Isn't the W2 class was used on the city circle? Upon travelling to Melbourne, it is quite notable the age of most of the fleet. Not sure if this is true, but I presumed that the tram system ran quite well
W2s haven't been used in service since the 80s or early 90s I believe, long before the City Circle was born. The typical "City Circle" tram is the last shape of W class tram, the W6/SW6 or W7 (formerly SW5, but they have all since been retired). The W8 class is merely a refurbishment rather than a new tram type.
W2s were the original shape of Melbourne's trams, and had canvas blinds instead of doors (the first design of these trams was simply called W, being later upgraded to W1, and then W2). The SW2 upgrade added sliding doors to the trams, but most W2s were left as-is and were the most numerous of the W class fleet.
This link shows the differences between the various W classes:http://www.tramway.org.au/collections_mmtb.html
In a way, Yarra Trams running only W6/W7/W8 trams on the City Circle is sort of like having a Holden museum where they only have VF Commodores on display.
So basically the c1 and combino's are in the same state as the variotrams are. The vario's were end of life and don't be fooled into thinking that they would help Melbourne's system out. Melbourne needs to modernise the overhead to 750v along it's entire length and then maybe the E's can go elsewhere.
600V is still within tolerance, all of the low floor trams in Melbourne are designed for 750V but still operate on 600V. I believe this is also the case with Adelaide's network too, and many other places around the world.
If we upgraded from 600V to 750V however, it may cause the older W/Z/A/B class trams to be overvolted by the 25% increase in power. Going down from 750V to 600V is only a 20% decrease in voltage, it just means the trams operate slightly slower than they should or take a few more amps or whatever. It's better to have a little less voltage than overvolting something. I wouldn't want to set my mains voltage to 300V AC, but 190-200V would most likely be fine for a 230-240V device. A simple device such as a vacuum cleaner might not care, but I just wouldn't trust 300V going to my PC's or TV's power supply.
The E class restriction is just red tape and depot pecking order. Route 96 has long been the poster child for Melbourne, even back in the 1970s it was the route which had the first modern tram in Melbourne, PCC 1041 (the prototype of the Z class). Going back even further to the 1950s, the Bourke Street route was also the one to get the brand new W7s when they came out, which had softer suspension compared to the older trams.