Australian Energy Regulator v Australian Competition Tribunal

The AER's final decision 6 The AER's operative decision (of concern to this proceeding) was made under r 64(4) of the NGR. The decision gave effect to the AER's revisions to JGN's access arrangement. A significant aspect of the decision was the AER's estimation of the return on debt for the 2015 - 2020 access arrangement period. 7 Under the NGR, the allowed rate of return is to be determined such that it achieves the allowed rate of return objective: r 87(2). This objective is defined in r 87(3) in terms closely similar to the allowed rate of return objective defined in r 6.5.2(c) of the NER: 87(3) 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 (the allowed rate of return objective). (Italics in original.) 8 Rule 87(10)(b) of the NGR provides that one methodology to estimate the return on debt could reflect 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 access arrangement period. This methodology is referred to as the "trailing average" approach. Another methodology, referred to in r 87(10)(a), reflects the return that would have been required by debt investors in a benchmark efficient entity if it raised debt at the time, or shortly before the time, when the AER's decision on the access arrangement for that access arrangement period is made. This methodology is referred to as the "on-the-day" approach. Both of these approaches are also referred to in the NER discussed in the Electricity Networks reasons at [395]. 9 Prior to the operative decision, the AER had identified four options for estimating the return on debt for the 2015-2020 access arrangement period. These options combined forms of the on-the-day and trailing average approaches, and are the same options discussed at [399] of the Electricity Networks reasons. For ease of exposition, we refer to them again, noting that the return on debt has two components. The first component is the risk free (or base) rate. The second component is a risk premium over the base rate, called the debt risk premium (DRP). It is common ground that, at relevant times, a service provider could hedge the base rate but not the DRP. 10 The first option was to continue the on-the-day approach. The second option was to start with an on-the-day rate for the first regulatory year and gradually transition into a trailing average approach over 10 years (Option 2). It is to be noted that Option 2 was the option expressed in the Rate of Return Guideline (the ROR Guideline) that had been published by the AER. The third option was to start with an on-the-day rate for the base rate component and gradually transition this component into a trailing average approach over 10 years. The DRP component of the return on debt would be determined using a backwards looking trailing average DRP. In other words, there would be no transition for this component. The AER referred to the combined elements of this approach as a "hybrid transition" (Option 3). The fourth option was to adopt a backwards looking trailing average approach, with no transition for either the base rate component or the DRP component (Option 4). 11 The AER was of the view that Option 2 should be adopted. The electricity networks opposed this approach. They advocated the adoption of Option 4. However, unlike the electricity networks, JGN was, at least initially, content with the adoption of Option 2. On 30 June 2014, it submitted an access arrangement revision proposal pursuant to r 52 of the NGR in respect of the 2015-2020 access arrangement period (the JGN proposal) in which it broadly accepted Option 2 as the approach to be adopted for transitioning to the trailing average approach when estimating the return on debt for the relevant period. However, importantly, JGN's acceptance was conditioned on Option 2 being "applied properly" and resulting in "reasonable estimates of the return on debt for the benchmark efficient entity". 12 On 27 November 2014, the AER made an access arrangement draft decision, as required by r 59(1) of the NGR (the draft decision). In the draft decision, and consistently with the JGN proposal, the AER adopted Option 2. 13 On 27 February 2015, JGN submitted a revised access arrangement revision proposal to the AER (the revised JGN proposal), including additions and other amendments to the JGN proposal to address matters raised in the draft decision. The revised JGN proposal was submitted in reliance on r 60 of the NGR. In the revised JGN proposal, JGN sought to withdraw its support of Option 2. Instead, it proposed that the 10 year incremental transition be applied only to the base rate, not the DRP. In short, it advocated the adoption of Option 3. JGN also sought to rely on Option 4 as an alternative methodology for estimating the return on debt. 14 Rule 60(1) of the NGR permits a service provider to submit additions or other amendments to an access arrangement proposal (including an access arrangement revision proposal) to address matters raised in an access arrangement draft decision made by the AER. However, r 60(2) provides: The amendments must be limited to those necessary to address matters raised in the access arrangement draft decision unless the AER approves further amendments. (Italics in original.) 15 When submitting the revised JGN proposal, JGN advanced two broad reasons for its change of view. First, JGN said that there had been recent changes to debt yields in relation to the DRP component of the return on debt (the Tribunal said that it was common ground that, by February 2015, the prevailing return on debt (including the DRP) was lower than it had been in June 2014). In the revised JGN proposal, JGN explained the position this way: At the time JGN submitted its proposal, it appeared that properly applying the trailing average approach and transition set out in the guideline (notwithstanding shortcomings with the transition) would result in a reasonable estimate of the return on debt for the benchmark efficient entity for the forthcoming period. That is, for the forthcoming period the required return on debt for an entity which had been operating under the hybrid financing model in previous periods would be reasonably close to - or was not expected to materially differ from - the allowed return on debt under the trailing average approach and transition set out in the guideline. However, due to changes in financial market conditions since JGN submitted its original proposal, this is no longer the case. Due to a decline in the prevailing DRP, the allowed return on debt under the trailing average approach and transition set out in the guideline will be significantly below the required return on debt for the benchmark efficient entity, given the embedded debt cost of the benchmark entity. [Emphasis added.] 16 Secondly, JGN claimed that the AER had made "new findings" in its draft decision on current efficient debt financing practices. 17 On 3 June 2015, the AER published its final decision pursuant to r 62 of the NGR. In its final decision, the AER refused to allow JGN to revise the JGN proposal to change from its original acceptance of Option 2. This was because, in its draft decision, the AER had accepted the JGN proposal which was based on Option 2. Consequently, the AER said, no amendment to JGN's proposal was necessary by reason of the draft decision itself. Moreover, the AER said that it had not otherwise approved of JGN making further amendments to the JGN proposal. In short, the AER was not persuaded that, in seeking to advance Option 3 in lieu of Option 2 in the revised JGN proposal, JGN had satisfied the requirements of r 60(2) of the NGR. 18 By way of further explanation, the AER noted that, under r 60(2) of the NGR, it could, as a matter of discretion, approve further amendments to an access arrangement proposal (including an access arrangement revision proposal). It explained that it might do so to deal with a change in circumstances of the service provider's business since submission of an access arrangement proposal. However, the AER was not satisfied that the two reasons advanced by JGN for its change in position were sufficient to warrant the AER's approval being given, as a matter of discretion, to the amendment that JGN had sought respecting the adoption of Option 3 in lieu of Option 2. 19 As to the first reason (a decline in the prevailing DRP), the AER reasoned that, at the time of the JGN proposal, JGN would have been aware that interest rates could change, either up or down, in the time between the proposal and the debt averaging period that JGN had proposed for the 2015-2016 regulatory year. JGN had proposed a particular averaging period and the AER had accepted that proposal and estimated the return on debt for the 2015-2016 regulatory year based on interest rates at the time of that averaging period. The AER said: It appears from JGN's proposal that had interest rates remained about the same level or increased (resulting in JGN being financially better off) it would have continued to support the Guideline approach. It is only because interest rates have decreased (resulting in JGN being financially worse off) that JGN now proposes a departure from the Guideline approach. We do not consider that accepting JGN's departure from the (initial) access arrangement proposal for this reason would provide a balanced or consistent approach to regulation. Rather, it would result in a biased approach that favours JGN at the expense of its customers. Accordingly, we are not satisfied this departure would be consistent with the national gas objective, or would contribute to the achievement of [the] allowed rate of return objective. 20 As to the second reason ("new findings" in the draft decision), the AER considered that JGN had misunderstood the draft decision. The AER said that it had not made "new findings". It said that its position in the draft decision on efficient financing practices was consistent with its position during the development of the ROR Guideline. 21 Thus, the AER was not satisfied that its draft decision constituted a change in circumstances or, indeed, stood as any other reason why it should approve of JGN making amendments beyond those that were actually necessary to address the matters raised in the draft decision. 22 The AER also considered that there were "broader concerns". In this connection, the AER said: If a service provider is able to change its proposal after it had been accepted in the draft decision, it dilutes the value of having a draft decision. A draft decision provides an opportunity for all stakeholders to narrow issues in contention as part of the access arrangement decision. If a service provider can change its proposal despite it being accepted in a draft decision, this raises the question as to why there is a draft decision at all. 23 In forming its assessment, the AER also considered the views of consumers who disagreed with JGN's proposed departure from Option 2. 24 The consequence of this was that, in the JGN decision, the AER determined that JGN could recover $2,229.0 million ($nominal, smooth) from consumers over the 2015-2020 access arrangement period. This represented a significant decrease in revenue for JGN compared with both past levels of revenue and the amount that it had proposed for the new period.

The JGN decision 25 The Tribunal considered that there was "much to be said" for the AER's view that, as it had adopted JGN's proposal on the topic of transitioning, "no amendments under r 59(2) [quaere, r 60(1)] were either required or permitted to be made by JGN to that element of its proposal". The Tribunal nevertheless concluded that the AER's discretion "should have been exercised differently". The Tribunal said that, contrary to the AER's view, JGN should have been entitled to make the amendments or revisions it had sought, in this regard, in the revised JGN proposal. This was because, in the Tribunal's view, JGN had not simply raised the fact of the change in interest rates in the period between the JGN proposal and the revised JGN proposal, it had also raised the proposition that the change in rates would have the consequence that the return on debt that would then be determined would be below the efficient financing costs of a benchmark efficient entity in the 2015-2020 access arrangement period. 26 In this connection, the Tribunal noted that there was evidence before the AER which indicated a significant drop in the DRP between the time of the JGN proposal and February 2016 (quaere, 2015): see [13]-[15] above. The Tribunal said (at [76]) that the drop was such that the application of Option 2 in the circumstances of a benchmark efficient entity with JGN's risk exposure would mean that the return on debt thus determined would be inconsistent with the allowed rate of return objective and with the revenue and pricing principles in ss 24(2), (3), (5) and (6) of the NGL. It is not clear from the language used by the Tribunal whether, in making this particular statement, the Tribunal was simply recording JGN's contention or expressing agreement with that contention. In light of other reasoning and statements made by the Tribunal, we are inclined to the view that, in this paragraph of its reasons, the Tribunal was doing no more than recording JGN's contention. 27 The Tribunal found that the AER had not taken that matter into account when, in exercising its discretion, it ought to have done so. The Tribunal went on to say (at [77]) that if the proposition were correct (as it appeared to be on the submissions that had been made to it) then it could be said that the AER had made a determination that was not consistent with the allowed rate of return objective. Here, the Tribunal seems to have accepted, at least provisionally, that the return on debt, estimated on the basis of Option 2, was below the efficient financing costs of a benchmark efficient entity with JGN's risk exposure. The Tribunal found (at [78]) that there had been a material error in the AER's exercise of discretion because, if JGN had been permitted "to present the alternative Option 3", it may have led to a significantly different outcome in the determination of the appropriate rate of return estimate for JGN for the current and ongoing regulatory years. We take this part of the Tribunal's reasons to be addressing the requirements of s 259(4a) of the NGL, which provides, relevantly, that the Tribunal may only make a determination to set aside a designated reviewable regulatory decision and remit the matter to the AER if: …the Tribunal is satisfied that to do so will, or is likely to, result in a decision that is materially preferable to the designated reviewable regulatory decision in making a contribution to the achievement of the national gas objective (a materially preferable designated NGO decision) … (Bold italics in original.) 28 Further, the Tribunal said that the AER had focused on what might or should have been apparent to JGN at the time of the JGN proposal in relation to prospective interest rate changes. But the consideration of whether the effect of the AER's determination would result in an estimate for the return on debt that was less than the allowed rate of return objective would accommodate, was "a separate consideration". 29 At this point, it is necessary to revert to the Ausgrid decision. The Tribunal concluded (at [938] of the Ausgrid decision) that the AER's selection or identification of the benchmark efficient entity as a regulated entity involved the wrong exercise of a discretion about the character of the benchmark efficient entity in all the circumstances. The Tribunal also concluded, in relation to the electricity networks (also at [938] of the Ausgrid decision), that the AER had erroneously exercised its discretion to apply the characteristics of its selected, regulated benchmark efficient entity to the transition process. It found that the AER's decision on the transition process, in respect of each electricity network, was unreasonable in all the circumstances. 30 Having come to these conclusions, the Tribunal considered that it was not necessary for it to address a number of other contentions advanced by the NSW electricity networks on the issue of return on debt. One of these contentions (recorded at [996(1)] of the Ausgrid reasons) was that the transition process was erroneous in any event because it was not possible to enter into hedging arrangements to match the regulatory allowance for the DRP component of the debt financing. This contention reflected JGN's position on why Option 3, and not Option 2, should have been adopted. 31 When the Tribunal came to consider the question of transitioning in the context of JGN's application for review, it noted, as one matter for consideration, the issue of whether the AER erred in deciding to apply Option 2 to implement the transitioning process, rather than Option 3: see at [46]. However, as matters transpired, the Tribunal did not decide whether Option 3 should be adopted over Option 2. Rather, it noted (at [80]) that the question of whether the transition under Option 2 should have been applied - specifically, whether the means of transition under Option 2 should have been applied to the DRP component of the cost of debt - was a matter that was common to JGN and the electricity networks alike. 32 Having noted this common issue, the Tribunal also noted that JGN's approach was "a little different" to that adopted by the electricity networks in that JGN had urged a transition of the base (or risk-free) component. However, JGN had also argued that the transition approach adopted by the AER in relation to the DRP component was erroneous and had shut it out of receiving "a proper and efficient DRP component that pertains to its existing debt portfolio". 33 Having reached this view, the Tribunal concluded (at [82]) that, for the reasons given in the Ausgrid decision, it would follow that the decision of the AER to determine the estimate for the DRP component of the return on debt on the basis of Option 2 should be set aside and the matter remitted to the AER for reconsideration. 34 In reaching this conclusion, the Tribunal noted that the proper application and construction of r 87 of the NGR (corresponding to r 6.5.2 of the NER) was "a common one" in the applications for merits review brought by the electricity networks and JGN. The Tribunal said that the same was true of the issue of whether it was appropriate to apply a "standard or across the board transition" to the DRP component of the return on debt, and the AER's identification of a standard benchmark efficient entity.

Introduction 35 In this proceeding, the AER raised a number of grounds of review in relation to the Tribunal's decision concerning the return on debt, namely Grounds 6 to 9 and Grounds 10 to 15. 36 Grounds 6, 7 and 9 correspond to Grounds 12, 13 and 14 of the applications for judicial review brought by the electricity networks. These grounds concern whether (as the AER framed it) the Tribunal erred in concluding that the AER was bound to address the allowed rate of return objective on the basis that the benchmark efficient entity must be an unregulated entity; whether the Tribunal erred in its construction of r 6.5.2(k)(4) of the NER (corresponding to r 87(11)(d) of the NGL); and whether the Tribunal failed properly to undertake a review of the AER's decision on return on debt. JGN adopted the electricity networks' submissions in relation to these grounds, which are addressed in the Electricity Networks reasons. 37 Ground 8, which is addressed in these reasons, is to the effect that the Tribunal erred in setting aside the AER's decision. As particularised, this ground was said to involve a number of reviewable errors. However, ultimately, the AER advanced three contentions in support of this ground. 38 First, the AER argued that the Tribunal had not granted leave to JGN to raise grounds of review in relation to whether the benchmark efficient entity was regulated or unregulated. The AER said that, in the absence of proper grounds of review, the Tribunal's jurisdiction to make findings of error on this issue was not enlivened in JGN's application to the Tribunal for review and that it was an error for the Tribunal to proceed as if it did have jurisdiction. 39 Secondly, the AER argued that the Tribunal had not determined the core argument underlying JGN's contention that the AER erred in deciding to adopt Option 2 rather than Option 3. The AER argued that this meant that the Tribunal could not properly have found that JGN had made out a ground of review. The AER argued that it was an error for the Tribunal to proceed on the basis that the reasoning advanced in the Ausgrid decision was sufficient to dispose of JGN's grounds of review with respect to the decision to adopt Option 2 rather than Option 3. 40 Thirdly, the AER argued that, even if the Ausgrid decision could be construed as dealing with some parts of JGN's contention, it did not deal with one of the matters relied upon by the AER in deciding to adopt Option 2 in preference to Option 3. This matter was the practical difficulties that arise from seeking to estimate a backwards looking estimate of the DRP component. The AER argued that this matter, in and of itself, was a sufficient reason for supporting its decision. It says, however, that the Tribunal specifically did not determine that matter in the Ausgrid decision or, by incorporation, in the JGN decision. 41 Grounds 10 to 15, which are also addressed in these reasons, challenge the Tribunal's finding that the AER had erred in a material respect in declining to exercise its discretion under r 60(2) of the NGR to permit JGN to revise its access arrangement proposal by raising Option 3. Senior counsel for the AER referred to these as, in effect, six cascading grounds of review. Once again, as particularised, the grounds were said to involve a number of reviewable errors. In written submissions, these grounds were distilled into five contentions. 42 We will commence our consideration of the AER's grounds of review by dealing, firstly, with the five contentions advanced in support of Grounds 10 to 15. We will then deal with the three contentions advanced by the AER is support of Ground 8

The AER's submissions 43 As we have noted, the AER challenged, on various grounds, the Tribunal's finding that the AER had erred in a material respect in declining to exercise its discretion under r 60(2) of the NGR to permit JGN to revise its access arrangement proposal by raising Option 3. The five contentions advanced by the AER are as follows. 44 First, the AER submitted that the Tribunal did not have jurisdiction to engage in any review of the AER's decision-making under r 60. The AER argued that, under s 245(1) of the NGL, the Tribunal's jurisdiction was limited to reviewing a "reviewable regulatory decision". Section 244 of the NGL defines a "reviewable regulatory decision" to include (in paragraph (d) of the definition) "a designated reviewable regulatory decision". There is no doubt that the AER's final access arrangement decision in relation to JGN was such a decision. However, the AER argued that its decision with respect to r 60 was not a decision providing for price, revenue regulation or other matters required by the NGR to be addressed in an access arrangement as set out in the definition of "full access arrangement" in s 2(1) of the NGL. That definition is reached by virtue of the definitions of "designated reviewable regulatory decision" and "applicable access arrangement decision". 45 Thus, the AER said, its refusal to exercise the discretion under r 60(2) in favour of JGN was not a "designated reviewable regulatory decision". The AER continued that there was no warrant for construing the definition of a "reviewable regulatory decision" in s 244 (including paragraph (d) thereof) to include a decision that was a precursor to, or made in connection with, an access arrangement decision. Relatedly, the AER submitted that its decision to refuse to amend the access arrangement proposal was of a procedural kind because it lacked the requisite quality of finality. In this connection, the AER relied on the observations of Mason CJ in Australian Broadcasting Tribunal v Bond [1990] HCA 33; 170 CLR 321 (Bond) at 337, and Toohey and Gaudron JJ at 377 when dealing with the nature of a decision that is amenable to review under the ADJR Act. It also relied, in this connection, on the joint judgment of Northrop and Lockhart JJ in Edelsten v Health Insurance Commission (1990) 27 FCR 56 at 68. The AER pointed to the fact that, before the Tribunal, it had argued that the discretionary exercise of power under r 60(2) was not, itself, a reviewable regulatory decision. The AER submitted that the Tribunal did not deal with that argument; it simply assumed that it was empowered to review the AER's discretionary decision under r 60(2). 46 The AER also said, without elaboration, and somewhat delphically, that its jurisdiction to make any decision under r 60(2) "in relation to JGN may itself be questioned in circumstances where JGN did not expressly seek the AER's approval under that rule:…" 47 This last-mentioned point can be dealt with immediately because, whatever its purport, the argument proceeds on a false basis. JGN did, in fact, seek the AER's approval to the amendment that JGN sought. Appendix 7.10 of the revised JGN proposal (containing JGN's return on debt response) stated: To the extent that the AER considers that this revision is not responsive to matters raised in the draft decision, JGN requests that the AER approves this revision to its original proposal for the reasons discussed above. 48 We also note that in oral submissions, senior counsel for the AER accepted, for the purposes of the application for judicial review, that an implied request to change enlivened the AER's discretion. In the circumstances, it is not necessary for us to decide whether r 60 requires a service provider, in the position of JGN, to make an express request in order for AER to give its approval to the making of further amendments. 49 Secondly, the AER submitted that, even if the AER's decision under r 60(2) was reviewable by the Tribunal, that review would need to be conducted within the constraints imposed by s 246 of the NGL, which sets out the only grounds on which such a review can be conducted. The AER argued that the Tribunal observed no such constraint. According to the AER, the Tribunal simply decided (at [73]) that the AER's discretion had been "exercised in a way with which the Tribunal does not agree" and "should have been exercised differently". The AER argued that the discretion it had exercised in relation to r 60(2) could not be "incorrect" for the purposes of s 246(1)(c) of the NGL simply because the Tribunal held a different view on a discretionary matter in respect of which reasonable minds might differ. 50 Thirdly, the AER submitted that the reasons given by the Tribunal for why it would have exercised the discretion differently reflect a misunderstanding of the operation of the discretion. Here, the AER said that the fact that in February 2015 JGN might have received a lower return on debt than it had originally anticipated when it lodged the JGN proposal was not a matter that would justify an exercise of discretion in JGN's favour to allow Option 3 to be raised in the revised JGN proposal. Further, the AER said that, in making its final decision, it maintained the view, expressed in the ROR Guideline, that Option 2 reflected the efficient financing costs of a benchmark efficient entity. The AER also pointed to the "broader set of matters" it had expressed in its final decision, namely that if a service provider were able to change its proposal after it had been accepted, the value of the draft decision would be "diluted" and would not narrow the issues in contention as part of the access proposal. 51 The AER argued that the Tribunal did not identify these matters as relevant considerations. The AER said that the Tribunal accepted JGN's argument that the application of Option 2 would mean that the return on debt for a benchmark efficient entity with JGN's risk exposure would be inconsistent with the allowed rate of return objective and the revenue and pricing principles in the NGL. The AER argued that, regardless of the correctness of that particular finding (which the AER disputed in any event), it could not stand as the sole basis for determining the proper exercise of the discretion in r 60(2), whose exercise, according to the AER, should also have been guided by "the important functional and procedural considerations" to which the AER had referred. Thus, the AER argued, the Tribunal had conflated the merits of JGN's argument (which the Tribunal treated as dispositive of whether JGN should have been entitled to raise Option 3) with "the broader set of matters which were relevant to the applicable procedural decision" under r 60(2). 52 Fourthly, the AER submitted that, even if the Tribunal were correct in finding that the AER had erred in exercising the discretion under r 60(2), the Tribunal nevertheless erred in finding that the AER's error was "material" or capable of leading to a "materially preferable designated NGO decision", one of the pre-conditions imposed by s 259(4a) of the NGL to the Tribunal setting aside a designated reviewable regulatory decision. Here, the AER argued that, contrary to the Tribunal's finding at [78] concerning the possibility of a significantly different outcome in the determination of an appropriate rate of return estimate for JGN, the AER did, in fact, proceed to address the merits of the argument which it found that JGN was not entitled to advance. The AER said that, in doing so, it had given detailed reasons for why it concluded that Option 3 was not to be preferred over Option 2. The AER argued that the Tribunal made no finding of error in this part of the AER's final decision. Further, the Tribunal, in its reasons, left open the question of whether Option 2 or Option 3 was to be preferred. Thus, the AER said, the Tribunal had erroneously assumed the materiality of the AER's exercise of discretion under r 60(2), had misconstrued the condition in s 259(4a)(c) of the NGL, and failed to properly exercise its review jurisdiction. 53 Fifthly, the AER submitted that, regardless of the above, the Tribunal ought to have found that JGN was precluded from advocating the adoption of Option 3. This was because, in initially proposing Option 2, and then switching to Option 3, it could not be said that JGN had "raised and maintained" its position on debt transition for the purposes of s 258A(3) of the NGL. By way of explanation, the AER submitted that s 258A(3) only contemplates the consideration of issues which have been "maintained" in opposition to a draft decision of the AER, which might give rise to a ground of review. The AER went so far as to say that the word "maintained" implies that the AER has, through some mechanism, opposed the matter that was raised by the service provider. The AER argued that s 258A(3) does not apply to the maintenance of issues which are the subject of the AER's acceptance in a draft decision, "which should never have been traversed again". The AER argued that to construe s 258A(3) otherwise would be inconsistent with the iterative decision-making process contemplated by the NGR.

JGN's submissions 54 As to the AER's first submission (see [44]-[46] above), JGN argued that the AER's final access arrangement decision was predicated on the conclusion that, by dint of r 60, JGN was not permitted to raise Option 3 in the revised JGN proposal. JGN argued that the AER's conclusion in relation to r 60 was one that had an operative influence on the AER's final decision to reject the revised JGN proposal and to make its decision under r 64(4) giving effect to its (the AER's) proposal. JGN argued that the AER's conclusion on the r 60(2) point was part of the reasoning for its reviewable decision, with the consequence that the reviewable decision could be reviewed by reference to that reasoning. Here, JGN called in aid the following observations of Mason CJ in Bond at 338 when dealing with the meaning of "decision" in the ADJR Act: To say that a reviewable decision is an ultimate or operative determination does not mean that antecedent conclusions or findings which contribute to the ultimate or operative decision are beyond reach. Review of an ultimate or operative decision on permissible grounds will expose for consideration the reasons which are given for the making of the decision and the processes by which it is made. 55 As to the second and third submissions made by the AER (see [49]-[51] above), JGN submitted that the AER had simply invited an analysis of the matters that "militated in each direction" on whether the discretion under r 60(2) should have been exercised in favour of JGN. JGN referred to the matters it had raised before the AER, to which the Tribunal itself made reference in its reasons. JGN argued that there was no reason to think that those were proscribed, impermissible considerations (Minister for Aboriginal Affairs v Peko-Wallsend Ltd [1986] HCA 40; 162 CLR 24 at 39-42) or that the countervailing policy matters raised by the AER were mandatory, relevant considerations. In any event, JGN argued, there was no reason to suppose that the matters referred to by the AER precluded a favourable exercise of the discretion under r 60(2). 56 As to the fourth submission made by the AER (see [52] above), JGN accepted that the Tribunal expressed no conclusion about whether, or in what circumstances, the adoption of Option 3 would be appropriate. JGN noted that the Tribunal left this matter for the AER to consider on remittal. However, JGN also noted that the Tribunal did find that the adoption of Option 2 was inapposite to the case of the electricity networks and JGN because of the AER's erroneous conclusion as to the characteristics of the benchmark efficient entity. JGN argued that this was sufficient to meet the "materially preferable" threshold in s 259(4a)(c) of the NGL. 57 With respect to the AER's comparison, in its final decision, of Option 2 and Option 3, JGN submitted that it should not be supposed that the Tribunal did not weigh these matters, even though the Tribunal made no express findings or conclusions on them. JGN submitted that the absence of such consideration in the Tribunal's reasons was not, of itself, determinative of the question whether it was open to the Tribunal to attain satisfaction concerning the "materially preferable" criterion. 58 As to the fifth submission made by the AER (see [53] above), JGN submitted that it had raised Option 3 in the revised JGN proposal and maintained it until the AER made its final decision. 59 Further, with respect to Option 4, JGN said that, although its contention with respect to that option was not "developed" (in particular, JGN had not expressly included a reference to the proposition that the benchmark efficient entity was an unregulated entity) it nonetheless necessarily implied that JGN was raising and maintaining the proposition that the benchmark efficient entity was unregulated. It also argued that this proposition was one that "broadly arises" out of the contention it did make. 60 It is convenient at this point that we record the submission that JGN did make to the AER in its revised proposal, concerning Option 4: JGN notes that the financing practices it has engaged in over past access arrangement periods may not have been efficient - or even possible - for all businesses. JGN understands that other businesses may not have been able to use swaps to manage base interest rate risk across their entire debt portfolio. In the case of these businesses, an efficient financing strategy is likely to have involved simply issuing fixed rate debt on a staggered maturity cycle in order to hedge against interest rate movements. As previously noted, JGN does not agree with the AER's position that there is a single benchmark efficient entity across the provision of gas, electricity, transmission and distribution services - rather there is likely to be multiple benchmark entities with different characteristics and different financing practices. This is specifically recognised by the NGR, and by the AEMC in the relevant rule determination implementing the current version of clause 87 of the NGR. However, if the correct position is to adopt a single benchmark entity, then the AER has selected the wrong single benchmark. The AER's benchmark is assumed to adopt a debt management practice that is only replicable by a minority of relevant firms. The correct single benchmark efficient entity would already have been engaging in debt financing practices which reflect the trailing average approach - that is, this benchmark would not have been able to mimic the on-the-day approach. Therefore, for this single benchmark efficient entity no transition arrangements would be required. 61 JGN submitted that no support could be found in the terms of s 258A for the AER's argument that s 258A only permits matters to be raised in a review before the Tribunal where they had been "maintained" by the service provider in opposition to a draft decision of the AER. JGN said that the AER's argument was tantamount to saying that the matter must be raised at the outset (in the case of JGN, when it submitted its access arrangement revision proposal). JGN submitted that no such qualification can be seen in s 258A. Moreover, it argued that the AER's submission - that to read s 258A otherwise would be inconsistent with the iterative decision-making process contemplated by the NGR - should be rejected, because: the AER's approach requires words and concepts to be read into s 258A; section 258A(3) is directed, in terms, to what has been raised and maintained in "submissions", not a "proposal" as such; and the iterative decision-making process is a creature of rules made under the NGL and cannot control the meaning of s 258A itself, absent a valid "Henry VIII" clause. 62 JGN also argued that other companies had made submissions in support of Option 3 in response to the AER's final decision regarding JGN (and final decisions regarding other service providers) and had signified their preparedness before the Tribunal to raise Option 3 should JGN not be permitted to do so. Thus, JGN said, the AER had to decide whether to adopt Option 2 over Option 3. It said that the AER's final decision included its reasoning and conclusion on that question and that, as a result, the matter was properly before the Tribunal.

The AER's reply submissions 63 The AER repeated its submission that JGN had attempted to characterise its (the AER's) refusal to amend under r 60(2) as a reviewable regulatory decision. It also submitted that JGN's submissions did not answer its (the AER's) criticism that the Tribunal considered "at large" whether the amendment to JGN's access proposal ought to have been allowed by the AER, without directing attention to the constraints of s 246 of the NGL and, according to the AER, without taking into account what it (the AER) considered to be mandatory relevant considerations that supported its (the AER's) decision. 64 The AER reiterated its submission that JGN had not contended that the benchmark efficient entity was an unregulated entity. Further, the AER submitted that its proffered construction of "maintained", as used in s 258A(3) of the NGL, was open on the text of that provision and, in reliance on Thiess v Collector of Customs [2014] HCA 12; (2014) 250 CLR 664 at [22]-[23], fulfilled the "discernible objective intent of the provision, which clearly informs the construction exercise". The AER submitted that, here, the objective intent of s 258A was to ensure that the Tribunal, in exercising its limited merits review function, should consider only those issues that have been fully developed before the AER before it publishes its regulatory decision. The AER submitted that JGN's approach did not produce a workable or coherent limited merits review scheme.

Analysis and conclusion 65 As to the AER's first submission (see [44]-[46] above), it must, of course, be accepted that the Tribunal's jurisdiction under s 245 of the NGL is limited to reviewing a reviewable regulatory decision. Here, in making its access arrangement final decision under r 62(4) of the NGL and in making its decision to give effect to its proposal under r 64(4), the AER adhered to its view that Option 2 should be applied and that JGN's attempt to rely on Option 3 should be rejected. 66 The AER rejected JGN's attempt to rely on Option 3 in part because the AER reasoned that the requirements of r 60(2) had not been satisfied. This was an integral part of the AER's final decision. But the AER went further and stated its conclusion that, in any event, the Option 3 approach would result in a biased approach that "favours JGN at the expense of its customers". For this reason, the AER did not consider that a departure from Option 2 would be consistent with the national gas objective or would contribute to the achievement of the allowed rate of return objective. It explained its reasons for coming to that view. It would be wrong, therefore, to see the AER's final decision as turning simply on its application of a procedural requirement (r 60(2)) adversely to JGN. The AER's decision to adopt Option 2 and reject Option 3 was not reached solely on procedural grounds but was more broadly-based. 67 Nevertheless - and importantly for present purposes - the AER's reasoning and conclusion on the application of r 60(2) was an inseparable part of its final decision. We accept JGN's submission that the AER's conclusion on r 60(2) was one that had an operative influence on the AER's final decision to reject the revised JGN proposal (which included Option 3) and to make its decision under r 64(4) giving effect to its (the AER's) proposal (which adopted Option 2). Taken in the context of its final decision, the AER's decision to reject JGN's attempt to rely on Option 3 was not an isolated decision of a merely procedural kind. It stood as one of the substantive reasons for maintaining its position that Option 2 should be adopted. We are satisfied, therefore, that the Tribunal did have jurisdiction to review the AER's final decision insofar as it was based on its findings and conclusion in relation to the application of r 60(2) to the revised JGN proposal. 68 As to the AER's second submission (see [49] above), we do not read the Tribunal's statements at [73] of its reasons - that the AER's discretion "should have been exercised differently" and that its discretion was "exercised in a way with which the Tribunal does not agree" - as expressions of mere disagreement or mere preference. Indeed, at [79] of its reasons, the Tribunal made clear that the AER's exercise of discretion was "erroneous". 69 To explain, the Tribunal surveyed (at [74]-[75]) the reasons advanced by the AER for not permitting JGN to raise Option 3. The Tribunal recorded the AER's submissions that recent changes to debt yields, and its findings on current efficient debt financing practices, did not justify JGN in "reneging" on its (JGN's) prior acceptance of the AER's selection of Option 2. The Tribunal also noted the AER's conclusion, contrary to JGN's assertion, that the AER's draft decision did not involve "new findings" - a conclusion with which the Tribunal expressed its provisional agreement. 70 However, at [76] of its reasons, the Tribunal pointed out that, before the AER, JGN had not simply raised the fact that interest rates had changed, but also the consequence of that change, namely that the return on debt, estimated under Option 2, would be below the efficient financing costs of a benchmark efficient entity in the 2015-2020 access arrangement period. The Tribunal said: The evidence before the AER, and referred to in submissions, indicated a significant drop in the DRP between the time of the AA Proposal and February 2016. That drop was such that, as JGN contends, the application of Option 2 in the circumstances of a BEE with the risk exposure like that of JGN would mean that the return on debt to be determined would be inconsistent with the RoR Objective itself and with the revenue and pricing principles in sections 24(2), (3), (5) and (6) of the NGL. 71 At [77] of its reasons, the Tribunal made clear that this was a matter which the AER should have considered, but had not considered, in exercising its discretion under r 60(2). The Tribunal said that this was a matter which would lead the Tribunal, on review, to exercise the discretion differently. Thus, the Tribunal found (at [78]) that the AER's exercise of discretion involved a material error which may have led to a significantly different outcome in the determination of the appropriate rate of return estimate for JGN for the current and ongoing regulatory years. We see no judicially reviewable error in that conclusion. The Tribunal's reasoning directly addressed the way in which the AER expressed its reasons for refusing to allow JGN to amend its access arrangement revision proposal. We would add that the Tribunal's conclusion must be seen in the context of, and cannot be isolated from, its finding that the AER had erred in its conception of the benchmark efficient entity that was applicable to JGN. This conception was fundamental, firstly, to the AER's conclusion that Option 2 would, in JGN's case, achieve the allowed rate of return objective and, secondly, to its consequent estimation of JGN's return on debt for the regulatory period in question which, JGN said, did not meet its efficient debt financing costs. 72 Our conclusion effectively answers the AER's third submission (see [50]-[51] above), which was that the Tribunal misunderstood the discretion under r 60(2). We do not agree that the Tribunal misunderstood the discretion that was to be exercised. The Tribunal regarded the AER's exercise of discretion as erroneous because the AER had failed to take into account the contention, which the Tribunal provisionally accepted at [77], that the application of Option 2, in the circumstances of a benchmark efficient entity with a risk exposure like that of JGN, would result in the return on debt being determined inconsistently with the allowed rate of return objective and with the revenue and pricing principles in s 24 of the NGL. Once again, we see no judicially reviewable error in that conclusion. Once it is appreciated that the AER failed to take into account a materially relevant consideration which JGN had advanced, it is beside the point that there are other factors that might continue to support the way in which the AER exercised of its discretion. It is the AER's failure to take into account a relevant and material consideration which leads to the error in its purported exercise of discretion. As we have said, that failure must also be seen in the context of the Tribunal having also concluded that the AER was in error in adopting, in JGN's case, Option 2 for the purpose of estimating its return on debt. 73 The AER's fourth submission (see [52] above), was that, even if the Tribunal were correct to find that the AER had erred in exercising the discretion under r 60(2), the Tribunal nevertheless erred by assuming the materiality of the AER's exercise of discretion and in finding that this error would lead to a materially preferable decision within the meaning of s 259(4a). 74 In this connection, we note JGN's acceptance that the Tribunal did not make any finding or express a conclusion as to whether, or in what circumstances, Option 3 would be regarded as appropriate. That said, we accept JGN's submission that it should not therefore be assumed that the Tribunal did not give consideration to those matters. But, more importantly, the Tribunal's reasoning focused on Option 2, which it found to be inapposite for a benchmark efficient entity with JGN's risk exposure, such that an estimation of the return on debt for JGN, based on Option 2, would be inconsistent with the allowed rate of return objective and the revenue and pricing principles. 75 We agree with JGN's submission that, once it is appreciated that the AER applied the wrong benchmark, the requirement of s 259(4a) can be seen to have been satisfied. This is because, on remittal, the AER would be required to adopt an approach to estimating the return on debt for JGN that would, unlike Option 2, contribute to the achievement of the national gas objective and the revenue and pricing principles. 76 As to the AER's fifth submission (see [53] above), we do not accept that JGN had not "raised and maintained" its position on debt transition for the purposes of s 258A(3) of the NGL. We agree with the thrust of JGN's submission that the limitations placed by the AER on s 258A(3) are a significant embellishment of what the provision actually says. The requirement is that the relevant matter must be raised and maintained by the service provider in submissions to the AER before the decision is made. We are satisfied that the application of Option 3, or alternatively Option 4, over Option 2, were matters that were raised and maintained by JGN in submissions to the AER before the AER made its final decision. We do not read the word "maintained" in s 258A(3) as requiring, as a prerequisite, the active opposition by the AER to that which has been "raised" by the service provider, although the service provider's act of maintaining a matter may be a response to such opposition.

Did the Tribunal err in setting aside the AER's decision with respect to JGN's debt transition?

The submissions 77 We have recorded the three matters raised in AER's submissions on this topic at [38]-[40] above and will not repeat them here. 78 In response, JGN directed attention to the revised JGN proposal in which JGN not only advocated a transition based on Option 3 but also a transition based on Option 4 if a single benchmark efficient entity were to be adopted. We have set out the relevant passages of the revised JGN proposal at [60] above that relate to JGN's Option 4 submission to the AER. 79 We pause to note that, as is apparent from our analysis at [74] above, JGN accepted that the Tribunal did not make any findings or express any conclusions on Option 3. Further, JGN accepted that it did not advance an express submission, before the AER made its final decision, that the benchmark efficient entity was an unregulated entity. 80 Nevertheless, JGN said that it did raise and maintain before the AER the contention that if it be correct to adopt a single benchmark efficient entity then that entity would have been engaging in debt financing practices that reflect the trailing average approach (namely, issuing fixed rate debt on a staggered maturity cycle) which meant that no transitioning was required. JGN says that, before the Tribunal, it likewise contended that, in those premises, the failure of the AER to adopt Option 4 was erroneous. JGN then said that it was a necessary premise or implication of its contention with respect to Option 4 that the Tribunal would have to give consideration to the proposition that the benchmark efficient entity is properly to be regarded as an unregulated entity. 81 Having set this background, JGN submitted that the AER's contention that the Tribunal's reasoning in the Ausgrid decision (on the benchmark efficient entity and return on debt issues) is not capable of supporting the JGN decision on return on debt, should be rejected. JGN argued that the fundamental premise on which the Tribunal concluded that the AER's approach to return on debt was flawed was that the AER had erroneously conceived the benchmark efficient entity as a regulated entity. This was the reasoning in the Ausgrid decision: see at [938] with respect to the construction and application of the allowed rate of return objective under r 6.5.2(c) of the NER, which the Tribunal recognised was common to the construction and application of r 87 of the NGR. Thus, JGN argued, the AER had embarked on a consideration of the return on debt from a mistaken premise, which was so fundamental that each and every conclusion reached by the AER was materially affected. JGN submitted that the Tribunal's reasoning in the Ausgrid decision therefore provided ample foundation for the Tribunal's conclusion in the JGN decision. 82 JGN also argued that the Tribunal's duty and powers to make a determination, as set out in s 259 of the NGL, do not constrain it from correcting an error of law, regardless of the limitations placed on the parties by s 258A of the NGL. 83 JGN argued, alternatively, that the Court should not grant relief where the effect would be to permit the AER to conduct its regulatory process on remittal on a legally erroneous basis. JGN said that the AER has not sought to review the JGN decision by reference to the Tribunal's finding that the AER's treatment of Market Expansion Capex was vitiated by reviewable error. It said that the inevitable outcome of the review before the Tribunal was that the full access arrangement decision has been set aside and that a reconsideration by the AER will necessarily take place, regardless of the outcome of the present proceeding. JGN submitted that relief should not be granted which would prevent the AER from conducting that reconsideration, including on return on debt, on a legally correct basis. 84 In reply, the AER submitted that JGN's approach diminished the analysis and debate that should occur throughout the AER's decision-making process. It argued that such an approach would mean that a business, for tactical reasons, may elect not to raise and maintain an argument, safe in the knowledge that if another regulated entity successfully raised and maintained the argument, the business may nonetheless obtain the benefit of the decision on that argument on a remittal made in respect of another issue. 85 With respect to the submission that a reconsideration by the AER of the full access arrangement decision will take place in any event (because of the Tribunal's finding that the AER's treatment of Market Expansion Capex was erroneous) - which, consequently, should not proceed on an erroneous basis with respect to return on debt - the AER submitted that, in the context of the present judicial review proceedings, such an outcome (remittal to the AER of the full access arrangement decision) was not inevitable.

Analysis and conclusion 86 With respect to the first matter raised by the AER (see [38] above), we expressed the conclusion, in the Electricity Network reasons, that, for the purposes of the allowed rate of return objective, it is not appropriate to characterise the benchmark efficient entity as either a regulated or an unregulated entity. We also expressed our agreement with the Tribunal's primary conclusion that the benchmark efficient entity is not a regulated entity, and explained our reasons for that conclusion. Those reasons apply equally to the expression of the allowed rate of return objective in r 87(3) of the NGR. We will not repeat them here. 87 As we also explained in the Electricity Network reasons, a focus on the characteristics of the benchmark efficient entity (particularly as to whether it is a regulated or unregulated entity) is, at best, a focus on only a fragment of the true matter in issue which, in the case of JGN, was whether Option 2 should be adopted in estimating its return on debt or whether Option 3, or alternatively Option 4, should be adopted. As we have noted, JGN's position before the AER was that the adoption of Option 2 would lead to an estimation of the return on debt that, in its case, would be below the efficient financing costs of a benchmark efficient entity in the 2015-2020 access period, and thus a return on debt that was inconsistent with the allowed rate of return objective and the revenue and pricing principles. 88 As we see it, the real question between the AER and JGN was not so much whether the benchmark efficient entity, for the purposes of the allowed rate of return objective, should be conceived as either a regulated or unregulated entity, but whether Option 2 should be adopted over Option 3 or Option 4 when estimating JGN's return on debt for the period in question. In our view, the Tribunal had jurisdiction to deal with that matter. Adopting what we said in the Electricity Network reasons, a fixation on whether, for the purposes of r 87(3) of the NGR, the benchmark efficient entity is a regulated or unregulated entity raises a false dichotomy that masks the substance of the relevant matter in contention between the AER and JGN. JGN's position before the AER was that, contrary to the approach that the AER had adopted, there was no single benchmark efficient entity across the provision of gas, electricity, transmission and distribution services. Rather, there were likely to be multiple benchmark entities with different characteristics and different financing practices. Importantly for present purposes, JGN also said that if, contrary to its own position, there was a single benchmark efficient entity, it was not the one chosen by the AER; the correct single benchmark efficient entity would already have been engaging in financing practices that reflected the trailing average approach. JGN's use of the word "unregulated" with respect to this entity is really no more than a shorthand expression to explain its own approach and to distinguish that approach from the AER's approach. For these reasons, we reject the first matter raised by the AER. 89 With respect to the second matter raised by the AER (see [39] above), we have already noted (at [31] above) that the Tribunal did not decide whether the AER erred in deciding to apply Option 2 rather than Option 3 to implement a transitioning process, even though it had identified that as one matter for its consideration. We do not accept, however, that this meant that JGN had not made out a ground of review. 90 As JGN correctly points out, in the Ausgrid decision the Tribunal found that the AER's selection or identification of the benchmark efficient entity as a regulated entity was in error, as was the AER's application of its selected, regulated benchmark efficient entity to arrive at the view that a transitioning process from the on-the-day approach to the trailing average approach was necessary when determining the efficient financing costs of a benchmark efficient entity appropriate to each electricity network. The consequence was that the AER's adoption of Option 2, in the case of those service providers, was erroneous. 91 In the JGN decision, the Tribunal reached the same conclusion with respect to JGN: the AER had erred in its conception of the applicable benchmark efficient entity. The Tribunal correctly saw the matter as a common one affecting JGN as well as the electricity networks. Although by advocating Option 3, JGN might be seen as having accepted a transitioning of the base or risk free rate (subject, of course, to the matters it had raised with respect to the adoption of Option 4), it had contended otherwise in respect of the DRP component. As Option 2 encompassed the transitioning of the DRP component, the application of Option 2 to JGN's circumstances, when estimating its return on debt, was in error. Having reached that conclusion, it was not then necessary for the Tribunal to go on to consider whether Option 3 or Option 4 or, indeed, some other option, was appropriate, although it was open to the Tribunal to do so. Of cardinal importance was the Tribunal's identification of error in the AER's adoption of Option 2. This error lay in the AER's selection or identification of the benchmark efficient entity and in applying, in JGN's case, the characteristics of its selected, regulated benchmark efficient entity to arrive at the transitioning process that the AER considered to be necessary. But, as JGN said in oral submissions, the "predicates" on which the AER had adopted Option 2 - to which JGN responded by advancing Option 3 - had been "swept away" in the Ausgrid decision. In our view, contrary to the AER's submission, that was enough to dispose of JGN's grounds of review in JGN's favour because, on any view, the adoption of Option 2 was erroneous, for the reasons given by the Tribunal. 92 This conclusion effectively answers the third matter raised by the AER (see [40] above), namely that the Tribunal failed to deal with the practical difficulties that arise from seeking to estimate a backwards-looking estimate of the DRP component. The AER did not elaborate on these difficulties in submissions. Nonetheless, we are not persuaded that these difficulties, such as they might be, mean that Option 2 should be adopted or persisted with, whether in preference to Option 3 or any other option. The Tribunal found that, in the case of JGN, the adoption of Option 2 was erroneous. That finding was open to the Tribunal, for the reasons it gave, and required the AER, on remittal, to make a constituent decision on debt absent the errors which the Tribunal had found.

Disposition 93 The AER has not established the grounds of judicial review on which it relies. In conformity with the orders we have made when publishing the Electricity Network reasons, we direct that the parties consult and, within 21 days, file orders in an agreed form to give effect to these reasons. Failing agreement, the parties are to file, within the same period, the orders for which they contend. The proposed orders are to include orders as to costs. I certify that the preceding ninety-three (93) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justices Besanko, Yates and Robertson.