All you need to know about the abolition of Limited Merits Review: Six Q & A for the Australian energy industry.

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On 16 October, the federal Government passed the Competition and Consumer Amendment (Abolition of Limited Merits Review) Bill 2017 (the new legislation) which removes the right of Network Service Providers (NSPs) to apply for Limited Merits Review (LMR) of most of the decisions of the Australian Energy Regulator (AER).

By Dr Drew Donnelly, Compliance Quarter.

In today’s article, we provide six questions and answers on the new legislation with a focus on the effect this will have on those who will be most directly affected; Network Service Providers.

  • What is Limited Merits Review?

While the new legislation also abolished LMR under the National Gas Law, our focus is on the abolition of LMR in relation to the National Electricity Law (NEL), as this has been by far the most common form of LMR.

The NEL regulates the energy market, through, among other functions, giving the AER the power to:

  • set the prices that NSPs may charge from the provision of electricity network services
  • set the revenue NSP may earn the provision of electricity network services (see section 15(1), NEL and chapter six of the National Electricity Rules).

These economic regulatory decisions are subject to LMR by the Australian Competition Tribunal (the Tribunal) which means decisions of the AER can be reviewed on the grounds that:

  • the AER made a material error(s) in a finding of fact
  • the exercise of AER’s discretion was incorrect, having regard to all the circumstances
  • the decision was unreasonable, having regard to all the circumstances (see section 71C(1), NEL).

The Tribunal can either:

  • affirm or vary the original decision, or
  • set the decision aside and send the matter back to the AER for a decision to be made in accordance with any direction or recommendation of the Tribunal (see section 71C(1)(a), NEL).
  • What does the new legislation do?

The new legislation removes all these powers of LMR except one: The Tribunal can still review a decision relating to the disclosure of confidential or protected information under such a law (see Schedule 1, Part 1, clause 4 of the new legislation).

  • Why the change?

Since the LMR regime was established in 2008, two reviews have suggested shortcomings in the regime[1] including:

  • LMR reviews have become routine, rather than by exception. This introduces significant extra costs to all participants;
  • Difficulties for consumers in meaningfully participating in the process;
  • The drawn-out process leading to significant regulatory and price uncertainty;
  • Unjustifiably higher prices for consumers;
  • The AER’s decisions involve extensive public inquiry processes and consultations, which cannot adequately be replicated in the Tribunal.
  • Who will this affect?

Everyone. Until now, under section 71B of the NEL, “an affected or interested person or body, with the leave of the Tribunal” could apply for an LMR. The new legislation has the potential to impact on all Australian energy consumers. Nevertheless, the biggest direct impact will be on NSPs, who have made the majority of LMR applications over the years and have often used this mechanism to secure higher revenues.

  • Does this mean that the AER’s decisions cannot ever be called into question?

No. Applicants will still be able to seek judicial review of the decisions of the AER in Federal Court. The difference is that judicial review does not consider the correctness or merits of AER’s decision. Rather judicial review will only consider the lawfulness of AER’s decision (for example, whether the decision breached the rules of natural justice or made an error of law).

  • When will the new law commence?

As soon as it is signed into law by the Governor-General which is likely to be within a matter of days. It will apply to the decisions of the AER past or future unless an application for LMR was made before 21 June 2017 (when the reforms were announced, see new legislation Schedule 1, Part 2, clause 6(2)).

If you would like any further information about the new legislation see https://www.aph.gov.au/Parliamentary_Business/Bills_Legislation/Bills_Search_Results/Result?bId=r5929 and don’t hesitate to contact us if you feel we could be of any assistance.

[1] The independent ‘Review of the Limited Merits Review Regime’ (2012) chaired by Professor George Yarrow and the Council of Australian Governments (COAG) Energy Council Senior Committee of Officials ‘Review of the Limited Merits Review Regime’ (2016).

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