Analysis
228 We have set out in some detail the submissions of the parties to show the wide-ranging scope and complexity of the arguments marshalled on this topic. Despite that scope and complexity, we think that the resolution of the grounds of judicial review raised in this proceeding on this topic falls within a relatively confined area. We do not think that it requires us to pursue every argument that was agitated before us.
229 We commence by noting a number of foundational principles.
230 The AER is required to perform and exercise its economic regulatory functions and powers in a manner that will, or will be likely to, contribute to the achievement of the national electricity objective: s 16(1)(a) NEL. The national electricity objective 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 price, quality, safety, reliability and security of supply of electricity, and with respect to the reliability, safety and security of the national electricity system: s 7 NEL.
231 The AER must also take into account the revenue and pricing principles set out in s 7A of the NEL. These principles stipulate that a regulated network service provider should be provided with a reasonable opportunity to recover at least its efficient costs in providing direct control network services and complying with a regulatory obligation or requirement, or making a regulatory payment: s 7A(2). However, the revenue and pricing principles also stipulate that a regulated network service provider should be provided with effective incentives to promote economic efficiency with respect to the direct control network services that the service provider provides, including efficient investment in the distribution or transmission system with which the service provider provides direct control network services: s 7A(3).
232 The allowed rate of return objective concerns the return on capital that is to be allowed to each service provider under the building block approach to regulating revenues/prices using a PTRM. The return on capital has two components - a return on equity and a return on debt. The allowed rate of return objective addresses both components. It is the same objective.
233 The allowed rate of return objective is to ensure that a service provider receives returns that are commensurate with the efficient financing costs of a benchmark efficient entity. When the allowed rate of return objective refers to the "efficient financing costs" of a benchmark efficient entity, it is not referring merely to cost recovery. A broader notion is involved.
234 In the context of the return on debt, the "efficient financing costs" of a benchmark efficient entity also comprehend the economic efficiencies involved in the deployment of debt for capital expenditure. Indeed, r 6.5.2(k)(3) requires the AER to have regard to the incentives that the return on debt may provide in relation to capital expenditure over the regulatory control period, including as to the timing of that expenditure.
235 In this connection, in its 2012 Rule Determination the AEMC specifically noted that the return on debt should reflect the efficient financing costs of a benchmark efficiency service provider so as to provide an incentive to the service provider to adopt efficient financing practices, and to minimise the risks of creating distortions in the service provider's investment decisions: see at [190] above.
236 The AEMC recorded the economic advice it received (and accepted) that an historical trailing average approach to estimating the return on debt can lead to significant differences between the regulatory allowance for return on debt and the cost of debt in the market for funds at any point in time. It noted that such differences could impact on the incentives for service providers to invest efficiently in capital expenditure. It exemplified the case of a service provider who may not invest as much as would be efficient when the market cost of debt is higher than the regulatory allowance given. It noted that a proposal - the QTC proposal, which is reflected in Option 2 - was one way to address this risk. The AER stressed the importance of incentives for efficient capital expenditure and said that those incentives are stronger when the difference between the return on debt and the debt servicing costs of the service provider is minimised.
237 Relatedly, we observe that the NER accept that returns based on prevailing rates are consistent with the allowed rate of return objective. Rule 6.5.2(g) requires that, in estimating the return on equity, regard must be had to the prevailing conditions in the market for equity funds. Rule 6.5.2(j)(1) provides that the estimation for the return on debt can reflect the on-the-day approach which is, of course, concerned with prevailing rates at the time the estimate is made. Of course, r 6.5.2(j) also provides that the estimation of the return on debt can reflect the trailing average approach or some combination of the on-the-day approach and the trailing average approach. The important matter for present purposes is that the on-the-day approach is not presented in the NER as some flawed approach as SAPN's submissions appear to suggest. In its 2012 Rule Determination, the AEMC consistently stressed the importance of prevailing rates - what the AER described as a forward-looking approach - to estimating both the return on equity and the return on debt. Rule 6.5.2(k)(2) requires that, in estimating the return on debt, the AER must have regard to the interrelationship between the return on equity and the return on debt.
238 It is also convenient to note at this point that the building block model which the AER is required to use is based on the NPV=0 principle. In Appendix G to Attachment 3 of its Final Decision, the AER discussed the connection between this principle and the development of the NER: see at 3-563 to 3-565. One adviser to the AER described the position as follows:
The legal requirement for the allowed cost of debt to be commensurate with the costs incurred by a [benchmark efficient entity] is not sufficiently precise to be readily implemented, and therefore requires formalizing. This is obtained through the NPV=0 principle: the allowed prices or revenues of the regulated business should be such that the present value of the resulting revenues net of opex and taxes must equal the initial investment. Lower revenues than those that satisfy this principle will fail to entice producers to invest and higher revenues constitute the very excess profit that regulation seeks to prevent…
239 In its Final Decision, the AER addressed the meaning of "efficient financing costs" in the context of the return on debt. It recorded the economic advice it had acted on, including the relevance of the NPV=0 principle to the estimation of the return on debt. It considered the promotion of efficient financing practices consistent with the principles of incentive-based regulation and also the question of what would be required to provide a benchmark efficient entity with a reasonable opportunity to recover its efficient financing costs. These topics are reflected in the five considerations noted at [90] above to which the AER directed specific attention.
240 Having made these opening observations, we now turn to the grounds of review in this proceeding. It is convenient to commence with Grounds 10 to 12.
241 As to Ground 10, we are not persuaded that the Tribunal erred in finding that s 7A(2) of the NEL does not imply the recovery of costs within a particular regulatory control period. It is to be noted that s 7A(2) expresses a broadly-stated principle for revenue and pricing which refers to costs generally. Its concern is not specific to debt costs, but all efficiently incurred costs of the operator in providing direct control services and in complying with its regulatory obligations and requirements, including the making of regulatory payments. It seems to us that reading into such a broadly-stated principle a limitation that the opportunity it affords is one for recovery within a given or particular regulatory control period is an unwarranted gloss on the legislation and an unnecessary confinement of the principle it expresses.
242 Further, the principle stated in s 7A(2) must be read with the other revenue and pricing principles. If that principle is read with an eye to the recovery of debt costs, it must also be read with an eye to the requirement of s 7A(3) that a regulated network service provider should be provided with effective incentives in order to promote economic efficiency, including in respect of investment in the system with which it provides direct control network services.
243 The passage at [273] of the Tribunal's reasons to which Ground 10 is directed was made in the context of the Tribunal discussing the nature of incentive-based regulation under the NEL and NER, dealing more specifically with the interpretation of s 7A(2). We do not see that impugned statement as having any determinative significance in the Tribunal's finding in relation to the interpretation of r 6.5.2(k)(4).
244 Accordingly, we are not persuaded that Ground 10 discloses any judicially reviewable error on the part of the Tribunal.
245 As to Ground 11, we are not persuaded that the Tribunal erred in its construction of the phrase "across regulatory control periods" when used in r 6.5.2(k)(4). It is to be recalled that the Tribunal considered that the AER did not err in applying r 6.5.2(k)(4) as referring to a longer time period, such as that involved in recovering efficient financing costs over the life of assets.
246 The following matters should be noted.
247 First, as a matter of ordinary language, "across regulatory control periods" is not specific to two conterminous periods. Secondly, as a matter of context, there is no reason to construe the phrase as if it were qualified in this way. Thirdly, and in any event, r 6.5.2(k)(4) requires the AER to have regard to any impacts. Even if the phrase "across regulatory control periods" has the construction for which SAPN contends, the inclusive reference to the costs of servicing debt across regulatory control periods does not preclude the AER's consideration of impacts seen over a longer time period. In other words, in relation to the servicing of debt costs, r 6.5.2(k)(4) does not confine the AER's attention to having regard only to impacts and recovery in each regulatory year of the regulatory control period, as SAPN contends.
248 Accordingly, we are not persuaded that Ground 11 discloses judicially reviewable error on the part of the Tribunal.
249 As to Ground 12, we are not persuaded that the Tribunal acted on a wrong construction of either r 6.5.2(h) or r 6.5.2(k)(4) by considering whether the transition approach adopted by the AER would reduce the potential for "windfall gains or losses".
250 The topic of "windfall gains or losses" is bound up with the adoption of the NPV=0 principle in the regulatory framework. In this connection, it is important to bear in mind what the AER meant by "windfall gains or losses". These are gains or losses which result from changing the methodology for estimating the return on debt at a particular point in time. In its Final Decision, the AER characterised such gains or losses as a "side-effect" of changing estimation methodology: see the passage quoted at [89] above. They are not gains or losses which result from a service provider's decisions on efficient financing practices.
251 As we have noted at [207] above, before this Court the AER submitted that the Tribunal at [280]-[289] of its reasons correctly captured the AER's reasoning on this topic.
252 It is clear that the allowed rate of return objective is concerned with providing a return which is commensurate with efficient financing costs. This permeates the requirement of r 6.5.2(h) to estimate a service provider's return on debt such that it contributes to the achievement of the allowed rate of return objective. It is consistent with the allowed rate of return objective to ensure that returns are based on (what the AER described as) management induced efficiencies or inefficiencies rather than unexpected or "windfall" gains or losses that have nothing to do with management induced efficiencies or inefficiencies but are merely the happenstance of regulatory change.
253 Rule 6.5.2(k)(4) requires the AER, when estimating the return on debt, to have regard to impacts that could arise as a result of changing the methodology that is used to estimate the return on debt. When the AER came to consider the impacts of changing the methodology from the on-the-day approach to the trailing average approach, it took into account how "windfall" gains or losses, in the sense described above, could be avoided. We see no error in that approach. As events transpired, the AER concluded that Option 2 best achieved this outcome.
254 Similarly, we see no error in the Tribunal's acceptance of this approach. As we have said, we are not persuaded that, in so doing, the Tribunal acted on a wrong construction of either r 6.5.2(h) or r 6.5.2(k)(4).
255 Accordingly, we are not persuaded that Ground 12 discloses judicially reviewable error on the part of the Tribunal.
256 In determining Grounds 10, 11 and 12, it is not necessary for us to determine whether the conceptual "problems" to which SAPN referred in its submissions (see [168]-[182] above) exist, let alone investigate such "problems" (assuming them to exist) with a view to determining whether they truly present, for example, any difficulties in estimating the return on debt in accordance with the regulatory framework under the NER. The point of present significance is that there are a number of facets involved in estimating the return on debt, which include the incentives provided for efficient investment decisions of a long term nature in relation to assets required to provide the system used for direct control network services. The allowed rate of return objective is not limited to consideration of the recovery in any particular regulatory control period of efficient financing costs.
257 We now turn to the earlier grounds of SAPN's application for judicial review on the topic of return on debt.
258 As to Ground 7, we are not persuaded that the Tribunal acted on a wrong construction of r 6.5.2(h) in relation to its observation that the arguments advanced by SAPN suggested that the DRP component of its continuing debt costs are akin to "sunk" costs. Whether or not the Tribunal was correct to characterise SAPN's submissions in this way, and whether or not "sunk" is an appropriate characterisation in any event, are not matters which we need to address. Of present importance is the fact that, in this part of its reasons, the Tribunal was not saying that SAPN was precluded from obtaining a return on debt that was commensurate with its efficient financing costs in relation to both components of debt. This is enough to dispose of this ground.
259 We note, however, that in Ground 7 SAPN also queries the Tribunal's reference, in this part of its reasons, to "future financing arrangements" and "future practices". Further in this regard, SAPN argues that, in making these references, the Tribunal appears to have acted inconsistently with other passages in its reasons.
260 We do not accept that this part of the Tribunal's reasons has the difficulties to which SAPN refers. Contrary to SAPN's submission, the point made by the Tribunal at [246] is that the choice of transition arrangements has no consequences for a service provider's choice of future financing arrangements or practices. This is consistent with the earlier passages in the Tribunal's reasons ([239]-[244]) to which SAPN refers. We do not accept that this part of the Tribunal's reasons reflects error.
261 Accordingly, we are not persuaded that Ground 7 discloses judicially reviewable error on the part of the Tribunal.
262 As to Ground 8, we are not persuaded that the Tribunal acted on a wrong construction of r 6.5.2(h) by considering the avoidance of what the AER described as the potential for "regulatory bias". Once again, it is important to understand what the AER meant by "regulatory bias".
263 In its Final Decision, the AER noted that it is an important feature of building block incentive regulation that the rate of return (whether on equity or on debt) is forward-looking. We do not understand there to be any challenge to that statement as a general proposition. The AER reasoned that, whatever the virtues might be of choosing a trailing average approach to estimating the return on debt, the use of an historical averaging period can introduce a bias in regulatory decision-making simply because it might be said that the choice made by the regulator was one influenced by pre-knowledge of the historical data.
264 The AER explained its concerns in its Final Decision:
We are satisfied that an unbiased approach will contribute to estimating a rate of return that is commensurate with the efficient financing costs of a benchmark efficient entity. Setting the rate of return with foreknowledge of the outcome does not reward efficient decision making or allow a comparison to benchmark performance. It does not provide the appropriate incentive for efficient investment, as contemplated in both the NEO/NGO and the revenue and pricing principles. This is because the use of backwards looking data in selecting a regulatory approach is likely to increase the risk of biased regulatory decision-making.
265 In the context of applying r 6.5.2(k)(4) and considering what is an appropriate transitioning arrangement to take into account the impacts occasioned by the change in methodology for estimating the return on debt, we are not persuaded that the AER acted on an incorrect construction of r 6.5.2(h) by taking into account the potential for regulatory bias, as explained by it. Similarly, we are not persuaded that, in deciding that the AER's approach in adopting Option 2 was a valid one in light of this consideration, the Tribunal was itself acting on an incorrect construction of r 6.5.2(h).
266 Accordingly, we are not persuaded that Ground 8 discloses judicially reviewable error on the part of the Tribunal.
267 As to Ground 9, we are not persuaded that the Tribunal acted on a wrong construction of r 6.5.2(h) when, at [284] of its reasons, it gave its example of setting the rate of return by a rule during the transition period that is different to the rule prevailing when the debt was issued. This ground is closely related to Ground 12 dealing with "windfall gains or losses".
268 In this part of its reasons, the Tribunal was simply illustrating the meaning of "windfall". Its point was that, if debt was taken out during the period when the on-the-day approach was required to be applied in estimating the return on debt, and that debt would mature in a future regulatory control period, the service provider would have had, at the time of taking out the debt, an expectation that, in the future regulatory control period, its return on debt would be estimated according to the on-the-day approach. However, if in the future regulatory control period the rule changed, and produced by reason of that change alone a gain or loss, that gain or loss would be a "windfall". It would have nothing to do with the service provider's own efficient (or perhaps inefficient) financing practices or decisions.
269 In our view, this ground falls with Ground 12. We are not persuaded that Ground 9 discloses judicially reviewable error on the part of the Tribunal.
270 The fate of Ground 13 is really dependent on our conclusions with respect to Grounds 8 to 12. We are not persuaded that the matters covered by those grounds, as discussed above, involve the errors attributed to them or stand as irrelevant considerations to the Tribunal's decision. For this reason, we are not persuaded that Ground 13 discloses judicially reviewable error on the part of the Tribunal.
271 As to Ground 14, we do not accept that the matters discussed at [239]-[241] of the Tribunal's reasons formed no part of its reasoning on its return on debt decision. We do not see this part of the Tribunal's reasons as some free-standing meditation divorced from its consideration of the grounds of review brought before it.
272 In this part of its reasons, the Tribunal gave consideration to important background matters providing some of the context in which a return on debt decision is made. The Tribunal referred to the requirement of r 6.5.2(k)(3) that the AER must have regard to the incentives that the return on debt may provide in relation to capital expenditure over the regulatory control period, including the timing of that expenditure. It discussed the incidents of the on-the-day approach to estimating the return on debt and how, theoretically, this approach could impact on investment decisions. It discussed the building block model and the significance of the NPV=0 principle to that model. With respect to transitioning from the on-the-day approach to the trailing average approach, it noted that although the transition used will have implications for the service provider's profitability, it should have no material implications for the efficiency of future investment decisions.
273 SAPN did not develop this ground in its submissions. In substance, it treated its "primary" position - that the Tribunal's "findings" in this part of its reasons did not form the basis of its ultimate conclusion on the return on debt topic - as its only position. This ground was pleaded as covering numerous grounds under the ADJR Act. On the basis of the submissions presented, we are not persuaded that any of these grounds are made out.
274 Grounds 15 and 16 were treated similarly. Ground 15 is that the Tribunal considered matter other than review related matter within the meaning of s 71R(6) of the NEL. Ground 16 is that the Tribunal did not afford SAPN the opportunity to make submissions in relation to this material. These grounds were not developed in SAPN's submissions in chief.
275 As we have noted, in response the AER provided a number of references in its submissions to the material that was before it in making its Final Decision. This included the AEMC's 2012 Rule Determination and the extrinsic material referred to in the 2012 Rule Determination which were referenced or discussed by the AER in its Final Decision. It included discussion of the NPV=0 principle in the context of choosing the correct transition approach.
276 SAPN's reply submissions did not really engage with what material was or was not before the Tribunal. It took issue with some matters in the AER's submissions before us which, it said, were not in the AER's Final Decision, but there was no precise identification of these matters. It referred to some matters (once again, not precisely identified) as not having been addressed in the AER's oral submissions before the Tribunal. It said that it had cautioned the Tribunal that some matters in the AER's submissions were not to be found in its Final Decision. It gave an oblique reference in the transcript of the hearing before the Tribunal to illustrate this point. That reference is not informative of any error sought to be captured by Ground 15.
277 Our own reading of the AER's Final Decision indicates that significant elements of it were referred to in the Tribunal's discussion at [239]-[244]. We cannot tell from SAPN's submissions the precise matters in the Tribunal's reasons which it says were not review related matter or whether, if there was such matter, it had any significance for the findings that SAPN has challenged.
278 It is for SAPN to make good its grounds of review. In the absence of precise articulation, and a properly developed argument, we are not persuaded that Ground 15 is established. Therefore, Ground 15 fails, and Ground 16 with it.
279 As we have noted, in supplementary submissions SAPN relied on certain conclusions expressed in AER v Australian Competition Tribunal as supporting its construction of r 6.5.2(k)(4). One question which arose for consideration in that case was the characteristics of the benchmark efficient entity referred to in the allowed rate of return objective in r 6.5.2(c) - in particular, whether the benchmark efficient entity was a regulated or unregulated entity. On that question, the Full Court expressed its conclusion, at [537], as follows:
Thus, in our view, it is not appropriate to characterise the benchmark efficient entity as either a regulated or an unregulated entity. The allowed rate of return objective does not do so, and there is no need to do so. The allowed rate of return objective confers on the benchmark its particular, necessary and defining characteristics: it must be efficient and it must face "a similar degree of risk" as that which applies to the particular service provider in question in relation to the provision of standard control services. But the attribution of the relevant "efficiency" (ie, in respect of financing costs) is to be gauged by the disciplines of a workably competitive market (ie, an unregulated market).
280 Another question was whether the Tribunal had correctly applied r 6.5.2(k)(4) by adopting a single definition of a benchmark efficient entity and a single transition approach based on that entity in estimating the return on debt for all service providers. This question arose in the context of whether the AER had erred in adopting, as the appropriate transition arrangement, Option 2 over another option - Option 4 - which was the immediate adoption of a backwards looking trailing average approach to estimate the return on debt, with no transition of either the risk-free component or the DRP component of debt.
281 The questions identified at [279]-[280] above are not questions that were before the Tribunal in the present review.
282 One of the consequences of the AER's approach discussed in AER v Australian Competition Tribunal was that, when deciding that Option 2 should be implemented over Option 4, the AER had attributed to the service providers in question the fiction that each of them had hedging contracts that needed to be unwound. In fact, the relevant service providers had no such contracts. It will be immediately apparent that no such fiction was attributed to SAPN in the present case.
283 At [571], the Full Court said:
The requirement of r 6.5.2(h) is to estimate the return on debt for a particular service provider in a way that achieves the allowed rate of return objective. In this connection, the undoubted function of r 6.5.2(c) is to provide, as the electricity network respondents said, an "efficiency yardstick" for the particular costs under consideration. This was plainly the AEMC's intention in the 2012 Rule Determination. While, for this purpose, the benchmark efficient entity is a construct, there is nothing in r 6.5.2(c) which requires one to be oblivious to the actual circumstances, including the debt management practices, of the particular service provider whose debt costs are being benchmarked. It is the efficiency of that service provider's costs that is to be benchmarked according to what would be required by the disciplines of a workably competitive market. Considered against the yardstick of the efficient financing costs of the benchmark, the service provider's debt management practices will either be efficient or inefficient. Where inefficiency exists, that inefficiency should not be reflected in the allowed rate of return for that service provider. Only efficient financing costs are to be allowed. But none of this means that, in applying r 6.5.2(c) to estimate the return on debt under r 6.5.2(h), and in considering whether impacts of the kind referred to in r 6.5.2(k)(4) exist that should be taken into account for that purpose, fictions should be imposed when the service provider has, for example, already implemented a debt structure that satisfies a required aspect of the intended benchmark efficiency.
284 The Full Court remarked that, when the AER came to consider r 6.5.2(k)(4) in relation to those service providers, there were no impacts in the form of hedging contracts that needed to be unwound. The Full Court said (at [572]):
At the commencement of the new regulatory period, the NSW service providers already had in place a debt structure that was both their particular response to the previous on-the-day approach to estimating the return on debt and, as it happened, a debt structure that was amenable to the "changed" methodology of the trailing average approach which the AER had decided to adopt. Significantly, in each case, that debt structure was not one complicated by the overlay of hedging contracts that needed to be unwound. The consequence of this was that, when the AER came to consider r 6.5.2(k)(4) in relation to those service providers, there were no impacts (in the form of hedging contracts that needed to be unwound) apposite to the benchmark efficient entity (or each benchmark efficient entity) for each such service provider that could be said to have arisen from the AER's change in methodology from the on-the-day approach to the trailing average approach. Given that there were no such impacts, there was no need for the AER to take a step which, in the circumstances, r 6.5.2(k)(4) did not require for those service providers, namely a transition to the trailing average approach of estimating the return on debt by adopting a mechanism to unwind hedging contracts, such as that reflected in Option 2.
285 At [573], the Full Court expressed a similar conclusion with respect to another service provider (ActewAGL) which had no debt.
286 In its supplementary submissions, SAPN sought to rely on AER v Australian Competition Tribunal as supporting its characterisation (in its submissions in chief) of r 6.5.2(k)(4) as a transitional provision. In its submissions in chief, SAPN had exemplified the word "impacts" in r 6.5.2(k)(4) by reference to the possibility that there may be hedging contracts taken out in one regulatory control period that affect the cost of debt in that period and in a subsequent period, such that the AER is required to consider the impact of a change of methodology on the cost of debt across the two periods. This submission was made in the context of arguing that the words "across regulatory control periods" means (and only means) two conterminous periods - a submission we have rejected.
287 In its supplementary submissions, SAPN argued that, for the purposes of r 6.5.2(k)(4), the only relevant "impact" on SAPN from the change in methodology to estimate the return on debt is the unwinding of "commitments" it had entered into in relation to the risk-free component of debt when the on-the-day approach had been applied to estimating its return on debt. It submitted that this is the only point of distinction between its position and the position of the particular service providers in AER v Australian Competition Tribunal.
288 We do not think that it is in question that r 6.5.2(k)(4) envisages the possible need for transitioning arrangements when there is a change in the methodology used for estimating the return on debt. Moreover, it can be accepted that, in part, the reasoning in AER v Australian Competition Tribunal might support an argument that Option 3 might be a preferable alternative to Option 2. In this connection, SAPN argued in its supplementary submissions:
…a hybrid transition, whereby a transition is applied to the base rate and no transition is applied to the DRP, for an entity in the position of SAPN, has the benefit of matching the costs that would be incurred by an efficient business in the position of SAPN, both under existing facilities and under new facilities as they are taken out over the regulatory control period. The on-the-day approach does not. As it happens, the hybrid transition also provides an appropriate signal for efficient investment for a business in the position of SAPN because it provides the current rate for new debt, whereas the on-the-day approach does not because it provides a single rate for all debt (both existing and new) across the whole 5 year period, and indeed for 10 years (in decreasing weighting) under the AER's transition.
289 Whatever the merits of this argument might be, the question whether Option 3 is a preferable alternative to Option 2 is not the question before us. The question before us is whether the Tribunal made the judicially reviewable errors identified in SAPN's grounds of review.
290 Further, the issues before the Tribunal under review in the present proceeding are quite different to, and distinct from, the issues before the Tribunal that were under review in AER v Australian Competition Tribunal.
291 SAPN acknowledged this at the outset of the present case. It accepted that s 71O of the NEL precluded it from raising matters before the Tribunal it might otherwise have wished to raise. It went so far as to state that, under the limited merits review regime provided by the NEL, the Tribunal in the present case "had to proceed on an artificial basis" or "on potentially an incorrect construction of the NER".
292 For the reasons we have given, we do not accept that the Tribunal proceeded on an artificial basis or on an incorrect construction of the NER on the matters raised in SAPN's grounds of review to this Court. Further, we do not think that there is any necessary inconsistency between the determination of the particular questions of construction of r 6.5.2(k)(4) raised in AER v Australian Competition Tribunal and the particular questions of construction determined in the present case.
293 In responding to SAPN's supplementary submissions, the AER pointed out:
In the case of the AER, having received the adverse decision from the Tribunal in the NSW/ACT matters, the AER reconsidered the proper approach to the applicable rules, including the economic considerations relevant to the applicable rules and the AER's decision on the return on debt topic. In light of the relevant extrinsic material relating to NER clause 6.5.2, and based on the evidence before it (including economic expert reports), the AER advanced arguments to the Tribunal below concerning:
(a) the economic principles underpinning the building block framework prescribed by the NER generally, and why the building block framework prescribed by the NER is premised on an NPV=0 condition;
(b) the proper construction of the expression "efficient financing costs" within the allowed rate of return objective in NER clause 6.5.2(c);
(c) the economic reasons for using an "on the day" methodology in determining a return on debt (and the cost of capital more generally);
(d) the economic reasons for changing to a trailing average methodology for determining the return on debt instead of the "on the day" methodology; and
(e) the impacts of such a change on the service provider and consumers and how such impacts could be mitigated by a forward looking transition process.
294 We accept the AER's submission that while the Full Court in AER v Australian Competition Tribunal considered r 6.5.2(k)(4) in the course of addressing the AER's judicial review grounds in that case, its consideration does not impact on the grounds of review raised by SAPN in the present case in relation to r 6.5.2(k)(4).
295 We would add that the present proceeding has raised a number of issues that were not advanced by the parties in AER v Australian Competition Tribunal. The Full Court's observation at [572] of AER v Australian Competition Tribunal that there were no impacts in the form of hedging contracts that needed to be unwound was made in the context of the facts of that case and the submissions that were advanced by the parties at that time. No wider consideration of the possible "impacts" of a change in methodology to estimate the return on debt was advanced or addressed. We do not regard AER v Australian Competition Tribunal as in any way confining the "impacts" to which the AER might have regard when applying r 6.5.2(k)(4).