We should see more details of the amended Limited Merits Review regime in the first quarter of 2017, and a consultation process is likely. 

At the August meeting of the COAG Energy Council, a review was initiated of the role of Limited Merits Review for gas and electricity regulatory decisions and whether it should be abolished. This came from a concern by the Energy Ministers that the regime was failing to meet its policy intent and leading to higher prices for consumers.

The results of that review were provided to the December meeting of the COAG Energy Council and while Limited Merits Review was not abolished, it has certainly been changed quite significantly from its current form. The details of the changes are still being worked out, but key aspects of the changes are:

  • Introduction of a binding rate-of-return guideline, with relevant elements of the regulator’s decision not subject to merits review. This reform draws upon the New Zealand weighted average cost of capital (WACC) experience with "input methodologies". It reflects the fact that the rate-of-return aspect alone can give rise to multiple appeals under the current Australian regulatory arrangements and regulated revenue decision timings. Under this reform, a single, binding rate-of-return determination will apply to all regulated revenue decisions. Presumably, the methodology in the rate-of-return determination will need to be accompanied by a worked example that generates a WACC point estimate, based on the prevailing conditions in the market for funds. It is not clear whether the proposed reform will allow the binding guideline itself to be reviewable, or if the binding guideline and the subsequent rate-of-return decisions will all be excluded from limited merits review.
  • No more oral hearings before the Australian Competition Tribunal. It seems that all reviews will be on the papers rather than through the form of oral hearing which has been used up until now in these hearings. It is hoped this will reduce the expense and time taken by reviews.
  • Tightening and clarifying the grounds for review. It is not clear precisely what this will involve as there are already fairly narrow grounds on which a review can be initiated.
  • Higher unspecified financial thresholds before a review can be initiated.
  • A strengthened requirement for review appellants to demonstrate that overturning the regulator’s decision would not be to the serious detriment of the long-term interests of consumers.
  • More flexible arrangements for consumer participation in reviews.
  • Remove opportunities for gaming by limiting the time-frames in which material can be submitted to the regulator.
  • Costs of reviews, including those of the AER, to be borne by network businesses. This is a way to encourage only reviews where the benefits will exceed all parties' costs. It would, however, be dangerous if there were no scope for the Tribunal to make different costs orders if it were to find that there were serious errors on the part of the AER.

Next steps

A working group of officials has been tasked with quickly developing detailed amendments for the Ministers’ consideration and approval in the first quarter of 2017. It seems likely that there will be opportunities for interested stakeholders to engage with Energy Council officials, and it is important to start thinking about how the reforms should be most usefully implemented.

A further review of the regime will be undertaken by officials two years after the amendments have been implemented.