02 October 2007
The crucial need for certainty in access regimes has been recognised by the High Court. Although the decision last Thursday in East Australian Pipeline Pty Limited v Australian Competition and Consumer Commission [2007] HCA 44 is based on a particular set of rules for pipelines, its implications go beyond the gas sector to all regulated industries.
The underlying facts are very simple. East Australian Pipeline owned a pipeline which was covered under the National Third Party Access Code for Natural Gas Pipeline Systems, and was required to submit to the ACCC an Access Arrangement for use of the pipeline by third parties. The ACCC rejected the proposed Access Arrangement and adopted its own Access Arrangement incorporating a Reference Tariff based on a lower Initial Capital Base ("ICB").
Section 8.10 of the Code sets out a number of factors which are to be considered in establishing the ICB for an existing pipeline. The way the ACCC went about this was idiosyncratic. Was this idiosyncrasy permissible?
The High Court held it wasn't. The Code does not allow the ACCC to put aside known valuation methodologies and devise a methodology of its own. The catch-all provision allowing it to consider "any other relevant matters" does not allow it to abandon the process and weighting of factors in the Code.
This access regime, said the Court, "is at least intended to allow efficient costs recovery to a service provider and at the same time ensure pricing arrangements for the consuming public which reflect the benefits of competition, despite the provision of such services by monopolies."
It added that if the ACCC were allowed to devise a methodology of its own, "the task of establishing a rate of return on investment, for regulatory purposes, commensurate with prevailing market conditions for funds and the risk involved would be rendered a much less certain process than it is already. Such a result could distort future investment decisions about essential infrastructure. "
This decision is a welcome acknowledgement of an access regime's need to balance the need to eliminate monopoly pricing while ensuring infrastructure owners get a rate of return commensurate with a competitive market, and will no doubt influence future decisions on access regimes and pricing models. The Court specifically acknowledged that the greater the degree of uncertainty and unpredictability in the regulatory process, the greater the perceived risk of the investment and the higher returns that will be sought.
