; and Port Hedland. There is no ministerial approval of port charges of these port authorities, nor is there independent regulatory oversight of their port charges. The PA Act gives the port authorities the power to levy “such port charges as the port authority determines”.65 However, the port authorities’ discretion in performing their functions is subject to directions of the designated Minister.66 Ports in Western Australia are not a “regulated industry” for the purpose of the Economic Regulation Authority Act 2003 (WA) and, as such, the Economic Regulation Authority (Western Australia)’s (“ERA’s”) powers of economic regulation are not currently applied to the ports sector.67 However, the relevant Minister may direct the ERA to inquire into or report on non-regulated industries, including the seaports industry.68

Economic regulation at Tasmanian ports [11.270]

Similarly to Western Australia (see [11.260]), the ports sector in Tasmania continues to be government owned and is not currently subject to specific access regulation. The Tasmanian Ports Corporation (“TasPorts”) was established under the Tasmanian Ports Corporation Act 2005 (Tas) (“TPC Act”). TasPorts is fully owned by the Tasmanian Government and is responsible for the operation and management of all ports in Tasmania. The TPC Act does not provide for regulation of TasPorts’s fees and charges. There are also no provisions regarding access to TasPorts’s infrastructure. The Economic Regulator Act 2009 (Tas), which establishes the powers and functions of the Tasmanian access regulator (the Office of the Tasmanian Economic Regulator (“OTTER”), provides scope for the responsible Minister to declare a service to be a prescribed monopoly service if the Minister is satisfied that it is a service for which:69

65 PA Act, s 37. 66 PA Act, s 72. 67 Economic Regulation Authority Act 2003 (WA), s 3. 68 Economic Regulation Authority Act 2003 (WA), s 38. 69 Economic Regulator Act 2009 (Tas), s 6.

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• there are no other suppliers to provide competition in the relevant market; and • there is no contestable market by potential suppliers in the short term. Declaration will trigger an investigation by the OTTER into the pricing policies of a monopoly service provider that provides prescribed monopoly services. However, none of TasPort’s services have been declared as prescribed monopoly services and, as such, no access regulation is currently applied to TasPorts.

Economic regulation at Northern Territory ports [11.280]

Until recently, there was no framework for independent regulatory oversight of port charges in the Northern Territory. Port charges for the government-owned Port of Darwin were approved by the relevant shareholding Minister under the Darwin Port Corporation Act 1983 (NT), and any changes in the port’s pricing structure had to be approved by the Minister, although individual variations in charges did not require approval.70 Other ports in the Northern Territory were not subject to any form of regulation or price oversight. However, in 2015, the Northern Territory Government introduced two major reforms: 1. the Port of Darwin Act 2015 (NT), which allowed it to privatise the Port of Darwin under a long-term lease arrangement; and 2. the Ports Management Act 2015 (NT), which included a new framework for regulation of the Port of Darwin and other ports. Key features of the regulatory framework, contained in Pt 11 of the Ports Management Act 2015 (NT), include: • identification of the Port of Darwin as a “designated port”, and powers for the Minister to declare other Northern Territory ports as “designated ports”;71 • obligations on operators of designated ports in respect of the supply of “prescribed services”, including obligations not to prevent or hinder access, and reporting obligations;72 • powers for the Utilities Commission to make price determinations in respect of prescribed services provided by an operator of a designated port;73 and • pricing principles to be applied in making determinations.74 70 Darwin Port Corporation Act 1983 (NT), s 17A. 71 Ports Management Act 2015 (NT), ss 3, 6. 72 Ports Management Act 2015 (NT), Pt 11, Div 2. 73 Ports Management Act 2015 (NT), s 132. 74 Ports Management Act 2015 (NT), s 133.

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The Ports Management Act 2015 (NT) also provides for regulations to be made specifying a form of price regulation.75 The Port Management Regulations (NT) specify that monitoring price levels of a prescribed service is to be used as the form of price regulation, with the regulator to specify the basis on which, or the standard against which, it intends to monitor price levels.76 The regulations also specify the “prescribed services” to which regulation applies.77 At the time of writing, the Utilities Commission had recently made its first price determination under the new regulatory framework. The final price determination for prescribed services at the Port of Darwin was made in February 2016.78

RAIL ACCESS REGULATION [11.290]

Similarly to ports, there are two main sources of economic regulation for rail infrastructure: • state-based access regimes; and • Pt IIIA of the CCA. As discussed at [11.70], the CIRA is intended to achieve a simple and consistent national approach to the economic regulation of significant infrastructure, including port and rail infrastructure. The CIRA sets out a number of commitments in relation to rail access regulation (see Box 11.1). These include a commitment to implement a consistent national framework for regulation of certain “nationally significant” railways, and a commitment to submit state-based rail access regimes governing other significant export-related rail infrastructure for certification. However, the CIRA does not provide for a uniform national approach to regulation of all railways. While there are commitments to a consistent national framework for certain “nationally significant” railways (including certain interstate railways), for other intrastate railways it is envisaged that certified state access regimes would apply.

75 Ports Management Act 2015 (NT), s 134. 76 Port Management Regulations (NT), reg 16. 77 Port Management Regulations (NT), reg 12. 78 Utilities Commission, 2015-2018 Prescribed Port Services Price Determination – Port of Darwin: Final Determination, 16 February 2016.

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Box 11.1: The CIRA commitments on rail freight infrastructure79 Rail freight infrastructure 3.1. The Parties agree to implement a simpler and consistent national system of rail access regulation, using the Australian Rail Track Corporation access undertaking to the Australian Competition and Consumer Commission as a model, to apply to the following agreed nationally significant railways: (a) Interstate rail track from Perth to Brisbane, currently managed by the Australian Rail Track Corporation and other parties, subject to the outcome of commercial negotiations; and (b) Major intra-state freight corridors on an agreed case by case basis depending on the costs and benefits of inclusion under a national regime. 3.2. The Parties agree to develop an agreed approach to the application of the Australian Rail Track Corporation access undertaking model including pricing and access mechanisms that will be appropriate if vertically integrated operators retain control of relevant sections of track. 3.3. The Parties agree that state based rail access regimes governing other significant export related rail infrastructure facilities will be submitted for certification as required by clause 2.9. 3.4. This agreement does not require any change to passenger priority policies. As a result, rail access regulation varies from state to state and, in some cases, between different railways within the same state.

Economic regulation of interstate rail infrastructure ARTC interstate rail network

[11.300]

Access to the interstate rail network operated by Australian Rail Track Corporation (“ARTC”) is currently subject to an undertaking accepted by the ACCC under Pt IIIA of the CCA. The interstate network connects each of the five mainland states and is used for both passenger and freight services.80 This undertaking commenced in July 2008 and continues until July 2018 unless it is withdrawn (with the ACCC’s consent) before this date. 79 Competition and Infrastructure Reform Agreement, 10 February 2006. 80 A description of the network covered by the current undertaking is set out in Sch E to that undertaking.

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The ARTC undertaking includes: • a framework for negotiating access and dispute resolution (Pt 3); • pricing principles and indicative access prices (Pt 4); • capacity management rules (Pt 5); and • a framework for determining network expansion requirements (Pt 6). Any variations to the current undertaking must be approved by the ACCC. Tarcoola-Darwin railway access regime

[11.310]

A specific access regime is in place for the Tarcoola to Darwin railway under the AustralAsia Railway (Third Party Access) Code, which is a Schedule to the AustralAsia Railway (Third Party Access) Act 1999 (SA & NT). The access regime in the Code was certified as an effective state regime under s 44N of the Trade Practices Act 1974 (Cth) (now the CCA), pursuant to a recommendation of the NCC made in February 2000.81

The Code establishes a negotiate/arbitrate framework for access to the Tarcoola-Darwin railway. Under this framework: • there is a requirement for the access provider and access seekers to negotiate in good faith; • where parties are unable to reach agreement, an access dispute may be notified to the responsible regulator (ESCOSA); • the regulator must, upon receiving notification of a dispute, attempt to resolve the dispute by conciliation or appoint an arbitrator. ESCOSA has been appointed as the responsible regulator under the Code. Under cl 5 of the Code, ESCOSA may exercise and perform the powers and functions of the regulator under the Code for the purposes of both the law of South Australia and the law of the Northern Territory.

Economic regulation of rail in Queensland [11.320]

Access to freight rail infrastructure in Queensland is governed by the general access regime in Pt 5 of the QCA Act. As discussed at [11.200], Pt 5 of the QCA Act provides for the declaration of services, a negotiate/arbitrate framework for determining the terms of access to declared services, enforcement mechanisms and the giving of undertakings (and a power for the regulator to require that an undertaking be given). The following rail services are declared for the purposes of Pt 5 of the QCA Act: • the use of certain rail systems for providing transportation of coal. These are the four systems comprising the central Queensland coal network (the Blackwater system, the Goonyella system, the Moura system and the Newlands system), which are now operated by Aurizon Network; and

81 NCC, Australasia Railway Access Regime Application for Certification under Section 44M(2) of the Trade Practices Act 1974: Final Recommendation, February 2000.

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• the use of rail transport infrastructure for operating a railway for which Queensland Rail Limited (or a successor, assign or subsidiary) is the railway manager. This includes the passenger network in south-east Queensland and a regional freight network connecting parts of inland southern Queensland and the north coast with Brisbane.82 These declarations cover the below-rail infrastructure only – that is, the track and associated infrastructure such as bridges, communications systems and signalling equipment. The declarations do not cover above-rail infrastructure, such as rolling stock. Undertakings have been submitted and approved by the QCA for the central Queensland coal network and the rail network managed by Queensland Rail. Like the ARTC interstate undertaking (see [11.300]), these undertakings include a negotiating framework, pricing principles, capacity management rules and network planning provisions. However, a key distinguishing feature of these undertakings is that they also include ring-fencing rules designed to provide a degree of separation between below-rail activities and other related activities undertaken by Aurizon and Queensland Rail (for example, above-rail operations). These ring-fencing rules are designed to address issues that might arise due to the vertical integration of the Queensland rail network operators. There is currently an undertaking in force for the central Queensland coal network. This undertaking was accepted by the QCA under Pt 5 of the QCA Act and was originally scheduled to expire in June 2013. However, the expiry date has been extended to allow time for the QCA to consider a proposed replacement undertaking. A draft replacement undertaking was submitted to the QCA in early 2013 for approval (and a revised version submitted in August 2014), but at the time of writing, no replacement undertaking had yet been approved. There was no access undertaking in force for the rail network managed by Queensland Rail at the time of writing. As for the central Queensland coal network, the QCA is considering a new undertaking from Queensland Rail to replace the undertaking that was approved in 2008. However, the QCA refused to approve a proposal from Queensland Rail to extend the 2008 undertaking past 30 June 2015 while this consideration (which is ongoing at the time of writing) takes place.83 The Queensland rail access regime is a certified access regime under Pt IIIA of the CCA. The regime was certified on 26 July 2011, pursuant to a recommendation made by the NCC on 26 May 2011.84 82 QCA Act, s 250. 83 QCA, Final Decision: Queensland Rail’s Draft Amending Access Undertaking – Extension of Termination Date, 26 June 2015. 84 NCC, Queensland Rail Access Regime Application for Certification under s 44M of the Trade Practices Act 1974: Final Recommendation, 22 November 2010.

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Addressing the need for network investment and expansion

[11.330]

An issue that has arisen in recent years in Queensland is how to drive efficient investment in the rail network. As demand for rail capacity in the central Queensland coal network grew during the resources boom of the 2000s, there was a reluctance on the part of the network operator (Aurizon Network and its predecessor QR Network) to build additional capacity to meet this demand. The access undertaking for the central Queensland coal network does not require the network operator to expand capacity, and it has been argued that Aurizon/QR did not face strong enough incentives to do so. Two alternative mechanisms have been developed to address this issue: 1. network users have in some cases contracted with the network operator to pay additional charges (above the regulated charge) for use of new capacity. In effect, users have agreed to pay above regulated rates in order to provide the network operator with sufficient incentive to undertake network expansions; and 2. a framework has been proposed for users to fund network expansions in the central Queensland coal network. At the time of writing, this framework was being considered by the QCA as part of its assessment of the proposed new access undertaking for the central Queensland coal network. This experience highlights the key drawback of segmenting the supply chain – that a standalone operator of one part of the supply chain (in this case the rail network operator) may not face sufficiently strong incentives to expand network capacity where this is required. However, it also demonstrates how such issues can be at least partially addressed, by sharing some of the benefits of network expansion between the access provider and users.

Economic regulation of rail in New South Wales Access to the Hunter Valley coal system

[11.340]

Access to certain rail infrastructure operated by the ARTC in the Hunter Valley is currently subject to an undertaking accepted by the ACCC under Pt IIIA of the CCA. The infrastructure subject to this undertaking includes rail lines used principally to transport coal from mines in the Hunter Valley to the Port of Newcastle.85 This undertaking commenced on 1 July 2011 and was due to expire on 30 June 2016. At the time of writing, the ACCC was consulting on a proposed replacement undertaking and had extended the term of the existing undertaking by six months (to 31 December 2016) to facilitate this consultation. 85 A description of the network covered by the current undertaking is set out in Sch B to that undertaking.

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Access to other parts of the NSW rail network

[11.350]

Access to other parts of the NSW rail network is governed by an access undertaking approved by the Minister under Sch 6AA to the Transport Administration Act 1988 (NSW). This undertaking applies those parts of the New South Wales rail network (but not above-rail infrastructure, such as rolling stock) that is owned and operated by RailCorp and Transport NSW, and to those parts operated by that ARTC that are not subject to the ARTC Interstate Undertaking 2008 or the ARTC Hunter Valley Undertaking (see [11.340]). It contains provisions covering: • right of access; • method of negotiation for access; • matters to be addressed in access agreements; • pricing principles to determine the price of access; • arbitration of access disputes by IPART in accordance with Pt 4A of the Independent Pricing and Regulatory Tribunal Act 1992 (NSW); and • information disclosure obligations.86

The New South Wales rail access regime is not certified under Pt IIIA of the CCA.

Economic regulation of rail in Victoria [11.360]

Part 2A of the Rail Management Act 1996 (Vic) (“RM Act”) establishes a Victorian rail access regime, which applies to certain rail infrastructure and rail terminals. The Victorian rail access regime was introduced in 2001, following the privatisation of the Victorian rail freight business and the regional rail network. Significant changes were made to the access framework in 2006, prior to the below-rail infrastructure reverting to public ownership.

The RM Act provides for rail transport services to be declared by the Governor in Council, on the recommendation of the Minister.87 The RM Act also provides for declaration of persons to be access providers for the purposes of the access regime.88 The services currently declared under the Victorian rail access regime include: • rail network access services provided to freight trains on the regional and metropolitan rail networks;89 86 NSW Rail Access Undertaking Pursuant to Schedule 6AA of the Transport Administration Act 1988 (NSW). 87 RM Act, s 38I. 88 RM Act, s 38D. 89 Freight Network Declaration Order 2005.

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• track access provided to V/Line Passenger;90 and • terminal services provided in the rail terminals in the Dynon precincts.91 The access providers subject to regulation under the regime are: • • • •

V/Line Passenger, the manager of the regional rail network; Metro Trains Melbourne, the manager of the metropolitan rail network; Pacific National, the manager of the South Dynon Terminal; and VicTrack and P&O Trans Australia, the managers of the Dynon Intermodal terminal, with VicTrack also managing the North Dynon Agents’ Sidings.

Each access provider is required to have an access arrangement for any declared services that it provides, which is to be approved by the ESCV. An access arrangement must contain:92 • the terms and conditions (including price) for the provision of each reference service; • information on the availability and indicative terms and conditions for non-reference services; • a procedure for making, assessing and determining access applications; and • the term of the access arrangement. Access arrangements must also conform to a Government Pricing Order,93 which prescribes the pricing principles that an access provider must apply when charging for access. The Victorian rail access regime contains a dispute resolution framework in which the ESCV arbitrates disputes notified to it by either an access seeker or an access provider. The dispute resolution framework provides a “last resort” mechanism. The ESCV is responsible for the economic regulation of the rail industry in Victoria. The principal roles of the ESCV under the regime are to assess and approve the access arrangements of access providers and to resolve access disputes. ESCV review of the Victorian rail access regime

[11.370]

The ESCV undertook a review of the Victorian rail access regime in 2009–10. One of its key findings was that the Victorian regime is more prescriptive than most other state-based regimes, because, for example, the majority of declared services (terminals aside) are not priced by reference to a “floor-ceiling test” as in other regimes. The ESCV

90 Passenger Network Declaration Order 2005. 91 Dynon Terminal Order 2005. 92 Rail Management Act 1996 (Vic), ss 38W, 38X. 93 Rail Network Pricing Order 2005.

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considered that such a prescriptive regime was not necessary for rail access in Victoria, given the competitive constraint imposed by alternative modes of transport (particularly road).94 The ESCV’s main recommendations were:95 • the access regime should be retained for rail infrastructure services in order to facilitate competition between providers of rail freight services, but should be scaled back to a “light-handed” regime; and • a negotiate/arbitrate framework should be applied, but access providers should retain the ability to submit an access undertaking voluntarily. These recommendations do not appear to have been adopted. The RM Act still includes a requirement that access providers periodically submit access arrangements for approval by the ESCV.96

Economic regulation of rail in South Australia [11.380]

The South Australian rail access regime is established by the Railways (Operations and Access) Act 1997 (SA) (“ROA Act”).

The ROA Act provides for: • declaration by the Governor that operators and railway services are subject to the application of the access regime;97 • a negotiate/arbitrate framework for determining the terms of access to declared services;98 and • enforcement mechanisms.99 ESCOSA is responsible for monitoring and enforcing the ROA Act and performing regulatory functions under the Act.100 The regime covers access to the following rail infrastructure: • the metropolitan heavy rail passenger network, owned and managed by the South Australian Government; and • three freight lines owned and operated by Genesee & Wyoming Australia in the Mid-North, the Murray-Mallee Region and the Eyre Peninsula; and • the Great Southern Railway passenger terminal at Keswick. ESCOSA reviews of the South Australian rail access regime

[11.390]

ESCOSA undertook a review of the South Australian rail access regime in 2009, pursuant to a request from the South Australian Treasurer.

94 ESCV, Review of the Victorian Rail Access Regime, February 2010. 95 ESCV, Review of the Victorian Rail Access Regime, February 2010. 96 RM Act, s 38W. 97 ROA Act, s 7. 98 ROA Act, Pts 5 and 6. 99 ROA Act, Pt 8. 100 ROA Act, s 9.

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ESCOSA was asked to advise on potential amendments to the ROA Act required to achieve greater consistency with the CIRA.101 ESCOSA concluded that the access regime is generally consistent with the requirements of cl 2 of the CIRA, although it recommended that certain amendments to the access regime could be made to achieve greater consistency.102 Some minor modifications were recommended to otherwise improve the manner in which the access regime operates. ln response to the findings of ESCOSA’s 2009 review, the South Australian Government approved amendments to the ROA Act. The amendments included expansion of the objects clause and additional pricing principles.103 In 2015, ESCOSA conducted a further review of the rail access regime. ESCOSA’s final recommendation was that the current regime continues from 31 October 2015 for a further five-year period. ESCOSA’s overall conclusion was that: • there is the potential for misuse of market power by rail infrastructure service providers, which justifies access regulation; however, • there is no evidence of the misuse of market power, which suggests that only “light-handed” regulation is required.104 ESCOSA also identified some scope to enhance the regime, including by clarifying the scope of regulated infrastructure services and investigating opportunities for greater integration of transport access regimes. However, it was noted that these do not require immediate legislative change.105 Certification of South Australian regime

[11.400]

The South Australian rail access regime is a certified access regime under Pt IIIA of the CCA. The regime was certified on 26 July 2011, pursuant to a recommendation made by the NCC on 26 May 2011.106

Economic regulation of rail in Western Australia [11.410]

Rail access regulation in Western Australia is a patchwork of state-based and national regulation. Certain railways are covered by a state-specific regime established under the Railways (Access) Act 1998 (WA) (“RA Act”). However, some railways in Western Australia fall outside this state-based regime and are instead covered by declarations or undertakings

101 ESCOSA, 2009 SA Rail Access Regime Inquiry: Final Inquiry Report, October 2009. 102 ESCOSA, 2009 SA Rail Access Regime Inquiry: Final Inquiry Report, October 2009, 1. 103 Railways (Operations and Access) (Miscellaneous) Amendment Act 2009 (SA). 104 ESCOSA, South Australian Rail Access Regime Review: Final Report, August 2015, 3. 105 ESCOSA, South Australian Rail Access Regime Review: Final Report, August 2015, 3. 106 NCC, South Australian Rail Access Regime Application for Certification as an Effective Access Regime – Section 44M of the Trade Practices Act 1974 (Cth): Final Recommendation, 26 May 2011.

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under the national access regime (Pt IIIA of the CCA). Some railways in Western Australia are not currently subject to any specific form of economic regulation. Railways subject to the WA rail access regime

[11.420]

The Western Australian rail access regime is established by the RA Act and the Railways (Access) Code 2000 (WA) (“RA Code”).

The Western Australian rail access regime applies in respect of the rail network specified in Sch 1 to the RA Code. This includes the passenger and freight network in the south-west of Western Australia to the west of Kalgoorlie. The Western Australian rail access regime also covers the railway owned by The Pilbara Infrastructure Pty Ltd (a subsidiary of Fortescue Metals Group (“FMG”)), connecting FMG’s Cloudbreak mine in the eastern Pilbara to port facilities at Port Hedland. As discussed at [11.410], the rail access regime does not cover the railways in the Pilbara owned by BHP Billiton Iron Ore and BHP Billiton Minerals (“BHPB”) and Rio Tinto Ltd, one of which is declared under Pt IIIA of the CCA. It also does not apply to the railway line east of Kalgoorlie, which is operated by ARTC subject to an undertaking accepted by the ACCC under Pt IIIA of the CCA (see [11.300]). The reason that one privately built railway (the FMG railway) is subject to the access regime while others are not is that the state agreement that allows for construction of that railway contemplates this.107 By contrast, the earlier state agreements that provided for construction of the BHPB and Rio Tinto railways did not contemplate application of the state-based access regime. The RA Act provides for: • the establishment of the powers and functions of an independent access regulator, namely the ERA;108 • ring-fencing arrangements that require a railway owner to separate its access-related below-rail (non-competitive) functions from other competitive functions;109 and • the establishment of the RA Code, and the legal basis for its enforcement. The RA Code establishes a negotiate/arbitrate framework for access to the railways that are covered by the access regime. The RA Code also sets out certain principles for determining access charges, including “floor” and “ceiling” price limits.110 The ERA may determine these floor and ceiling price limits, but does not otherwise have a role in determining access 107 Railway and Port (The Pilbara Infrastructure Pty Ltd) Agreement Act 2004 (WA), Sch 1. 108 RA Act, ss 20 – 23. 109 RA Act, s 28. 110 RA Act, Sch 4.

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charges under the RA Code. Rather, terms of access are to be determined by commercial negotiation within these pricing limits, with arbitration available as a means of resolving disputes.

[11.430]

Certification has been sought for the Western Australian rail access regime under Pt IIIA of the CCA. However, after a review of the regime, the NCC recommended that it not be certified. The NCC considered that, while the Western Australian rail access regime satisfies or reasonably conforms to the principles it must address in order to be certified as an effective access regime, the regime does not provide for a consistent approach to regulation of third party access to railways in Western Australia.111 The NCC considered that, having regard to the objects of Pt IIIA of the CCA (which include providing a framework and guiding principles to encourage a consistent approach to access regulation in each industry), the Western Australian rail access regime could not be certified as an effective access regime.112 The NCC expressed concern that, under the Western Australian rail access regime, there did not appear to be any discernible policy to determine whether a railway is regulated, what is regulated (access to below-rail services or haulage) by which regulator (ERA or ACCC) and what approach to key elements of regulation is adopted. Rather, it appeared that an operator could structure its operations such that they fell outside the scope of the regime altogether. The NCC stated: Western Australian railways are subject to a variety of access regulation – some being for below rail access and the proposed [Roy Hill Infrastructure Pty Ltd] RHI railway being for haulage; some being subject to Part IIIA and others to be regulated under the Regime; some regulated by the ERA, with others falling to the ACCC either as a result of declaration or via a proposed access undertaking, such as in the case of the proposed RHI railway. The current state of play means, within the Pilbara region, that there are at least three different forms of regulation that apply, two regulators and two railways that are not subject to any access regulation. … While the CPA principles do not necessarily require all Western Australian railways to be subject to the Regime, the second limb of the objects of Part IIIA does necessitate that there be consistency in the approach to access regulation where it is applied through a state access regime. The current situation, and in particular the recent decision to regulate access to the proposed RHI railway via haulage and an access undertaking to the ACCC, brings to the fore an apparent lack of consistency in access regulation in Western Australia. While an historical legacy explains why the Pilbara railways owned and operated by BHPBIO and 111 NCC, Western Australian Rail Access Regime: Application for Certification as an Effective Access Regime – Section 44M Trade Practices Act 1974 (Cth): Final Recommendation, 13 December 2010. 112 NCC, Western Australian Rail Access Regime: Application for Certification as an Effective Access Regime – Section 44M Trade Practices Act 1974 (Cth): Final Recommendation, 13 December 2010, 68.

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Rio Tinto are not subject to the Regime, the recent decision regarding access regulation of the proposed RHI railway suggests that while the WA Rail Access Regime exists there is no consistency in or certainty to its application. Looking forward there is nothing to suggest that the opportunity and ability to structure rail access regulation outside of the Regime, or potentially structure arrangements such that there is no access regulation, will not continue.113

Despite these concerns, and the recommendation of the NCC that the Western Australian rail access regime not be certified, the Western Australian rail access regime was certified by the responsible Minister in February 2011.114 The Minister did not agree with the NCC that the objects of Pt IIIA dictated that an access regime could not be certified if it did not provide for a consistent approach to regulation within each state. Rather, the Minister considered that the “consistency” limb of the Pt IIIA objects clause simply required consideration of whether the WA rail access regime detracts from the framework and guiding principles of Pt IIIA.115

[11.440]

The Western Australian rail access regime is considered a “light-handed” regulatory regime, due to the absence of any ERA power to establish a reference tariff.116 As noted at [11.420], rather than establishing reference tariffs, the ERA is only empowered to establish “floor” and “ceiling” tariffs; the ERA merely establishes the boundaries for commercial negotiation, rather than setting default terms of access. Some concerns have been expressed in relation to the effectiveness of the Western Australian rail access regime.117 At the time of writing, the ERA had recently completed a review of the access regime and made several recommendations for reform.118 113 NCC, Western Australian Rail Access Regime: Application for Certification as an Effective Access Regime – Section 44M Trade Practices Act 1974 (Cth): Final Recommendation, 13 December 2010, 67. 114 Decision on the Effectiveness of the Western Australian Rail Access Regime, 11 February 2011. 115 Statement of Reasons – Decision on the Effectiveness of the Western Australian Rail Access Regime, 11 February 2011, 9-10. 116 Legislative Assembly, Parliament of Western Australia – Economics and Industry Standing Committee, The Management of Western Australia’s Freight Rail Network, Report No 3, October 2014. 117 ERA, Review of the Railways (Access) Code 2000: Issues Paper, February 2015. The ERA notes the views of some stakeholders that the Western Australian rail code is not effective in enabling access to railway infrastructure in Western Australia. The ERA also notes that the NCC previously recommended that the regime not be declared effective, partly due to inconsistency between the Western Australian regime and the ARTC undertaking which determines access conditions on the interstate route into Kalgoorlie from the east. An important difference between the RA Code and the ARTC regime is that the latter is more prescriptive, in that it establishes a benchmark access tariff for a standard service, whereas the Western Australian regime establishes only cost boundaries within which negotiations must take place. 118 ERA, Review of the Railways (Access) Code 2000: Final Report, December 2015.

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WA rail access services subject to undertakings under the National Access Regime

[11.450]

As discussed at [11.300], the ARTC interstate network is subject to an access undertaking given by ARTC under Pt IIIA of the CCA. The interstate network includes track in Western Australia to the east of Kalgoorlie. This part of the Western Australian rail network is not subject to the state-specific rail access regime discussed at [11.410].

WA rail access services declared under the National Access Regime

[11.460]

In November 2007, FMG sought declaration under Pt IIIA of the CCA in respect of the Goldsworthy rail line owned by BHPB. The Goldsworthy line links iron ore mines in the Pilbara region with port facilities at Port Hedland.

Pursuant to a recommendation by the NCC, the Goldsworthy line was declared by the responsible Minister on 19 November 2008 for a period of 20 years. On review, the Australian Competition Tribunal affirmed the Minister’s decision to declare the service.119 However, there have been no requests for access to the Goldsworthy line. In 2013, BHPB advised the Productivity Commission that no third party access has occurred on the Goldsworthy line (nor has any third party entered into negotiations with BHPB over access) as a result of declaration.120 One possible reason for this is that the original applicant for declaration (FMG) has since constructed its own rail infrastructure to connect its Cloudbreak mine in the eastern Pilbara to port facilities at Port Hedland. WA rail access services not currently subject to economic regulation

[11.470]

Between 2004 and 2008, FMG lodged declaration applications in respect of three rail lines in the Pilbara region: the Mt Newman line owned by BHPB, and the Hamersley and Robe lines owned by Rio Tinto. The NCC recommended that all three lines be declared, along with the Goldsworthy line. In 2006, the Mt Newman line was deemed not to be declared, as the responsible Minister did not publish a decision within the required timeframe. In 2008, the Minister accepted the NCC’s advice and declared the Hamersley and Robe lines, along with the Goldsworthy line. However, subsequent review of these decisions by the Australian Competition Tribunal, the Federal Court and the High Court led to the revocation of the declarations for the Robe and Hammersley lines.

119 In the matter of Fortescue Metals Group Limited [2010] ACompT 2. 120 Productivity Commission, National Access Regime, Inquiry Report No 66, 25 October 2013, 58.

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The current status of each line is: • The Mt Newman line is not declared as, on review, the Australian Competition Tribunal affirmed the Minister’s deemed decision to not declare the service.121 • The Hamersley line is not declared as, on review a second time, the Tribunal decided to set aside the Minister’s original decision to declare the service.122 • The Robe line is not declared as, on review a second time, the Tribunal decided to set aside the Minister’s original decision to declare the service.123 As noted at [11.420], these rail lines are carved out of the state-based access regime under the RA Code. Therefore, they are not currently subject to any form of economic regulation, either under the National Access Regime or the Western Australian rail access regime.

Economic regulation of rail in Tasmania [11.480]

A state-based rail-specific access regime does not exist in Tasmania; therefore, rail access in Tasmania is subject only to the general national access regime in Pt IIIA of the CCA. Use of the Tasmanian rail network is a declared service under Pt IIIA of the CCA. The declared service is described as follows: The declared service is the use of the rail tracks and associated infrastructure that comprise the Tasmanian Railway Network for the purpose of operating a rail service on the Tasmanian network, including, without limitation, loading and unloading freight, making up trains, shunting and other activities necessary for the efficient haulage of freight by rail. The facility which is the subject of the declaration is: (a) the infrastructure that comprises the Tasmanian Railway Network consisting of rail lines, crossing loops, sleeper ballasts, cuttings, tunnels, embankments, bridges, culverts, rail tracks and yards on wharves, fastenings, points, poles, pylons, structures and supports, signalling equipment, overhead lines, platforms, railway stations, freight sheds and associated buildings (excluding terminals, workshops, electrical substations, train communications systems, plant, machinery and other fixed equipment; and (b) the rail terminals at Burnie, Devonport, Launceston and Hobart.124

121 In the matter of Fortescue Metals Group Limited [2010] ACompT 2. 122 Applications by Robe River Mining Co Pty Ltd and Hamersley Iron Pty Ltd [2013] ACompT 2. 123 Applications by Robe River Mining Co Pty Ltd and Hamersley Iron Pty Ltd [2013] ACompT 2. 124 Declaration of the Service Provided by Means of the Tasmanian Railway Network under Part IIIA of the Trade Practices Act 1974: Statement of Decision and Reasons, 2 October 2007.

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The service was declared in October 2007 for a period of 10 years.125 To date, there have been no access disputes notified in respect of access to the Tasmanian rail network. One possible reason for the apparent success of commercial negotiation (and absence of access disputes needing to be resolved by the ACCC) is that other forms of transport (particularly road transport) are highly competitive with rail in Tasmania. This has been attributed to: • the limited scale of the Tasmanian freight rail network, compared to other rail networks; • poor track condition and aged rolling stock (a result of past underinvestment), which limits the attractiveness of rail for moving freight.126 As a consequence of these constraints, it appears that TasRail, the network operator, is not in a position to exercise monopoly pricing power. Due to continuing leakage of volumes to road, TasRail has failed to achieve a sustainable rate of return on its operations, let alone achieve supracompetitive profits.127

Economic regulation of rail in Northern Territory [11.490]

As discussed at [11.310], a specific access regime is in place for the Tarcoola-Darwin railway under the AustralAsia Railway (Third Party Access) Code, which forms a Schedule to the AustralAsia Railway (Third Party Access) Act 1999 (SA & NT). The access regime in the Code has been certified as an effective state regime in accordance with s 44N of the Trade Practices Act 1974 (Cth), pursuant to an NCC recommendation made in February 2000.128

There are no other major rail lines in the Northern Territory, besides the Tarcoola-Darwin line.

SUMMARY [11.500]

There are a number of different regulatory regimes and measures in place in the Australian port and rail sectors. The form of access regulation that is applied to port and rail infrastructure varies between states and, in some cases, between different facilities within the same state. Some of the assets are subject to “heavy-handed” regulation with an access

125 Declaration of the Service Provided by Means of the Tasmanian Railway Network under Part IIIA of the Trade Practices Act 1974: Statement of Decision and Reasons, 2 October 2007. 126 Productivity Commission, Tasmanian Shipping and Freight, Inquiry Report No 69, 7 March 2014, 188-89. 127 Productivity Commission, Tasmanian Shipping and Freight, Inquiry Report No 69, 7 March 2014, 190. 128 NCC, Australasia Railway Access Regime Application for Certification under Section 44M(2) of the Trade Practices Act 1974: Final Recommendation, February 2000.

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regime in place, while other assets are subject to “light-handed” regulation through price monitoring arrangements.

Questions for discussion 1. What is the most common form of access regulation for Australian seaports? 2. What is the legal basis for access regulation at Australian seaports? 3. What is the most common form of access regulation for rail infrastructure? 4. How does the Victorian rail access regime differ from rail access regimes in other states?

12

Review of Regulatory Decisions [12.10] OVERVIEW ...................................................................................................................................... 377 [12.20] TYPES OF REVIEW ........................................................................................................................ 378 [12.30] MERITS REVIEW OF REGULATORY DECISIONS IN AUSTRALIA ................................... 379 [12.30] Objectives .......................................................................................................................................... 379 [12.50] Availability of merits review of access-related decisions ........................................................ 380 [12.60] History of merits review of access-related decisions ............................................................... 382 [12.120] MERITS REVIEW OF REGULATORY DECISIONS – KEY ELEMENTS ............................ 391 [12.120] Overview ........................................................................................................................................ 391 [12.130] Obtaining leave to apply for merits review (electricity and gas only) ............................... 392 [12.170] Time for making an application for merits review ................................................................. 396 [12.180] Effect of an application for merits review on the operation of the decision ..................... 397 [12.200] Grounds for review ....................................................................................................................... 398 [12.250] Parties to a merits review process ............................................................................................. 402 [12.300] Limitations on materials that may be referred to in merits review .................................... 410 [12.340] Remedies ......................................................................................................................................... 414 [12.360] Time limits for making decisions ............................................................................................... 418 [12.380] Review of Tribunal decisions ...................................................................................................... 418 [12.390] JUDICIAL REVIEW ...................................................................................................................... 419 [12.400] Availability of judicial review under the ADJR Act ............................................................... 419 [12.410] Availability of judicial review under the Judiciary Act ......................................................... 420 [12.420] Who can make an application for judicial review .................................................................. 420 [12.430] Grounds for review under the ADJR Act ................................................................................. 421 [12.470] Manner of making applications under the ADJR Act ............................................................ 423 [12.480] Parties to a proceeding under the ADJR Act ........................................................................... 423 [12.490] Effect of an application for judicial review on the operation of the decision ................... 425 [12.500] Discretion to refuse to grant an application for review under the ADJR Act ................... 425 [12.510] Remedies ......................................................................................................................................... 428 [12.520] SUMMARY ..................................................................................................................................... 428

OVERVIEW [12.10]

Regulatory bodies that make decisions about third-party access to services provided by essential facilities come within the executive or “administrative” branch of government. As discussed in Ch 6, these regulatory bodies include the Australian Competition and Consumer Commission (“ACCC”), the Australian Energy Regulator (“AER”), the

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National Competition Council (“NCC”), and various state- and territoryspecific regulators. Access-related decisions include whether there should be a right of access to services and, if so, the terms and conditions on which access should be provided. As administrative decisions, these decisions may be subject to administrative (merits review) and/or judicial review. This chapter examines the rights of review available to parties affected by access-related decisions under the general access regime in Pt IIIA of the Competition and Consumer Act 2010 (Cth) (“CCA”), as well as the access regimes in electricity, gas and telecommunications. It begins with a general description of the two types of review available. It then identifies the access-related decisions that are able to be reviewed on their merits, discusses the background to the various merits review provisions, and sets out the key elements and limits of the merits review regimes. Finally, the chapter turns to considering judicial review of access-related decisions, which is narrower in scope than merits review but more widely available.

TYPES OF REVIEW [12.20]

There are two broad types of review: merits review and judicial

review. As a general proposition, merits review involves a complete review of the decision of the primary decision-maker, with the review body reconsidering the facts, law and policy aspects of the relevant matter and determining the correct and preferable decision.1 Typically, it is not necessary to show that the primary decision-maker made an error of a particular kind in order to enliven the powers of the review body to, for example, vary the original decision. However, merits review can be “limited” in one or more ways. For example, an applicant for review may be required to establish that the original decision-maker made one or more errors of a particular kind in making the decision before the powers of the review body may be exercised. These errors may include, for example, an error of fact, incorrect exercise of discretion, or unreasonableness. Another type of limit that may be placed on merits review is to restrict the material the review body may have regard to in reviewing a decision. Both of these types of limits can be found in the electricity and gas merits review frameworks (see [12.210]–[12.330]). By contrast, judicial review is concerned with whether the decision of the primary decision-maker was made in accordance with law.

1 See, for example, Administrative Review Council, What Decisions Should be Subject to Merit Review? (1999), [1.1]; Attorney-General’s Department, Australian Administrative Law Policy Guide, 2011, 12.

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MERITS REVIEW OF REGULATORY DECISIONS IN AUSTRALIA Objectives The Administrative Review Council2 describes the objectives of merits review as ensuring that:

[12.30]

• administrative decisions are correct (made according to law) and preferable (as there may be a range of decisions that are correct in law, the preferable decision is the best that could have been made on the basis of the relevant facts); • all persons affected by a decision are treated fairly; • the quality and consistency of the decisions of primary decision-makers is improved over the long term; • the openness and accountability of decisions made by government is enhanced.3 Administrative decisions that affect, or are likely to affect, the interests of a person are generally considered to be decisions that should be able to be reviewed on their merits.4 This general principle is the default position unless there is something particular in the nature of the decision that makes it unsuitable for merits review.5 Decisions not suitable for merits review include decisions that are “legislation-like” and decisions that are automatic or mandatory.6 “Legislation-like” decisions are of broad application, as opposed to being directed at the circumstances of particular persons, and are unlikely to affect the interests of any one person. Automatic or mandatory decisions are those where the decision-maker is under an obligation to act in a particular way when a particular set of circumstances occurs. As the outcome follows automatically where the circumstances arise, there is no decision of substance that can properly be the subject of review.

[12.40]

Various factors may weigh against providing for merits review of particular decisions. Such factors include where: • the decision is of a preliminary or procedural nature; • providing for merits review may unduly delay administrative decisionmaking processes that may not have substantive consequences; and

2 On 11 May 2015, the Australian Government announced that the Administrative Review Council would be discontinued and its functions consolidated into the Attorney-General’s Department. 3 Administrative Review Council, What Decisions Should be Subject to Merit Review?, 1999, [1.3]–[1.5]. 4 Administrative Review Council, What Decisions Should be Subject to Merit Review?, 1999, [2.1]. 5 Attorney-General’s Department, Australian Administrative Law Policy Guide, 2011, 11. 6 Administrative Review Council, What Decisions Should be Subject to Merit Review?, 1999, [3.1].

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• decisions are the outcome of processes that would be time consuming and costly to repeat on review.7 The Administrative Review Council identifies a number of factors that do not provide a proper basis for excluding merits review, including that: • the decision-maker is an expert or requires specialised expertise; • the decision-maker is of a high status (for example, a Minister); and • large numbers of people may take advantage of review.8 The availability of judicial review for particular decisions is not a basis for excluding merits review of those decisions.9 The Administrative Review Council considers the judicial review powers of the Federal Court to be complementary to, but distinct from, merits review powers. The key difference is that judicial review involves the exercise of the Commonwealth’s judicial power and results in findings of law, whereas merits review involves the exercise of administrative power and results in a correct and preferable decision. In this light, the view of the Administrative Review Council is that merits review and judicial review “can, and often do, co-exist”.10

Availability of merits review of access-related decisions [12.50]

Chapters 7, 8, 9 and 10 considered the National Access Regime in Pt IIIA of the CCA, the electricity and gas access regimes established by the National Electricity Law (“NEL”) and the National Gas Law (“NGL”), and the telecommunications-specific access regime in Pt XIC of the CCA. Table 12.1 identifies the various access-related decisions made under those regimes that are subject to merits review. The body responsible for review of these decisions is the Australian Competition Tribunal, a description of which is set out in Ch 6. Table 12.1 Selected access-related decisions subject to merits review Decision CCA, Pt IIIA Ministerial decisions to declare or not to declare a service Ministerial decisions not to revoke declaration of a service Ministerial decisions that a service is ineligible to be a declared service, and the revocation of such decisions

Provision CCA, s 44K CCA, s 44L CCA, ss 44LJ and 44LK

7 Administrative Review Council, What Decisions Should be Subject to Merit Review?, 1999, [4.3]–[4.4] and [4.52]–[4.55]. 8 Administrative Review Council, What Decisions Should be Subject to Merit Review?, 1999, Ch 5. 9 Attorney-General’s Department, Australian Administrative Law Policy Guide, 2011, 14. 10 Administrative Review Council, What Decisions Should be Subject to Merit Review?, 1999, [5.30]–[5.31].

12 Review of Regulatory Decisions Decision Ministerial decisions on whether an access regime is an effective access regime, and decisions to extend the period for which a decision under CCAs 44N (that an access regime is an effective regime) is in force ACCC decisions to approve or refuse to approve a competitive tender process, and revocation of such approvals ACCC final determinations on access by a third party to a declared service ACCC decisions not to register a contract which, once registered, may be enforced as if the contract were a determination of the ACCC ACCC decisions to accept or not to accept an access undertaking or an access code, or to extend or not to extend the operation of an access undertaking or access code Electricity Distribution and transmission determinations, which are determinations that regulate one or more of: the terms and conditions for the provision of electricity network services regulated under the National Electricity Law/National Electricity Rules (NEL/NER), including the prices that may be charged for such services; and/or the revenue that may be earned by network providers for providing such services Any other determination or decision of the AER under the NER prescribed by the regulations to be a reviewable regulatory decision. The regulations prescribe that determinations of the AER as to positive and negative pass through amounts following a positive change event or a negative change event occurring are reviewable regulatory decisions11 Gas Ministerial coverage decisions (a decision of the Minister whether to: make a coverage determination in respect of a pipeline; revoke coverage; make a 15-year no coverage determination; grant a price regulation exemption) Light regulation determinations or decisions of the NCC not to make a light regulation determination Decisions of the NCC to revoke or not to revoke light regulation determinations Designated reviewable regulatory decisions, being applicable access arrangement decisions (other than full access arrangement decisions that do not approve a full access arrangement). Essentially, these are decisions that set the prices charged for services regulated under the NGL/National Gas Rules (“NGR”) and/or the revenues that may be earned by the network service provider from providing such services AER ring fencing determinations and decisions of the AER to give an exemption from the minimum ring fencing requirements Decisions of the AER to approve or not approve an associate contract Decision of an original decision maker that is prescribed by the regulations to be a reviewable regulatory decision. The regulations do not currently prescribe any such decisions

381

Provision CCA, s 44O

CCA, ss 44PG and 44PH CCA, s 44ZP CCA, s 44ZX CCA, s 44ZZBF

NEL, s 71B(1)

NEL, s 71A and National Electricity (South Australia) Regulations (SA), r 9

NGL, s 245(1)

NGL, s 245(1) NGL, s 245(1) NGL, s 245(1)

NGL, s 245(1) NGL, s 245(1) NGL, s 245(1)

11 These are decisions by the AER pursuant to NER, Ch 6, cl 6.6.1(d) and 6.6.1(g) (distribution), and Ch 6A, cl 6A.7.3(g) (transmission).

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Decision Provision Telecommunications Merits review is no longer available under the telecommunications-specific access provisions in CCA, Pt XIC, although a recent review has recommended that merits review provisions be re-introduced.12

History of merits review of access-related decisions History of merits review under Part IIIA of the CCA

[12.60]

The National Access Regime set out in CCA, Pt IIIA is discussed in Ch 7. In short, the National Access Regime provides for the declaration of services provided by essential facilities. The National Access Regime applies to services that may be provided by any facility where the relevant declaration criteria have been satisfied. Following declaration of a service, an access seeker has a right to be provided with the service, with terms and conditions of access either commercially negotiated between the access seeker and the service provider or, failing agreement, determined by the ACCC. As noted in Table 12.1, there are a number of decisions of the Minister and the ACCC under Pt IIIA that may be the subject of merits review. These include decisions of the Minister to declare or not to declare services, and determinations by the ACCC of terms and conditions of access following the declaration of a service.

In conducting the National Competition Policy review that led to the establishment of the National Access Regime, the Hilmer Committee did not appear to envisage that decisions such as the decision to provide a right of access and any arbitration on the terms and conditions of access would be the subject of merits review. The Hilmer Committee considered that the ultimate decision to provide a right of access “should be one for Government, rather than a court, tribunal or other unelected body”.13 Similarly, with respect to arbitration decisions, the Hilmer Committee considered that an arbitrator’s determination would be binding and appeals would be “limited to matters of law”.14 However, the Competition Policy Reform Act 1995 (Cth), which inserted Pt IIIA into the Trade Practices Act 1974 (Cth), provided for merits review of decisions, including decisions of the Minister on declaration and ACCC access determinations. The Productivity Commission’s 2001 review of the National Access Regime found that the Australian Competition Tribunal’s involvement in Pt IIIA 12 See [10.520]. The Australian Government has stated that it considers the appropriate time to reconsider regulatory issues such as the reintroduction of merits review is at the time privatisation of NBN Co is under consideration: Australian Government, Telecommunications Regulatory and Structural Reform, December 2014, 7. 13 Frederick Hilmer (Chair), Mark Rayner and Geoffery Taperell, National Competition Policy, 25 August 1993 (“Hilmer Committee”), 250. 14 Hilmer Committee, 256.

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processes had not been questioned by stakeholders.15 The Productivity Commission recommended that merits review under Pt IIIA be further extended to ACCC decisions on access undertakings, which at that stage were not able to be reviewed by the Australian Competition Tribunal.16 The Productivity Commission considered that rights of appeal against regulatory decisions “can be an important discipline on inappropriate decision-making and a means to promote regulatory accountability”.17 It also recommended a target time limit of four months for the processing of appeals by the Tribunal be introduced in response to concerns about delays with appeals.18 These recommendations were adopted in amendments made to CCA, Pt IIIA in 2006.19 Concerns about delays in decision-making under Pt IIIA continued even after the adoption of the target time limits in 2006. Further amendments were made in 2010 to provide for the Australian Competition Tribunal (as well as the NCC and the ACCC) to make decisions (or recommendations as relevant) within an expected period of generally 180 days (see also Ch 7).20 Part IIIA was also amended so that the Australian Competition Tribunal is limited to the information that was before the original decision-maker when conducting a review. The exception to this is that the Australian Competition Tribunal may seek additional information from the ACCC or NCC for the purposes of clarifying information that was before the original f-maker and from the ACCC and the NCC in their role of assisting the Australian Competition Tribunal.21

[12.70]

The Productivity Commission conducted a further review of the National Access Regime in 2013 and concluded that the availability of merits review for decisions under Pt IIIA of the Trade Practices Act 1974 (Cth) remained an appropriate and important part of the regulatory regime. While the report recorded the ongoing concern with the time taken for reviews, it noted that the efficacy of the amendments made in 2010 to address these concerns had not yet been tested:

15 Productivity Commission, Review of the National Access Regime: Inquiry Report, Report No 17, 28 September 2001, 378. 16 Productivity Commission, Review of the National Access Regime: Inquiry Report, Report No 17, 28 September 2001, 391. 17 Productivity Commission, Review of the National Access Regime: Inquiry Report, Report No 17, 28 September 2001, 391. 18 Productivity Commission, Review of the National Access Regime: Inquiry Report, Report No 17, 28 September 2001, 405. 19 Trade Practices Amendment (National Access Regime) Act 2006 (Cth), Sch 1, items 108, 112. 20 Trade Practices Amendment (Infrastructure Access) Act 2010 (Cth), Sch 1, item 71; see also Explanatory Memorandum, Trade Practices Amendment (Infrastructure Access) Bill 2009 (Cth), 5–6, 24 –31, [1.2]–[1.3], [1.7] and [1.92]–[1.125]. 21 Trade Practices Amendment (Infrastructure Access) Act 2010 (Cth), Sch 1, item 70; see also Explanatory Memorandum, Trade Practices Amendment (Infrastructure Access) Bill 2009 (Cth), 31, [1.126].

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In a handful of cases, reviews and appeals of Regime decisions have taken years and entailed significant costs. This has led to calls to remove steps such as merits review from the decision-making process. • However, many participants argued that merits review by the Australian Competition Tribunal contributes to good decision making, promotes confidence in the Regime, and in some cases provides the only avenue for error correction. • Amendments to the CCA made in 2010 and the High Court’s 2012 decision in the Pilbara rail case mean that merits review of Regime decisions are likely to be more confined, take less time, and thus be less costly, than in the past. • On balance, the availability of merits review as now framed should contribute to sound decision-making, which is particularly important given the “at large” nature of the Regime and its application to infrastructure of national significance.22

The Government indicated that it would respond to the Productivity Commission’s most recent review of the National Access Regime after the Harper Panel’s “root and branch” review of competition law and policy announced in December 2013.23 In its final report published in March 2015, the Harper Panel expressed the view that Pt IIIA declaration decisions, or decisions to determine terms and conditions of access, are “very significant economic decisions where the costs of making a wrong decision are likely to be high”.24 As a result, the Panel recommended maintaining merits review of access decisions by the Australian Competition Tribunal and providing for the Tribunal to be able to hear directly from employees and relevant experts where that would assist, while maintaining appropriate statutory time limits for the review process.25 In responding to the recommendations of the Productivity Commission review and the Harper Panel, the Government stated that it did not support the recommendation to expand the power of the Australian Competition Tribunal to hear and test new evidence. The Government considered that the effect of adopting the recommendation would be to undo the amendments that were made in 2010 directed at streamlining the regime.26 History of merits review of electricity and gas decisions

[12.80]

Merits review of gas access arrangement decisions was available under the previous gas regime established under the Gas Pipelines Access (South Australia) Act 1997 (SA) (repealed), as enacted by the relevant states

22 Productivity Commission, National Access Regime: Productivity Commission Inquiry Report, Report No 66, 25 October 2013, 283. 23 The Hon B Billson MP, “Productivity Commission’s Final Report on National Access Regime Released” (Media release, 11 February 2014). 24 Ian Harper (Chair), Peter Anderson, Su McCluskey, Michael O’Bryan, Competition Policy Review: Final Report, March 2015, 74, 439 (“Harper Review”). 25 Harper Review, 439. 26 Australian Government, Australian Government Response on the National Access Regime, 24 November 2015, 7.

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and territories. Under this regime, the relevant regulators were the various state- and territory-based regulators, and the review bodies were “local appeals bodies”, which took various forms, including: • in Victoria, the Essential Services Commission Appeal Panel constituted under the Office of the Regulator General Act 1994 (Vic) (repealed); • in South Australia, the South Australian Gas Review Board constituted under the Gas Pipelines Access (South Australia) Act 1997 (SA) (repealed); • in Queensland, the Queensland Gas Appeals Tribunal established under the Gas Pipelines Access (Queensland) Act 1998 (Qld) (repealed); and • in New South Wales, the Australian Competition Tribunal.27 The Productivity Commission reviewed the previous gas access regime in 2004 and recommended merits review be retained: There is a need for a merits review under the Gas Access Regime. In the Commission’s view, appropriate protection for property rights and natural justice are key considerations. While the appeal process might take considerable time and expend considerable resources, the regulatory bodies and Ministers have powers to make decisions that have an impact on fundamental rights of services providers. The prospect of exposure to imperfect regulatory instruments means there is a strong case for a merits review.28

Ahead of the introduction of the NEL and NGL in 2008, the Ministerial Council on Energy29 (“MCE”) (a body established by the Council of Australian Governments (“COAG”) to pursue policy issues of national significance in the energy sector) considered whether a merits review framework should be included in the revised electricity and gas regulatory regimes. The view of the MCE was similar to that of the Productivity Commission in 2004, in that it considered merits review was a fundamental part of the regulatory framework. The MCE considered that merits review was an important part of balancing between competing interests and protecting the property rights of stakeholders. The MCE stated that review mechanisms should be aimed at: • Maximising accountability; • Maximising regulatory certainty; • Maximising the conditions for the decision-maker to make a correct initial decision; • Achieving the best decisions possible; • Ensuring that all stakeholders’ interests are taken into account, including those of service and network providers, and consumers; 27 Gas Pipelines Access (New South Wales) Act 1998 (NSW), s 9 (repealed). 28 Productivity Commission, Review of the Gas Access Regime, 11 June 2004, 498. 29 The functions of the MCE were subsumed by the new Standing Council on Energy and Resources in February 2011. Following further streamlining of the council structure in December 2013, the Energy Council was created and now has responsibility for pursuing national energy reforms: see COAG Communiqués of 13 February 2011 (Attachment C) and 13 December 2013.

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• Minimising the risk of “gaming”; and • Minimising time delays and cost.30

With the introduction of the (broadly) national framework for the regulation of gas distribution and transmission networks in 2008, merits review of access arrangement decisions remained available; however, the Australian Competition Tribunal became the review body for these decisions. In Western Australia, the Australian Competition Tribunal did not become the review body for gas transmission and distribution access arrangement decisions until late 2009.31

[12.90]

Merits review of specified electricity regulatory decisions, including distribution and transmission determinations made by the AER, became generally available with the introduction of the (broadly) national framework for the regulation of electricity distribution and transmission networks in 2008. The electricity transmission network operator in South Australia commenced the first merits review under the provisions in the NEL in 2008.32

On 9 December 2011, after three years of operation, the successor to the MCE, the Standing Council on Energy and Resources (“SCER”), determined that the statutory review of the merits review provisions in the NEL and NGL should be brought forward33 in light of increasing concerns surrounding the operation of the regime in practice.34 The MCE appointed a panel35 (“Review Panel”) to undertake the review, and published terms of reference in March 2012.36 The stated purpose of the review was to assess the effectiveness of the merits review regime against the MCE’s original policy intention, and to advise on any required amendments to, or restructuring of, the merits review framework.37 The review focused primarily on merits review of electricity distribution and transmission 30 Ministerial Council on Energy, Decision – Review of Decision-Making in the Gas and Electricity Regulatory Frameworks, May 2006, 2–3. 31 National Gas Access (WA) Act 2009 (WA). 32 Re Application by ElectraNet Pty Limited (No 3) [2008] ACompT 3. 33 The NEL and the NGL, as originally enacted, provided for a review of the merits review and other non-judicial review provisions, with such review to be undertaken within seven years after commencement: NEL, s 71Z (as at 1 January 2008); NGL, s 270 (as commenced, 1 July 2008). 34 Standing Council on Energy and Resources, “Meeting Communiqué”, Melbourne, 9 December 2011; Standing Council on Energy and Resources, Terms of Reference: Review of the Limited Merits Review Regime in the National Electricity Law and National Gas Law, 1. 35 The panel comprised Professor George Yarrow (Chair), Dr John Tamblyn, and the Hon Michael Egan: Standing Council on Energy and Resources, Bulletin: Commencement of the Review of the Limited Merits Review Regime, 22 March 2012. 36 Standing Council on Energy and Resources, Terms of Reference: Review of the Limited Merits Review Regime in the National Electricity Law and National Gas Law. 37 Standing Council on Energy and Resources, Terms of Reference: Review of the Limited Merits Review Regime in the National Electricity Law and National Gas Law, 1.

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determinations and gas access arrangement decisions. Chapter 8 discusses in detail the nature and content of electricity determinations, and Ch 9 examines gas access arrangement decisions. In its Stage One report, and based on its high-level assessment of the performance of the merits review regime, the Review Panel found that the regime failed to address the realities of regulatory decisions, which, according to the Review Panel, involved high levels of discretion, complex economic concepts and many layers of small, interrelated judgments.38 The Review Panel considered that a narrower, more formalistic and more formulaic approach to review had been developed which was detached from the promotion of the NEL and NGL objectives, in particular the requirement that regulatory decisions be directed towards encouraging outcomes in the long-term interests of consumers.39 The Review Panel identified a number of deficiencies in the operation of the merits review regime, including that: • the arrangements had not ensured that all stakeholder interests were adequately taken into account; • the long-term interests of consumers had typically not been explicitly considered when review decisions had been made; • consumer bodies and network user associations felt excluded from the appeals process; • the regime lacked legitimacy with important stakeholder groups, and trust and confidence in the AER and the Australian Competition Tribunal had not been established; • doubts about the effectiveness of the arrangements had a basis in the facts that: – some of the Australian Competition Tribunal decisions had had major implications for network charges and end consumer prices; – convincing and coherent accounts of how these decisions might have positive effects on the long-term interests of consumers had been lacking; and – an informed consumer would find it difficult to discover a credible account of why energy prices were changing as they were; • the measures introduced to mitigate the risk of appeals becoming too narrowly focused had not been utilised; and • the regime had been costlier to operate and cases had taken longer than anticipated.40 38 George Yarrow, Michael Egan and John Tamblyn, Stage One Report – Review of the Limited Merits Review Regime, 29 June 2012, 3. 39 George Yarrow, Michael Egan and John Tamblyn, Stage One Report – Review of the Limited Merits Review Regime, 29 June 2012, 3. 40 George Yarrow, Michael Egan and John Tamblyn, Stage One Report – Review of the Limited Merits Review Regime, 29 June 2012, 3–4.

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In its Stage Two Report, the Review Panel concluded that in order to address the problems it had identified with the merits review regime, a “significant reorientation” of the review process was required.41 Its recommendations included that: • merits review should be capable of directly addressing regulatory decisions with material implications for consumer interests, the aim being to discover whether a materially preferable decision could be adopted; • the criteria for judging whether one decision is preferable to another should be the national electricity and gas objectives and the revenue and pricing principles; and • review should be investigative rather than adversarial in nature and consumer views should be routinely invited at the review stage.42

[12.100] In December 2012, the SCER’s Senior Committee of Officials published a consultation paper on merits review in the electricity and gas regulatory frameworks in the form of a regulation impact statement.43 The Senior Committee of Officials considered that the Review Panel had provided evidence of regulatory failure, specifically in the areas of delivering the policy intention, the narrow focus of merits review proceedings, the accessibility of the regime, and the timeliness of decision-making.44 The consultation paper identified three main options: preservation of the status quo; retention of the Australian Competition Tribunal as the review body but with amendments to the grounds for review and other changes directed at reducing the formality of review proceedings; and replacement of the Australian Competition Tribunal with a new review body that would adopt an investigative approach to the review of decisions. Together with the consultation paper, the SCER published a statement of policy intent on the review framework for electricity and gas regulatory decision-making. Details of this statement are set out in Box 12.1.

41 George Yarrow, Michael Egan and John Tamblyn, Stage Two Report – Review of the Limited Merits Review Regime, 30 September 2012, 3. 42 George Yarrow, Michael Egan and John Tamblyn, Stage Two Report – Review of the Limited Merits Review Regime, 30 September 2012, 4. 43 Standing Council on Energy and Resources (Senior Committee of Officials), “Regulation Impact Statement: Limited Merits Review of Decision-Making in the Electricity and Gas Regulatory Frameworks – Consultation Paper”, 14 December 2012. 44 Standing Council on Energy and Resources (Senior Committee of Officials), “Regulation Impact Statement: Limited Merits Review of Decision-Making in the Electricity and Gas Regulatory Frameworks – Consultation Paper”, 14 December 2012, iv.

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Box 12.1: SCER—Statement of Policy Intent

The SCER made a statement of policy intent following the Review Panel’s recommendation that the council provide a clear statement of policy about the merits review regime. In the statement the SCER stated that it: • Affirms that, in interpreting the National Electricity Objective and the National Gas Objective, the long-term interests of consumers (with respect to price, quality, safety, reliability and security of supply) are paramount in the regulation of the energy industry. • Affirms that the objective of the review framework, in common with the objectives of the laws, is to ensure that relevant decisions promote efficient investment, operation, and use of energy infrastructure, and are consistent with the revenue and pricing principles of the NEL and NGL, in ways that best serve the long-term interests of consumers. • Considers that, consistent with the Australian Administrative Law Policy Guide, achieving the most preferable decision in the pursuit of this objective should be the aim of both regulator and review body alike. • Considers furthermore that 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. • Considers that the review process should promote an accountable and high performing regulator such that material error is minimised and notes that the focus on the correction of selected errors is not equivalent to – and may not of itself lead to – the achievement of the most preferable overall decision in the long term interests of consumers. • Considers that a well designed limited merits review process can achieve the policy objectives outlined above.

The statement of policy intent provided that the limited merits review regime should deliver the principles stated above through, among other things: • providing a balanced outcome between competing interests and protecting the property rights of all stakeholders by ensuring that all stakeholders’ interests are taken into account; • maximising the conditions for the decision-maker to make a correct initial decision by providing an accountability framework that drives continual improvement in initial decision making; • achieving the best decisions possible by ensuring that the review process reaches justifiable overall decisions against the energy objectives; and • minimising the risk of “gaming” through balancing the incentives to initiate reviews with the objective of ensuring regulatory decisions are taken in the long term interests of consumers. Source: Standing Council on Energy and Resources, Statement of Policy Intent: Review Framework for the Electricity and Gas Regulatory Decision Making, December 2012.

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The SCER published its decision paper on the merits review framework for electricity and gas in June 2013.45 The SCER decided to retain the Australian Competition Tribunal as the review body, but considered that substantial changes should be made to the merits review provisions. These included amendments concerning the circumstances in which the Tribunal could give an applicant leave to seek review and when the Tribunal could make a determination varying or remitting a decision, as well as amendments directed at reducing barriers to user and consumer participation in reviews.46 History of merits review under Part XIC of the CCA

[12.110] Merits

review of ACCC decisions under the telecommunications-specific access regime in Pt XIC of the CCA is no longer available. Prior to the removal of the merits review regime in the CCA by the Telecommunications Legislation Amendment (Competition and Consumer Safeguards) Act 2010 (Cth), merits review by the Australian Competition Tribunal could be sought in relation to decisions of the ACCC to accept or reject: • an application for an exemption from the standard access obligations; • an ordinary access undertaking or a special access undertaking; and • a variation to an ordinary access undertaking or a special access undertaking.47 The Explanatory Memorandum to the Telecommunications Legislation Amendment (Competition and Consumer Safeguards) Bill 2010 (Cth) stated that merits review of decisions under Pt XIC was removed in order “to promote regulatory certainty and timely decision-making”.48 Merits review of individual access dispute determinations by the ACCC had also been available, but these provisions were repealed in 2002.49 The Explanatory Memorandum to the Telecommunications Competition Bill 2002 (Cth) stated that merits review of ACCC determinations was being removed in order to promote timely decision-making and regulatory 45 Standing Council on Energy and Resources, “Regulation Impact Statement: Limited Merits Review of Decision-Making in the Electricity and Gas Regulatory Frameworks – Decision Paper”, 6 June 2013. 46 Standing Council on Energy and Resources, “Regulation Impact Statement: Limited Merits Review of Decision-Making in the Electricity and Gas Regulatory Frameworks – Decision Paper”, 6 June 2013, 39–45. 47 Sections 152AV and 152CE, as repealed by ss 152 and 177, Telecommunications Legislation Amendment (Competition and Consumer Safeguards) Act 2010 (Cth)). 48 Explanatory Memorandum, Telecommunications Legislation Amendment (Competition and Consumer Safeguards) Bill 2010, 5. 49 Telecommunications Competition Act 2002 (Cth), s 3, Sch 2 [8], effective 19 December 2002.

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certainty: ACCC arbitration hearings involve a detailed and exhaustive assessment of access pricing and other issues. Repeating this process before the Australian Competition Tribunal can be costly and unnecessary, leaving access seekers to bear the contingent liabilities, given that final prices can be backdated by the Australian Competition Tribunal to the time of the access dispute. Lengthy delays in finally resolving access disputes impose costs on industry participants and create uncertainty for investors, particular in a telecommunications industry that is subject to rapid technological change.50

In response to a recent review that recommended the re-introduction of merits review in CCA, Pt XIC, the Government has stated that an appropriate time to consider this issue would be at the time of privatisation of NBN Co, the owner of the national broadband network.51

MERITS REVIEW OF REGULATORY DECISIONS – KEY ELEMENTS Overview [12.120] Key elements of the merits review regimes contained in Pt IIIA of the CCA, the NEL and the NGL include: • the matters that must be satisfied in order to obtain leave of the Australian Competition Tribunal to apply for merits review of a reviewable regulatory decision (applicable to electricity and gas only) (see [12.130]); • the time limit for making an application for review (see [12.170]); • the effect of an application for review on the operation of the decision under review (see [12.180]); • the grounds for review of a regulatory decision (see [12.200]); • the parties to a merits review process (see [12.250]); • documentary limitations on merits reviews (see [12.300]); • remedies available (see [12.340]); • time limits for making decision (see [12.360]); and • review of Tribunal decisions (see [12.380]). The discussion of merits review of gas and electricity decisions in this chapter is relevant to jurisdictions that apply the NEL or NGL as law in their jurisdiction. A notable exception is Western Australia, which has its own electricity access regime and where the Economic Regulation Authority (“ERA”) is currently responsible for regulatory determinations applying to electricity and gas networks. Western Australia has adopted 50 Commonwealth, Parliamentary Debates, House of Representatives, 26 September 2002, 7325 (Peter McGauran). 51 Australian Government, Telecommunications Regulatory and Structural Reform, December 2014, 7.

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the NGL as law and the discussion on merits review in this chapter does apply to gas networks in Western Australia; however, references to the AER should be read as references to the ERA. Western Australia has not adopted the NEL as law and the discussion on merits review in this chapter does not apply to electricity networks in Western Australia. In respect of electricity, the Western Australian Government has indicated that the transfer to the AER of regulatory functions relating to Western Power’s electricity distribution and transmission network should occur in September 2016, with the AER’s first determination for Western Power to apply from 1 July 2018. It is also intended that gas regulatory functions be transferred to the AER.52

Obtaining leave to apply for merits review (electricity and gas only) [12.130] Under the NEL and NGL, applicants must obtain the leave of the Australian Competition Tribunal before they can apply for review of a regulatory decision.53 There are three mandatory matters that must be satisfied before the Tribunal may grant leave: • that there is a serious issue to be heard and determined as to whether a ground for review exists; • that the applicant has established a prima facie case that a Tribunal determination varying, setting aside or remitting the decision would result in a materially preferable national electricity objective decision54 (materially preferable NEO decision) or national gas objective decision55 (materially preferable NGO decision) (as relevant) (see [12.140]); and • a financial threshold (see [12.150]). As noted in Table 12.1, there are a number of decisions under the NGL that may be the subject of merits review. The “serious issue to be heard and determined” threshold applies to all of these decisions, while the last two thresholds set out above only apply to gas access arrangement decisions.56 52 See Department of Finance, Government of Western Australia, Transfer of Regulatory Functions Project, 27 November 2015, . 53 NEL, s 71B(1); NGL, s 245(1). 54 The national electricity objective is set out in s 7 of the National Electricity Law (which in turn is set out in the schedule to the National Electricity (South Australia) Act 1996 (SA)). Section 7 provides: “The objective of this Law is to promote efficient investment in, and efficient operation and use of, electricity services for the long term interests of consumers of electricity with respect to–(a) price, quality, reliability and security of supply of electricity; and (b) the reliability, safety and security of the national electricity system.” 55 The national gas objective is set out in s 23 of the National Gas Law (which in turn in set out in the schedule to the National Gas (South Australia) Act 2008 (SA)). Section 23 provides: “The objective of this Law is to promote efficient investment in, and efficient operation and use of, natural gas services for the long term interests of consumers of natural gas with respect to price, quality, safety, reliability and security of supply of natural gas”. 56 NGL, ss 248(b), 249(1)(a).

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In the case of electricity, each of the three thresholds applies to decisions that may be the subject of merits review, but the financial threshold only applies where the reviewable decision is a network revenue or pricing determination.57 The Australian Competition Tribunal must not hear a review unless it considers there is a serious issue to be heard and determined as to whether a ground for review exists.58 In ElectraNet,59 the Australian Competition Tribunal held that the concept of “a serious issue to be heard and determined” should be analysed and applied by reference to the learning and principles applicable to the grant of interlocutory injunctions.60 It referred to a number of authorities that had expounded these principles as follows:61 • “the plaintiff must show (1) that there is a serious question to be tried or that the plaintiff has made out a prima facie case, in the sense that if the evidence remains as it is there is a probability that at the trial of the action the plaintiff will be held entitled to relief”;62 • “a plaintiff seeking an interlocutory injunction must be able to show sufficient colour of right to the final relief, in aid of which interlocutory relief is sought”;63 • “whether the plaintiff has made out a prima facie case, in the sense that if the evidence remains as it is there is a probability that at the trial of the action the plaintiff will be entitled to relief … it is sufficient that the plaintiff show a sufficient likelihood of success to justify in the circumstances the preservation of the status quo pending the trial”.64 In a number of cases since ElectraNet it has been argued that the approach of applying principles relevant to interlocutory applications to the serious issue to be heard and determined threshold should not be followed because this threshold is too high in circumstances where, under the NEL and NGL, all that is obtained is the right to have a decision reviewed. In response to these submissions, the Australian Competition Tribunal has noted that “the test imposed … is not a particularly onerous one” and only requires the applicant to demonstrate that there is a “sufficient prospect of success to 57 NEL, s 71F(1)(a). 58 NEL, s 71E(a); NGL, s 248(a). 59 Re Application by ElectraNet Pty Ltd [2008] ACompT 1. 60 Re Application by ElectraNet Pty Ltd [2008] ACompT 1, [39]. 61 Re Application by ElectraNet Pty Ltd [2008] ACompT 1, [40]–[42]. 62 Castlemaine Tooheys Ltd v South Australia (1986) 161 CLR 148, 153 (Mason ACJ). 63 Australian Broadcasting Corporation v Lenah Game Meats Pty Ltd (2001) 208 CLR 199, 217–218 (Gleeson CJ). 64 Australian Broadcasting Corporation v O’Neill [2006] HCA 46; (2006) 227 CLR 57, 82 (Gummow and Hayne JJ).

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justify in the circumstances it being given the opportunity to have the Reviewable Decision reviewed by the Tribunal”.65 The Tribunal has held that the “serious issue” threshold must be satisfied in respect of each ground for review raised by an applicant.66

[12.140] The “prima facie materially preferable” threshold requires the applicant to establish a prima facie case that a determination made by the Australian Competition Tribunal varying, setting aside, or remitting the decision would result in a materially preferable national electricity or gas objective decision (as relevant).67 This prima facie case must be established on the basis of one or more grounds raised in the application, either separately or collectively. The terms “a materially preferable [national electricity objective] decision” and “a materially preferable [national gas objective] decision” are each defined in the respective laws as a decision that is materially preferable to the reviewable regulatory decision in making a contribution to the achievement of the national electricity (or gas) objective.68 The “prima facie materially preferable” threshold was introduced into the NEL and NGL in December 2013 and was first considered by the Australian Competition Tribunal in a number of electricity proceedings in July 2015. In those proceedings, the applicants for review, which included the Public Interest Advocacy Centre (“PIAC”) and the New South Wales electricity distributors, sought review of a number of matters including the allowance for operating expenditure and the rate of return. PIAC submitted that the regulatory allowances for these building blocks were too high, and the NSW distributors submitted that the regulatory allowances were too low. The Australian Competition Tribunal considered that if there were errors in the AER’s determinations, correction of those errors prima facie would result in a materially preferable [national electricity objective] decision because otherwise consumers would be paying too much (PIAC’s application) or there would be a less safe or reliable or secure supply of electricity (applications of the electricity distributors): In the case of the PIAC contentions, the focus was on price. If (as PIAC asserted) the other elements in s 7(a) and (b) [of the national electricity objective] were adequately satisfied by the amount of the proposed regulatory decision as set out in the AER’s Draft Decision, then it is prima facie the case that the lesser price which would follow from either or both of PIAC’s grounds of review succeeding would, or would be likely to, be in the long term interests of consumers of electricity. It is, or it is arguably, not in their long term interests that the price should be more than that reasonably required under the NEL and the NER to otherwise satisfy the [national electricity objective]. 65 Application by Envestra Limited [2011] ACompT 13, [21]. 66 Application by Energex Limited (No 4) [2011] ACompT 4 [46]. 67 NEL, s 71E(b); NGL, s 248(b). 68 NEL, s 71P(2a)(c); NGL, s 259(4a)(c).

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As the Tribunal considered that, as PIAC put its case, it was prima facie the case that the AER’s Draft Decision may have been the more correct one, it follows that it appears to the Tribunal that in relation to PIAC’s applications (if s 71E(a) is satisfied) the condition of the grant of leave to apply in s 71E(b) is met. In the case of Networks NSW’s applications, the focus was on the elements of quality, safety, reliability and security of supply of electricity. They argued that, on the material before the Tribunal, it should appear to the Tribunal that, unless altered in a very material way, then prima facie the AER Decision would expose consumers to vulnerability in respect of those elements of the factors in the [national electricity objective] recognised as part of the long term interests of consumers. It is equally the case that it does appear at present to the Tribunal that, the Networks NSW grounds of review (which it considers give rise to serious issues to be heard and determined, relevantly in the present context in relation to opex and return on debt as they are the same matters as PIAC has ventilated) prima facie would, or would be likely to, result in a materially preferable [national electricity objective] decision if either or both of those matters are shown to give rise to a ground of review because, without adjustment to the AER Decision, the long term interests of consumers would, or would be likely to be, adversely affected by a less safe or reliable or secure supply of electricity.69

[12.150] The financial threshold only applies where the grounds for review relate to the amount of revenue that may be earned by a service provider.70 The Australian Competition Tribunal must not grant leave to apply for review unless the amount at issue (the “amount that is specified in or derived from the decision”) exceeds the lesser of $5 million or two per cent of the average annual regulated revenue of the service provider.71 The Australian Competition Tribunal has stated that there are problems with the drafting of the financial threshold provision, both in respect of the relevant “amount” that must be demonstrated, and whether the threshold operates cumulatively (in the event there is more than one ground for review) or needs to be satisfied in respect of each ground for review.72 The Tribunal has said that the expression “the amount specified in or derived from the decision” should not be read literally as meaning the total revenue to be derived by the service provider from the decision under review,73 as a 69 Applications by Public Interest Advocacy Centre Ltd, Ausgrid, Endeavour Energy and Essential Energy [2015] ACompT 2, [22]–[26]. 70 NEL, s 71F(1)(b); NGL, s 249(1)(b). 71 NEL, s 71F(2); NGL, s 249(2). The NEL subsection provides: “Despite section 71E, the Tribunal must not grant leave to apply under section 71B(1) even if there is a serious issue to be heard and determined as to whether a ground for review set out in section 71C(1) exists unless the amount that is specified in or derived from the decision exceeds the lesser of $5 000 000 or 2% of the average annual regulated revenue of the regulated network service provider”. The NGL provision is in the same terms. 72 Application by Energex Limited (No 4) [2011] ACompT 4, [5], [50]–[52]. 73 Application by Energex Limited (No 4) [2011] ACompT 4, [50].

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plain reading of the provision might suggest. Rather, it is the amount at issue in relation to the grounds on which the regulator’s decision is challenged.74 The Australian Competition Tribunal has noted that the ordinary meaning of the provision is that each ground must meet the threshold individually, rather than in aggregate.75 However, after referring to policy documents which recorded the formulation of the current merits review framework in the NEL and the NGL, the Tribunal found that the intended meaning is that the effect of all of the alleged errors must be taken into account when determining whether the financial threshold is satisfied.76 Although the Tribunal has not had to determine whether it is possible to consider the effects of the regulator’s decision over multiple regulatory periods in assessing whether the financial threshold has been met, it has expressed the view that only revenue that will be earned in the revenue period to which the decision relates can be included when deciding if the financial threshold has been met.77

[12.160] Even in circumstances where the thresholds described at [12.130]–[12.150] are satisfied, the Australian Competition Tribunal has a discretion not to grant leave if the applicant is the service provider to whom the decision relates. The discretion arises if the service provider: fails to comply with a request or direction of the AER; conducts itself in a way that delays the making of the decision; or misleads the AER.78 Time for making an application for merits review [12.170] Applications for review by the Australian Competition Tribunal of decisions under the National Access Regime in Pt IIIA of the CCA must be made within 21 days after the decision is published (or, in the case of a decision of the ACCC in an access arbitration, 21 days after the ACCC makes the final determination).79

74 Application by Energex Limited (No 4) [2011] ACompT 4, [50]. 75 Application by Energex Limited (No 4) [2011] ACompT 4, [51]. 76 Application by Energex Limited (No 4) [2011] ACompT 4, [52]. 77 Application by Jemena Gas Networks (NSW) Ltd (No 2) [2011] ACompT 5, [6]. 78 NEL, s 71H; NGL, s 251. 79 CCA, s 44K(3) (Minister’s decision to declare, or not to declare a service); CCA, s 44L(2) (Minister’s decision not to revoke a declaration); CCA, s 44LJ(2) (Minister’s decision on whether a service is ineligible to be a declared service); CCA, s 44LK(2) (Minister’s decision to revoke or not revoke a decision that a service is ineligible to be a declared service); CCA, s 44O (Commonwealth Minister’s decision that an access regime is an effective regime/decision to extend the period for which a decision that a regime is an effective regime); CCA, s 44PG(2) (decision of ACCC to approve or refuse to approve a tender process); CCA, s 44PH (decision of ACCC to revoke a decision to approve a tender

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Any application for review under the NEL and NGL must be made within 15 business days of the decision being published.80 As it is impractical for an application for leave to be made and determined in time for an application for review to be filed within that period, a practice has developed of filing both an application for leave and an application for review (usually contained within the one document) within 15 business days of the decision being published.

Effect of an application for merits review on the operation of the decision [12.180] Where an application for review has been made under CCA, Pt IIIA, the Australian Competition Tribunal has an explicit power to stay the operation of a decision only where the decision is a decision of the relevant Minister to declare a service. An application for review of a decision to declare a service does not affect the operation of the declaration, however a party to the review proceedings may apply for an order staying the declaration or otherwise affecting its operation.81 The Tribunal may make an order if it considers it desirable to do so, taking into account the interests of persons who may be affected by the review, and whether the order is appropriate for securing the effectiveness of the hearing and determination of the application for review.82 A number of the decisions made under CCA, Pt IIIA that may be reviewed by the Australian Competition Tribunal do not come into effect where an application for review is made until the Australian Competition Tribunal makes its decision.83 Therefore there is no need for the Tribunal to make an order that the operation of the decision is stayed to prevent the decision coming into operation. Where review is sought of a final determination of an ACCC arbitration, the ACCC’s determination has no effect until the Australian Competition Tribunal makes its determination on the review.84 In this way, an application for review will have the effect of staying the operation of the ACCC’s determination until the Tribunal’s decision is made.

process as a competitive tender process; CCA, s 44ZP (determination by the ACCC in arbitrating an access dispute); CCA, s 44ZX(2) (decision of the ACCC not to register a contract); CCA, s 44ZZBF (decision of the ACCC in relation to an access undertaking or an access code). 80 NEL, s 71D; NGL, s 247. 81 CCA, s 44KA(1) and (2). 82 CCA, s 44KA(2). 83 CCA, s 44LI(9) (decision of the designated Minister to revoke an ineligibility decision); CCA, s 44ZZBA (decision of the ACCC to accept an access undertaking or an access code). 84 CCA, s 44ZO(2).

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[12.190] Under the NEL, an application for review does not stay the operation of an electricity network revenue or pricing determination.85 Similarly, under the NGL an application for review does not stay the operation of a gas access arrangement decision.86 An application for review of an associate contract decision will also not stay the operation of that decision.87 Of the other access-related decisions that may be the subject of merits review under the NGL, an application for review will stay the operation of those decisions on the granting of leave to apply for review by the Australian Competition Tribunal unless the Tribunal otherwise orders.88 Grounds for review [12.200] In merits review processes under CCA, Pt IIIA, it is not necessary to establish that the decision-maker has made a particular kind of error before the Australian Competition Tribunal can vary or set aside the decision. The review by the Australian Competition Tribunal is expressed to be a “reconsideration of the matter”89 (and where the decision is a determination of the ACCC following an arbitration of an access dispute it is a “re-arbitration”90 of the matter). This means that the Tribunal can determine the correct and preferable decision and substitute its decision for the decision of the original decision-maker without having to find error in the original decision-makers’ decision. [12.210] For merits reviews of decisions under the NEL and the NGL, an applicant must establish one or more of the four specified grounds for review before the Australian Competition Tribunal may vary, or set aside and remit the regulator’s decision back to the regulator to be remade. The four grounds for review in the NEL and the NGL are as follows: • the AER made an error of fact in its findings of facts, and that error of fact was material to the making of the decision; • the AER made more than one error of fact in its findings of facts, and that those errors of fact, in combination, were material to the making of the decision; • the exercise of the AER’s discretion was incorrect, having regard to all the circumstances; or • the AER’s decision was unreasonable, having regard to all the circumstances.91 85 NEL, s 71I; NGL, s 252. 86 NGL, s 252(a)(i). 87 NGL, s 252(a)(ii). 88 NGL, s 252(b). 89 CCA, s 44LJ(3), s 44LK(3), s 44O(3), s 44PG(3), s 44PH(3), s 44ZZBF(3). 90 CCA, s 44ZP(3). 91 NEL, s 71C; NGL, s 246.

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The above grounds are loosely based on the grounds for review in the regulatory regime that applied to gas networks prior to the introduction of the NGL. The following were provided as grounds for review of a regulator’s decision: • that there was an error in the relevant regulator’s finding of facts; • that the exercise of the relevant regulator’s discretion was incorrect or was unreasonable having regard to all the circumstances; or • that the occasion for exercising the discretion did not arise.92 In merits review proceedings under the NEL and the NGL, the Australian Competition Tribunal has referenced and relied on decisions made under the Gas Code regarding the scope of the specified grounds for review.93

[12.220] Errors of fact under the merits review provisions in the NEL and the NGL may relate to the existence of a present or historical fact, being an event or circumstance.94 Errors of fact may also include opinions about the existence of a future fact or circumstance, including opinions formed by a regulator based on an approach to the assessment of facts or methodologies that it has chosen to apply.95 The Australian Competition Tribunal has held that the term “finding of fact” should be interpreted broadly enough to be meaningful in relation to the function of the AER under review, which necessarily involves an assessment by the AER as to likely future occurrences and states of affairs that are formed on the basis of expert opinion and evidence of current and historic facts.96 In relation to the incorrect exercise of discretion ground for review, the Australian Competition Tribunal has described a “discretionary decision” in the following way: It is most commonly applied to decision making which involves essentially weighing up of relevant facts. First the decision maker finds the facts. Then the decision maker undertakes a weighing up process which involves taking into account considerations that are found to be relevant, assessing the weight to be given to those considerations so assessed and determining what, as a result of that process, is the right result.97 92 Gas Pipelines Access (South Australia) Act 1997 (SA), Sch 1, s 39(2) (repealed). 93 See, for example, Re Application by ElectraNet Pty Limited (No 2) [2008] ACompT 3, [64]–[72]. 94 Application by APT Allgas Energy Limited (No 2) [2012] ACompT 5, [27]; Re Application by ElectraNet Pty Limited No 3 [2008] ACompT 3, [67]; Australian Competition and Consumer Commission v Australian Competition Tribunal (2006) 152 FCR 33, 73. 95 Re Application by ElectraNet Pty Limited No 3 [2008] ACompT 3, [67]; Australian Competition and Consumer Commission v Australian Competition Tribunal (2006) 152 FCR 33, 74. 96 Application by APT Allgas Energy Limited (No 2) [2012] ACompT 5, [29], citing Australian Competition and Consumer Commission v Australian Competition Tribunal (2006) 152 FCR 33, 74. 97 Application by APT Allgas Energy Limited (No 2) [2012] ACompT 5, [35], citing Re ActewAGL Distribution [2010] ACompT 4, [34].

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It is necessary to demonstrate that the exercise of the discretion was incorrect. This ground will not be made out merely because the Australian Competition Tribunal would exercise the discretion in a different way.98 The Tribunal has held that the following decisions may involve the incorrect exercise of discretion: • the exercise of discretion which is based on a misconstruction or misapplication of the relevant principles, methodologies or factors required to be considered under the law or the rules;99 • a failure to have regard to a mandatory relevant factor as prescribed by the law or the rules;100 • where the exercise of discretion is affected by the regulator taking into account a factor extraneous to those relevant by reason of the law and the rules;101 • if a factual error is made out and the exercise of the discretion is based upon it. The concept of incorrectness in the unreasonable ground for review extends beyond what is referred to as “Wednesbury unreasonabless”, which is a decision that is so unreasonable on the basis of the matters available to the decision-maker than no reasonable decision-maker could ever come to it.102 The Australian Competition Tribunal has held that “unreasonableness” would pick up logical error or irrationality in a decision.103

[12.230] There may be considerable overlap between the four grounds for review in the NEL and NGL. The Australian Competition Tribunal has noted that there is “no clear line between factual error, opinion and discretionary judgment: one may feed into the other”.104 This is particularly the case in relation to the incorrect exercise of discretion and unreasonableness grounds. For example, if the reasons for a decision contain an element of arbitrariness, the decision may be unreasonable and the exercise of discretion may also have been in error.105 Similarly, if a decision has not been determined by reference to the criteria in the law and 98 Application by APT Allgas Energy Limited (No 2) [2012] ACompT 5, [36]; Re Application by ElectraNet Pty Limited No 3 [2008] ACompT 3, [72]. 99 Re Application by ElectraNet Pty Limited (No 2) [2008] ACompT 3, [66]. 100 Re Application by ElectraNet Pty Limited (No 2) [2008] ACompT 3, [66]. 101 Re Application by ElectraNet Pty Limited (No 2) [2008] ACompT 3, [66]. 102 Application by EnergyAustralia [2009] ACompT 8, [64]–[67]; Application by APT Allgas Energy Limited (No 2) [2012] ACompT 5, [36]; Re Application by ElectraNet Pty Limited No 3 [2008] ACompT 3, [72]. 103 Re Application by ElectraNet Pty Limited (No 2) [2008] ACompT 3, [65]. 104 Applications by Public Interest Advocacy Centre Ltd, Ausgrid, Endeavour Energy and Essential Energy [2015] ACompT 2, [57]. 105 Application by EnergyAustralia [2009] ACompT 8, [67].

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the rules, the exercise of any discretion in making the decision may be incorrect, and the decision may also be unreasonable.106 The Australian Competition Tribunal has noted that the grounds for review in the NEL and NGL do not directly cover “procedural” errors, such as failing to ensure stakeholders are informed of material issues and given a reasonable opportunity to make submissions before a determination is made.107 However, if the AER does not take into account a submission made in the regulatory process, this may result in the exercise of a discretion being incorrect because a relevant matter has not been taken into account in the exercise of the discretion.108

[12.240] Similarly to the merits review provisions in Pt IIIA of the CCA, the merits review provisions that were previously in the telecommunications-specific access regime in Pt XIC of the CCA did not set out grounds for review. Where merits review was available for a particular decision (for example, a decision of the ACCC to grant or not grant an exemption from the standard access obligations, or accept or reject an access undertaking), the provisions simply stated that a person whose interests were affected by a decision of the ACCC could apply in writing to the Australian Competition Tribunal for review.109 The Australian Competition Tribunal considered the nature of its review function under Pt XIC in an application brought by Seven Network Ltd and C7 Pty Ltd. In that case, the applicants sought review of the ACCC’s decision to exempt Foxtel and Telstra from the standard access obligations in respect of the provision of digital subscription television via Telstra’s HFC network. Foxtel and Telstra argued that the review by the Australian Competition Tribunal was not an appeal de novo (that is, an appeal without reference to the findings and conclusions in the ACCC’s decision), but was a review that required the applicants to satisfy the Tribunal that the ACCC had made an error in deciding to grant Foxtel and Telstra the exemption orders.110 The applicants, however, argued that the role of the Australian Competition Tribunal was simply to review the merits of the ACCC’s decision to grant the exemption order and there was no requirement for the Tribunal to identify any error in that decision before the Tribunal could set aside or vary the ACCC’s decision.111 The ACCC similarly submitted that 106 Application by EnergyAustralia [2009] ACompT 8, [68]. 107 Application by Energex Limited (No 2) [2010] AcompT 7, [34]–[35], citing Application by EnergyAustralia [2009] ACompT 8, [316(d)]. 108 Application by EnergyAustralia [2009] ACompT 8, [316(d)]. 109 CCA, s 152AV, as repealed by Telecommunications Legislation Amendment (Competition and Consumer Safeguards) Act 2010 (Cth) Sch 1 item 152; CCA, s 152CE, as repealed by Telecommunications Legislation Amendment (Competition and Consumer Safeguards) Act 2010 (Cth) Sch 1 item 177. 110 Seven Network Limited (No 3) [2004] ACompT 10, [10]. 111 Seven Network Limited (No 3) [2004] ACompT 10, [12].

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the Australian Competition Tribunal was required to form its own view on whether the exemption order should be made.112 The Australian Competition Tribunal noted that there is “no magic” in the concept of a “review” and that the content of any review will depend upon the statutory context in which it appears.113 After canvassing the legislative history of the review provision and its context, the Tribunal determined that the terms of the statute did not require it to find error in the decision of the ACCC.114

Parties to a merits review process [12.250] Who may apply for review of a decision under CCA, Pt IIIA depends on the decision made, as set out in Table 12.2. Table 12.2 Persons who may apply for merits review of decisions under CCA, Pt IIIA Decision

Who may apply for review

Decision of the designated Minister to declare a service Decision of the designated Minister not to declare a service Decision of the designated Minister not to revoke a declaration Decision of the designated Minister that a service is ineligible to be a declared service Decision of the designated Minister to revoke an ineligibility decision or not to revoke an ineligibility decision Decision of the Commonwealth Minister that an access regime is an effective access regime

The provider of the service

CCA provision s 44K(1)

The person who applied for the declaration recommendation The provider of the service

s 44K(2)

A person whose interests are affected

s 44LJ(1)

A person whose interests are affected

s 44LK(1)

s 44L(2)

The responsible Minister of the s 44O(1)(a) state or territory who applied for a recommendation that the Commonwealth Minister decide that the access regime is an effective access regime The responsible Minister of the Decision of the Commonwealth s 44O(1)(b) state or territory who applied for Minister to extend the period for a recommendation that the which a decision that an access regime is an effective access regime is Commonwealth Minister decide to extend the period for which the in force decision is in force Decision of the ACCC to approve or A person whose interests are s 44PG(1) refuse a tender process as a affected competitive tender process

112 Seven Network Limited (No 3) [2004] ACompT 10, [11]. 113 Seven Network Limited (No 3) [2004] ACompT 10, [26]. 114 Seven Network Limited (No 3) [2004] ACompT 10, [41]. The Australian Competition Tribunal decision was a decision of the (then) President, Justice Goldberg.

12 Review of Regulatory Decisions Decision

Who may apply for review

Decision of the ACCC to revoke a decision to approve a tender process as a competitive tender process because the ACCC is satisfied that the assessment of the tenders was not in accordance with the tender process Decision of the ACCC to revoke a decision to approve a tender process as a competitive tender process because the ACCC is satisfied that the provider of the relevant service is not complying with the terms and conditions of access to the service Determination of the ACCC in an arbitration of an access dispute Decision of the ACCC not to register a contract for access to a declared service Decision of the ACCC on an access undertaking or access code

The applicant for approval or any other person whose interests are affected by the decision

403

CCA provision s 44PH(1)(a)

The applicant for approval, any other person whose interests are affected by the decision, and the provider of the service

s 44PH(1)(b)

A party to the final determination

s 44ZP(1)

A party to the contract

s 44ZX(1)

A person whose interests are affected

s 44ZZBF(1)

A number of parties, in addition to the applicant, may be permitted to participate in a review process. In a review under s 44K of the CCA of a declaration of a service, reg 22B(1) of the Competition and Consumer Regulations 2010 (Cth) provides that the person who applied to the NCC for the declaration recommendation may participate in the review, in addition to the provider. Similarly, in a review under CCA, s 44K of a decision not to declare a service, the provider may participate in the review in addition to the person who applied for the declaration recommendation (reg 22B(2) of the Competition and Consumer Regulations 2010 (Cth)). In a review under s 44L of the CCA of a decision not to revoke a declaration of a service, reg 22B(3) provides that the person who applied for the declaration recommendation may participate in the review, in addition to the provider. In a review under s 44ZX of the CCA of a decision not to register a contract, reg 22B(4) provides that any other party to the contract may participate in the review, in addition to the party who applied for review. In respect of reviews of access determinations made by the ACCC, the regulations provide that all of the parties to the access determination may participate in a review of that determination.115 The regulations appear to envisage that there may also be interveners in any review, whose participation is at the discretion of the Australian Competition Tribunal and on any conditions the Tribunal considers fit.116 The parties to the review

115 Competition and Consumer Regulations 2010 (Cth), reg 28E. 116 Competition and Consumer Regulations 2010 (Cth), reg 28E(2).

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will therefore comprise any party to the determination who participates in the review and any person permitted to intervene in the review.117

[12.260] Other than in respect of reviews pursuant to CCA, ss 44K, 44L, 44ZP and 44ZX (discussed above), the Competition and Consumer Regulations 2010 (Cth) do not explicitly deal with persons who may otherwise be made a party to the review by the Australian Competition Tribunal. The Tribunal has held that the participation of other parties in review proceedings is governed by s 109 of the CCA.118 It has also found that a further basis for intervention by parties may be found in the provisions of the CCA, which provide that, for the purposes of the review, the Australian Competition Tribunal has the same powers as the designated Minister. These points were discussed in the case of Application by Fortescue Metals Group Limited [2006] ACompT 6, considered in Box 12.2. This matter was decided prior to the amendments made to the merits review provisions in CCA, Pt IIIA that placed limits on the information to which the Australian Competition Tribunal may have regard in undertaking a review (which are discussed further at [12.310]–[12.320]).119 In light of these limitations, it may be that parties who did not participate in the decision-making process before the NCC, the Minister or the ACCC (as relevant) would not be permitted to participate, or would be restricted in their participation, consistent with the intention that the Australian Competition Tribunal only considers material that was before the original decision-maker. Box 12.2: Who may intervene in CCA, Pt IIIA declaration decisions? Fortescue Metals Goup Limited (“Fortescue”) sought review pursuant to CCA, s 44K(2) of the deemed decision by the designated Minister not to declare the Mt Newman rail facility service owned and operated by BHP Billiton. Fortescue was a joint venture participant with Consolidated Minerals Limited in the Pilbara Iron Ore Joint Venture, which held tenements at Mindy Mindy in the Pilbara region in Western Australia. Fortescue had sought access to the Mt Newman rail facility to transport ore from Mindy Mindy to port facilities at Port Hedland. Two applicants sought leave to intervene in the review proceedings: Rio Tinto Limited (“Rio Tinto”) and Mr Derek Noel Ammon. Rio Tinto did not have any interest in the Mt Newman railway line and was not a potential access seeker to the service the subject of the application for declaration. It 117 Competition and Consumer Regulations 2010 (Cth), reg 28E(3). 118 Application by Fortescue Metals Group Limited [2006] ACompT 6. 119 CCA, s 44ZZOAA, inserted by the Trade Practices Amendment (Infrastructure Access) Act 2010 (Cth), Sch 1, item 70.

12 Review of Regulatory Decisions

operated several mines in the Pilbara region and each of these were serviced by a rail system that was privately owned by, and dedicated to, Rio Tinto’s operations. Rio Tinto sought leave in order to make submissions on the declaration criteria. Mr Ammon claimed that he had a common interest in Fortescue’s application as he maintained that he was one of the owners, or possibly the only owner, of the Mindy Mindy project and had commenced proceedings concerning this ownership interest. The Australian Competition Tribunal considered whether the provisions of the CCA set out in Div 2 of Pt IX applied to the review process. Part IX is headed “Review by Tribunal of Determinations of Commission”, and Div 1 of Pt IX is concerned with applications for review of decisions of the ACCC relating to authorisations and notifications. However, the Australian Competition Tribunal determined that, unless otherwise expressly excluded, reviews by it under provisions such as s 44K were to be undertaken in accordance with the procedures and evidence determined in accordance with Div 2 of Pt IX. Therefore, s 109(2), which provides that the Australian Competition Tribunal may, upon such conditions as it thinks fit, permit a person to intervene in proceedings before the Tribunal, applied to the review proceedings. The Australian Competition Tribunal considered that sections 44H(1), and 44K(4) and (5) provided an alternative basis for an application to intervene in a review under section 44K. Section 44H(1) requires the designated Minister to declare a service or not declare a service after receiving a declaration recommendation. Sections 44K(4) and (5) provide that the review by the Australian Competition Tribunal is a re-consideration of the matter, and that for the purposes of the review the Australian Competition Tribunal has the same powers as the designated Minister. The Australian Competition Tribunal held that, if a person whose rights or interests may be affected by the Tribunal’s decision wishes to make submissions to it, ordinarily they should be allowed to do so, as long as they can demonstrate a right or interest that may be affected. The Australian Competition Tribunal held that this connection should “usually be one that discloses … some interest which is ignited by the proceeding, which is an interest other than that found in members of the general community”.120

120 Application by Fortescue Metals Group Limited [2006] ACompT 6, [35].

405

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Rio Tinto was granted leave to intervene on the basis that its role in the Pilbara iron ore industry was such that it would be able to contribute and assist the Australian Competition Tribunal in its considerations of the declaration criteria. Mr Ammon was refused leave with liberty reserved to renew his application.

[12.270] Under the NEL and NGL, an “affected or interested person or body” may apply to the Australian Competition Tribunal for review of a “reviewable regulatory decision”.121 The classes of reviewable regulatory decisions this book is primarily concerned with include electricity distribution and transmission determinations, and gas access arrangement decisions. An “affected or interested person or body” is defined to mean: • the service provider to which the decision applies; • a service provider, user, prospective user or end user whose commercial interests are materially affected by the decision; • a user or consumer association; • a reviewable regulatory decision process participant.122 A “user or consumer association” is defined to mean an association or body, the members of which include more than one user, prospective user or end-user, and which represents and promotes the interests of those members in relation to the provision of electricity services or natural gas services, as relevant.123 The distinction between “user” and “end-user” is that a “user” is someone that would be provided with network services, and an “end-user” is someone who acquires electricity or gas for consumption. A “reviewable regulatory decision process participant” is a person or body that participated in the consultation process leading to the decision being made by making a submission or comment to the regulator.124 The parties to a review under the NEL and NGL are: the applicant; the AER (or in the case of gas where the decision-maker may not be the AER, the original decision-maker whose decision is the decision being reviewed); and any interveners.125 121 NEL, s 71B; NGL, s 245. 122 NEL, s 71A (definition of “affected or interested person or body”); NGL, s 244 (definition of “affected or interested person or body”). 123 NEL, s 71A (definition of “user or consumer association”); NGL, s 244 (definition of “user or consumer association”). 124 NEL, s 71A (definition of “reviewable regulatory decision process participant”); NGL, s 244 (definition of “reviewable regulatory decision process participant”). 125 NEL, s 71N; NGL, s 257.

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[12.280] There are three categories of interveners under the NEL and NGL. The first category comprises interveners who may intervene in a review process as a matter of right. That is, they do not require the leave of the Australian Competition Tribunal to participate in the review. This category includes the network service provider to which the decision being reviewed applies (in the event the service provider is not the applicant for review) and a Minister of a participating jurisdiction.126 The second and third categories comprise persons or bodies who require the leave of the Australian Competition Tribunal to intervene. The second category is reviewable regulatory decision process participants, which, as noted above, are persons or bodies that made a submission to the AER as part of the regulatory decision-making process. The Australian Competition Tribunal is required to grant leave to reviewable regulatory decision process participants to intervene in a review, unless they are user or consumer interveners.127 The third category is user or consumer interveners.128 A user or consumer intervener is a “user or consumer association”129 or a “user or consumer interest group”130 that has made a submission or comment in the regulatory decision-making process. The Australian Competition Tribunal has discretion whether or not to grant leave to a user or consumer intervener to intervene. The Australian Competition Tribunal may grant leave to a user or consumer intervener if it is satisfied that: • the user or consumer intervener will raise a matter that will not be raised by the AER or the applicant; • the information or material the user or consumer intervener will present, or the submissions it wishes to make, are likely to be better presented if submitted by the user or consumer intervener; or • the interests of the user or consumer intervener or its members are affected by the decision being reviewed.131 126 NEL, s 71J; NGL, s 253. 127 NEL, s 71K; NGL, s 254. 128 NEL, s 71L; NGL, s 255. 129 A “user or consumer association” is defined to mean an association or body (whether incorporated or unincorporated): (a) the members of which include more than one user, prospective user, or end user; and (b) that represents and promotes the interests of those members in relation to the provision of natural gas services or electricity services (as relevant): NEL, s 71A; NGL, s 244. 130 A “user or consumer interest group” is defined to mean an association or body (whether incorporated or unincorporated): (a) that has, as an object or purpose, the object or purpose of representing and promoting the interests of users or prospective users or end users of natural gas services or electricity services (as relevant); but (b) the members of which need not include a user, prospective user or end user: NEL, s 71A; NGL, s 244. 131 NEL, s 71L(3); NGL, s 255(3).

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The interests of a user or consumer intervener are considered to be affected if the decision being reviewed relates to an object or purpose of the user or consumer intervener.132

[12.290] The provisions of the NEL and NGL with respect to the second category of interveners (reviewable regulatory decision process participants) were amended in December 2013. Prior to these amendments, s 71K of the NEL and s 254 of the NGL defined a “reviewable regulatory decision process participant” as a person or body that not only made a submission or comment in relation to the making of the decision, but also had a “sufficient interest” in the reviewable regulatory decision being reviewed. The amendment to remove this requirement (with the effect that a reviewable regulatory decision process participant is essentially a person or body that made a submission or comment in relation to the making of the decision), appears to have been made to reflect the view of the SCER that barriers to stakeholder participation in merits review process should be lowered or removed. The “sufficient interest” requirement had operated to prevent some parties from intervening in merits review processes. For example, in a merits review application brought by the NSW gas distribution network operator, Jemena Gas Networks,133 three parties sought leave of the Australian Competition Tribunal to intervene: the retailers AGL and TRUenergy, and an individual, Ms Kingston. The Australian Competition Tribunal found that AGL and TRUenergy had a sufficient interest in the decision being reviewed and had made a submission or comment in relation to the decision following an invitation to do so, and therefore could intervene as of right.134 Ms Kingston had made a submission to the AER in relation to its decision, but the question was whether she satisfied the other criterion of “sufficient interest”. In this regard the Australian Competition Tribunal noted: The Tribunal is in no doubt that Ms Kingston is, in an intellectual sense, interested in the AER’s decision, as she is in many other decisions made by the AER. Not only does she have an intellectual interest in those decisions, she seems to know a good deal about the relevant industry. That, however, is not enough to establish that she has a “sufficient interest” for the purposes of intervention. More must be shown. While it may be accepted that a “sufficient interest” is not a concept that involves technical niceties of the kind encountered in the old standing rules for judicial review, more than merely being a citizen must be established. Here it is not necessary to consider precisely what must be shown. Whatever that might be, Ms Kingston has not shown enough. She lives in Victoria. She consumes gas in Victoria from an organisation (or organisations) that supplies (or supply) gas in Victoria. The AER’s decision is 132 NEL, s 71L(4)(a); NGL, s 255(4). 133 Application by Jemena Gas Networks (NSW) Ltd [2010] ACompT 8. 134 Application by Jemena Gas Networks (NSW) Ltd [2010] ACompT 8, [10].

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not a decision that affects Victorian consumers of gas. It does not affect them because it does not regulate the price that Victorian consumers are required to pay for their gas. We do not mean to suggest one way or the other that a mere consumer whose price for gas is affected by an impugned decision is or is not a person with a “sufficient interest” to intervene in a proceeding that brings up the validity of that decision. But, plainly, a person who is not directly affected in the way we have just discussed falls outside of the standing threshold. For this reason we cannot accede to Ms Kingston’s request. Perhaps Ms Kingston has useful information which she could put to the Tribunal. But she does not have a sufficient interest that would enable her to put forward that material.135

The Australian Competition Tribunal also refused to grant leave on the basis that the applicant did not have a “sufficient interest” in an application by EnergyAustralia (a New South Wales electricity distribution service provider, now called Ausgrid) to intervene in merits review proceedings concerning the AER’s electricity distribution determinations for Energex, Ergon, and ETSA Utilities (now SA Power Networks) in 2010. EnergyAustralia sought to intervene with respect to two particular issues raised in the reviews, being the value to be adopted for imputation credits and the classification of public lighting services. The Australian Competition Tribunal noted that the distribution determinations in question did not apply to EnergyAustralia, but that this did not necessarily preclude intervention.136 However, the Tribunal considered that there must be an interest other than by reason of just being a network service provider or a distribution network service provider.137 It regarded the interest claimed by EnergyAustralia, being in the precedential effect of the way in which the Australian Competition Tribunal would conduct the review, or of the criteria by which the review would be conducted, was not a sufficient interest to support intervention in the review.138 The Tribunal did not accept that the decision it would make in the review process involving Energex, Ergon, and ETSA Utilities would necessarily be probative in relation to EnergyAustralia’s regulatory review process, which would not take place until 2013. Further, it did not accept that the decisions already made by the AER, or its own decisions, would directly bear on the interests of EnergyAustralia or that the evidence and material that would be placed before the Tribunal in the review proceedings would be the same by the time EnergyAustralia was required to submit its next regulatory proposal.139 As such, the Australian Competition Tribunal held that EnergyAustralia had not established that it 135 Application by Jemena Gas Networks (NSW) Ltd [2010] ACompT 8, [12]–[15]. 136 In the matter of Energex Limited [2010] ACompT 3, [27]. 137 In the matter of Energex Limited [2010] ACompT 3, [28]. 138 In the matter of Energex Limited [2010] ACompT 3, [30]. 139 In the matter of Energex Limited [2010] ACompT 3, [34].

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had a “sufficient interest” for the purposes of NEL, s 71K (as it then was) and was therefore not a reviewable regulatory decision process participant for the purposes of that section.140

Limitations on materials that may be referred to in merits review [12.300] Often a merits review regime will specify that it is limited in the sense of the material that the review body is permitted to consider in making its determination. This limitation exists in the merits review process under CCA, Pt IIIA and the NEL and NGL, and also existed in the merits review provisions that used to apply under the telecommunicationsspecific access provisions in the CCA. [12.310] Generally, in reviews under Pt IIIA of the CCA, the Australian Competition Tribunal is limited to considering the information that was before the original decision-maker, and may only seek additional information from the ACCC or the NCC, in their role of assisting the Australian Competition Tribunal or to clarify information that was before the original decision-maker. More precisely, the Australian Competition Tribunal’s review is expressed to be a “re-consideration of the matter based on the information, reports and things referred to in section 44ZZOAA”.141 These categories may, depending on the nature of the decision being reviewed, include: • the information that the decision-maker took into account in making the decision (in circumstances other than a deemed decision);142 • where the decision is a deemed decision because the relevant Minister did not publish a decision within the timeframe required by the CCA, information that the NCC took into account in making the relevant recommendation to the Minister;143 • where the decision is a deemed decision because the ACCC did not publish a decision – or, in the case of an access arbitration, make a final determination – within the timeframe required by the CCA, information or documents given to the ACCC in connection with the decision to which the review relates, other than information that was the subject of a request for confidentiality that was refused by the ACCC;144 • information provided in response to a request from the Australian Competition Tribunal;145 140 In the matter of Energex Limited [2010] ACompT 3, [37]. 141 CCA, s 44ZZBF(3). 142 CCA, ss 44ZZOAA(a)(i) and 44ZZOAAA(4)(c). 143 CCA, ss 44ZZOAA(a)(i) and 44ZZOAAA(3)(a). 144 CCA, ss 44ZZOAA(a)(i) and 44ZZOAAA(3)(b). 145 CCA, ss 44ZZOAA(a)(ii) and 44ZZOAAA(4) and (5).

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• where the presiding member of the Australian Competition Tribunal has required the NCC or the ACCC (as relevant) to provide assistance during the course of the review, anything done in providing that assistance;146 and • where the presiding member of the Australian Competition Tribunal has required the NCC or the ACCC (as relevant) to give information or make reports for the purposes of the review, that information or those reports.147 Prior to amendments made in 2010, the relevant provisions in Pt IIIA of the CCA provided that the review by the Australian Competition Tribunal was a “re-consideration” of the matter and did not contain an express provision limiting the materials the Tribunal could consider. The Australian Competition Tribunal had interpreted “re-consideration” to mean that it could take into account material that was not before the recommending body (NCC) and the primary decision-maker (Minister): “The Tribunal’s review is a re-consideration of the matter (s 44K(4) of the Act). In other words, it is not an appeal and the Tribunal can consider new information and evidence that was not available to the NCC or the Minister.”148 In The Pilbara Infrastructure Pty Ltd v Australian Competition Tribunal,149 the High Court considered the interpretation of s 44K(4) of the CCA, which provided that “[t]he review by the Australian Competition Tribunal is a reconsideration of the matter”. The High Court said that the “matter” was the Minister’s decision on declaration;150 that is, the relevant “matter” was not what the NCC did when it made its declaration recommendation. The High Court went on to say that the requirement to review the Minister’s decision “neither permits nor requires a quasicurial trial between the access seeker and the facility provider as adversarial parties, on new and different material, to determine whether a service should be declared”.151 The High Court framed the task of the Australian Competition Tribunal as follows: the Tribunal treated its task as being to decide afresh on the new body of evidence and material placed before it whether the services should be declared. That was not its task. Its task was to review the Minister’s decisions by reconsidering those decisions on the material before the Minister, supplemented, if necessary, by any information, assistance or report given to the Tribunal by the NCC in response to a request made under s 44K(6).152 146 CCA, ss 44ZZOAA(a)(iii). 147 CCA, s 44ZZOAA(a)(iv). 148 Application by Services Sydney Pty Limited [2005] ACompT 7, [9]. 149 (2012) 246 CLR 379. 150 The Pilbara Infrastructure Pty Ltd v Australian Competition Tribunal (2012) 246 CLR 379, 399. 151 The Pilbara Infrastructure Pty Ltd v Australian Competition Tribunal (2012) 246 CLR 379, 402. 152 The Pilbara Infrastructure Pty Ltd v Australian Competition Tribunal (2012) 246 CLR 379, 407.

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[12.320] The amendments made to Pt IIIA of the CCA, now make clear that the re-consideration is to be primarily based on the information before the original decision-maker. Although additional information may be provided by the NCC or the ACCC (as relevant) pursuant to a request from the Australian Competition Tribunal, the Explanatory Memorandum accompanying the amendments makes clear that this avenue for additional information to be provided is intended to be limited, stating that “it is expected that the review will still largely be limited to the information submitted to the original decision-maker”.153 The Explanatory Memorandum provided the following example of the nature of the information that the Australian Competition Tribunal might request from the NCC or the ACCC: The Tribunal might ask the NCC or ACCC to provide a report on an issue and direct that they consult with the parties or other relevant persons when preparing the report. For example, in reviewing an arbitration determination, the Tribunal may consider that a different model should be used to determine access prices. As this model was not used by the ACCC the parties would not have made any submissions on it to the ACCC. Further, parties could not make submissions to the Tribunal on the model as this would be new information, which the Tribunal can not consider under limited merits review … By directing the ACCC to make a report on the model and consult with parties the Tribunal would be able to consider the arguments of all relevant parties and the ACCC when making its decision.154

[12.330] The electricity and gas merits review frameworks limit the “matters” the Australian Competition Tribunal may consider when conducting a review. Prior to finding that a ground for review has been established (that is, that there is some kind of error in the decision), the Australian Competition Tribunal is prohibited from considering “any matter” other than: • “review related matter”; and • a matter arising out of the consultations it is required to conduct with users and prospective users of the relevant network services, and any user or consumer associations or interest groups. The term “review related matter” embraces the procedural documents that relate to the review and the material that was properly before the AER when it made its decision.155 153 Explanatory Memorandum, Trade Practices Amendment (Infrastructure Access) Bill 2009 (Cth), [1.117]. 154 Explanatory Memorandum, Trade Practices Amendment (Infrastructure Access) Bill 2009 (Cth), [1.119]. 155 NEL, s 71R(6) provides that “review related matter” means: (a) the application for review; (b) a notice raising new grounds for review filed by an intervener; (c) the submissions made to the Tribunal by the parties to the review; (d) decision related matter under section 28ZJ; and (e) any other matter properly before the Tribunal in connection with the relevant proceedings. Section 28ZJ defines “decision related matter” as: (a) the

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Once a ground for review has been established, the Australian Competition Tribunal has discretion to consider new information and material. This discretion is enlivened where the party seeking to provide the information to the Australian Competition Tribunal can establish that the information or material: • was publicly available or known to be available to the AER when it was making the reviewable regulatory decision; or • would assist the Australian Competition Tribunal on any aspect of the determination to be made and was not unreasonably withheld from the AER when it was making the reviewable regulatory decision.156 The information or material must also be information or material that the Tribunal considers the AER would reasonably have been expected to have considered when making the decision.157 Further, and also only after the Australian Competition Tribunal is of the view that a ground for review has been made out, the Tribunal may obtain information or material that would assist it to determine whether a “materially preferable” decision exists.158 A similar position on the limits of the information the review body could consider existed under the previous gas regulatory regime.159 However, the regime did not provide for any exceptions – the appeals body could only consider the matters that were listed in s 39(5) of Sch 1 to the Gas Pipelines Access (South Australia) Act 1997 (SA) (repealed). decision and the written record of it and any written reasons for it; (b) any document, proposal or information required or allowed under the Rules to be submitted as part of the process for the making of the decision; (c) any written submission made to the AER after the proposal to which the decision relates was lodged by a network service provider and before the decision was made; (d) any reports and materials (including (but not limited to) consultant reports, data sets, models or other documents) considered by the AER in making the decision; (e) any draft of the decision that has been released for consultation purposes; (f) any submissions on the draft of the decision or the decision itself considered by the AER; and (g) the transcript of any hearing (if any) conducted by the AER for the purpose of making the decision. The analogue provision in the NGL is s 261(7). 156 NEL, s 71R(3)(a) and (b). Note s 71R(4) provides that, subject to the NEL, for the purposes of s 71R(3)(b), information or material not provided to the AER following a request for that information or material by it under the NEL or the NER is taken to have been unreasonably withheld. For the analogue provisions in the NGL see, s 261(3a)(a) and (b), and (4). 157 NEL, s 71R(3); NGL, s 261(3a). 158 NEL, s 71R(5a). The Tribunal is only permitted to make a determination varying or setting aside the reviewable regulatory decision if it is satisfied that to do so will, or is likely to, result in a decision that is “materially preferable” to the reviewable regulatory decision in making a contribution to the achievement of the national electricity objective (termed a “materially preferable NEO decision”). For the analogue provision in the NGL, see s 261(3b). 159 Gas Pipelines Access (South Australia) Act 1997 (SA), Sch 1, s 39(5) (repealed).

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Remedies [12.340] The powers of the Australian Competition Tribunal in merits reviews under the National Access Regime in Pt IIIA of the CCA vary depending on the decision that is the subject of review, as set out in Table 12.3. Table 12.3 Powers of the Australian Competition Tribunal under CCA, Pt IIIA Decision Decision of the designated Minister to declare a service Decision of the designated Minister not to declare a service Decision of the designated Minister not to revoke a declaration Decision of the designated Minister that a service is ineligible to be a declared service Decision of the designated Minister that a service is not ineligible to be a declared service Decision of the designated Minister to revoke an ineligibility decision Decision of the designated Minister not to revoke an ineligibility decision Decisions of the Commonwealth Minister: that an access regime is an effective access regime; or to extend the period for which a decision that an access regime is an effective access regime is in force Decision of the ACCC to approve a tender process as a competitive tender process Decision of the ACCC to refuse to approve a tender process as a competitive tender process Decision of the ACCC to revoke a decision to approve a tender process as a competitive tender process because: the ACCC is satisfied that the assessment of the tenders was not in accordance with the tender process; or the provider of the service is not complying with the terms and conditions of access to the service Determination of the ACCC in an arbitration of an access dispute Decision of the ACCC not to register a contract for access to a declared service

Tribunal power Affirm, vary, or set aside the decision Affirm the decision, or set aside the decision and declare the service Affirm the decision, or set aside the decision and revoke the declaration Affirm, vary, or set aside the decision

CCA provision s 44K(7)

Affirm the decision, or set aside the decision and decide that the service is ineligible to be a declared service for a specified period Affirm or set aside the decision

s 44LJ(9)

s 44K(8) s 44L(6) s 44LJ(8)

s 44LK(8)

Affirm the decision, or set aside and revoke the decision

s 44LK(9)

Affirm, vary or reverse the decision

s 44O(6)

Affirm or set aside the decision

s 44PG(8)

Affirm the decision, or set aside and approve the tender process as a competitive tender process Affirm or set aside the decision

s 44PG(6)

Affirm or vary the determination Affirm the decision, or register the contract

s 44PH(6)

s 44ZP(6) s 44ZX(6)

12 Review of Regulatory Decisions Decision A decision of the ACCC on an access undertaking or access code, where the ACCC: accepted an undertaking or code; consented to the withdrawal of an undertaking or code; consented to the revocation or variation of a fixed principle; or extended the period for which an undertaking or code is in operation A decision of the ACCC on an access undertaking or access code, where the ACCC: rejected an undertaking or code; refused to consent to the withdrawal of an undertaking or code; refused to consent to the revocation or variation of a fixed principle; or refused to extend the period for which an access undertaking or access code is in operation

Tribunal power Affirm or set aside the decision

CCA provision s 44ZZBF(6)

Affirm the decision, or set aside the decision and accept the undertaking or code, consent to the withdrawal or variation of the undertaking or code, consent to the revocation or variation of the fixed principle or extend the period for which the undertaking or code is in operation

s 44ZZBF(7)

415

[12.350] Under the merits review provisions in the NEL and the NGL, a determination of the Tribunal may: • affirm the decision; • vary the decision; or • set aside the decision and remit the matter back to the AER to make the decision again in accordance with any direction or recommendation of the Australian Competition Tribunal.160 The making of a determination by the Australian Competition Tribunal is subject to a number of limitations. First, the Australian Competition Tribunal may only make a determination to vary, or to set aside the decision and remit the matter back to the AER, if it is satisfied that this will result in a decision that is materially preferable to the reviewable regulatory decision in making a contribution to the achievement of the national electricity objective or national gas objective as relevant. A materially preferable decision is referred to in the NEL as a “materially preferable NEO decision” and in the NGL as a “materially preferable NGO decision”.161 If the Tribunal is not satisfied that varying or remitting the decision will result in a materially preferable decision, it must affirm the AER’s decision.162 This prerequisite to the Tribunal making a determination varying, or setting aside and remitting a decision, was introduced as part of the amendments to the NEL and NGL in December 2013. The NEL and NGL provide some guidance on what matters do not, of themselves, determine whether a materially preferable decision exists. These are: • that a ground for review has been established; 160 NEL, s 71P(2); NGL, s 259(2). 161 NEL, s 71P(2a)(c); NGL, s 259(4a)(c). 162 NEL, s 71P(2a)(c); NGL, s 259(4a)(c).

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• the consequences for, or impacts on, the regulated revenue of the regulated network service provider arising from the ground for review that has been established; and • that the relevant financial threshold to obtain leave has been satisfied.163 The Australian Competition Tribunal applied the materially preferable decision threshold for the first time in a number of determinations made on 26 February 2016 relating to the NSW and ACT electricity distributors, and the NSW gas distributor. In interpreting the objectives of the NEL and the NGL, the Australian Competition Tribunal concluded that the objectives are based on the premise that the long term interests of consumers are “served through the promotion of efficient investment in, and efficient operation and use of, electricity and natural gas services”.164 The Australian Competition Tribunal further observed: This promotion is to be done “for” the long term interests of consumers. It does not involve a balance as between efficient investment, operation and use on the one hand and the long term interest of consumers on the other. Rather, the necessary legislative premise is that the long term interests of consumers will be served by regulation that advances economic efficiency.165

The Australian Competition Tribunal referred to the extrinsic material that accompanied the introduction of the materially preferable decision requirement and noted that the 2013 amendments contemplate that there may be more than one decision that is economically efficient,166 and as such, the correction of an error or errors in a decision may not necessarily lead to a materially preferable decision.167 The Australian Competition Tribunal found that the materially preferable decision threshold required an assessment of the AER’s decision as a whole and a comparison of the AER’s decision with a hypothetical alternative decision, and not just on whether there are errors in particular components of the decision.168 The Australian Competition Tribunal observed that the introduction of the materially preferable decision threshold does not override the requirement for decisions to be made in accordance with the NER and NGR.169 However, even if there has been some misapplication of the requirements of the NER or NGR, correction of that will not necessarily promote the objectives of the NEL or NGL. The Australian Competition Tribunal considered that this could be so where the AER had taken into account other matters which offset any adverse consequences of non-compliance 163 NEL, s 71P(2b)(d); NGL, s 259(4a)(d). 164 Applications by Public Interest Advocacy Centre Ltd and Ausgrid [2016] ACompT 1, [77]. 165 Applications by Public Interest Advocacy Centre Ltd and Ausgrid [2016] ACompT 1, [77]. 166 Applications by Public Interest Advocacy Centre Ltd and Ausgrid [2016] ACompT 1, [90]–[93]. 167 Applications by Public Interest Advocacy Centre Ltd and Ausgrid [2016] ACompT 1, [91]. 168 Applications by Public Interest Advocacy Centre Ltd and Ausgrid [2016] ACompT 1, [91]. 169 Applications by Public Interest Advocacy Centre Ltd and Ausgrid [2016] ACompT 1, [95].

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with rule requirements, or where the amounts involved would not impact in a material way on the objectives.170 In respect of the applications for review brought by the NSW electricity distributors, the Australian Competition Tribunal determined that the nature of the decisions made by the AER on a number of the topic areas raised in the applications and the consequences of those decisions was sufficient to satisfy the Tribunal that a determination setting aside and remitting the decisions back to the AER to be remade would, or would be likely to, result in a materially preferable national electricity objective decision. in the Networks NSW matters, the Tribunal’s conclusions on the grounds of review indicate that in significant respects the AER has formed its decision on foundations that are not properly established. Put another way, its decisions have been reached on complex factual bases and/or the exercise of discretions giving rise to very significant outcomes which, by reason of the Tribunal’s conclusions on the grounds of review, are not appropriate to support the ultimate decision of the AER. The Tribunal, in that light, is satisfied that it is appropriate to set aside the AER Networks NSW Final Decision and to remit them to the AER under s 71P(2)(c) of the NEL. In that way, the AER will better identify the appropriate revenue during the current regulatory control period for those entities to achieve the level of quality, safety, reliability and security of supply of electricity and of the national electricity system in the long term interests of consumers, and be in a better position then to also address the desirability of consumers not paying more than is necessary over the long term for those services.171

On 24 March 2016, the AER filed applications for judicial review of the determinations made by the Australian Competition Tribunal.172 These applications do not seek review of the approach taken by the Australian Competition Tribunal to the materially preferable decision requirement. At the time of writing those judicial review applications had not been heard or determined. The second limitation on the power of the Australian Competition Tribunal when making a determination is that the Tribunal may only make a determination varying the reviewable regulatory decision where it is satisfied that it will not require the Tribunal to undertake an assessment of

170 Applications by Public Interest Advocacy Centre Ltd and Ausgrid [2016] ACompT 1, [1179]. 171 Applications by Public Interest Advocacy Centre Ltd and Ausgrid [2016] ACompT 1, [1218]–[1220]. 172 Federal Court file numbers NSD 415 (Ausgrid), 416 (Essential Energy), 418 (Endeavour Energy), 419 (ActewAGL Distribution) of 2016. See also AER media release: AER, “AER Appeals Against Electricity and Gas Price Decisions” (Media Release, NR 05/16, 24 March 2016).

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such complexity that it would be preferable to set aside the decision and remit the matter to the AER to make the decision again.173 The NEL and NGL provide that, in connection with the operation of the provisions relating to when the Australian Competition Tribunal may make a determination to vary or remit the decision, the following matters are relevant: • the Tribunal must consider how the constituent components of the decision interrelate with each other and with the matters raised as a ground for review; • the Tribunal must take into account the revenue and pricing principles in the same manner the AER is required to; and • the Tribunal must, in assessing the extent of contribution to the achievement of the national electricity or gas objective (as relevant), consider the reviewable regulatory decision as a whole.

Time limits for making decisions [12.360] When conducting a review under the National Access Regime in Pt IIIA of the CCA, the Australian Competition Tribunal is required to make a decision on the review within the “consideration period”.174 The consideration period is a period of 180 days (termed the “expected period”) commencing at the start of the day the application for review is received.175 The consideration period can be extended.176 In calculating the expected period, various days are disregarded pursuant to “stopping the clock” provisions.177 [12.370] In conducting a merits review under the NEL or NGL, the Australian Competition Tribunal is required to use its best endeavours to make a determination within three months after the Tribunal grants leave (termed the “standard period”).178 The standard period may be extended.179 Review of Tribunal decisions [12.380] Judicial review may be sought of decisions of the Australian Competition Tribunal. The principles at [12.390] and following apply equally to judicial review of decisions of the Australian Competition Tribunal. A full court of the Federal Court hears judicial reviews of Tribunal decisions. 173 NEL, s 71P(2a)(d); NGL, s 259(4a)(d). 174 CCA, s 44ZZOA(1). 175 CCA, s 44ZZOA(2). 176 CCA, s 44ZZOA(7). 177 CCA, s 44ZZOA(3) – (5). 178 NEL, s 71Q(1); NGL, s 260(1). 179 NEL, s 71Q(4); NGL, s 260(4).

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JUDICIAL REVIEW [12.390] Judicial review of decisions under Pts IIIA and XIC of the CCA, and of determinations by the AER under the NEL and NGL, is available pursuant to the Administrative Decisions (Judicial Review) Act 1977 (Cth) (“ADJR Act”) and s 39B of the Judiciary Act 1903 (Cth). In respect of CCA, Pt IIIA and XIC, declarations and orders of prohibition, certiorari and mandamus may also be sought pursuant to s 163A of the CCA. Availability of judicial review under the ADJR Act [12.400] The ADJR Act provides generally for review of decisions of Commonwealth authorities. In order for the ADJR Act to apply, the decision must be a “decision to which this Act applies”.180 In respect of the decisions discussed in Chs 7, 8, 9 and 10 of this book the ADJR Act applies to: • decisions made under the National Access Regime in CCA, Pt IIIA; • decisions made under the telecommunications-specific access regime in CCA, Pt XIC; • decisions of the AER made under the NEL and the NGL as they are decisions of a Commonwealth authority or an officer of the Commonwealth made underthe various state and territory Acts that implement the NEL and the NGL which the ADJR Act specifically lists as enactments to which the ADJR Act applies.181 In the context of an electricity distribution determination, the Federal Court has considered whether the “decision” to which the ADJR Act applies is the distribution determination or the relevant “constituent decision” (that is, one of the decisions listed in cl 6.12.1 of the NER).182 While the Court found support for a view that each constituent decision is a “decision to which this Act applies” for the purposes of the ADJR Act, the Court considered that it ultimately did not matter whether the “decision” is the distribution determination or the constituent decision. This is because if the decision was the distribution determination, the relief the Court could grant under s 16 of the ADJR Act, if a ground for review had been established, would include setting aside part of that decision, comprising as much of it as was predicated upon the relevant constituent decisions. If the decision was the constituent decision, in setting aside the relevant constituent decision, it would be necessary to additionally set aside, by way of consequential relief, as much of the distribution determination as was predicated upon that constituent decision.183 180 ADJR Act, s 3. 181 ADJR Act, s 3 (definitions of “decision to which this Act applies” and “enactment”), and Sch 3, cll 2(daa) and (da). 182 Ergon Energy Corporation Ltd v Australian Energy Regulator [2012] FCA 393. 183 Ergon Energy Corporation Ltd v Australian Energy Regulator [2012] FCA 393, [21] (Logan J).

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Availability of judicial review under the Judiciary Act [12.410] Section 39B(1) of the Judiciary Act 1903 (Cth) provides that, subject to other matters stated in the section, the original jurisdiction of the Federal Court includes jurisdiction with respect to any matter in which a writ of Mandamus or prohibition or an injunction is sought against an officer or officers of the Commonwealth. Mandamus is a remedy directed at compelling the fulfillment of a duty of a public nature that has not been performed, and is also available to command the performance of the duty in accordance with law. Prohibition is directed at restraining a public officer from exceeding jurisdiction. Section 39B(1) draws upon s 75(v) of the Constitution, which provides that in all matters where a writ of mandamus or prohibition or an injunction is sought against an officer of the Commonwealth, the High Court has original jurisdiction. Mandamus and prohibition (also referred to as the “constitutional writs”) are only available for jurisdictional error. However, the grounds for issue of these writs are “not frozen”,184 which has arguably resulted in the circumstances in which such writs may issue being wider than strict jurisdictional error. For example, the High Court has held that prohibition may issue where there has been a denial of procedural fairness.185 Whatever the scope of the constitutional writs, s 39B of the Judiciary Act 1903 (Cth) is limited insofar as it is concerned with jurisdictional errors, and as such is more limited in scope than the grounds for review in the ADJR Act. For this reason, judicial review challenges to decisions of a decision-maker are typically brought under the ADJR Act, but may be brought on both the ADJR Act and s 39B of the Judiciary Act 1903 (Cth).186 The discussion below focusses on reviews under the ADJR Act.

Who can make an application for judicial review [12.420] A person who is “aggrieved” by a decision to which the ADJR Act applies may apply to the Federal Court187 for review of that decision.188 A person whose interests are adversely affected by the decision will be an “aggrieved” person.189 184 Re Refugee Review Tribunal; Ex parte Aala [2000] HCA 57, [164] (Hayne J). 185 Re Refugee Review Tribunal; Ex parte Aala [2000] HCA 57. 186 See for example: East Australian Pipeline Pty Limited v Australian Competition and Consumer Commission [2007] HCA 44, in particular the decision of Gummow and Hayne JJ at [70]–[72]. 187 The Federal Circuit Court of Australia also has jurisdiction to hear applications under the ADJR Act: ADJR Act, s 8(2). 188 ADJR Act, s 5(1). 189 ADJR Act, s 3(4)(a).

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The classes of persons who can seek merits review of a decision (see [12.270]) is considerably wider than the class of persons who may seek judicial review of the same decision. This is illustrated by a number of decisions concerning applications for merits review where the relevant merits review provisions previously provided that a person “adversely affected” by a decision could apply to the relevant appeals body for review of the decision. In applications for merits review brought by the Energy Users Association of Australia (“EUAA”) and the Energy Action Group (“EAG”) of a decision by the Minister to revoke coverage of a portion of the Moomba to Sydney gas pipeline, the Australian Competition Tribunal determined that these entities were not qualified applicants for review, as neither body was adversely affected by the decision of the Minister.190 The Australian Competition Tribunal did not consider that a consumer advocate organisation such as the EUAA and the EAG is “adversely affected” by a decision that relates to its objects and purposes and with which it disagrees on policy grounds. The Tribunal noted that the role of a consumer advocate organisation is not affected by an actual decision that is arrived at one way or the other and that each organisation is to be distinguished from individual members who will have varied, and perhaps competing, commercial and personal interests.191 The fact that there was scope for the participation of such organisations in the process up to the point of the Minister’s decision (and, in fact, that such organisations could even have sought revocation of coverage themselves) did not mean that they were adversely affected by the decision of the Minister.192 This position can be contrasted to that under the merits review provisions in the NGL discussed at [12.270], which provide that an “affected or interested person or body” may apply for review, with an affected or interested person or body including a user or consumer association and a person or body who has made a submission to the regulator in the regulatory determination process.

Grounds for review under the ADJR Act [12.430] There are three broad categories of action (or inaction) in respect of which an application for review may be made: 1. the making of a decision (see [12.440]); 2. conduct related to the making of a decision (see [12.450]); and 3. the failure to make a decision (see [12.460]). 190 Application by Orica IC Assets Ltd re Moomba to Sydney Gas Pipeline System [2004] ACompT 2, [1]. 191 Application by Orica IC Assets Ltd re Moomba to Sydney Gas Pipeline System [2004] ACompT 2, [12]. 192 Application by Orica IC Assets Ltd re Moomba to Sydney Gas Pipeline System [2004] ACompT 2, [14]–[16].

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Review of a decision

[12.440] The grounds for review of a decision are set out in s 5 of the ADJR Act. The grounds for review that are typically relevant to the regulatory decisions discussed in this book include:193 • a breach of the rules of natural justice; • procedures required to be observed in making of the decision were not observed; • the person who purported to make the decision did not have jurisdiction to make the decision; • the decision was not authorised by the enactment pursuant to which it was purported to be made; • the making of the decision was an improper exercise of the power conferred by the enactment pursuant to which it was purported to be made;194 • the decision involved an error of law; • there was no evidence or other material to justify the making of the decision; and • the decision was otherwise contrary to law. Review of conduct related to making of decisions

[12.450] A person who is aggrieved by the conduct of a person making a decision may seek review of that conduct pursuant to s 6 of the ADJR Act. Review may be brought on grounds that mirror those in s 5 of the ADJR Act, except that the grounds are expressed in a way that captures past and present conduct in respect of the decision being made, as well as conduct that is anticipated to occur. Failure to make decisions

[12.460] Section 7 of the ADJR Act provides for review where a person has a duty to make a decision and the person has failed to do so. Section 7 distinguishes between the circumstances in which the law prescribes a period within which the person is required to make the decision, and where the law does not prescribe a period. Where the law prescribes the period and the person has failed to make the decision before the expiration of that period, the ground for review is that the person has a duty to make the decision notwithstanding the expiration of the period.195 Where the law 193 ADJR Act, s 5(1)(a) – (j). 194 Section 5(2) of the ADJR Act provides that the reference to “improper exercise of a power” shall be construed as including a reference to, among other things: taking an irrelevant consideration into account in the exercise of a power; failing to take a relevant consideration into account in the exercise of a power; and an exercise of a power that is so unreasonable that no reasonable person could have so exercised the power. 195 ADJR Act, s 7(2).

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does not prescribe the period, the ground for review is that there has been unreasonable delay in making the decision.196

Manner of making applications under the ADJR Act [12.470] An application under the ADJR Act must: • be made in the manner as is prescribed by the Federal Court Rules;197 • set out the grounds of the application; and • be lodged with a Registry of the Court.198 In general terms, an application for review must be made within 28 days after the decision is given to the applicant.199

Parties to a proceeding under the ADJR Act [12.480] A person interested in the decision or conduct that is the subject of an application for review under the ADJR Act may apply to the Federal Court to be made a party to the application.200 The Court has discretion whether to grant (either unconditionally or subject to such conditions as it thinks fit) or refuse the application.201 Parties to a judicial review process will usually be persons or entities with some self-interest at stake in the actual outcome of the case. In order to become a party to a judicial review proceedings the interest in the proceedings must be a direct interest that is particular to the person or entity seeking to be a party to the review. That is, the interest must be more than a general interest, such as one that any member of the public may have.202 The case of Pilbara Infrastructure Pty Ltd v Australian Competition Tribunal [2010] FCA 1118, discussed in Box 12.3, considered whether the interest of two entities was sufficient for them to be parties to a judicial review of an Australian Competition Tribunal determination.

196 ADJR Act, s 7(1). 197 The current form is Form 66 for both the Federal Court and the Federal Circuit Court and can be located on the Federal Court’s website: . For the Federal Court, see also the requirements in Ch 3 of the Federal Court Rules 2011. For the Federal Circuit Court, see also the requirements in the Federal Circuit Court Rules 2001, Ch 1, Pt 4 and Ch 6, Pt 42. 198 ADJR Act, s 11(1). 199 ADJR Act, s 11(3). 200 ADJR Act, s 12(1). 201 ADJR Act, s 12(2). 202 United States Tobacco Company v Minister for Consumer Affairs (1988) FCR 520, 526–530.

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Box 12.3: What is sufficient interest? Fortescue Metals Group (Ltd) (“Fortescue”) sought declaration of rail facilities that BHP Billiton Iron Ore Pty Ltd and BHP Billiton Minerals Pty Ltd (“BHPB”) and Rio Tinto Ltd (“RTIO”) use to transport iron ore from mines in the Pilbara region of Western Australia to port. The relevant facilities to which access was sought included: • use of the Robe and Hammersley rail facilities, owned by RTIO; and • use of the Goldsworthy railway and Mt Newman railway line, owned by BHPB. The decision of the designated Minister (in these matters, the Treasurer) was: • to declare the Robe facility for a period of 20 years; • to declare the Hammersley facility for a period of 20 years; • to declare the Goldsworthy facility for a period of 20 years; and • not to declare the Mt Newman facility. RTIO sought review by the Australian Competition Tribunal of the Treasurer’s decisions in respect of the Robe and Hammersley facilities; BHPB sought review of the Treasurer’s decision in respect of the Goldsworthy facility; and Fortescue sought review of the Treasurer’s decision not to declare the Mt Newman facility. The Australian Competition Tribunal: • affirmed the decision of the Treasurer in relation to the BHPB facilities; • varied the decision of the Treasurer in respect of the Robe facility so that the declaration only applied for 10 years; and • set aside the decision of the Treasurer to declare the Hammersley facility. Fortescue, by way of judicial review to the Federal Court, challenged the determination of the Tribunal with respect to the RTIO facilities only (Robe and Hammersley). BHPB applied to be made a party to the applications, despite there being no judicial review proceedings on foot in respect of BHPB’s railways. Kenny J held that BHPB was a “person interested”: The term “interested person” is not a restrictive criterion and signifies “an involvement with a case greater than the concern of a person who is a mere intermeddler or busybody”: United States Tobacco Company v Minister

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for Consumer Affairs. Further, the requisite “interest” is not confined to a legal, proprietary, financial or other tangible interest: see United States Tobacco and Ogle v Strickland. The expression covers a person who has an interest in the decision complained of “beyond that which he or she has as an ordinary member of the public”: see Tooheys Ltd v Minister for Business and Consumer Affairs.203

Kenny J accepted that the matters raised in the judicial review proceedings had a real potential to be significant for BHPB’s legal and business interests in respect of the Goldsworthy and Mt Newman railways.

Effect of an application for judicial review on the operation of the decision [12.490] Making an application for judicial review of a decision to the Federal Court does not affect the operation of the decision or prevent the taking of action to implement the decision.204 However, the court or a judge may suspend the operation of the decision and may order a stay of all or any proceedings under the decision.205 Such an order may be made on the application of the person seeking review or by the court or a judge of its or his or her own motion.206

Discretion to refuse to grant an application for review under the ADJR Act [12.500] The right to make an application to the Federal Court under the ADJR Act is in addition to any other rights that a person has to seek review, including by another court or tribunal.207 Therefore, for example, an electricity network service provider could seek judicial review of a decision of the AER under the ADJR Act and merits review of that decision under the NEL. However, the Federal Court has a discretion to refuse to grant an application made under the ADJR Act where adequate provision is made by a law other than the ADJR Act for review, including by another court or tribunal.208 Boxes 12.4 and 12.5 set out two examples of where the Federal Court indicated that it would be appropriate to refuse relief under the ADJR Act on the basis that the merits review mechanism in the NEL provided an adequate remedy.

203 Pilbara Infrastructure Pty Ltd v Australian Competition Tribunal [2010] FCA 1118, [9]. 204 ADJR Act, ss 15(1) and 15A(1). 205 ADJR Act, ss 15(1)(a) and (b) and 15A(1)(a) and (b). 206 ADJR Act, ss 15(2) and 15A(2). 207 ADJR Act, s 10(1)(a). 208 ADJR Act, s 10(2)(b).

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Box 12.4: ActewAGL Distribution v The Australian Energy Regulator In ActewAGL Distribution v The Australian Energy Regulator (2011) 195 FCR 142, ActewAGL (an electricity distributor) sought judicial review of the distribution determination made by the AER that regulated prices for distribution services provided by ActewAGL in the ACT for the 2009–14 period. The review sought by ActewAGL related to the AER’s decision on the averaging period during which the risk-free rate (an input into the cost of capital building block) was observed. In essence, ActewAGL considered that the averaging period that was used resulted in a rate of return that did not account for the impact of the global financial crisis.209 The AER argued that the Court should exercise its discretion under the ADJR Act to refuse to grant ActewAGL’s application because ActewAGL could have sought merits review of the decision before the Australian Competition Tribunal but chose not to do so.210 Katzmann J found that merits review under the NEL provides an adequate alternative remedy to judicial review under the ADJR Act, including because: • the grounds for review are very broad, and in fact broader than those under the ADJR Act; • when the Australian Competition Tribunal hears a matter it is constituted by a Federal Court judge and by two lay members with specialist expertise in industry, commerce and economics; • the Australian Competition Tribunal has greater powers than the Federal Court under the ADJR Act, including the power to vary the decision it is reviewing; and • judicial review may be sought of decisions of the Australian Competition Tribunal.211 As such, Katzmann J concluded that the appropriate forum for ActewAGL to seek review of the AER’s decision was before the Australian Competition Tribunal. The decision concluded: It is clear from the terms of the NEL that parliament envisaged that in the normal course, if there were to be a challenge to the correctness of a

209 ActewAGL Distribution v The Australian Energy Regulator (2011) 195 FCR 142, 146. 210 ActewAGL Distribution v The Australian Energy Regulator (2011) 195 FCR 142, 146. 211 ActewAGL Distribution v The Australian Energy Regulator (2011) 195 FCR 142, 184.

12 Review of Regulatory Decisions decision of the AER, including the exercise of its discretion, then that would be heard by the Tribunal. Here, ActewAGL chose not to exercise its statutory right to apply to the Tribunal. In all the circumstances, and particularly when so much time has passed, it is fair that it be held to the consequences of that decision.212

Box 12.5: SPI Electricity Pty Ltd v Australian Energy Regulator In SPI Electricity Pty Ltd v Australian Energy Regulator [2014] FCA 1012, Foster J considered whether the Federal Court should withhold relief under the ADJR Act in circumstances where not only did SPI have a right of appeal to the Tribunal, but it had also exercised these rights and had not obtained relief.213 The AER submitted that the Court should not consider grounds for review that, in substance, SPI had raised before the Australian Competition Tribunal and which the Tribunal had not accepted. The AER also submitted that the Court should only consider grounds for review that could not be raised in the proceedings before the Tribunal.214 Specifically, the AER submitted that the Court should not consider SPI’s arguments that the AER’s decision was an improper exercise of power (pursuant to ss 5(1)(e) and 6(1)(e) of the ADJR Act) because the AER: took an irrelevant consideration into account in the exercise of that power; failed to take a relevant consideration into account in the exercise of that power; or acted unreasonably in the exercise of that power. The AER argued that each of these matters were available to be pursued by SPI in the appeal before the Australian Competition Tribunal under the general ground of material error of fact.215 Foster J accepted the AER’s submissions. Foster J went on to conclude that the AER’s decision was not affected by any reviewable error, but, even if he had come to a different view, he would have exercised his discretion under s 10(2)(b)(ii) of the ADJR Act to refuse to grant any relief to SPI based upon the grounds in ss 5(1)(e) and 6(1)(e).216

212 ActewAGL Distribution v The Australian Energy Regulator (2011) 195 FCR 142, 185. 213 SPI Electricity Pty Ltd v Australian Energy Regulator [2014] FCA 1012, [53]. 214 SPI Electricity Pty Ltd v Australian Energy Regulator [2014] FCA 1012, [54]. 215 SPI Electricity Pty Ltd v Australian Energy Regulator [2014] FCA 1012, [55]. 216 SPI Electricity Pty Ltd v Australian Energy Regulator [2014] FCA 1012, [57].

427

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Access Regulation in Australia

Remedies [12.510] The powers of the Federal Court in respect of applications for order of review are set out in s 16 of the ADJR Act. Where the review is in relation to a decision, the Federal Court may make all or any of the following orders: • an order quashing or setting aside the decision, or a part of the decision; • an order referring the matter to which the decision relates to the person who made the decision for further consideration, subject to such directions as the Court thinks fit; • an order declaring the rights of the parties in respect of any matter to which the decision relates; and/or • an order directing any of the parties to do, or to refrain from doing, any act or thing the doing, or the refraining from the doing, of which the court considers necessary to do justice between the parties.217 Where the application is in respect of conduct that has been, is being, or is proposed to be engaged in for the purpose of making a decision, the Federal Court may make either or both of the following orders: • an order declaring the rights of the parties in respect of any matter to which the conduct relates; and/or • an order directing any of the parties to do, or to refrain from doing, any act or thing.218 Where the application relates to a failure to make a decision, the Federal Court may make all or any of the following orders: • an order directing the making of the decision; • an order declaring the rights of the parties in relation to the making of the decision; and/or • an order directing any of the parties to do, or to refrain from doing, any act or thing.219

SUMMARY [12.520] Access-related decisions can have significant commercial implications for both access providers and access seekers. These decisions may impose legal requirements on access providers to provide access to third parties, and also set the terms and conditions of access. Terms and conditions of access may include how much the access seeker is required to pay for the services, and, consequently, the maximum amount of revenue that an access provider is entitled to earn from the provision of services. 217 ADJR Act, s 16(1)(a) – (d). 218 ADJR Act, s 16(2)(a), (b). 219 ADJR Act, s 16(3)(a) – (c).

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In light of the significance of access-related decisions, the ability to seek merits and/or judicial review of these decisions is an important feature of third party access regimes in Australia. Merits review considers whether the decision of the original decisionmaker is the correct and preferable decision. Judicial review is concerned with whether the decision of the original decision-maker was made in accordance with the law. The national access regime in Part IIIA of the CCA, and the electricity and gas regimes in the NEL and NGL, provide for merits review of access-related decisions by the Australian Competition Tribunal. The telecommunications-specific access regime in Part XIC of the CCA previously provided for merits review of decisions of the ACCC, however, merits review under Part XIC is no longer available. Judicial review of access-related decisions is more widely available than merits review, however, the grounds for review are narrower and, as such, greater use is typically made of merits review. Judicial review may also be sought of decisions of the Australian Competition Tribunal.

Questions for discussion 1. Should merits review of access-related decisions be provided for? What are the benefits and detriments of providing for merits review of such decisions? 2. If merits review is to be provided for, should it be “limited” in any way (for example, by restricting the review body to the materials that were before the regulator when it made its decision)? What incentives do these types of limits place on the regulator and participants in the regulatory process? 3. What are the key differences between merits review and judicial review?

Appendix A: Merits Reviews of Revenue and Pricing Determinations under the National Electricity Law and National Gas Law [A.10] Merits review of electricity revenue and pricing determinations has been available under the National Electricity Law1 since 1 January 2008. During the period 1 January 2008 to 30 April 2016, the Australian Energy Regulator (“AER”) made 31 electricity distribution and transmission determinations.2 Of these, 19 have been appealed to the Australian Competition Tribunal (“Tribunal”) and, of those, 14 have been finalised by the Tribunal. The outstanding matters include applications for review made by the New South Wales/Australian Capital Territory distribution network service providers. The Tribunal made its determinations in these matters on 26 February 2016. On 24 March 2016, the AER applied to the Federal Court for judicial review of the Tribunal’s determinations seeking orders that the Tribunal’s decision be set aside and the matters referred back to the Tribunal for further consideration.3 Merits review of gas access arrangement decisions4 under the National Gas Law has been available since 1 July 2008 (in Western Australia, since 1 January 2010).5 During the period 1 July 2008 to 30 April 2016, the AER has made 14 access arrangement decisions under the National Gas Law. Of these, eight have been appealed to the Australian Competition Tribunal. All 1 The National Electricity Law is set out in the Schedule to the National Electricity (South Australia) Act 1996 (SA) and has been adopted in all states and territories, except Western Australia: see [8.40]. 2 This excludes transmission determinations made by the AER in respect of the transmission services provided by the Australian Energy Market Operator in Victoria (previously provided by VENCorp) pursuant to National Electricity (Victoria) Act 2005 (Vic), s 32. 3 Federal Court file numbers NSD 415 (Ausgrid), 416 (Essential Energy), 418 (Endeavour Energy), 419 (ActewAGL Distribution) of 2016. 4 Other than access arrangement decisions that do not approve a full access arrangement: National Gas Law, s 44. 5 The National Gas Law is set out in the Schedule to the National Gas (South Australia) Act 2008 (SA) and has been adopted in all states and territories: see [9.30].

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of these applications have been finalised with the exception of the application made by Jemena Gas Networks (NSW) in respect of its 2015-20 access arrangement period. The Tribunal made its determination in this matter at the same time as the New South Wales/Australian Capital Territory electricity matters mentioned above, and the AER has also sought judicial review of the determination made in respect of Jemena Gas Networks (NSW).6 The Economic Regulation Authority in Western Australia has made three gas access arrangement decisions in respect of gas pipelines under the National Gas Law and merits review was sought in relation to all of those decisions. The Tribunal’s decision in the ATCO Gas (WA) (Mid-West and South-West gas distribution system) matter is pending. Details of the decisions made by the AER and the ERA to which the merits review provisions in the National Electricity Law and National Gas Law applied, together with an indication of whether merits review was sought of those decisions and, if so, in respect of what issues, are set out in Table A1. Table A1 Revenue / pricing decisions in respect of which the merits review provisions in National Electricity Law or National Gas Law applied Network/pipeline

Date of regulatory decision

Electricity transmission networks SP AusNet (Vic) 31 January 2008 ElectraNet (SA) 11 April 2008 TransGrid (NSW/ACT)

28 April 2009

Transend (Tas) 28 April 2009 Powerlink (Qld) 30 April 2012 Murraylink (SA/Vic) 30 April 2013 ElectraNet (SA) 30 April 2013 AusNet Services (SP 31 January 2014 AusNet) (Vic) TransGrid (NSW/ACT) 30 April 2015 TasNetworks (Tas) 30 April 2015 Directlink (NSW/Qld) 30 April 2015 Electricity distribution networks ActewAGL (ACT) 28 April 2009 Country Energy (NSW) 28 April 2009 (now Essential Energy) 6 Federal Court file number NSD20/2016.

Application for merits review made and, if so, issues raised No Yes – valuation of easements Yes – rate of return, defect maintenance expenditure Yes – rate of return No No No No No No No No Yes – rate of return

Merits Reviews of Revenue and Pricing Determinations ...

Network/pipeline

Date of regulatory decision

EnergyAustralia (NSW) (now Ausgrid)

28 April 2009

Integral Energy (NSW) (now Endeavour Energy) Energex (Qld)

28 April 2009

Ergon Energy (Qld)

6 May 2010

6 May 2010

ETSA Utilities (SA) (Now 6 May 2010 SA Power Networks) Citipower (Vic)

29 October 2010

Powercor (Vic)

29 October 2010

SPI Electricity (Vic) (Now 29 October 2010 AusNet Services)

Jemena Electricity Networks (Vic)

29 October 2010

433

Application for merits review made and, if so, issues raised Yes – rate of return, operating expenditure, public lighting Yes – rate of return Yes – assumed value of imputation credits Yes – assumed value of imputation credits, labour cost escalators, capital expenditure, service target performance incentive scheme, classification of services (street lighting) Yes – value of imputation credits, valuation of easements Yes – value of imputation credits, rate of return, indexation of the regulatory asset base, incentive schemes, operating expenditure Yes – value of imputation credits, rate of return, indexation of the regulatory asset base, incentive schemes, operating expenditure Yes – value of imputation credits, rate of return, indexation of the regulatory asset base, incentive schemes Yes – value of imputation credits, rate of return, indexation of the regulatory asset base, operating expenditure, capital expenditure

434

Access Regulation in Australia

Network/pipeline

Date of regulatory decision

United Energy Distribution (Vic)

29 October 2010

Aurora Energy (Tas) (Now TasNetworks) ActewAGL (ACT)

30 April 2012

Ausgrid (NSW)

30 April 2015

Essential Energy (NSW)

30 April 2015

30 April 2015

Endeavour Energy (NSW) 30 April 2015

Energex (Qld) 29 October 2015 Ergon Energy (Qld) 29 October 2015 SA Power Networks (SA) 29 October 2015

Application for merits review made and, if so, issues raised Yes – value of imputation credits, rate of return, indexation of the regulatory asset base, incentive schemes No Yes – value of imputation credits, rate of return, operating expenditure, metering services classification, metering expenditure, service target performance incentive scheme Yes – value of imputation credits, rate of return, operating expenditure, metering, efficiency benefit sharing scheme, control mechanism Yes – value of imputation credits, rate of return, operating expenditure, efficiency benefit sharing scheme, control mechanism Yes – value of imputation credits, rate of return, operating expenditure, efficiency benefit sharing scheme, control mechanism No No Yes – value of imputation credits, rate of return, operating expenditure, capital expenditure, inflation

Merits Reviews of Revenue and Pricing Determinations ...

Network/pipeline

Date of regulatory decision

Gas distribution networks Country Energy (Wagga 23 April 2010 Wagga, NSW) (now owned by Australian Gas Networks, and no longer a covered pipeline) ActewAGL (ACT) 27 April 2010 Jemena Gas Networks 28 June 2010 (NSW)

435

Application for merits review made and, if so, issues raised No

WA Gas Networks (WA) (now ATCO Gas)

28 April 2011

APT Allgas (Qld) (now Allgas Energy and now subject to light regulation) Envestra (Qld) (now Australian Gas Networks and now subject to light regulation) Envestra (SA) (now Australian Gas Networks) Multinet (Vic)

30 June 2011

Yes – rate of return Yes – value of imputation credits, rate of return, mine subsidence expenditure, deduction of the weighted average cost of capital associated with estimated capital expenditure, reference services agreement Yes – value of imputation credits, rate of return, inflation rate to apply to initial capital base, operating expenditure, capital expenditure, tariff variation mechanism and terms and conditions Yes – rate of return

30 June 2011

Yes – rate of return

7 July 2011

Yes – rate of return, operating expenditure and capital expenditure Yes – opening capital base/capital expenditure No

SP Ausnet (Vic) (now AusNet Services) Envestra (Vic) Envestra (Albury) Jemena Gas Networks (NSW)

29 April 2013 29 April 2013 29 April 2013 29 April 2013 3 June 2015

No No Yes – value of imputation credits, rate of return, capital expenditure

436

Access Regulation in Australia

Network/pipeline

Date of regulatory decision

ATCO Gas (WA)

10 September 2015

Gas transmission pipelines Amadeus Gas Pipeline 27 July 2011 (NT) Dampier to Bunbury 22 December 2011 Pipeline (WA)

Roma to Brisbane (Qld) APA GasNet (Vic)

27 August 2012 29 April 2013

Application for merits review made and, if so, issues raised Yes – value of imputation credits, rate of return, operating expenditure, capital expenditure, depreciation, reference tariff variation mechanism No Yes – rate of return, inflation rate to apply to initial capital base, capital expenditure, operating expenditure, specification of reference services, terms and conditions, coverage of expansions No Yes – rate of return, interval of delay, capital base, depreciation

[A.20] Although approximately two-thirds of reviewable regulatory decisions have been the subject of merits review, these merits reviews tend to relate only to discrete issues within the regulator’s decision. That is, the regulator’s decisions comprise many elements and merits review is generally only taken with respect to a limited number of those elements. It is this fact that has led critics of the merits review process to label it as “cherry picking” by network applicants – applying for merits review of aspects of the decision only for which there is a strong case.7 The majority of the merits reviews have related to rate of return issues, such as the correct measurement of a component in the WACC formula (for example, the debt risk premium or the market risk premium). These issues are generally of significant commercial importance as they tend to have revenue impacts in the order of tens of millions of dollars.

7 Allan Fels, The Merits Review Provisions in the Australian Energy Laws, March 2012, 51.

Index A ACCC — see Australian Competition and Consumer Commission (ACCC) Access agreements telecommunications, ..... [10.390], [10.480] hierarchy of regulatory documents, ............................................... [10.510] terms and conditions of access, ............................................... [10.390] written statement to ACCC, . [10.480] Access and Pricing Regulator (APR) recommendation for, ........ [6.150], [9.290] Access arrangements gas — see Gas access arrangements Access determinations ACCC power to make, .................... [6.20] AER, ...................... [8.180], [8.200], [8.530] building block model codified in, . [5.30] electricity, .............. [8.180], [8.200], [8.530] “have regard to” requirement, ..... [6.280] merits review, .................. [12.60], [12.250] purposes of, ..................................... [6.240] relevant considerations, ................. [6.290] telecommunications — see Telecommunications access determinations Access disputes arbitration — see Arbitration determination — see Access determinations electricity, .......................................... [8.530] termination, ...................................... [8.530] vexatious, .......................................... [8.530] Access regulation alternatives to, ....................... [3.50]–[3.90] application of, ...................... [3.190], [7.60] Australian regimes, ......................... [3.110] benefits to community, ................... [3.190] building block model — see Building block model competition law and, ....................... [1.20] complexity, ....................................... [3.190]

cost-based — see Cost-based access regulation costs of, ............................................. [3.190] CPI-X price caps, ............................. [4.180] debate over framework, .................. [1.10] definition, ........................................... [1.20] electricity — see Electricity essential facilities, ........................... [3.100] forms of, ................... [1.20], [4.10], [4.160] gas — see Gas implementation in Australia, ......... [1.10], [3.110] inappropriate application of, ........ [3.190] key access regimes, ......................... [7.110] market failure, addressing, . [1.20], [3.20] national regime — see National Access Regime objectives, ........................... [3.120]–[3.180] origins, .............................................. [3.100] overview, .................... [1.10], [1.20], [3.10] price caps, ........................................ [4.180] “problem” addressed by, ..... [3.10], [3.20] promotion of competition, .............. [1.20] regulatory bodies — see Regulatory bodies retail-minus approach, ................... [4.170] summary, .......................................... [3.200] telecommunications — see Telecommunications time involved, .................................. [3.190] total factor productivity (TFP) method, ................................................. [4.180] uncertainty, ....................................... [3.190] what is, ............................................... [1.20] Access undertakings acceptance by ACCC, ........ [5.30], [6.210], [7.30], [7.250] “have regard to” requirement, ................................................. [6.280] prescribed method, ................... [6.270] procedure, .................................. [7.260] review of decision, .................... [7.260] time limit, ................................... [7.260] assessment by ACCC, ...... [7.260], [7.270] factors to be considered, .......... [7.270] review recommendations, ....... [7.320] time limit, ................................... [7.260] building block model, ...................... [5.30] draft decision to reject, .................. [7.260] framework for acceptance, ............ [6.270] interests to be considered, ............. [7.270]

438

Access Regulation in Australia

Access undertakings — cont more than one application, ........... [7.260] National Access Regime, .. [6.210], [7.30], [7.250] procedure, .................... [7.260], [7.270] use of, .......................................... [7.310] National Electricity Code lodged as, ................................................... [8.80] number of applications/decisions, ................................................. [7.310] obtaining access after, .................... [7.280] arbitration process, ..... [7.290], [7.300] pre-lodgment discussions, ............. [7.260] pricing principles, consideration of, ................................................. [7.270] procedure, ............................ [7.30], [7.260] propose/respond intervention model, ................................... [6.200], [6.210] public interest, ................................. [7.270] publication on ACCC website, ..... [7.260] rail networks ARTC interstate, ....... [3.110], [11.300], [11.450] Hunter Valley, ............ [3.110], [11.340] NSW rail network, .................. [11.350] QCA undertakings, ................. [11.320] review of ACCC decision, ............. [7.260] review of Tribunal decision, ......... [7.260] submission by infrastructure owners, ................................................. [7.250] telecommunications — see Telecommunications access undertakings terms and conditions of access, setting out, ......................................... [7.250] third party gaining access by, ......... [7.30] time limits, ....................................... [7.260] voluntary submission of, ............... [7.250] wheat terminal operators, ............. [11.90] AER — see Australian Energy Regulator (AER) Airports ACCC powers, .................................. [6.20] essential facilities, ........................... [3.100] Allocative efficiency definition, ......................................... [2.110] efficient market outcomes, ............. [2.140] perfect competition, .................. [2.160] maximisation, ................................... [2.110] monopoly and, ................................ [2.180] supply and demand and, .............. [2.140]

Alternatives to access regulation do nothing, ............................. [3.50], [3.60] government ownership, ....... [3.50], [3.70] market failure, addressing, ............. [3.50] options, ............................................... [3.50] overview, ................................ [3.10], [3.50] price monitoring, .................. [3.50], [3.80] s 46 Competition and Consumer Act, ................................................... [3.60] vertical separation, ............... [3.50], [3.90] Arbitration merits review of determinations, ... [6.60] re-arbitration of matter, ......... [12.200] National Access Regime, under, . [6.180], [7.40], [7.280] ACCC, by, ....... [6.180], [7.280]–[7.300] draft determination, ................. [7.290] factors to consider, .................... [7.290] final determination, .................. [7.300] flexible process, ......................... [7.300] interim determination, ............. [7.290] limits on determinations, ........ [7.290] manner of conducting, ............. [7.300] notice of dispute, ........ [7.280], [7.290] number of applications/decisions, ................................................. [7.310] process, ....................................... [7.290] review of determinations, ....... [7.300] rules of evidence and procedure not applicable, ............................ [7.300] time limit for determination, .. [7.290] negotiate/arbitrate intervention model, ................................................. [6.170] move away from, .... [10.180], [10.400] National Access Regime, ........ [6.180], [6.210], [7.40] propose/respond model combined with, ...................................... [6.210] telecommunications access regime, ................................. [6.190], [10.180] telecommunications access disputes, ................................. [6.190], [10.160] complaints about, .................... [10.170] move from negotiate/arbitrate model, ............................... [10.180], [10.400] publication of determinations, ............................................... [10.160] Artificially reduced prices barriers to entry and expansion, .. [2.200] breach of Competition and Consumer Act, ........................................ [2.200] Asset base definition, ........................................... [5.50]

Index Asset base — cont valuation — see Valuation of asset base Australian and New Zealand Minerals and Energy Council (ANZMEC) Carnegie report on gas industry, ... [9.50] Australian Competition and Consumer Commission (ACCC) AER and, ............................................ [6.30] arbitration of access disputes, ...... [6.180] building block model used by, ....... [5.20] access determinations, ............... [5.30] cost of debt, ................................ [5.150] revenue allowance, ................... [5.210] valuation of Telstra assets, ....... [5.60], [5.90] east coast gas market inquiry, ...... [9.310] establishment, .................................... [6.20] Gas Reform Taskforce, ..................... [9.70] National Access Regime, views on, ................................................. [7.350] positively tilted annuity, ................ [5.110] powers and functions, ..................... [6.20] regulatory discretion, ........ [6.250]–[6.300] “have regard to” requirement, ................................................. [6.280] prescription of methods, .......... [6.270] relevant considerations, ........... [6.290] subject matter of decision, ...... [6.300] review of decisions, .............. [6.20], [6.60] merits review — see Merits review time limits on decision making, .... [7.80], [7.100] undertakings to — see Access undertakings Australian Competition Tribunal certification decisions, review of, . [7.260] declaration decisions, review of, .. [7.140] differences between original and current regime, .................................... [7.80] establishment, .................................... [6.60] judicial review of decisions, ....... [12.380] merits review by — see Merits review powers of, .. [6.60], [7.80], [7.100], [7.330], [12.340] regulatory discretion, ........ [6.250]–[6.300] role, ...................................................... [6.60] time limits for decisions, .. [7.80], [7.100], [12.360] Australian Constitution telecommunications power, .......... [10.10]

439

Australian Council for Competition Policy (ACCP) recommendation for, ...................... [6.150] Australian Energy Market Commission (AEMC) establishment, ....... [6.40], [8.100], [8.110], [9.100] functions, ................ [6.40], [8.100], [8.110] gas access regime discussion paper on pipeline regulation, ............................ [9.330] review, ......................................... [9.320] rule-making role, ....................... [9.100] members, .......................................... [8.100] regulatory discretion, ........ [6.250]–[6.300] rule making, ....................................... [6.40] electricity, ........ [8.100], [8.120], [8.230] form of regulation factors, ...... [8.240] gas, ............................................... [9.100] Australian Energy Regulator (AER) ACCC and, ......................................... [6.30] building block model used by, ....... [5.20] economic regulatory function or power, ................................................. [9.150] efficiency benefit sharing scheme, ................................... [4.140], [5.280] electricity regulation, ........... [1.70], [6.30], [8.110], [8.140] access determinations, ............ [8.180], [8.200] contribution to achieving national objective, ............................... [8.190] distribution determinations — see Distribution determinations (electricity) economic regulatory functions, ................................................. [8.180] exemptions, .................. [8.150], [8.180] functions and powers, ............. [8.180] information-gathering powers, ................................................. [8.210] investigating breaches, ............. [8.180] merits review, .............. [8.130], [8.520] monitoring compliance, ........... [8.180] reviewable regulatory decisions, ................................................. [8.200] transmission determinations — see Transmission determinations (electricity) establishment, ....... [6.30], [8.100], [8.110], [9.100] functions and powers, ................... [8.180] contribution to achieving NEL objective, ............................... [8.190]

440

Access Regulation in Australia

Australian Energy Regulator (AER) — cont NEL setting out, ........... [6.30], [8.110], [8.180] gas regulation, .......... [1.70], [6.30], [9.10], [9.100] assessment of access arrangement proposals, ............................. [9.150] economic regulatory function or power, ................................... [9.150] information-gathering powers, .... [4.140], [8.210] members, .......................................... [8.100] Rate of Return Guideline, ............ [8.340], [8.350], [8.380] refusal to provide information to, ................................................. [8.210] regulatory discretion, ....... [6.250]–[6.300], [8.100] permissive or mandatory language, ................................................. [6.260] regulatory information notice (RIN), ................................... [4.140], [8.220] regulatory information order (RIO), ................................... [4.140], [8.220] review of decisions, .............. [6.30], [6.60] judicial review, ............. [6.30], [8.520], [12.500] merits review — see Merits review: electricity and gas decisions role, .......................... [6.30], [8.100], [8.110] state energy laws, powers under, .. [6.30] Australian Rail Track Corporation (ARTC) interstate rail networks operated by, ............................................... [11.300] access undertaking, ... [3.110], [11.300] [11.450]

B

Barriers to entry and expansion artificially reduced prices, ............. [2.200] cost structures, ................................. [2.200] customer loyalty or “stickiness”, . [2.200] economies of scale, ......................... [2.200] high sunk costs, .................. [2.60], [2.200] legal barriers, ................................... [2.200] market power, assessing, ................. [3.30] market structure and, ..................... [2.200] patents, .............................................. [2.200] perfect competition where none, . [2.200] raised input costs, ........................... [2.200] regulatory requirements, ............... [2.200] strategic barriers, ............................ [2.200]

Benchmarking advantages and disadvantages, ... [4.200] category level, .................................. [8.470] economic, .......................................... [8.470] electricity service providers, ......... [8.470] AER Expenditure Forecast Assessment Guidelines, ..... [8.470] forecasting operating expenditure, ................................... [8.460], [8.470] ex post check for cost-based regulation, ................................................. [4.200] information asymmetry, reducing, ................................................. [4.200] international, .................................... [4.200] operating costs, ................. [5.190], [8.470] overview, .......................................... [4.200] telecommunications services, ........ [4.200] workable competition as benchmark, ................................................. [2.170] Binding rules of conduct (BROCs) telecommunications, .... [10.180], [10.390], [10.500] ACCC may make, ................... [10.390] general or limited application, ............................................... [10.500] hierarchy of regulatory documents, ............................................... [10.510] matters to be considered, ...... [10.410] NBN-specific, ........................... [10.500] purpose, .................................... [10.500] restrictions on, ......... [10.420], [10.500] terms and conditions of access, ............................... [10.390], [10.500] urgent matters, dealing with, ............................... [10.180], [10.500] Building block model access prices determined by, ......... [4.100] asset base, ........................................... [5.50] electricity, ...................... [8.280]–[8.320] valuation of, ................... [5.50]–[5.100] basic principle, .................................. [5.10] benchmarking and, ......................... [4.200] codification in regulatory instruments, ................................................... [5.30] core building blocks, ............ [5.10], [5.40] operating costs, ............. [5.40], [5.190] return of capital, ........... [5.40], [5.110], [5.120] return on capital, ....................... [5.40], [5.130]–[5.180] taxation allowance, ....... [5.40], [5.200] depreciation of value of asset base, ................................................. [5.110]

Index Building block model — cont acceleration, ................................ [5.110] choice of methodology, ............ [5.120] deferral, ....................................... [5.110] electricity, .................................... [8.360] National Gas Rules (NGR) criteria, ................................................. [5.120] straight line basis, ..................... [5.110] efficiency incentives, ......... [5.270], [5.280] electricity, ................ [4.100], [5.30], [8.270] building blocks, ......................... [8.270] depreciation, .............................. [8.360] gas compared, ........................... [9.170] regulatory asset base, . [8.280]–[8.320] return on capital, ......... [8.330]–[8.350] gas, ............. [4.100], [5.30], [9.160]–[9.210] building blocks, ......................... [9.160] conforming capital expenditure, ................................................. [9.170] depreciation criteria, .. [5.120], [9.160], [9.180] incentive mechanisms, ............. [9.190] National Gas Rules (NGR), ...... [5.30], [5.120] operating expenditure, ............. [9.200] return on projected capital base, ................................................. [9.170] total revenue, ............................. [9.210] incentive mechanisms, ..... [5.260]–[5.310] bespoke mechanisms, ............... [5.310] efficiency, ....................... [5.270], [5.280] gas, ............................................... [9.190] service standards, ....... [5.290], [5.300] inflation, ............................................ [5.220] valuation of asset base adjusted for, ................................................... [5.90] key components, ............................... [5.40] operating and maintenance costs, ..................................... [5.40], [5.190] overview, .................... [1.50], [5.10], [5.20] regulatory period, ............................. [5.10] return of capital, .................. [5.40], [5.110] core building block, .................... [5.40] depreciation, ................. [5.110], [5.120] return on capital, ............... [5.130]–[5.180] core building block, .................... [5.40] cost of capital, ............................ [5.130] cost of debt, .................. [5.150], [5.160] cost of equity, ............................. [5.170] efficient costs of supply, ............. [4.90] electricity, ...................... [8.330]–[8.350] rate of return, .............. [5.130], [5.140] regulated rate of return, variability, ................................................. [5.180] return on debt, .......................... [5.130] return on equity, ....................... [5.130]

441

revenue allowance, ......................... [5.200] adjustments, ................. [5.240], [5.250] sectors requiring use of, ................ [4.100] service standard incentives, ......... [5.290], [5.300] summary, .......................................... [5.320] taxation allowance, ............. [5.40], [5.200] adjustments, ................. [5.240], [5.250] electricity, .................................... [8.370] telecommunications access determinations, ...... [5.30], [10.450] total revenue requirement, ............ [5.230] TSLRIC+ methodology compared, ................................................. [4.100] valuation of asset base, ...... [5.50]–[5.100] choice of methodology, .. [5.60], [5.70] depreciation, ................. [5.110], [5.120] initial valuation, .............. [5.60]–[5.80] value over time, .......................... [5.90] Bulk wheat terminals — see Wheat export industry

C Capital expenditure electricity — see Electricity: annual revenue requirements tests of prudence and efficiency, .. [5.100] valuation of asset base, updating for, ................................................. [5.100] Capital expenditure incentive scheme (CESS) electricity, .......................................... [8.410] asset base valuation and, ........ [8.290], [8.300] revenue increments or decrements from, ...................................... [8.410] Certification Competition Principles Agreement amendment, proposed, ............ [7.240] application assessed against, .... [7.30] discretion of Minister, .................... [7.240] dispute resolution, .......................... [7.240] guidelines for, .................................. [7.240] interstate issues, .............................. [7.240] Minister’s decision, ............. [7.30], [7.230] National Access Regime, ... [7.30], [7.230] use of, .......................................... [7.310] National Competition Council (NCC) public consultation, ...... [7.30], [7.230] recommendation, ...................... [7.230]

442

Access Regulation in Australia

Certification — cont negotiation framework, ................. [7.240] number of applications/decisions, ................................................. [7.310] principles, ......................................... [7.240] procedure, ............................ [7.30], [7.230] promoting terms and conditions of access, .................................... [7.240] scope of regime, .............................. [7.240] state and territory access regimes, ................................................. [7.230] efficiency, determining, ............ [7.240] third party gaining access by, ......... [7.30] Certiorari judicial review seeking, ............... [12.390] Common costs definition, ........................................... [2.50] overhead costs, .................................. [2.50] regulated utilities, ............................. [2.50] Competition access regulation promoting, .......... [1.20] declaration of services, criterion for, ................................... [7.170], [7.180] definition of market, ................. [7.180] differences between original and current regime, ...................... [7.80] interpretation of, ....................... [7.180] material increase, promoting, ................................... [7.170], [7.180] proposed changes, .................... [7.340] review of, .......... [7.90], [7.310], [7.320] separate dependent markets, .. [7.180] “with” or “without” assessment, ................................................. [7.180] dependant markets, in cost-based pricing promoting, .. [4.70] effective competition, ..................... [2.170] Hilmer Report — see Hilmer Report infrastructure-based competition, ................................................. [10.10] market structure and degree of, ... [2.200] National Competition Policy (NCP), ................................................. [3.100] natural monopolies and, ................ [2.190] perfect competition, .......... [2.160], [2.200] telecommunications industry declaration of services where lack of, ................................................. [10.10] facilities-based competition, .... [10.10] infrastructure-based competition, ................................................. [10.10] workable competition, ................... [2.170]

Competition and Consumer Act 2010 (Cth) general access regime (Pt IIIA) — see National Access Regime price surveillance under — see Price monitoring s 46 as alternative to access regulation, ................................................... [3.60] telecommunications access regime (Pt XIC) — see Telecommunications Competition and Infrastructure Reform Agreement (CIRA) National Access Regime revisions, ................................................. [7.100] overview, .......................................... [11.70] port infrastructure, .......................... [11.70] rail infrastructure, ......................... [11.290] Competition law ex ante application of, ...................... [1.20] Competition Principles Agreement (CPA) amendment, proposed, .................. [7.240] certification applications assessed against, .................................... [7.30] national access regime, providing for, ................................................. [3.100] public interest in declaration, assessment of, ........................................... [7.220] Competitive tenders ACCC approval, ................................ [7.30] most favourable access terms, ........ [7.90] National Access Regime, ................. [7.30] insertion of provisions in, ......... [7.90] use of, .......................................... [7.310] number of applications/decisions, ................................................. [7.310] third party gaining access by, ......... [7.30] Consider/determine intervention model access determinations, ................... [6.240] overview, .......................................... [6.230] telecommunications access regime, ................... [6.190], [6.240], [10.180] Cost access regulation, of, ...................... [3.190] common costs, ................................... [2.50] debt, of, ............................... [5.150], [5.160] economic concepts, ............... [2.20]–[2.80] efficient cost, ........................... [2.80], [4.10] equity, of, .......................................... [5.170] fixed costs

Index Cost — cont cost-based access regulation, .... [4.80] long-run or short-run, ................ [2.30] recovery of, .................................. [4.80] long-run cost of supply, ................... [2.30] definition, ..................................... [2.30] fixed or variable, ......................... [2.30] marginal cost, .............................. [2.40] matching access price with, ...... [2.30] marginal cost, .................................... [2.40] marginal unit, .................................... [2.40] opportunity cost, ............................... [2.70] short-run cost fixed or variable, ......................... [2.30] long-run distinguished, ............. [2.30] marginal cost, .............................. [2.40] sunk costs, .......................................... [2.60] natural monopoly where high, ..................................... [2.60], [2.190] productive efficiency and, ....... [2.150] Cost-based access regulation Australian system, .......................... [4.100] average cost, ...................................... [4.80] benchmarking and, ......................... [4.200] building block model — see Building block model competition, promoting, .................. [4.70] dependant markets, in, .............. [4.70] sustainably low prices, .............. [4.70] cost recovery, providing for, ........... [4.30] drawbacks, .......................... [4.110]–[4.150] benefits outweighing, ............... [4.150] incentive issues, .......... [4.120], [4.130] information requirements, ....... [4.140] resource requirements, ............. [4.150] efficient costs of supply, ................... [4.90] prices based on, ............... [4.10], [4.90] recovery of, .................................. [4.30] electricity, .............................. [1.70], [4.100] efficiency benefit sharing scheme (EBSS), ....... [4.140], [5.280], [8.400] ex post review of expenditure, ..................... [4.120], [8.280], [8.290] “gold plating” concerns, .......... [4.120] ex ante scrutiny of forecast cost, .. [4.120] ex post review of expenditure, ..... [4.120] benchmarking used as, ............ [4.200] fixed costs, recovery of, ................... [4.80] forecast costs, using, ....................... [4.120] assessment of prudence and efficiency, ............................... [4.130] gas, ..................................................... [4.100] efficient costs, ............................... [4.90] ex post review of expenditure, ................................................. [4.120]

443

pricing principles, ........... [4.80], [4.90] implementation in practice, ..................................... [4.80]–[4.100] incentive issues, .............................. [4.120] incentive schemes, .......................... [4.140] information asymmetry, ................. [4.140] information-gathering powers, ..... [4.140] legal basis, ........................................ [4.100] main form in Australia, ...... [1.20], [4.10], [4.210] marginal cost, .................................... [4.80] measure of cost efficient vs actual cost, ............... [4.90] forecast costs, ............... [4.120], [4.130] marginal vs average cost, .......... [4.80] multi-part tariffs, ............................... [4.80] objectives of access regulation inability to achieve, .................... [4.40] promoting, .................................... [4.20] over-investment, incentive for, ..... [4.120] overview, .................... [1.20], [1.50], [4.10] Ramsey pricing, ................................. [4.80] rationale for, ........................... [4.20]–[4.70] regulated infrastructure efficient investment in, promoting, ................................................... [4.50] efficient use of, promoting, ....... [4.60] regulatory contract, .......................... [4.30] resource requirements, ................... [4.150] telecommunications, ....... [4.100], [10.460] TSLRIC+ methodology, .. [4.100], [10.460] Council of Australian Governments (COAG) Agreement to Implement the NCP and Related Reforms, ................... [9.60] ANZ Minerals and Energy Council report for, ............................... [9.50] Australia Energy Market Agreement, ................................................. [9.100] Competition and Infrastructure Reform Agreement, ............. [7.100], [11.70] Competition Principles Agreement, ................................................... [9.60] Conduct Code Agreement, .............. [9.60] electricity reforms, ................ [8.60], [8.70] Energy Market Review (Parer Review), ..................................... [8.90]–[8.110] government response, .. [6.40], [8.100] gas industry reforms, ........... [9.50]–[9.80] intergovernmental agreements, ...... [9.60] National Grid Management Council (NGMC), ..................... [8.60], [8.70] Natural Gas Pipelines Access Agreement, ................................................... [9.80]

444

Access Regulation in Australia

CPI-X price caps overview, .......................................... [4.180] profit sharing combined with, ...... [4.190] setting value of X, ........................... [4.180] total factor productivity (TFP) method compared, ............................. [4.180]

D

Debt cost of, ................................. [5.150], [5.160] cases relating to, ........................ [5.160] choice of data source, ............... [5.160] credit rating, .............................. [5.150] measurement period, ............... [5.160] term to maturity, ....................... [5.150] return on, .......................................... [5.130] benchmark assumption, ........... [8.350] cost of debt, .................. [5.150], [5.160] debt management strategy, ..... [8.350] electricity, ...................... [8.340], [8.350] interest rate risk, ....................... [8.350] “on-the-day” method, .............. [8.340] refinancing risk, ......................... [8.350] “trailing average” method, ..... [8.350] Declaration of services application for, .................... [7.40], [7.140] assessment, ................................. [7.140] definition of service, ................. [7.140] number of applications made, ................................................. [7.310] preparation, ................................ [7.140] publication on NCC website, . [7.140] submission, ................................ [7.140] who may make, ......................... [7.140] assessment of profitability, ............ [7.190] competition criterion, ....... [7.170], [7.180] definition of market, ................. [7.180] differences between original and current regime, ...................... [7.80] interpretation of, ....................... [7.180] material increase, promoting, ................................... [7.170], [7.180] proposed changes, .................... [7.340] review of, .......... [7.90], [7.310], [7.320] separate dependent markets, .. [7.180] “with” or “without” assessment, ................................................. [7.180] criteria for, ................. [7.20], [7.40], [7.60], [7.170]–[7.220] application explaining how met, ................................................. [7.140] consideration of, ........................ [7.170]

differences between original and current regime, ...................... [7.80] interpretation of, .......... [7.190]–[7.220] nationally significant, .... [7.20], [7.40], [7.170], [7.200] promoting competition, ............ [7.40], [7.80], [7.90], [7.170], [7.180] proposed changes, .................... [7.340] public interest, .... [7.40], [7.60], [7.80], [7.170], [7.220] requirement to satisfy all, ........ [7.170] review of, ......... [7.90], [7.100], [7.320], [7.330] state or territory access regime, not subject to, . [7.100], [7.170], [7.210] uneconomic to duplicate, ......... [7.40], [7.80], [7.170], [7.190] electricity networks, ......................... [8.80] essential facilities, ................. [7.50], [7.60] Hilmer Report, .................................. [7.60] ineligibility of proposed new infrastructure facility application by interested person, ................................................. [7.100] gas regime compared, .............. [7.100] period of ineligibility, ............... [7.100] initiation of process, ............. [7.30], [7.40] merits review — see also Merits review Australian Competition Tribunal, by, ....................... [6.60], [7.140], [12.50] grounds, .................................... [12.200] who may apply, ...................... [12.250] Minister’s decision, ............. [7.40], [7.140] publication of, ................ [7.30], [7.140] review of, .................................... [7.140] time limit, ................................... [7.140] National Access Regime, .... [7.10], [7.40], [7.130]–[7.220] review and amendment, ........... [7.90], [7.100] use of, .......................................... [7.310] National Competition Council (NCC) assessment of application, ....... [7.140] Declaration Guide, .................... [7.190] publication of application, ...... [7.140] recommendation, ........... [7.30], [7.40], [7.60] time limit for decisions, ........... [7.140] nationally significant facilities, ...... [7.20], [7.40], [7.170], [7.200] importance to constitutional trade or commerce, ............................ [7.200] importance to national economy, ................................................. [7.200] interpretation of criterion, ....... [7.200] proposed changes, .................... [7.340]

Index Declaration of services — cont size, .............................................. [7.200] number of applications/decisions, ................................................. [7.310] obtaining access after, ........ [7.40], [7.280] arbitration process, ..... [7.290], [7.300] Port of Newcastle shipping channel, ................................................. [7.220] procedure, ............................ [7.30], [7.140] request for, ................................... [7.30] protection of legitimate interests, .. [7.60] public interest criterion, ...... [7.40], [7.60], [7.170], [7.220] CPA, assessment against, ........ [7.220] differences between original and current regime, ...................... [7.80] interpretation of, ....................... [7.220] Pilbara Case, .............................. [7.220] proposed changes, .................... [7.340] review of criterion, ..... [7.310], [7.320] publication of application, ............ [7.140] publication of Minister’s decision, ..................................... [7.30], [7.140] review of decisions merits review, .. [6.60], [7.140], [12.50] Minister’s decision, ................... [7.140] time limit to apply, ................... [7.140] right of access, creating, ...... [7.20], [7.70] right to negotiate, creating, ........... [7.130] setting terms and conditions after, ....................................... [7.40], [7.70] state or territory access regime, not subject to, . [7.100], [7.170], [7.210] effective access regime, ............ [7.210] interpretation of criterion, ....... [7.210] proposed changes, .................... [7.340] review of criterion, ................... [7.310] telecommunications — see Telecommunications: declaration of services third party gaining access by, ......... [7.30] stages, ............................................ [7.40] time limits, .......................... [7.140]–[7.160] aim to improve efficiency, ....... [7.160] extension of, ............................... [7.150] introduction of, ............. [7.80], [7.100], [7.140] length of process prior to imposition of, ........................................... [7.160] “stopping the clock”, ............... [7.150] uneconomic to duplicate criterion, ....................... [7.40], [7.170], [7.190] assessment of profitability, ...... [7.190] differences between original and current regime, ...................... [7.80] interpretation of, ....................... [7.190]

NCC Declaration Guide, ......... Pilbara Case, ................ [7.220], private profitability test, .......... proposed changes, .................... review of, ...................... [7.310],

445 [7.190] [9.130] [7.190] [7.340] [7.320]

Demand management incentive scheme (DMIS) carryover amount, .......................... [8.430] electricity DNSPs, ........................... [8.430] objective, ........................................... [8.430] Demand management innovation allowance (DMIA) electricity DNSPs, ........................... [8.430] objective, ........................................... [8.430] Depreciated optimised replacement cost (DORC) asset base valuation method, ......... [5.60], [5.80] advantages and disadvantages, ................................................... [5.80] electricity networks, ................... [5.80] gas pipelines, ............................... [5.80] Depreciation of value of asset base acceleration, ...................................... [5.110] choice of methodology, .................. [5.120] deferral, ............................................. [5.110] electricity, .......................................... [8.360] National Gas Rules (NGR) criteria, ................................................. [5.120] return of capital, .............................. [5.110] straight line basis, ........................... [5.110] Determinations — see Access determinations Dispute resolution certification guidelines, .................. [7.240] Gas Code (former), ........................... [9.90] rail access regime (Vic), ............... [11.360] Distribution determinations (electricity) AER, by, ................ [8.180], [8.200], [8.250] definition, ......................................... [8.160] draft determination, ....................... [8.480] final determination, ........................ [8.480] forecast operating expenditure, .... [8.470] forms of control mechanism, ........ [8.250] framework and approach paper, ................................... [8.480], [8.490] imputation credit estimates, ......... [8.370]

446

Access Regulation in Australia

Distribution determinations (electricity) — cont merits review, ...... [8.130], [8.520], [12.50] procedure, ........................... [8.480]–[8.520] regulated operator to comply with, ................................................. [8.160] regulatory proposal, .......... [8.10], [8.480], [8.500] revenue and pricing principles, ... [8.200] review rights, ................................... [8.520] reviewable regulatory decisions, .. [8.200] revised proposal, ............................. [8.510] time limits, ....................................... [8.480] DNSP — see Electricity distribution Dynamic efficiency adaptability, ...................................... [2.120] definition, ......................................... [2.120] efficient market outcomes, ............. [2.150] maximisation, .................................. [2.120] monopoly and, ................................ [2.180]

E Economic concepts allocative efficiency, .......... [2.110], [2.140], [2.180] common costs, ................................... [2.50] consumer surplus, .......................... [2.140] cost concepts, ......................... [2.20]–[2.80] dynamic efficiency, ........... [2.120], [2.150], [2.180] effective competition, ..................... [2.170] efficiency concepts, .............. [2.90]–[2.120] efficient cost, ........................... [2.80], [4.10] efficient market outcomes, ................................... [2.130]–[2.150] long-run v short-run costs, ............. [2.30] marginal costs, ................................... [2.40] monopoly, ......................................... [2.180] natural monopoly, ... [1.20], [2.60], [2.190] opportunity cost, ............................... [2.70] overview, ............................................ [2.10] perfect competition, .......... [2.160], [2.200] producer surplus, ............................ [2.140] productive efficiency, ........ [2.100], [2.150] summary, .......................................... [2.220] sunk costs, .............. [2.60], [2.150], [2.190] supply and demand, ........ [2.140], [2.150] total surplus, .................................... [2.140] vertical integration, ......................... [2.210] workable competition, ................... [2.170] Economic Regulation Authority of Western Australia (ERA) establishment, .................................. [6.120]

gas regulated by, ............................... [9.10] ports not regulated by, ................. [11.260] powers and functions, ................... [6.120] Economies of scale barriers to entry and expansion, .. [2.200] natural monopoly, ........................... [2.190] Efficiency allocative efficiency, ......................... [2.110] efficient market outcomes, ....... [2.140] monopoly and, .......................... [2.180] perfect competition, .................. [2.160] building block model incentive mechanisms, ........... [5.270], [5.280] dynamic efficiency, ............ [2.120], [2.150] efficient market outcomes, ....... [2.150] monopoly and, .......................... [2.180] economic concepts, ............. [2.90]–[2.120] efficient market outcomes, ................................... [2.130]–[2.150] allocatively efficient, ... [2.140], [2.160] dynamically efficient, ............... [2.150] perfect competition, .................. [2.160] productively efficient, ............... [2.150] supply and demand and, ........ [2.140] long-term interests of consumers and, ................................................. [3.170] productive efficiency, ........ [2.100], [2.150] technical efficiency, ......................... [2.100] Efficiency benefit sharing scheme (EBSS) electricity, .............. [4.140], [5.280], [8.400] incremental efficiency gains, ......... [8.400] operation of, ..................................... [8.400] revenue increments or decrements from, ................................................. [8.400] Efficient costs cost-based regulation, ...................... [4.90] prices based on, ............... [4.10], [4.90] recovery of, .................................. [4.30] definition, ........................................... [2.80] examples, ............................................ [4.90] gas pipelines, ..................................... [4.90] recovery of, ........................................ [4.30] remuneration of service provider based on, ............................................ [2.80] Electricity access determinations, .... [8.180], [8.200], [8.530] access disputes, ............................... [8.530] AER — see also Australian Energy Regulator (AER)

Index Electricity — cont access determinations, ............ [8.180], [8.200] distribution determinations — see Distribution determinations (electricity) functions and powers, ............. [8.180] regulated by, ...... [1.70], [6.30], [8.110], [8.140] transmission determinations — see Transmission determinations (electricity) annual revenue requirements — see Electricity: annual revenue requirements complexity of regulatory regime, ... [8.10] cost-based access regulation, ......... [1.70], [4.100] building block model — see Electricity: annual revenue requirements “gold plating” concerns, .......... [4.120] declaration of services, .................... [8.80] direct control network services, .. [8.130], [8.200], [8.250] access determinations, ............. [8.200] distribution services, ................ [8.250] form of regulation factors in making rules, ...................................... [8.240] opportunity to recover costs, .. [8.190] pricing principles, ..................... [8.190] distribution — see Electricity distribution efficiency benefit sharing scheme (EBSS), ..................... [4.140], [5.280], [8.400] electricity supply chain, ................... [8.30] end users, ........................................... [8.30] ERA (WA) role, ................................ [6.120] essential facilities, ........................... [3.100] exemptions from registration, ...... [8.150] deemed exemptions, ................. [8.150] registrable exemptions, ............ [8.150] forms of regulation, ........................ [8.130] gas regime compared, ...... [9.170], [9.220] generation, .......................................... [8.30] major owners of generation capacity, ................................................... [8.30] retailers vertically integrated with interests in, ............................. [8.30] scope of NEL, ............................ [8.140] history of access regulation, .......... [8.20], [8.40]– 1990s reform, 8.50] importance of access regulation, .... [1.10] Industry Commission Energy

447

Distribution and Generation Report 1991, ........................... [8.50] interconnectors, ................................. [8.30] regulated, ...................................... [8.30] unregulated, ................................. [8.30] merits review — see Merits review: electricity and gas decisions micro-embedded generators, .......... [8.30] national access regime, ... [3.110], [3.140], [7.110], [8.10], [8.20] complexity, ................................... [8.10] history of, ............ [8.20], [8.40]–[8.130] MCE reforms, ............... [8.100], [8.110] overview, ........................ [8.20], [8.140] price and/or revenue regulation, ................................................... [8.20] propose/respond intervention model, ................................................. [6.220] National Electricity Code access undertaking, lodged as, . [8.80] authorisation by ACCC, ............ [8.80] drafting of, ................................... [8.70] National Electricity Law — see National Electricity Law (NEL) National Electricity Market (NEM), ....................... [3.110], [3.140], [8.20] National Electricity Rules — see National Electricity Rules (NER) National Grid Management Council (NGMC), ..................... [8.60], [8.70] negotiated network services, ........ [8.130] form of regulation factors in making rules, ...................................... [8.240] network failure in New Zealand, .. [4.50] Northern Territory, ............ [3.110], [6.130] overview, ................................ [1.70], [8.20] Parer Review, ........... [6.40], [8.90]–[8.110] propose/respond intervention model, ................................................. [6.220] regulatory information instruments, ................................................. [8.220] retail supply, ...................................... [8.30] retailers, .............................................. [8.30] purchase of “use of system” services, ................................................... [8.30] scope of NEL, ............................ [8.140] vertical integration with interests in generation, .............................. [8.30] revenue and pricing principles, ... [8.190] AEMC rules to take account of, ................................................. [8.240] AER determinations to take account of, ........................................... [8.200] incentives to promote economic efficiency, ............................... [8.190]

448

Access Regulation in Australia

Electricity — cont NEL containing, ......... [3.140], [8.140], [8.190] opportunity to recover costs, .. [8.190] regulatory asset base, regard to, ................................................. [8.190] revenue and pricing regulation, ..... [8.20] review of decisions judicial review — see Judicial review merits review — see Merits review: electricity and gas decisions rule making by AEMC, ..... [6.40], [8.100], [8.120], [8.230] form of regulation factors, ...... [8.240] summary, .......................................... [8.540] supply chain, ..................................... [8.30] transmission — see Electricity transmission vertical integration, ............. [2.210], [8.30] Western Australia, ............. [3.110], [6.120] merits review, .......................... [12.120] Electricity: annual revenue requirements AER Expenditure Forecast Assessment Guidelines, ........................... [8.470] AER Rate of Return Guideline, ... [8.340], [8.350], [8.380] benchmarking, ................... [8.460], [8.470] building block model, ....... [4.100], [5.30], [8.270] building blocks, ......................... [8.270] gas compared, ........................... [9.170] general principles — see Building block model capital expenditure incentive scheme (CESS), .................................. [8.410] asset base valuation and, ........ [8.290], [8.300] revenue increments or decrements from, ...................................... [8.410] capital expenditure objectives, ..... [8.310] cost-based access regulation, ......... [1.70], [4.100] “gold plating” concerns, .......... [4.120] depreciation, .................................... [8.360] efficiency benefit sharing scheme (EBSS), ..................... [4.140], [5.280], [8.400] revenue increments or decrements from, ...................................... [8.400] estimated cost of corporate income tax (ETCt), ................................... [8.370] ex post review of expenditure, .... [4.120], [8.280], [8.290] forecast capital expenditure, ......... [8.310] acceptance by AER, .................. [8.310] approved forecast amounts, .... [8.310]

building block proposal, .......... [8.310] capital expenditure criteria, .... [8.310] capital expenditure objectives, ................................................. [8.310] ex post review, ............ [4.120], [8.280], [8.290] incentives not to overspend, .. [8.290], [8.300] forecast operating expenditure, ................................... [8.450]–[8.470] acceptance by AER, .... [8.450], [8.460] AER Expenditure Forecast Assessment Guidelines, ..... [8.470] “base-step-trend” approach, ... [8.470] base year, .................................... [8.460] benchmarking, ............. [8.460], [8.470] building block proposal, .......... [8.450] distribution determinations, ... [8.470] factors to be considered by AER, ................................................. [8.460] operating expenditure criteria, ................................................. [8.450] operating expenditure objectives, ................................................. [8.450] incentive schemes, revenue increments or decrements from, ................ [8.390] capital expenditure incentive scheme (CESS), .................................. [8.410] demand management incentive scheme (DMIS), ................... [8.430] demand management innovation allowance (DMIA), ............. [8.430] efficiency benefit sharing scheme (EBSS), ................................... [8.400] operating expenditure incentive schemes, ................................ [8.400] service target performance incentive scheme (STPIS), ................... [8.420] small scale incentive scheme, . [8.440] income tax liability estimate, ........ [8.370] indexation of asset base, ................ [8.320] operating expenditure objectives, ................................................. [8.450] past capital expenditure disallowed, ................................................. [8.300] capitalisation requirement, ...... [8.300] margin requirement, ................. [8.300] regulatory asset base, ....... [8.280]–[8.320] capital expenditure incentives, ................................... [8.290], [8.300] depreciation, .............................. [8.360] distribution system, .................. [8.280] ex post review of capital expenditure, ..................... [4.120], [8.280], [8.290] forecast capital expenditure, ... [8.310]

Index Electricity: annual revenue requirements — cont general principles — see Valuation of asset base indexation, .................................. [8.320] inflation, ........................ [8.300], [8.320] past capital expenditure disallowed, ................................................. [8.300] roll forward model, .... [8.280], [8.300] transmission system, ................ [8.280] return on capital, ............... [8.330]–[8.350] AER Rate of Return Guideline, ................................... [8.340], [8.350] allowed rate, .............................. [8.330] general principles — see Return on capital leverage/gearing, ...................... [8.330] regulatory determinations, ...... [8.350] weighting, ................................... [8.330] return on debt, .................. [8.340], [8.350] benchmark assumption, ........... [8.350] cost of debt, .................. [5.150], [5.160] debt management strategy, ..... [8.350] general principles, .................... [5.130] interest rate risk, ....................... [8.350] “on-the-day” method, .............. [8.340] refinancing risk, ......................... [8.350] “trailing average” method, ..... [8.350] return on equity, ............................. [8.340] cost of equity, ............................. [5.170] general principles, .................... [5.130] Sharpe–Lintner Capital Asset Pricing Model (SL CAPM), ............ [5.170], [8.340] service target performance incentive scheme (STPIS), ..... [5.290], [8.420] taxation allowance, ......................... [8.370] AER Rate of Return Guideline, ................................................. [8.380] distribution determinations, ... [8.380] estimated cost of corporate income tax (ETCt), ............................ [8.370] general principles — see Taxation allowance imputation credits, estimate of, ................................................. [8.380] Electricity distribution access determinations, .... [8.180], [8.200], [8.530] access disputes, ............................... [8.530] alternative control services, .......... [8.250] forms of control mechanism, .. [8.250] annual revenue requirements — see Electricity: annual revenue requirements

449

cost-based access regulation, ......... [1.70], [4.100] building block model — see Electricity: annual revenue requirements direct control network services, .. [8.130], [8.200], [8.250] access determinations, ............. [8.200] alternative control services, .... [8.250] form of regulation factors in making rules, ...................................... [8.240] opportunity to recover costs, .. [8.190] price and revenue regulation, ................................................. [8.250] pricing principles, ..................... [8.190] standard control services, ........ [8.250] distribution determinations, ........ [8.200], [8.250], [8.480] AER, by, .......... [8.180], [8.200], [8.250] definition, ................................... [8.160] forecast operating expenditure, ................................................. [8.470] forms of control mechanism, .. [8.250] framework and approach paper, ................................... [8.480], [8.490] imputation credit estimates, ... [8.370] merits review, ............. [8.130], [8.520], [12.50] procedure, ..................... [8.480]–[8.520] regulated operator to comply with, ................................................. [8.160] regulatory proposal, .... [8.10], [8.480], [8.500] revenue and pricing principles, ................................................. [8.200] review rights, ............................. [8.520] reviewable regulatory decisions, ................................................. [8.200] revised proposal, ....................... [8.510] time limits, ................................. [8.480] distribution network service provider (DNSP), ....................... [8.10], [8.30] annual revenue — see Electricity: annual revenue requirements classification of services provided, ................................................. [8.250] demand management incentive schemes (DMIS), ................. [8.430] demand management innovation allowance (DMIA), ............. [8.430] exemptions from registration, ................................................. [8.150] incentives to promote economic efficiency, ............................... [8.190] opportunity to recover costs, .. [8.190] registered DNSPs, ....................... [8.30]

450

Access Regulation in Australia

Electricity distribution — cont regulatory asset base — see Electricity: annual revenue requirements regulatory proposal, .... [8.10], [8.480], [8.500] retailers purchasing “use of system” services from, ......................... [8.30] service target performance incentive scheme (STPIS), ................... [8.420] distribution networks, ........ [3.140], [8.30] declaration of services, .............. [8.80] micro-embedded generators, .... [8.30] scope of NEL, ............................ [8.140] electricity supply chain, ................... [8.30] negotiated network services, ....... [8.130], [8.250] form of regulation factors in making rules, ...................................... [8.240] lighter regulation, ..................... [8.250] NER provisions dealing with, ...... [8.250] overview, ............................................ [8.30] regulated distribution system operator definition, ................................... [8.160] distribution determination, compliance with, ................. [8.160] economic regulation by AER, . [8.180] regulatory information instrument served on, ............................. [8.220] regulation of services, .................... [8.250] regulatory control periods, ............ [8.480] regulatory information instruments, ................................................. [8.220] regulatory proposal, .......... [8.10], [8.480], [8.500] revenue or pricing determination, ................................................. [8.530] scope of NEL, .................................. [8.140] scope of NER, .................................. [8.250] standard control services, .............. [8.250] forms of control mechanism, .. [8.250] termination of access dispute, ...... [8.530] vexatious access dispute, ............... [8.530] Electricity transmission access determinations, .... [8.180], [8.200], [8.530] access disputes, ............................... [8.530] annual revenue requirements — see Electricity: annual revenue requirements cost-based access regulation, ......... [1.70], [4.100] building block model — see Electricity: annual revenue requirements

electricity supply chain, ................... [8.30] negotiated transmission services, ................................................. [8.260] overview, ............................................ [8.30] prescribed transmission services, . [8.260] revenue determination, ............ [8.260] regulated transmission system operator definition, ................................... [8.160] economic regulation by AER, . [8.180] regulatory information instrument served on, ............................. [8.220] transmission determination, compliance with, ................. [8.160] regulation of services, .................... [8.260] regulatory control periods, ............ [8.480] regulatory information instruments, ................................................. [8.220] revenue or pricing determination, ................................................. [8.530] revenue proposal, . [8.10], [8.480], [8.500] scope of NEL, .................................. [8.140] scope of NER, .................................. [8.260] termination of access dispute, ...... [8.530] transmission determinations, ....... [8.200], [8.260], [8.480] AER, by, .......... [8.180], [8.200], [8.260] definition, ................................... [8.160] framework and approach paper, ................................... [8.480], [8.490] merits review, ............................ [8.520] negotiated transmission services, ................................................. [8.260] prescribed transmission services, ................................................. [8.260] procedure, ..................... [8.480]–[8.520] regulated operator to comply with, ................................................. [8.160] revenue and pricing principles, ................................................. [8.200] revenue proposal, ........ [8.10], [8.480], [8.500] review rights, ............................. [8.520] reviewable regulatory decisions, ................................................. [8.200] revised proposal, ....................... [8.510] time limits, ................................. [8.480] transmission network service provider (TNSP), ........................ [8.10], [8.30] annual revenue — see Electricity: annual revenue requirements exemptions from registration, ................................................. [8.150] incentives to promote economic efficiency, ............................... [8.190] opportunity to recover costs, .. [8.190] registered TNSPs, ........................ [8.30]

Electricity transmission — cont regulatory asset base — see Electricity: annual revenue requirements retailers purchasing “use of system” services from, ......................... [8.30] revenue proposal, ......... [8.10], [8.500] service target performance incentive scheme (STPIS), ................... [8.420] transmission determinations, .. [8.260] transmission networks, ...... [3.140], [8.30] declaration of services, .............. [8.80] interconnectors linking, ............. [8.30] natural monopolies, ... [2.190], [3.100], [8.50] scope of NEL, ............................ [8.140] vexatious access dispute, ............... [8.530] Equity cost of, ............................................... [5.170] Black CAPM, ............... [5.170], [8.340] Fama-French Model, ................. [5.170] Sharpe–Lintner Capital Asset Pricing Model (SL CAPM), ............ [5.170], [8.340] return on, .......................................... [5.130] electricity, .................................... [8.340] Essential facilities/services Hilmer Report, .................... [3.100], [7.50] internet as essential service, ........ [10.120] natural monopolies, ............ [3.100], [7.90] third-party access regime, . [3.100], [7.50] vertical integration, ......................... [3.100] Essential Services Commission of South Australia (ESCOSA) establishment, .................................. [6.110] ports regulation, .............. [6.110], [11.130] negotiate/arbitrate framework, ............................................... [11.150] price determinations, .............. [11.140] price monitoring, ..................... [11.140] rail regulation, .................. [6.110], [11.380] review of access regime, ........ [11.390] Tarcoola-Darwin railway, ........ [6.110], [11.310] role, .................................... [6.110], [11.130] Essential Services Commission of Victoria (ESCV) establishment, .................... [6.90], [11.220] ports regulation, ............. [11.220]-[11.250] “light-handed” regulation, .... [11.240] price determinations, .............. [11.220]

Index

451

price monitoring, ..... [11.220], rail regulation, ................... [6.90], review of regime, .................... role, ...................................... [6.90],

[11.230] [11.360] [11.370] [11.220]

Export supply chain port and rail, involving, ................. [11.20] typical example, .............................. [11.20]

F

Fixed costs cost-based access regulation, .......... long-run or short-run costs, ............ multi-part tariffs, ............................... recovery of, ........................................

[4.80] [2.30] [4.80] [4.80]

Forms of access regulation benchmarking, ................................. [4.200] cost-based — see Cost-based access regulation CPI-X price caps, ............................. [4.180] overview, .................. [1.20], [4.10], [4.160] profit sharing, .................................. [4.190] retail-minus approach, ................... [4.170] summary, .......................................... [4.210] total factor productivity (TFP) method, ................................................. [4.180]

G

Gas ACCC inquiry on east coast gas market, ................................................. [9.310] access arrangement — see Gas access arrangements AER — see also Australian Energy Regulator (AER) assessment of access arrangement proposals — see Gas access arrangements economic regulatory function or power, ................................... [9.150] regulated by, ..... [6.30], [9.10], [9.100], [9.110] Australian Energy Market Commission (AEMC) discussion paper on pipeline regulation, ............................ [9.330] review by, ................................... [9.320] rule-making role, ....................... [9.100] common costs, ................................... [2.50]

452

Access Regulation in Australia

Gas — cont cost-based access regulation, ........ [4.100] building block model, . [4.100], [5.30], [9.160]–[9.210] efficient costs, ............................... [4.90] ex post review of expenditure, ................................... [4.120], [8.290] operating and capital expenditure rules, ........................................ [4.90] pricing principles, ........... [4.80], [4.90] coverage determination, ................ [9.130] covered pipelines — see Gas: covered pipelines degrees of regulation, ........ [9.10], [9.110], [9.220] dispute resolution mechanisms, ... [9.260] light regulation and, ... [9.110], [9.260] distribution networks, ........ [9.20], [9.280] regulatory status, ...................... [9.280] distribution pipelines, ...................... [9.20] essential facilities, ..................... [3.100] pricing principles, ........... [4.80], [4.90] reference tariffs, ............. [4.80], [9.210] tariff classes, ................................. [4.80] electricity regime compared, ......... [9.220] extension and expansion requirements, ................................................. [9.220] form of regulation factors, ............ [9.250] former regime — see Gas: former regime full access arrangement — see Gas access arrangements full regulation, ................... [9.110]–[9.230] approval of terms of access, ... [9.140] covered pipelines, ........ [9.110]–[9.130] distribution networks subject to, ................................................. [9.280] full access arrangement, .......... [9.140] assessment — see Gas access arrangements process, ................................... [9.230] requirement to submit, ........... [9.140] key regulatory issues, .............. [9.140] regulatory framework applicable, ................................................. [9.140] transmission pipelines subject to, ................................................. [9.280] Gas Access Regime, .............. [9.10], [9.30] covered pipelines — see Gas: covered pipelines electricity compared, ................ [9.220] recent issues, ................ [9.290]–[9.320] Gas Code (former) — see Gas: former regime Gas Pipelines Access Law (GPAL) — see Gas: former regime gas supply chain, .............................. [9.20]

Harper Review, ................. [9.290], [9.300] history of regime, .... [9.10], [9.30]–[9.100] 1990s reform, .................... [9.40]–[9.80] 2000s reform, ............................. [9.100] Carnegie report, .......................... [9.50] COAG reforms, ................ [9.50]–[9.70] former regime — see Gas: former regime intergovernmental agreements, ................................................... [9.60] Parer Review, ............................. [9.100] importance of access regulation, .... [1.10] Independent Pricing and Regulatory Tribunal (IPART), .................. [6.80] Industry Commission review, ........ [9.40] industry-specific access regime, ..... [9.70] information-gathering powers, ..... [4.140] intergovernmental agreements, ...... [9.60] light regulation, ................ [3.110], [9.110], [9.240]–[9.260] designated pipelines, ................ [9.240] determination, ........................... [9.250] dispute resolution, ...... [9.110], [9.260] distribution networks subject to, ................................................. [9.280] form of regulation factors, ...... [9.250] limited access arrangement, .... [9.260] NCC decision as to, .................. [9.250] policy intent of NGL, ............... [9.240] Productivity Commission recommendation, ................ [9.240] prohibited conduct, .................. [9.260] publication of terms of access, ................................................. [9.260] rationale for, ............................... [9.250] regulatory framework, ............. [9.260] report on access negotiations, ................................... [9.110], [9.260] transmission pipelines subject to, ................................................. [9.280] limited access arrangement, .......... [9.260] merits review — see Merits review: electricity and gas decisions national access regime, ... [3.110], [3.150], [7.110] National Competition Council (NCC) decision of form of regulation, ................................................. [9.250] Gas Guide, ................... [9.130], [9.250] National Gas Law (NGL) — see National Gas Law (NGL) National Gas Rules (NGR) — see National Gas Rules (NGR) National Strategy for the Natural Gas Industry, ...................... [9.40], [9.50] natural monopolies, .......... [2.190], [3.100]

Index Gas — cont no coverage determination, ......... [7.100], [9.110] no regulation, ..................... [9.110], [9.270] overview, ................................ [1.70], [9.10] Parer Review, ................................... [9.100] Previous Gas Access Regime, ......... [9.10] processing plants, ............................. [9.20] recent issues, ...................... [9.290]–[9.320] reference services, ........................... [9.110] access arrangement specifying, ................................................. [9.110] reference tariffs, ................... [4.80], [9.210] regulator, ..... [6.30], [9.10], [9.100], [9.110] regulatory information notice (RIN), ................................................. [4.140] regulatory information order (RIO), ................................................. [4.140] retail supply, ...................................... [9.20] review of decisions judicial review — see Judicial review merits review — see Merits review: electricity and gas decisions reviews of regime, ............. [9.290]–[9.320] revocation of coverage, .................. [9.110] scope of regulation, ........................ [9.110] summary, .......................................... [9.330] supply chain, ..................................... [9.20] tariffs, .................................... [4.80], [9.210] tiers of regulation, . [9.10], [9.110], [9.220] transmission pipelines, ...... [9.20], [9.280] regulatory status, ...................... [9.280] unregulated pipelines, ...... [9.110], [9.270] greenfields pipeline, ................. [9.110] no coverage determination, ... [7.100], [9.110] pipelines becoming, .................. [9.110] revocation of coverage, ............ [9.110] Western Australian regime, .......... [6.120], [9.10] ERA as regulator, .......... [6.120], [9.10] merits review, .......................... [12.120] Gas access arrangements AER role in assessing, .................... [9.150] approval of proposal, ..................... [9.230] assessment of proposals, ............... [9.150] AER economic regulatory function or power, ................................... [9.150] building block model, ................................... [9.160]–[9.210] draft decision, ............................ [9.230] final decision, ............................. [9.230] merits or judicial review, ......... [9.230] process, ....................................... [9.230]

453

revenue and pricing principles, ................................................. [9.150] building block model, ....... [4.100], [5.30], [9.160] application by AER, .... [9.160]–[9.210] building blocks, ......................... [9.160] conforming capital expenditure, ................................................. [9.170] depreciation criteria, .. [5.120], [9.160], [9.180] electricity compared, ................ [9.170] generally — see Building block model incentive mechanisms, ............. [9.190] National Gas Rules (NGR), ...... [5.30], [5.120] operating expenditure, ............. [9.200] return on projected capital base, ................................................. [9.170] total revenue, ............... [9.160], [9.210] consultation process, ...................... [9.230] designated reviewable regulatory decisions, .............................. [9.150] draft decision, .................................. [9.230] electricity regime compared, ........ [9.170], [9.220] extension and expansion requirements, ................................................. [9.220] final decision, ................................... [9.230] full access arrangement, submission of, ................................................. [9.140] covered pipeline, becoming, ... [9.120] process, ....................................... [9.230] full regulation process for, ................................. [9.230] requirements for, ....................... [9.110] judicial review of decisions, ......... [9.230] merits review of decisions, ........... [9.230] preferable designated reviewable regulatory decision, ............ [9.150] pre-proposal submission process, ................................................. [9.230] pre-submission conference, ........... [9.230] process, ............................................. [9.230] reference services, specifying, ....... [9.110] reference tariffs, ................... [4.80], [9.210] refusal of proposal, ......................... [9.230] requirement to submit, ................... [9.110] submission of, .................... [9.140], [9.230] total revenue, ..................... [9.160], [9.210] Gas: covered pipelines access regime applying to, .. [9.10], [9.30] change of coverage status, ............ [9.130] competition criterion, ..................... [9.130] proposed revision of, ............... [9.300]

454

Access Regulation in Australia

Gas: covered pipelines — cont “with” or “without” test, ........ [9.130] coverage determination, ................ [9.130] criteria for coverage, ........ [9.130], [9.300] AEMC assessment of appropriateness, ................................................. [9.320] Harper review, ........................... [9.290] Pilbara Case, .............................. [9.130] preserving human health and safety, ................................................. [9.130] promoting competition, .......... [9.130], [9.300] proposed revision of, ............... [9.300] public interest, ............. [9.130], [9.300] uneconomic to duplicate, ........ [9.130] former regime, ....................... [9.30], [9.80] change of coverage status, ........ [9.80] criteria for coverage, .................. [9.90] Gas Code, ......................... [9.80], [9.90] GPAL, ............................................ [9.30] revocation of coverage, .............. [9.80] ways of becoming, ...................... [9.90] full access arrangement, submission of, ................................................. [9.120] Nation Gas Law, under, .. [9.110], [9.120], [9.130] natural monopoly test, ................... [9.130] NCC Gas Guide, ............................. [9.130] net social benefit test, ..................... [9.130] private profitability test, ................ [9.130] public interest criterion, ................. [9.130] proposed revision of, ............... [9.300] recommendation from NCC, ........ [9.120] regime applicable to, ........................ [9.10] tender, award of, ............................. [9.120] ways of becoming, .......................... [9.120] Gas: former regime access arrangements, ........................ [9.90] reference tariffs, ........................... [9.90] Carnegie report, ................................ [9.50] COAG report, .................................... [9.60] covered pipelines change of coverage status, ........ [9.80] criteria for coverage, .................. [9.90] Gas Code applicable to, ............. [9.80] revocation of coverage, .............. [9.80] ways of becoming, ...................... [9.90] criticism of, ....................................... [9.100] Gas Code, ............................... [9.10], [9.80] certification as effective access regime, ................................................... [9.80] change of coverage status, ........ [9.80] covered pipelines, ........... [9.80], [9.90] dispute resolution provisions, .. [9.90] key features, ................................. [9.90]

NGL retaining structure of, ..... [9.110] objectives, ..................................... [9.80] Productivity Commission, ....... [9.100] Gas Pipelines Access Law (GPAL), ....................................... [9.10], [9.30] Application Acts, ........................ [9.80] reform ahead of, .............. [9.40]–[9.80] Gas Reform Implementation Group, ................................................... [9.70] Gas Reform Taskforce, ..................... [9.70] history of regime, .... [9.10], [9.30]–[9.100] 1990s reform, .................... [9.40]–[9.80] 2000s reform, ............................. [9.100] COAG reforms, ................ [9.50]–[9.80] intergovernmental agreements, ...... [9.60] local appeals bodies, ...................... [12.80] National Strategy for the Natural Gas Industry, ...................... [9.40], [9.50] Natural Gas Pipelines Access Agreement, ................................................... [9.80] Parer Review, ................................... [9.100] reference tariffs, ................................. [9.90] review of decisions, ........ [12.80]–[12.100] General access regime — see National Access Regime Government ownership alternative to access regulation, .... [3.50], [3.70] National Broadband Network Company, ................................................... [3.70] overview, ............................................ [3.70] privatisation of public utilities, ...... [3.70]

H Harper Review gas regulation, ................... [9.290], [9.300] government response to, .............. [7.340], [9.290], [9.300] merits review, .................................. [12.70] recommendations, ............ [6.150], [7.330], [9.290] Hilmer Report application of access regulation, .... [7.60] background, ..................................... [3.100] competition policy reforms, ............ [1.20] electricity reforms based on, ........... [8.70] essential facilities, ........................... [3.100] gas regulation, ....................... [9.50], [9.60] government ownership, ................... [3.70] merits review, .................................. [12.60]

Index Hilmer Report — cont National Access Regime, .............. [3.100], [3.130], [7.10], [7.50]–[7.70] natural monopolies, ........................ [3.100] s 46 Competition and Consumer Act, ................................................... [3.60] third-party access regime, ............. [3.100]

I Incentives building block model incentive mechanisms, ......................... [5.260] bespoke mechanisms, ............... [5.310] efficiency, ....................... [5.270], [5.280] service standards, ....... [5.290], [5.300] cost-based regulation, .................... [4.120] incentive schemes, .................... [4.140] over-investment, incentive for, ................................................. [4.120] efficiency benefit sharing scheme (EBSS), ..................... [4.140], [5.280], [8.400] electricity DNSPs and TNSPs, ................................... [8.390]–[8.440] capital expenditure incentive scheme (CESS), .................................. [8.410] demand management incentive scheme (DMIS), ................... [8.430] demand management innovation allowance (DMIA), ............. [8.430] efficiency benefit sharing scheme (EBSS), ................................... [8.400] operating expenditure incentive schemes, ................................ [8.400] revenue increments or decrements from, ...................................... [8.390] service target performance incentive scheme (STPIS), ................... [8.420] small scale incentive scheme, . [8.440] service target performance incentive scheme (STPIS), ..... [5.290], [8.420] Independent Competition and Regulatory Commission (ICRC) establishment, .................................. [6.140] role, .................................................... [6.140] Independent Pricing and Regulatory Tribunal (IPART) establishment, .................................... [6.80] role, ...................................................... [6.80] Industry Commission Energy Distribution and Generation Report 1991, ........................... [8.50]

455

Inflation building block model, .................... [5.220] accounting for, ........................... [5.220] adjustment of asset base valuation, ................................................... [5.90] nominal asset value with nominal rate of return, ................................... [5.220] real asset value with nominal rate of return, ................................... [5.220] real asset value with real rate of return, ................................................. [5.220] Information AER information-gathering powers, ................................... [4.140], [8.210] asymmetry benchmarking reducing, .......... [4.200] cost-based regulation, .............. [4.140] cost-based regulation, .................... [4.140] power to obtain, .............................. [4.140] regulatory information notice (RIN), ................................... [4.140], [8.220] regulatory information order (RIO), ................................... [4.140], [8.220] Infrastructure-based competition telecommunications, ....................... [10.10] Infrastructure businesses opportunity cost, ............................... [2.70] privatisation, ...................................... [1.10] Injunction judicial review seeking, ............... [12.410] merits review seeking, ................. [12.130] Interconnectors electricity transmission networks, linking, .................................... [8.30] regulated, ............................................ [8.30] unregulated, ....................................... [8.30] Intervention by regulator — see Regulatory intervention models

J

Judicial review ACCC decisions, ............................... [6.20] access-related decisions, .............. [12.520] ADJR Act — see Judicial review under ADJR Act AER decisions, ..... [6.30], [8.520], [12.500]

456

Access Regulation in Australia

Judicial review — cont Australian Competition Tribunal decision, .............................. [12.380] certiorari, ........................................ [12.390] injunction, ....................................... [12.410] Judiciary Act 1903 s 39B, under, ............................... [12.390], [12.410] constitutional writs, ................ [12.410] jurisdictional errors, ............... [12.410] lawfulness of decision, ................... [12.20] mandamus, ..................... [12.390], [12.410] meaning, ........................................... [12.20] merits review alternative remedy, ... [12.40], [12.500] distinguished, ............................ [12.20] prohibition, ..................... [12.390], [12.410] summary, ........................................ [12.520] Judicial review under ADJR Act AER decisions, ..... [6.30], [8.520], [12.500] application for, .............................. [12.470] discretion to refuse, ................ [12.500] effect on operation of decision, ............................................... [12.490] manner of making, ................. [12.470] who can make, ........................ [12.420] availability, ..................................... [12.400] constituent decision, ..................... [12.400] distribution determination, ......... [12.400] decision, .......................... [12.430], [12.440] conduct relating to, . [12.430], [12.450] failure to make, ....... [12.430], [12.460] discretion to refuse application, . [12.500] Federal Court, by, ......... [12.400], [12.510] grounds, .......................... [12.430]–[12.460] breach of natural justice, ....... [12.440] categories of (in)action, .......... [12.430] conduct relating to decision, ............................... [12.430], [12.450] decision contrary to law, ....... [12.440] error of law, ............................. [12.440] failure to make decision, ...... [12.430], [12.460] improper exercise of power, . [12.440] lack of jurisdiction, ................. [12.440] non-compliance with procedures, ............................................... [12.440] unauthorised decision, ........... [12.440] unjustified decision, ............... [12.440] interested person, .......................... [12.480] orders available on, ...................... [12.510] parties to, ........................................ [12.480] person aggrieved, application by, ............................................... [12.420] remedies, ........................................ [12.510] sufficient interest, .......................... [12.480]

who can apply, .............................. [12.420]

L Licensing barriers to entry and expansion, .. [2.200] Long-run cost of supply definition, ........................................... fixed or variable, ............................... marginal cost, .................................... matching access price with, ............ short-run cost distinguished, ..........

[2.30] [2.30] [2.40] [2.30] [2.30]

Long term interests of end-users (LTIE) economic efficiency and, ................ [3.170] objective to promote, ...................... [3.170] National Electricity Law, ......... [3.140] National Gas Law, .................... [3.150] telecommunications regime, .. [3.160], [10.320] telecommunications regime, ........ [3.160], [10.320] access determinations, ........... [10.410] declaration of services, .......... [10.320] exemptions from standard access obligations, ......................... [10.290] object of CCA, Pt XIC, ............ [3.160], [10.320] terms and conditions, reasonableness of, ......................................... [10.360]

M Major infrastructure industries natural monopolies, .......................... [1.20] single supplier of services, .............. [1.20] Mandamus judicial review seeking writ, ...... [12.390], [12.410] nature of remedy, .......................... [12.410] Marginal cost access prices reflecting, .................... cost-based access regulation, .......... definition, ........................................... marginal unit, ....................................

[4.80] [4.80] [2.40] [2.40]

Market failure access regulation addressing, ........ [1.20], [3.20]

Index Market failure — cont alternatives, ...................... [3.50]–[3.90] definition, ............................... [1.20], [3.20] lack of effective competition, .......... [3.20] natural monopoly as, ..................... [2.190] Market power asset stranding risk, .......................... [3.30] countervailing power of customers, ................................................... [3.30] essential facilities, ........................... [3.100] exercise of, .......................................... [3.40] detrimental to competition, ...... [3.20] preventing or hindering access, ................................................... [3.40] reducing service quality, ............ [3.40] s 46 CCA dealing with, .............. [3.60] factors in assessing, .......................... [3.30] meaning, ............................................. [3.30] preventing or limiting exercise of, . [3.30] detrimental to competition, ...... [3.20] factors in assessing, .................... [3.30] substitute services, availability of, . [3.30] when firm has, .................................. [3.30] Market structures barriers to entry and expansion and, ................................................. [2.200] determinants, ................................... [2.200] monopoly, ......................................... [2.180] natural monopoly, ........................... [2.190] perfect competition, ........................ [2.160] workable competition, ................... [2.170] Merits review ACCC decisions, ................... [6.20], [6.60] affirming, setting aside or varying, ............................................... [12.340] Australian Competition Tribunal, by, ................................................... [6.60] who may apply, ....... [12.250], [12.260] access determinations, ... [12.60], [12.250] access-related decisions, ............... [12.50], [12.520] additional information, seeking, ............................................... [12.310] administrative decisions, ............... [12.30] AER decisions — see Merits review: electricity and gas decisions affirmation of decision, ................ [12.340] application for effect on operation of decision, ............................................... [12.180] time limit, ................................. [12.170] who may make, ....... [12.250], [12.260]

457

arbitration determinations, .............. [6.60] re-arbitration of matter, ......... [12.200] Australian Competition Tribunal, by, ................................................... [6.60] limitations on, .......................... [12.310] parties to, .................. [12.250], [12.260] powers of, .......... [6.60], [7.80], [7.100], [7.330], [12.340] reconsideration of matter, ..... [12.200], [12.310] review of decision of, ............. [12.380] time for decision, .................... [12.360] automatic decisions excluded, ...... [12.30] consideration period, ................... [12.360] decisions not suitable for, .............. [12.30] declaration decisions, ........ [6.60], [7.140], [12.50] who may apply, ...................... [12.250] delays, concerns about, .... [12.60], [12.70] electricity decisions — see Merits review: electricity and gas decisions error by original decision-maker, . [12.20] extension of time for decision, ... [12.360] factors weighing against, ............... [12.40] gas decisions — see Merits review: electricity and gas decisions general principles, .......................... [12.30] grounds, .......................................... [12.200] information before original decision-maker, based on, ............................... [12.310], [12.320] judicial review available, where, . [12.40] adequate alternative remedy, ............................................... [12.500] judicial review distinguished, ...... [12.20] key elements, ................................. [12.120] legislation-like decisions excluded, ................................................. [12.30] limitations on, .. [12.20], [12.300]–[12.330] mandatory decisions excluded, .... [12.30] meaning, ........................................... [12.20] Minister’s decisions, .......... [6.60], [7.140], [12.50] who may apply, ...................... [12.250] National Access Regime, under, ... [6.60], [12.50] ACT powers, ..... [6.60], [7.80], [7.100], [7.330] effect of application, ............... [12.180] grounds, .................................... [12.200] history, ........................................ [12.60] limitations, ................ [12.300]–[12.320] Productivity Commission reviews, ................................... [12.60], [12.70] remedies, .................................. [12.340] time limit, ................... [12.60], [12.170]

458

Access Regulation in Australia

Merits review — cont who may apply, ...................... [12.250] NEL or NGL, under — see Merits review: electricity and gas decisions objectives, ......................................... [12.30] overview, ........................................ [12.120] parties to, ........................ [12.250], [12.260] reconsideration of matter, ........... [12.200], [12.310] regulatory decisions, ...... [12.20], [12.120] remedies, ........................................ [12.340] reversing decision, ........................ [12.340] review of tribunal decision, ........ [12.380] setting aside of decision, ............. [12.340] Standing Council on Energy and Resources (SCER), ............... [12.90] consultation paper, ................. [12.100] review of merits review regime, ................................................. [12.90] statement of policy intent, .... [12.100] summary, ........................................ [12.520] telecommunications decisions grounds, .................................... [12.240] history of, ................................. [12.110] not available, .............. [12.50], [12.110] time limit for application, ........... [12.170] history, ........................................ [12.60] time limit for decision, ................. [12.360] variation of decision, .................... [12.340] who may apply, ............. [12.250], [12.260] Merits review: electricity and gas decisions AER decisions, ........ [6.30], [6.60], [12.50], [12.120] affirming, setting aside or varying, ............................................... [12.350] remitting back to AER, .......... [12.350] affected or interested person or body application by, ......................... [12.270] definition, ................................. [12.270] application for effect on operation of decision, ............................................... [12.190] sufficient interest, .................... [12.290] time limit, ................................. [12.170] who may make, ....... [12.270], [12.280] Australian Competition Tribunal discretion not to grant leave, ............................................... [12.160] discretion to consider new material, ............................................... [12.330] powers of, .......... [6.60], [7.80], [7.100], [7.330], [12.340] review by, ....................... [6.60], [12.50] review of decision of, ............. [12.380]

test imposed by, ...................... [12.130] time for decision, .................... [12.370] categories of interveners, ............. [12.280] decisions not suitable for, .............. [12.30] electricity decisions, ........... [6.30], [12.50], [12.120] distribution determinations, .. [8.130], [8.520], [12.50] history of, .................... [12.80]–[12.100] matters to be satisfied, ........... [12.130] NEL, under, ... [6.60], [12.50], [12.120], [12.210] remedies, .................................. [12.350] revenue and pricing determinations, ..................................... [A.10], [A.20] reviewable regulatory decisions, ................................... [8.200], [12.50] sufficient interest, .................... [12.290] transmission determinations, . [8.130], [8.520], [12.50] Western Australia, ................... [12.120] error of fact, ..... [12.20], [12.210], [12.220] extension of time for decision, ... [12.370] factors weighing against, ............... [12.40] financial threshold, ....... [12.130], [12.150] gas decisions, ....... [6.30], [12.50], [12.120] access arrangements, .. [9.230], [12.50] coverage decisions, ....... [6.60], [12.50] history of, .................... [12.80]–[12.100] local appeals bodies (former), ................................................. [12.80] matters to be satisfied, ........... [12.130] NGL, under, .. [6.60], [12.50], [12.120], [12.210] remedies, .................................. [12.350] revenue and pricing determinations, ..................................... [A.10], [A.20] ring fencing determinations, ... [12.50] Western Australia, ................... [12.120] general principles — see Merits review grounds, .......................... [12.210]–[12.230] history of, .......................... [12.80]–[12.100] incorrect exercise of discretion, . [12.210], [12.220] unreasonableness, overlap with, ............................................... [12.230] interlocutory injunction sought, . [12.130] leave to apply, ................ [12.130]–[12.160] categories of interveners, ....... [12.280] discretion not to grant, .......... [12.160] financial threshold, . [12.130], [12.150] materially preferable [national electricity objective]/[national gas objective] decision, ........... [12.130], [12.140] matters to be satisfied, ........... [12.130]

Index Merits review: electricity and gas decisions — cont serious issue to be heard, ...... [12.130] limitations, ...................... [12.300], [12.330] materially preferable [national electricity objective]/[national gas objective] decision leave, condition for, ............... [12.130], [12.140] NEL/NGL guidance on, ........ [12.350] PIAC review, ............................ [12.140] “prima facie materially preferable” threshold, ............................ [12.140] Tribunal determination as to, ............................................... [12.350] Ministerial Council on Energy (MCE), ................................... [12.80], [12.90] parties to, ........................................ [12.270] procedural errors not covered, ... [12.230] remedies, ........................................ [12.350] revenue and pricing determinations, ..................................... [A.10], [A.20] review of tribunal decision, ........ [12.380] review related matter, .................. [12.330] reviewable regulatory decision process participant application by, ........ [12.270], [12.280], [12.290] definition, ................. [12.270], [12.290] sufficient interest, .................... [12.290] reviewable regulatory decisions, . [8.200], [12.50] right to intervene, ......... [12.270]–[12.290] serious issue to be heard, ............ [12.130] standard period for decision, ..... [12.370] Standing Council on Energy and Resources (SCER), .............. [12.90], [12.100] summary, ........................................ [12.520] time limit for application, ........... [12.170] time limit for decision, ................. [12.370] unreasonable decision, . [12.210], [12.220] incorrectness, overlap with, .. [12.230] Wednesbury unreasonableness, ............................................... [12.220] user or consumer association application by, ......... [12.270], [12.280] definition, ................................. [12.270] leave to apply, ......................... [12.280] Western Australia, ......................... [12.120] who may apply, ............................ [12.270] categories of interveners, ....... [12.280] Minister certification decisions, ...................... [7.30] declaration decisions, ....................... [7.30]

459

pricing determinations hierarchy of regulatory documents, ............................................... [10.510] telecommunications, .............. [10.390], [10.490] time limits on decision making, .... [7.80], [7.100] Ministerial Council on Energy (MCE) energy market reforms, ... [8.100], [8.110], [8.130] Expert Panel on Energy Access Pricing, ................................................. [8.130] merits review, .................... [12.80], [12.90] Monopolies allocative efficiency loss, ................ [2.180] barriers to entry and expansion and, ................................................. [2.200] definition, ......................................... [2.180] dynamic efficiency benefits, .......... [2.180] market structure, ............................. [2.180] natural — see Natural monopolies price maker, monopolist as, .......... [2.180] price monitoring, .............................. [3.80] profit maximisation, ....................... [2.180] retail-minus approach and monopoly pricing, .................................. [4.170] time-limited monopolies, ............... [2.180] Multi-part tariffs, ................................... [4.80]

N National Access Regime ACCC functions and powers, ........ [6.20] arbitration of disputes, ............ [6.180] undertakings, acceptance of, .... [5.30], [6.210] ACCC views on, ............................. [7.350] access code, ...................................... [6.210] access undertakings — see Access undertakings application of, ...................... [3.190], [7.60] arbitration of disputes, ..... [6.180], [7.40], [7.280]–[7.300] factors to consider, .................... [7.290] final determination, .................. [7.300] interim determination, ............. [7.290] manner of conducting, ............. [7.300] notice of dispute, ........ [7.280], [7.290] number of applications/decisions, ................................................. [7.310] review of determinations, ....... [7.300]

460

Access Regulation in Australia

National Access Regime — cont time limit for determination, .. [7.290] avenues to access, . [3.110], [7.30], [7.120] certification — see Certification declaration — see Declaration of services mutually exclusive, ................... [7.120] undertakings — see Access undertakings background, ................ [7.10], [7.50]–[7.70] benefits to community, ................... [3.190] certification — see Certification commercial negotiation, emphasis on, ................................................... [7.20] Competition and Consumer Act Pt IIIA, ......................... [1.60], [3.110], [7.10] objects clause, .............. [3.130], [7.270] Competition and Infrastructure Reform Agreement, 7.100] competitive tenders, ............. [7.30], [7.90] number of applications/decisions, ................................................. [7.310] declaration of services — see Declaration of services differences between original and current regime, .................................... [7.80] effectiveness of, ............................... [7.310] essential facilities, access to, ........ [3.100], [7.50] establishment, ........................ [7.10], [7.80] Harper Review, .. [6.150], [7.330], [7.340], [12.70] Hilmer Report, ..... [3.100], [3.130], [7.10], [7.50]–[7.70] merits review of decisions — see Merits review nationally significant infrastructure facilities, ...................... [7.20], [7.40] negotiate/arbitrate intervention model, ..................................... [6.180], [7.70] propose/respond model combined with, ...................................... [6.210] negotiate/arbitrate stage, ................ [7.40] objectives, ......................................... [3.130] assessment of undertaking, consideration in, .................. [7.270] obtaining access under, ...... [7.30], [7.280] arbitration process, ..... [7.290], [7.300] private agreement, .................... [7.280] stages, ............................................ [7.40] origins, ................................................ [7.50] overview, ....... [1.60], [3.110], [7.10]–[7.40] ports, application to, ....................... [11.20] pricing principles, ................. [2.80], [7.70] assessment of undertaking, consideration in, .................. [7.270]

private negotiation, ............ [7.30], [7.280] Productivity Commission review, ......... [3.130], [3.190], [7.90], [12.60] propose/respond intervention model, ................................................. [6.210] purpose of regime, ........................... [7.20] rail, application to, .......... [11.20], [11.290] ARTC interstate undertaking, ............................... [11.300], [11.450] Tas, ............................................. [11.480] WA, ............. [11.410], [11.430]–[11.460] regulatory discretion, ........ [6.250]–[6.300] prescription of methods, .......... [6.270] regulatory intervention models negotiate/arbitrate, ..... [6.180], [6.210] propose/respond, ..................... [6.210] reviews of, .......................... [7.310]–[7.340] 2001: Productivity Commission review, ....................... [7.90], [12.60] 2001–2005: amendments, ........... [7.90] 2006–2010: amendments, ......... [7.100] 2014: Productivity Commission review, ..................... [7.320], [7.340] 2015: Harper Review, .............. [6.150], [7.330], [7.340], [12.70] government response, .............. [7.340] summary, .......................................... [7.360] terms and conditions of access, ..... [7.20] negotiation of, .................. [7.40], [7.70] time limits on decision making, .... [7.80], [7.100] undertakings — see Access undertakings National Broadband Network (NBN) access regime — see also Telecommunications amendments to accommodate, ................. [10.20], [10.190]–[10.220] scope of regulation, ................ [10.260] Vertigan Review, ...... [10.520]–[10.550] binding rules of conduct (BROCs), ............................................... [10.500] declared services, .......................... [10.260] category B standard access obligations, ......... [10.220], [10.300] special access undertakings, . [10.370] standard form access agreement, ............................................... [10.380] fibre to the node (FTTN) model, ............................................... [10.190] fibre to the premises (FTTP) model, ............................................... [10.190] initial cost recovery account (ICRA), ............................................... [10.370] long term revenue constraint

Index National Broadband Network (NBN) — cont methodology (LTRCM) determination, ................... [10.370] National Broadband Network Company (NBN Co), .. [3.70], [3.110], [10.20], [10.190] Definitive Agreements with Telstra, ............................................... [10.210] objects, ...................................... [10.190] Special Access Undertaking (SAU), ............................................... [10.370] taking over ownership of copper and HFC networks, .................. [10.100] wholesale-only provider, ....... [10.190] non-discriminatory access, .......... [10.220] optimised multi-technology mix model, ............................................... [10.190] special access undertakings, ....... [10.370] NBN Co Special Access Undertaking (SAU), .................................. [10.370] when NBN corporation can give, ............................................... [10.370] standard access obligations, ....... [10.220], [10.300] standard form of access agreement (SFAA), ................................ [10.380] strategic review, ............................ [10.190] structural separation of Telstra, ............................... [10.200], [10.210] Definitive Agreements with NBN Co, ............................................... [10.210] draft mitigation plan, ............ [10.200], [10.210] undertaking (SSU), . [10.200], [10.210] Telecommunications Act amendments, ............................................... [10.220] Vertigan Review, ............ [10.520]–[10.550] National Competition Council (NCC) declarations — see also Declaration of services assessment of application, ....... [7.140] Declaration Guide, .................... [7.190] electricity networks, ................... [8.80] publication of application, ...... [7.140] recommendation, ........... [7.30], [7.40], [7.60] establishment, .................................... [6.50] functions, ............................................ [6.50] Gas Guide, ......................... [9.130], [9.250] Gas Reform Taskforce, ..................... [9.70] gas regulation, decision on form of, ................................................. [9.250] time limits on decision making, .... [7.80], [7.100]

461

WA rail access regime certification decision, .............................. [11.430] National Competition Policy (NCP) reforms, ................... [3.100], [7.10], [12.60] National Electricity Law (NEL) — see also Electricity AER functions and powers, ........... [6.30], [8.110], [8.180] contribution to achieving NEL objective, ............................... [8.190] economic regulatory functions, ................................................. [8.180] amendments in 2008, ..................... [8.130] application in States and Territories, ................................................... [8.70] background, .......................... [8.40]–[8.130] Expert Panel on Energy Access Pricing, ................................................. [8.130] long-term interests of consumers, promotion of, ......... [3.140], [3.170] merits review under — see Merits review: electricity and gas decisions national access regime, ... [3.110], [3.140], [7.110], [8.20], [8.40], [8.140] network activities, regulation of, . [8.140] “new” NEL in 2005, ............ [8.40], [8.110] objective, ............... [3.140], [8.110], [8.190] AER functions to contribute to, ................................................. [8.190] overview, ............................ [3.110], [8.140] regulatory code — see National Electricity Rules (NER) revenue and pricing principles, .. [3.140], [8.140], [8.190] review of decisions under, .............. [6.60] scope, ................................................. [8.140] South Australian Act, schedule to, ....................................... [8.40], [8.70] States and Territories, implemented in, ................................................... [8.40] National Electricity Market (NEM) national access regime, ... [3.110], [3.140], [8.10], [8.20] propose/respond intervention model, ................................................. [6.220] National Electricity Rules (NER) — see also Electricity AEMC making, ..... [6.40], [8.100], [8.120], [8.230] building block model codified in, . [5.30]

462

Access Regulation in Australia

National Electricity Rules (NER) — cont complexity of regime, ...................... [8.10] definitions, .......................................... [8.10] distribution, regulation of, ............ [8.250] efficiency benefit sharing scheme, ................................................. [5.280] force of law, ...................................... [8.110] national access regime, ....... [1.70], [8.10], [8.20], [8.40] National Electricity Market governed by, ................................................... [8.10] NEL providing for making of, ..... [8.110], [8.120], [8.230] propose/respond intervention model, ................................................. [6.220] regulatory code for NEL, ............... [8.110] regulatory discretion under, ................................... [6.250]–[6.300] permissive or mandatory language, ................................................. [6.260] prescription of methods, .......... [6.270] scope of, ............................................ [8.250] South Australian Minister, made by, ................................................. [8.120] States and Territories, implemented in, ................................................... [8.40] subject matter, .................................. [8.230] National Gas Law (NGL) — see also Gas access arrangement — see Gas access arrangements AER role and powers, ........ [6.30], [9.150] Application Acts, .............................. [9.30] covered pipelines, ............. [9.110], [9.120] coverage determination, .......... [9.130] criteria for coverage, .. [9.130], [9.300] ways of becoming, .................... [9.120] dispute resolution mechanism, .... [9.110], [9.260] full regulation, ................... [9.110]–[9.230] Gas Access Regime, ... [9.10], [9.30] — see also Gas Gas Code and GPAL replaced by, ................................................. [9.110] information-gathering powers, ..... [4.140] light regulation, ... [9.110], [9.240]–[9.260] limited access arrangements, ........ [9.260] long-term interests of consumers, promotion of, ......... [3.150], [3.170] merits review under — see Merits review: electricity and gas decisions national access regime, ... [3.110], [3.150], [7.110] objective, ............... [3.150], [7.350], [9.110] overview, .......................................... [3.110]

prohibited conduct, ........................ [9.260] review of decisions under, .............. [6.60] ring-fencing provisions, ................. [9.260] scope of regulation, ........................ [9.110] South Australian Act, schedule to, ..................................... [9.30], [9.110] test for regulation under, ............... [7.350] tiers of regulation, ........................... [9.110] Western Australia, varied form in, ................................................... [9.30] National Gas Rules (NGR) — see also Gas access arrangement — see Gas access arrangements AER role and powers, ........ [6.30], [9.150] Application Acts, .............................. [9.30] building block model codified in, . [5.30] depreciation criteria, ....................... [5.120] dispute resolution mechanism, .... [9.110], [9.260] full regulation, ................... [9.110]–[9.230] Gas Access Regime, ....... [9.10] — see also Gas Gas Code and GPAL replaced by, ................................................. [9.110] light regulation, ... [9.110], [9.240]–[9.260] regulatory discretion under, ................................... [6.250]–[6.300] permissive or mandatory language, ................................................. [6.260] prescription of methods, .......... [6.270] test for regulation under, ............... [7.350] National Grid Management Council (NGMC) drafting of National Electricity Code, ................................................... [8.70] electricity access reforms, .... [8.60], [8.70] establishment by COAG, ................. [8.60] Nationally significant infrastructure facilities declaration of service, ...................... [7.40] criterion for, ................. [7.170], [7.200] importance to constitutional trade or commerce, ............................ [7.200] importance to national economy, . [7.200] National Access Regime, ..... [7.20], [7.40] size, .................................................... [7.200] Natural monopolies access regulation addressing, ........ [1.20], [3.100] alternatives, ...................... [3.50]–[3.90] changes in market circumstances eroding, ................................. [2.190]

Index Natural monopolies — cont definition, ......................................... [2.190] economies of scale, ......................... [2.190] electricity transmission networks, ....................... [2.190], [3.100], [8.50] essential facilities, ............... [3.100], [7.90] examples, .......................................... [2.190] government ownership and, ........... [3.70] high sunk costs, .................. [2.60], [2.190] Hilmer Report, ................................ [3.100] key features, ..................................... [2.190] major infrastructure industries, ...... [1.20] market failure, ................................. [2.190] s 46 Competition and Consumer Act, ................................................... [3.60] strategic positions, .......................... [3.100] Negotiate/arbitrate intervention model advantages, ...................................... [6.170] ESCOSA, ......................................... [11.150] least interventionist model, ........... [6.170] National Access Regime, ... [6.180], [7.70] negotiate/arbitrate stage, .......... [7.40] propose/respond model combined with, ...................................... [6.210] telecommunications access regime, ................................... [6.190], [10.20] move away from, .... [10.180], [10.400] New South Wales ports — see Port infrastructure rail — see Rail infrastructure regulator, ............................................. [6.80] Northern Territory ports — see Port infrastructure rail — see Rail infrastructure regulator, ........................................... [6.130] Northern Territory Utilities Commission ports regulation, ............................ [11.280] price determinations, .................... [11.280] role, .................................................... [6.130]

O Objectives of access regimes core objective, .................... [3.180], [3.200] cost-based access regulation and, . [4.20], [4.40] general access regime, .................... [3.130] long-term interests of consumers, ................................................. [3.170] National Electricity Law, ............... [3.140]

463

National Gas Law, .......................... [3.150] overview, .......................................... [3.120] telecommunications regime, ......... [3.160] Office of the Tasmanian Economic Regulator (OTTER) declaration of prescribed monopoly, ............................................... [11.270] establishment, .................................. [6.100] ports regulation, ............................ [11.270] role, .................................................... [6.100] Operating and maintenance costs benchmarking, ................... [5.190], [8.470] bottom-up estimate, ....................... [5.190] building block model, ........ [5.40], [5.190] electricity — see Electricity: annual revenue requirements operating expenditure allowance, ................................................. [5.190] opex building block, ....................... [5.190] top-down estimate, ......................... [5.190] Opportunity cost definition, ........................................... [2.70] financial capital, ................................ [2.70] valuing assets, ................................... [2.70]

P

Parer Review electricity reforms based on, ........ [8.100], [8.110] Energy Market Review, ...... [8.90], [9.100] gas reforms based on, .................... [9.100] government response, ........ [6.40], [8.100] Patents barriers to entry and expansion, .. [2.200] Perfect competition allocatively efficient market outcome, ................................................. [2.160] concept, ............................................. [2.160] markets close to achieving, ........... [2.160] no material barriers to entry and expansion, ............................ [2.200] Pilbara region declaration of services, .... [7.220], [9.130] gas regime, covered pipelines, ..... [9.130] rail infrastructure, ............ [3.190], [11.40], [11.420], [11.470]

464

Access Regulation in Australia

Port infrastructure access undertakings — see also Access undertakings building block model codified in, ................................................... [5.30] wheat terminal operators, ....... [11.90] bulk wheat terminals, access to, .. [11.80] Code of Conduct, .................... [11.100] history of regulation, ................ [11.90] national access regime, ........... [11.80], [11.100] Wheat Export Marketing Act 2008, ................................................. [11.90] Competition and Infrastructure Reform Agreement (CIRA), ............. [11.70] declared services under QCA Act, ................................................... [6.70] essential facilities, ........................... [3.100] export supply chain, ....................... [11.20] government owned, ........................ [11.40] CIRA covering, .......................... [11.70] Northern Territory, .................. [11.280] privatisation, .............................. [11.40] Tasmania, .................................. [11.270] Western Australia, ................... [11.260] “heavy-handed” regulation, .......... [11.10] “light-handed” regulation, ............. [1.70], [11.10] Vic, move toward, ................... [11.240] National Access Regime application, ................................................. [11.20] natural monopolies, ........................ [3.100] New South Wales, ......... [11.160]–[11.180] declaration of services, ............ [11.50], [11.180] Port of Newcastle, .... [11.50], [11.100], [11.180] Ports and Maritime Administration Act 1995, ............................. [11.160] price monitoring regime, ...... [11.160], [11.170] no specific access regime, ............. [11.20], [11.70] non-homogenous, ............................ [11.30] Northern Territory, ........................ [11.280] Ports Management Act 2015, ............................................... [11.280] price determinations, .............. [11.280] overview, ... [1.70], [3.110], [11.10], [11.70] ownership, .......................... [11.40], [11.50] price monitoring NSW, .......................... [11.160], [11.170] Qld, ............................................ [11.210] SA, .............................................. [11.140] privatisations, ..................... [11.40], [11.50] Queensland, .................... [11.190]–[11.210]

Dalrymple Bay Coal Terminal, .................... [3.110], [11.50], [11.200] declared services, .......... [6.70], [6.200] deterministic price regulation, ................................................. [3.110] general State access regime, . [11.190], [11.200] price monitoring, ..................... [11.210] private ownership, .................... [11.50] QCA role, ...... [6.70], [11.200], [11.210] rail infrastructure and, ................... [11.20] common features, ...................... [11.20] export supply chain, ................. [11.20] vertical integration, ................... [11.60] South Australia, ............. [11.120]–[11.150] effective regime, certified as, . [11.150] ESCOSA role, ............................ [6.110], [11.130]–[11.150] essential maritime industries, ............................................... [11.130] essential maritime services, ... [11.130] Maritime Services (Access) Act 2000, ............................................... [11.120] negotiate/arbitrate framework, ............................................... [11.150] price determinations, .............. [11.140] price monitoring by ESCOSA, ............................................... [11.140] private ownership, .... [11.40], [11.120] proclaimed ports, .................... [11.120] regulated services, ................... [11.130] state-based regimes, ......... [3.110], [11.20], [11.70] consistency, drive for, ............... [11.70] summary, ........................................ [11.500] Tasmania, ........................................ [11.270] declaration of prescribed monopoly by OTTER, .......................... [11.270] Tasmanian Ports Corporation, ............................................... [11.270] variations in, .................................... [11.30] vertical integration, ......................... [11.60] Victoria, ........................... [11.220]–[11.250] ESCV role, ..... [6.90], [11.220]–[11.250] Essential Services Commission Act 2001, ......................... [6.90], [11.220] “light-handed” regulation, .... [11.240] Port Management Act 1995, .. [11.220] Port of Melbourne Corporation, ................................ [11.230]–[11.250] prescribed services, ................. [11.220] price cap regulation, ............... [11.240] price determinations, .............. [11.220] price monitoring, ........ [6.90], [11.220], [11.230]

Index Port infrastructure — cont Price Monitoring Determination 2015, ............................................... [11.230] recent developments, .............. [11.250] self-monitoring, ....................... [11.240] Western Australia, ......................... [11.260] Price caps CPI-X price caps, ............................. [4.180] overview, .......................................... [4.180] profit sharing combined with, ...... [4.190] Victorian ports, .............................. [11.240] Price monitoring ACCC view, ....................................... [3.80] alternative to access regulation, .... [3.50], [3.80] CCA prices surveillance provisions, ................................................... [3.80] ACCC functions and powers, . [6.20], [11.110] ports, .......................................... [11.110] ESCOSA, ......................................... [11.140] ESCV, ................................... [6.90], [11.220] Price Monitoring Determination 2015, ............................................... [11.230] Independent Pricing and Regulatory Tribunal (IPART), .................. [6.80] “light-handed” regulation, .............. [3.80] monopolies, for, ................................. [3.80] ports, ................................................ [11.110] NSW, .......................... [11.160], [11.170] Qld, ............................................ [11.210] SA, .............................................. [11.140] Vic, ................. [6.90], [11.220], [11.230] Privatisation competition policy and, ................... [3.70] ports, .................................... [11.40], [11.50] public utilities, ................................... [3.70] rail infrastructure, ............. [11.40], [11.50]

465

nature of remedy, .......................... [12.410] Propose/respond intervention model electricity network, ......................... mandatory propose/respond, ...... National Access Regime, ............... non-mandatory propose/respond, ................................................. overview, .......................................... undertakings to ACCC, .................

[6.220] [6.200] [6.210] [6.200] [6.200] [6.210]

Public interest access undertaking, assessment of, ................................................. [7.270] declaration criterion, ........... [7.40], [7.60], [7.170], [7.220] Competition Principles Agreement, assessment against, ............. [7.220] differences between original and current regime, ...................... [7.80] interpretation of criterion, ....... [7.220] Pilbara Case, .............................. [7.220] gas, covered pipelines, ..... [9.130], [9.300]

Q

Queensland ports — see Port infrastructure rail — see Rail infrastructure regulator, ............................................. [6.70] Queensland Competition Authority (QCA) establishment, .................................... [6.70] functions and powers, ..................... [6.70] ports regulation, ............... [6.70], [11.200], [11.210] price monitoring, ........................... [11.210] rail regulation, ................... [6.70], [11.320]

R Productive efficiency definition, ......................................... [2.100] efficient market outcomes, ............. [2.150] maximisation, .................................. [2.100] Profit sharing advantages and disadvantages, ... [4.190] overview, .......................................... [4.190] price caps combined with, ............ [4.190] Prohibition judicial review seeking writ, ...... [12.390], [12.410]

Rail infrastructure ACCC role, ......................................... [6.20] access undertakings — see also Access undertakings ARTC interstate, ....... [3.110], [11.300], [11.450] building block model codified in, ................................................... [5.30] Hunter Valley, ............ [3.110], [11.340] NSW rail network, .................. [11.350] QCA undertakings, ................. [11.320]

466

Access Regulation in Australia

Rail infrastructure — cont Australian Rail Track Corporation (ARTC), ............................... [11.300] Hunter Valley undertaking, ... [3.110], [11.340] interstate access undertaking, .................. [3.110], [11.300], [11.450] Competition and Infrastructure Reform Agreement (CIRA), ........... [11.290] consistent national framework, .. [11.290] declared services under QCA Act, ................................................... [6.70] essential facilities, ........................... [3.100] export supply chain, ....................... [11.20] “heavy-handed” regulation, .......... [11.10] interstate networks, ....................... [3.110], [11.300]–[11.310] ARTC undertaking, .. [3.110], [11.300], [11.450] Tarcoola-Darwin railway, ....... [11.310] “light-handed” regulation, ............. [1.70], [11.10] WA, ............................................ [11.440] marginal costs, ................................... [2.40] marginal unit, .................................... [2.40] National Access Regime, application of, ................................. [11.20], [11.290] ARTC interstate undertaking, ............................... [11.300], [11.450] Tas, ............................................. [11.480] WA, ............................ [11.410], [11.430] natural monopolies, .......... [2.190], [3.100] New South Wales, ......... [11.340]–[11.350] access undertakings, ................ [3.110], [11.340], [11.350] Hunter Valley coal system, ... [11.340] no specific access regime, .............. [11.20] Northern Territory, ........................ [11.490] Tarcoola-Darwin railway, ...... [11.310], [11.490] overview, ................. [1.70], [3.110], [11.10] ownership, .......................... [11.40], [11.50] port infrastructure and, .................. [11.20] common features, ...................... [11.20] export supply chain, ................. [11.20] vertical integration, ................... [11.60] private ownership, ............ [11.40], [11.50] Queensland, ...... [3.110], [11.320], [11.330] Aurizon, ........ [3.110], [11.40], [11.320] declared services, ........ [6.70], [11.320] general access regime, ............ [11.320] network investment and expansion, need for, .............................. [11.330] privatisation, .............................. [11.40] QCA role, ...................... [6.70], [11.320] Queensland Rail, ....... [3.110], [11.320]

undertakings by QCA, ........... [11.320] sources of economic regulation, . [11.290] South Australia, ............. [11.380]–[11.400] application of access regime, ............................................... [11.380] certification of regime, ........... [11.400] ESCOSA role, ............ [6.110], [11.310], [11.380] Railways (Operations and Access) Act 1997, ..................................... [11.380] review of access regime, ........ [11.390] Tarcoola-Darwin railway, ....... [11.310] state-based regimes, ......... [3.110], [11.20], [11.290] summary, ........................................ [11.500] Tarcoola-Darwin railway access regime, ............................... [11.310], [11.490] AustralAsia Railway (Third Party Access) Code, ..... [11.310], [11.490] ESCOSA as regulator, .............. [6.110], [11.310] Tasmania, ........................................ [11.480] declared services, .................... [11.480] national access regime, .......... [11.480] vertical integration, ......................... [11.60] Victoria, ............................. [11.10], [11.360] access regime, .......................... [11.360] declared services, .................... [11.360] dispute resolution framework, ............................................... [11.360] ESCV review of regime, ......... [11.370] ESCV role, .................... [6.90], [11.360] Rail Management Act 1996, .. [11.360] Western Australia, ............ [3.110], [11.10], [11.410]–[11.470] ARTC interstate network undertaking, ....................... [11.450] certification of regime, ........... [11.430] declared services, .................... [11.460] ERA role, ..................... [6.120], [11.420] Goldsworthy line, ................... [11.460] Hamersley line, ....................... [11.470] “light-handed” regulation, .... [11.440] Mt Newman line, .................... [11.470] national access regime, ......... [11.410], [11.430] Pilbara region, ............. [3.190], [11.40], [11.420], [11.470] privatisation, .............................. [11.40] Railways (Access) Act 1998, . [11.410], [11.420] Railways (Access) Code 2000, ............................................... [11.420] railways subject to state regime, ............................................... [11.420] Robe line, .................................. [11.470]

Index Rail infrastructure — cont services not currently subject to economic regulation, ........ [11.470] state-specific regime, ............... [3.110], [11.410], [11.420] undertakings, ........................... [11.450] Ramsey pricing, ...................................... [4.80] Rate of return — see Return on capital Regulatory bodies ACCC — see Australian Competition and Consumer Commission (ACCC) AER — see Australian Energy Regulator (AER) Australian Competition Tribunal — see Australian Competition Tribunal Australian Energy Market Commission, ................................................... [6.40] Commonwealth, .................... [6.20]–[6.60] different roles, ...................... [6.10], [6.160] Economic Regulation Authority of Western Australia, ............... [6.120] Essential Services Commission of South Australia, ............... [6.110], [11.130] Essential Services Commission of Victoria, ...................... [6.90], [6.90], [11.220]–[11.250] Harper Review, ................. [6.150], [12.70] Independent Competition and Regulatory Commission, ... [6.140] Independent Pricing and Regulatory Tribunal, .................................. [6.80] intervention models — see Regulatory intervention models National Competition Council, ...... [6.50] Northern Territory Utilities Commission, ................................. [6.130], [11.280] Office of the Tasmanian Economic Regulator, .............. [6.100], [11.270] overview, .................. [1.60], [6.10], [12.10] Queensland Competition Authority, ................... [6.70], [11.200], [11.210] reform recommendations, ............. [6.150] regulatory discretion, ........ [6.250]–[6.300] “have regard to” requirement, ................................................. [6.280] permissive or mandatory language, ................................................. [6.260] prescription of methods, .......... [6.270] relevant considerations, ........... [6.290] subject matter of decision, ...... [6.300] review of decisions — see Review of regulatory decisions

467

roles of, ................................. [6.10], [6.160] source of powers, .............................. [6.10] state and territory, ............... [6.70]–[6.140] summary, .......................................... [6.310] Regulatory information instruments AER power to issue, ......... [4.140], [8.220] penalties may apply for non-compliance, ................................................. [8.220] regulatory information notice (RIN), ................................... [4.140], [8.220] regulatory information order (RIO), ................................... [4.140], [8.220] Regulatory intervention models consider/determine, ....................... [6.230] telecommunications, .. [6.190], [6.240], [10.180] negotiate/arbitrate, ......................... [6.170] ESCOSA, ................................... [11.150] National Access Regime, ........ [6.180], [6.210] propose/respond model combined with, ...................................... [6.210] telecommunications, ... [6.190], [10.20] move away from, . [10.180], [10.400] overview, .......................................... [6.160] propose/respond, ........................... [6.200] electricity network, ................... [6.220] National Access Regime, ......... [6.210] undertakings to ACCC, ........... [6.210] regulatory discretion, ........ [6.250]–[6.300] telecommunications access regime consider/determine, .. [6.190], [6.240], [10.180] negotiate/arbitrate, .... [6.190], [10.20], [10.180] move away from, . [10.180], [10.400] Remuneration of service provider efficient costs, based on, .................. [2.80] Retail-minus approach advantages and disadvantages, ... [4.170] monopoly pricing, .......................... [4.170] overview, .......................................... [4.170] telecommunications services, ........ [4.170] Return of capital building block model, ...... [5.110], [5.120] core building block, .................... [5.40] depreciation of value of asset base, ................................... [5.110], [5.120] efficient costs of supply, ................... [4.90]

468

Access Regulation in Australia

Return on capital building block model, ...... [5.130]–[5.180] core building block, .................... [5.40] cost of capital, .................................. [5.130] cost of debt, ........................ [5.150], [5.160] cases relating to, ........................ [5.160] choice of data source, ............... [5.160] credit rating, .............................. [5.150] measurement period, ............... [5.160] term to maturity, ....................... [5.150] cost of equity, ................................... [5.170] Black CAPM, ............... [5.170], [8.340] electricity, .................................... [8.340] Fama-French Model, ................. [5.170] Sharpe–Lintner Capital Asset Pricing Model (SL CAPM), ............ [5.170], [8.340] efficient costs of supply, ................... [4.90] electricity, ............................ [8.330]–[8.350] AER Rate of Return Guideline, ................................... [8.340], [8.350] allowed rate, .............................. [8.330] leverage/gearing, ...................... [8.330] regulatory determinations, ...... [8.350] return on debt, ............ [8.340], [8.350] return on equity, ....................... [8.340] weighting, ................................... [8.330] rate of return, .................... [5.130], [5.140] AER Rate of Return Guideline, ................................... [8.340], [8.350] determination of, ....................... [5.140] electricity, ...................... [8.340], [8.350] regulated, variability in, .......... [5.180] return on debt, ................................ [5.130] benchmark assumption, ........... [8.350] cost of debt, .................. [5.150], [5.160] debt management strategy, ..... [8.350] electricity, ...................... [8.340], [8.350] interest rate risk, ....................... [8.350] “on-the-day” method, .............. [8.340] refinancing risk, ......................... [8.350] “trailing average” method, ..... [8.350] return on equity, ............................. [5.130] cost of equity, ............................. [5.170] electricity, .................................... [8.340] Sharpe–Lintner Capital Asset Pricing Model (SL CAPM), ............ [5.170], [8.340] weighted average cost of capital (WACC), ............................... [5.140] pre- or post-tax WACC, ........... [5.140] real or nominal WACC, ........... [5.140]

Revenue allowance — see Taxation allowance Review of regulatory decisions Australian Competition Tribunal, by, ................................................... [6.60] judicial review — see Judicial review merits review — see Merits review overview, .............................. [1.80], [12.10] summary, ........................................ [12.520] types, ................................................. [12.20]

S Service standard incentives building block model, ...... [5.290], [5.300] service target performance incentive scheme (STPIS), ..... [5.290], [8.420] electricity DNSPs, ..................... [8.420] electricity TNSPs, ...................... [8.420] Sharpe-Lintner capital asset pricing model (SL-CAPM), ........... [5.170], [8.340] Short-run cost fixed or variable, ............................... [2.30] long-run distinguished, ................... [2.30] marginal cost, .................................... [2.40] South Australia ports — see Port infrastructure rail — see Rail infrastructure regulator, ........................................... [6.110] Special access undertakings — see Telecommunications access undertakings Standing Council on Energy and Resources (SCER) merits review regime, review of, . [12.90] consultation paper, ................. [12.100] statement of policy intent, .... [12.100] State and territory access regimes certification — see Certification declaration of service not already subject to, ............... [7.100], [7.170], [7.210] State Energy Commission of Western Australia (SECWA), ............. [9.50] Structure of book overview, ............................................ [1.30] Part 1, .................................................. [1.40]

Index Structure of book — cont Part 2, .................................................. [1.50] Part 3, .................................................. [1.60] Part 4, .................................................. [1.70] Sunk costs asset stranding risk, .......................... [3.30] barriers to entry and expansion, ... [2.60], [2.200] definition, ........................................... [2.60] high, effect of, .................................... [2.60] natural monopoly where high, ..... [2.60], [2.190] productive efficiency and, ............. [2.150] Supply and demand allocatively efficient outcomes, ..... dynamic efficiency and, ................. economic concepts, ......................... productive efficiency and, .............

[2.140] [2.150] [2.140] [2.150]

T

Tasmania ports — see Port infrastructure rail — see Rail infrastructure regulator, ........................................... [6.100] Taxation allowance adjustments during regulatory period, ....... [5.240] end of regulatory period, ........ [5.250] uncertain events, ....................... [5.240] unforeseen events, .................... [5.240] building block model, .................... [5.200] calculating net tax liabilities, .. [5.210] core building block, .................... [5.40] electricity, .................................... [8.370] locking in allowance, ............... [5.240] efficient cost, ....................................... [4.90] electricity, .......................................... [8.370] net tax liabilities, ............................. [5.210] deductions, ................................. [5.210] imputation credits, .................... [5.210] post-tax basis, .................... [5.200], [5.210] pre-tax basis, .................................... [5.200] Telecommunications ACCC role, ......................................... [6.20] access agreements, ........ [10.390], [10.480] hierarchy of regulatory documents, ............................................... [10.510] written statement to ACCC, . [10.480]

469

access determinations — see Telecommunications access determinations access undertakings — see Telecommunications access undertakings amendments to regime, ............................... [10.170]–[10.230] move from negotiate/arbitrate model, ............................... [10.180], [10.400] NBN, to accommodate, ........... [10.20], [10.190]–[10.220] review of operation, ............... [10.230] arbitration of disputes, .. [6.190], [10.160] complaints about, .................... [10.170] move from negotiate/arbitrate model, ............................... [10.180], [10.400] publication of determination, ............................................... [10.160] background, ...................... [10.30]–[10.150] benchmarking, ................................. [4.200] billing information obligations, .. [10.270] binding rules of conduct (BROCs), ............... [10.180], [10.390], [10.500] general or limited application, ............................................... [10.500] hierarchy of regulatory documents, ............................................... [10.510] matters to be considered, ...... [10.410] NBN-specific, ........................... [10.500] purpose, .................................... [10.500] restrictions on, ......... [10.420], [10.500] terms and conditions of access, ............................... [10.390], [10.500] urgent matters, dealing with, ............................... [10.180], [10.500] cabling, access to, .......................... [10.270] carriage service, definition, ......... [10.240] carriage service provider, definition, ............................................... [10.240] carrier, definition, .......................... [10.240] carrier licence, ................................ [10.240] commercial negotiations, ............. [10.160] primacy over regulated outcome, ............................................... [10.510] competition declaration of services where lack of, ................................................. [10.10] facilities-based, .......................... [10.10] infrastructure-based, ................. [10.10] Competition and Consumer Act 2010, Pt XIC, ......... [1.70], [3.110], [10.10] amendments, ............ [10.170]–[10.230] insertion of, .............................. [10.160] objects clause, ............................ [3.160]

470

Access Regulation in Australia

Telecommunications — cont overlap with Telecommunications Act regime, ................ [10.140], [10.150] review of, .. [10.230], [10.520]–[10.550] summary, .................................. [10.560] complaints of participants, .......... [10.170] conditional access equipment category A standard access obligations, ......................... [10.270] category B standard access obligations, ......................... [10.300] consider/determine intervention model, ................... [6.190], [6.240], [10.180] cost-based access regulation, ........ [4.100] TSLRIC+ methodology, ........... [4.100], [10.460] declaration of services — see Telecommunications: declaration of services designated radiocommunications facilities, .............................. [10.250] determining terms of access, ...... [10.160] domestic transmission capacity service (DTCS), ............................... [10.330] access determination, ............ [10.330], [10.470] declaration of service, ............ [10.330] equivalence of fault detection, handling and rectification, ................ [10.270] equivalence of technical and operational quality, ................................ [10.270] essential facilities, ........................... [3.100] exemptions from standard access obligations category A obligations, ......... [10.280], [10.290] class exemptions, .................... [10.290] long term interests of end-users (LTIE), ................................. [10.290] facilities, access to, ........ [10.130]–[10.150] overlap with access to services, ............................... [10.140], [10.150] Telecommunications Act regime, ............................... [10.130]–[10.150] hierarchy of regulatory documents, ............................................... [10.510] history of access regime, .............. [10.20], [10.160]–[10.230] importance of access regulation, .... [1.10] infrastructure — see Telecommunications infrastructure and services interconnection of facilities, ........ [10.140] category A standard access obligations, ......................... [10.270] category B standard access obligations, ......................... [10.300]

overlap of access regimes, ..... [10.140] key concepts, ................. [10.240], [10.250] Layer 2 bitstream service, .......... [10.220], [10.270] long term interests of end-users (LTIE), promotion of, ....................... [3.160] access determinations, ........... [10.410] declaration of services, .......... [10.320] exemptions from standard access obligations, ......................... [10.290] object of CCA, Pt XIC, ............ [3.160], [10.320] terms and conditions, reasonableness of, ......................................... [10.360] merits review of ACCC decisions grounds, .................................... [12.240] history of, ................................. [12.110] no longer available, .. [12.50], [12.110] Ministerial pricing determinations, ............................... [10.390], [10.490] hierarchy of regulatory documents, ............................................... [10.510] national regime, .. [3.110], [3.160], [7.110], [10.10] natural monopolies, .......... [2.190], [3.100] NBN services — see also National Broadband Network (NBN) amendments to accommodate, ................. [10.20], [10.190]–[10.220] binding rules of conduct (BROCs), ............................................... [10.500] category B standard access obligations, ......................... [10.300] exceptions, ........................... [10.310] declared services, .................... [10.260] NBN Co, .......... [3.70], [3.110], [10.20], [10.100], [10.190] special access undertakings, . [10.370] standard form of access agreement (SFAA), ................................ [10.380] strategic review, ...................... [10.190] structural separation of Telstra, ............................... [10.200], [10.210] Vertigan Review, ...... [10.520]–[10.550] negotiate/arbitrate intervention model, ................................... [6.190], [10.20] move away from, .... [10.180], [10.400] network unit types, ...................... [10.250] declared facilities, ................... [10.250] designated radiocommunications facilities, .............................. [10.250] multiple line links, .................. [10.250] single line link, ........................ [10.250] non-NBN services category A standard access obligations, ......................... [10.270]

Index Telecommunications — cont exceptions, ........... [10.280], [10.290] declaration of, .......................... [10.320] special access undertakings, ............................... [10.340]–[10.360] objectives, ......................................... [3.160] overview, ... [1.70], [3.110], [10.10], [10.20] pricing principles, ......................... [10.160] Productivity Commission report, ............................... [10.160], [10.170] recent issues, .................................. [10.520] regulatory intervention models consider/determine, .. [6.190], [6.240], [10.180] negotiate/arbitrate, .... [6.190], [10.20], [10.180] retail-minus approach, ................... [4.170] scope of regulation, ...................... [10.260] services, ........................................... [10.130] declared — see Telecommunications: declaration of services explanation of — see Telecommunications infrastructure and services special access undertakings — see Telecommunications access undertakings standard access obligations category A, ............... [10.220], [10.270] exceptions, ........... [10.280], [10.290] category B, ................ [10.220], [10.300] exceptions, ........................... [10.310] hierarchy of regulatory documents, ............................................... [10.510] Layer 2 bitstream service, .... [10.220], [10.270] NBN corporations, .. [10.220], [10.300] summary, ........................................ [10.560] superfast broadband network, .. [10.220], [10.270] supply obligations, ....... [10.270], [10.300] Telecommunications Act regime, ............................................... [10.130] access to facilities, ... [10.130]–[10.150] NBN, amendments to accommodate, ............................................... [10.220] overlap with CCA requirements, ............................... [10.140], [10.150] terms and conditions of access declared services, .................... [10.160] determination of, ..... [10.160], [10.390] fixed principles term or condition, ............................................... [10.340] reasonableness, determination of, ............................................... [10.360] special access undertakings, . [10.360]

471

TSLRIC+ methodology, .. [4.100], [10.460] valuation of Telstra assets, .. [5.70], [5.90] roll forward mechanism, ........... [5.90] Vertigan Review, ............ [10.520]–[10.550] conclusions, .............................. [10.540] government response, ............ [10.550] Market and Regulatory Report, ............................... [10.520], [10.530] recommendations, ... [10.520], [10.530] Telecommunications access determinations ACCC power to make, ..... [6.20], [6.240], [10.400] backdating, ..................................... [10.430] building block model, ...... [5.30], [10.450] domestic transmission capacity service (DTCS), ............... [10.330], [10.470] benchmarking pricing approach, ............................................... [10.470] examples, ........................ [10.450]–[10.470] expiry date, .................................... [10.430] fixed line services model (FLSM), ............................................... [10.450] annual revenue requirements for each asset class, .......................... [10.450] costs of assets allocated to declared services, ............................... [10.450] price determination, ............... [10.450] regulatory asset base, ............. [10.450] fixed principles provision, ........... [10.420] hierarchy of regulatory documents, ............................................... [10.510] interim access determination, ..... [10.440] matters to be considered, ............. [6.290], [10.410] mobile services, ............................. [10.460] mobile terminating access service, ............................................... [10.460] total service long run incremental cost (TSLRIC) methodology, ... [10.460] overview, ........................................ [10.240] public inquiry, ............................... [10.440] replacement of previous determination, ............................................... [10.430] restrictions on, ............................... [10.420] scope, ................................. [6.240], [10.400] terms and conditions of access, .. [6.240], [10.390] TSLRIC+ methodology, .. [4.100], [10.460] Telecommunications access undertakings hierarchy of regulatory documents, ............................................... [10.510] NBN services, special access undertakings, ..................... [10.370]

472

Access Regulation in Australia

Telecommunications access undertakings — cont initial cost recovery account (ICRA), ............................................... [10.370] long term revenue constraint methodology (LTRCM) determination, ................... [10.370] NBN Co Special Access Undertaking (SAU), .................................. [10.370] when NBN corporation can give, ............................................... [10.370] non-NBN services, special access undertakings, ..................... [10.340] acceptance or rejection by ACCC, ............................................... [10.350] fixed principles term or condition, ............................................... [10.340] notice requiring variations, ... [10.350] terms and conditions, reasonableness of, ......................................... [10.360] variation, ................... [10.350], [10.360] terms and conditions of access, ............................... [10.160], [10.390] Telecommunications: declaration of services active declared services, ............... [10.10], [10.270] carriage service, ............................. [10.260] competition, existence of, .............. [10.10] consequences NBN services, .......... [10.300]–[10.310] non-NBN services, .. [10.270]–[10.290] declared services, ............................ [10.10] eligible services, ...................... [10.260] fixed line services, .... [10.50]–[10.100], [10.450] internet services, ..................... [10.120] NBN services, .......... [10.300]–[10.310] non-NBN services, .. [10.270]–[10.290] standard access obligations, ............................... [10.270]–[10.310] terms of access to — see Telecommunications wireless services, ..... [10.110], [10.120] domestic transmission capacity service (DTCS), ............................... [10.330] listed carriage services, ................ [10.260] long term interests of end-users (LTIE), promotion of, ....... [3.160], [10.320] methods of, ..................... [10.320]–[10.380] NBN services, ................................ [10.320] obligations after, ..... [10.260], [10.300], [10.310] prohibition on supplying service unless declared, ................. [10.260]

special access undertakings, . [10.370] standard form of access agreement (SFAA), ................................ [10.380] non-NBN services, ........................ [10.320] obligations after, ...... [10.270]–[10.290] special access undertakings, ............................... [10.340]–[10.360] public inquiry by ACCC, ........... [10.160], [10.320] recommendation of an industry body, ............................................... [10.160] technology neutral declaration, .... [10.30] when necessary, ............................... [10.10] Telecommunications facilities access to, ......................... [10.130]–[10.150] essential facilities, ........................... [3.100] exchange capping, ........................ [10.140] facilities-based competition, .......... [10.10] interconnection of facilities, ........ [10.140] category A standard access obligations, ......................... [10.270] category B standard access obligations, ......................... [10.300] Main Distribution Frame (MDF), ............................................... [10.140] superfast broadband network, ... [10.220] supplementary facilities, .............. [10.130] Telecommunications Act 1997 regime, ............................................... [10.130] NBN, amendments to accommodate, ............................................... [10.220] overlap with CCA requirements, ............................... [10.140], [10.150] Pt 3 of Sch 1, ............................ [10.140] Pt 5 of Sch 1, ............ [10.140], [10.150] Telstra exchange buildings, access to, ............................... [10.130], [10.140] terms and conditions of access, . [10.130] transmission towers, ..... [10.130], [10.150] underground facilities, . [10.130], [10.150] Telecommunications infrastructure and services asymmetric digital subscriber line (ADSL) services access to facilities required, .. [10.130] broadband services, ................ [10.120] wholesale services, ..... [10.50], [10.90] basic local access network, ............ [10.40] broadband services, ...................... [10.120] copper networks, ............ [10.40], [10.120] declared services — see Telecommunications: declaration of services

Index Telecommunications infrastructure and services — cont digital subscriber line access multiplexers (DSLAMs), .............. [10.10], [10.60] access to facilities to install, . [10.130], [10.140] domestic transmission capacity service (DTCS), ............................... [10.330] access determination, ............ [10.330], [10.470] declaration of, .......................... [10.330] exchange capping, ........................ [10.140] fixed and wireless infrastructure, ............................... [10.110], [10.120] fixed line infrastructure and services, ................................. [10.40]–[10.100] access determination, ............. [10.450] declared services, ..... [10.50]–[10.100], [10.450] supply chain, ............................. [10.50] fixed originating access service (FOAS), ................................... [10.50], [10.70] fixed terminating access service (FTAS), ................................... [10.50], [10.80] government ownership, ................... [3.70] hybrid fibre coaxial (HFC) cable networks, .............. [10.40], [10.100] infrastructure-based competition, ................................................. [10.10] interconnection of facilities, ........ [10.140] internet services, ........................... [10.120] local carriage service (LCS), ......... [10.50], [10.70] loop sharing service (LSS), ........... [10.50], [10.60] mobile networks, ........................... [10.110] mobile terminating access service (MTAS), ............................... [10.110] NBN services — see National Broadband Network (NBN) satellite networks, ......................... [10.110] unconditioned local loop service (ULLS), ................................... [10.50], [10.60] wholesale asymmetric digital subscriber line (ADSL) service, ........... [10.50], [10.90] wholesale line rental (WLR), ....... [10.50], [10.70] wireless infrastructure and services, ............................................... [10.110] internet services, ..................... [10.120] mobile networks, ..................... [10.110] satellite networks, ................... [10.110] supply chain, ........................... [10.110] xDSL services, .................................. [10.60]

473

Time limits access undertakings, ....................... [7.260] arbitration determinations, ............ [7.290] declaration of services, ..... [7.140]–[7.160] aim to improve efficiency, ....... [7.160] extension of, ............................... [7.150] introduction of, ............. [7.80], [7.100], [7.140] length of process prior to imposition of, ........................................... [7.160] “stopping the clock”, ............... [7.150] National Access Regime access undertakings, ................. [7.260] arbitration determinations, ...... [7.290] declaration of services, ................................... [7.140]–[7.160] introduction of, ............. [7.80], [7.100], [7.140] “stopping the clock”, . [7.150], [7.290] TNSP — see Electricity transmission Total factor productivity (TFP) method, ................................................. [4.180] Transmission determinations (electricity) AER, by, ................ [8.180], [8.200], [8.260] definition, ......................................... [8.160] draft determination, ....................... [8.480] final determination, ........................ [8.480] framework and approach paper, ................................... [8.480], [8.490] merits review, .................................. [8.520] negotiated transmission services, ................................................. [8.260] prescribed transmission services, . [8.260] procedure, ........................... [8.480]–[8.520] regulated operator to comply with, ................................................. [8.160] revenue and pricing principles, ... [8.200] revenue proposal, . [8.10], [8.480], [8.500] review rights, ................................... [8.520] reviewable regulatory decisions, .. [8.200] revised proposal, ............................. [8.510] time limits, ....................................... [8.480] TSLRIC+ methodology building block method compared, ................................................. [4.100] cost-based access regulation, ........ [4.100] telecommunications, ....... [4.100], [10.460]

474

Access Regulation in Australia

U Undertakings — see Access undertakings

V Valuation of asset base building block method, for, ..................................... [5.50]–[5.100] capital base, ........................................ [5.60] choice of methodology, ........ [5.60], [5.70] depreciated actual cost (DAC), ...... [5.60] depreciated historic cost, ................. [5.60] advantages of DORC over, ....... [5.80] depreciated optimised replacement cost (DORC), ...................... [5.60], [5.80] advantages and disadvantages, ................................................... [5.80] electricity networks, ................... [5.80] gas pipelines, ............................... [5.80] depreciation of value, ..................... [5.110] acceleration, ................................ [5.110] choice of methodology, ............ [5.120] deferral, ....................................... [5.110] electricity, .................................... [8.360] National Gas Rules (NGR) criteria, ................................................. [5.120] straight line basis, ..................... [5.110] electricity, ............................ [8.280]–[8.330] ex ante review, ................................. [5.100] ex post review, ................................. [5.100] electricity, ...................... [8.280], [8.290] factors affecting method choice, ..... [5.70] historic cost, ....................................... [5.60] inflation, ............................................ [5.220] adjustment for, ............................. [5.90] initial valuation, .................... [5.60]–[5.80] line in the sand, ................................ [5.60] lock in and roll forward approach, ................................................... [5.90] new capital expenditure, ............... [5.100] optimised deprival value (ODV), .. [5.60] price paid in recent transaction, .... [5.60] return of capital, .............................. [5.110] Telstra assets, ......................... [5.70], [5.90] roll forward mechanism, ........... [5.90] updating, ............................................ [5.90] inflation adjustments, ................. [5.90] new capital expenditure, ......... [5.100] value over time, ................................ [5.90] Vertical integration definition, ......................................... [2.210] economic benefit/harm, ................ [2.210]

essential facilities, ........................... [3.100] port and rail infrastructure, .......... [11.60] Vertical separation accounting separation, ..................... [3.90] alternative to access regulation, .... [3.50], [3.90] drawbacks, ......................................... [3.90] functional separation, ....................... [3.90] structural separation, ....................... [3.90] types, ................................................... [3.90] Vertigan Review conclusions, .................................... [10.540] government response, .................. [10.550] Market and Regulatory Report, ............................... [10.520], [10.530] recommendations, ......... [10.520], [10.530] telecommunications regime, of, ............................... [10.520]–[10.550] Victoria ports — see Port infrastructure rail — see Rail infrastructure regulator, ............................................. [6.90]

W

Water ACCC role, ......................................... [6.20] ERA (WA) role, ................................ [6.120] ESCOSA role, ................................... [6.110] IPART role, ......................................... [6.80] Northern Territory Utilities Commission, ................................................. [6.130] OTTER role, ..................................... [6.100] QCA role, ............................................ [6.70] Western Australia electricity regime, .............. [3.110], [6.120] merits review, .......................... [12.120] gas regime, ........................... [6.120], [9.10] ERA as regulator, .......... [6.120], [9.10] merits review, .......................... [12.120] NGL, varied form in, ................. [9.30] ports — see Port infrastructure rail — see Rail infrastructure regulator, ........................................... [6.120] Wheat export industry ACCC role, ......................................... [6.20] Australian Wheat Board (AWB), .. [11.90] bulk wheat terminals, access to, .. [11.80]

Index Wheat export industry — cont access test, .................................. [11.90] accreditation system, ................ [11.90] Code of Conduct, .................... [11.100] national access regime, ........... [11.80], [11.100] obligations of operators, ........ [11.100] single desk system, ................... [11.90] undertakings by operators, ..... [11.90] Wheat Export Marketing Act 2008, ................................................. [11.90] history of, ......................................... [11.90] Port Terminal Access (Bulk Wheat) Code of Conduct, ......................... [11.100]

475

Workable competition benchmark in access regulation, .. [2.170] common market structure, ............ [2.170] concept, ............................................. [2.170]

Y

Yardstick regulation — see Benchmarking