East Australian Pipeline Pty Limited v ACCC & Anor [2007] HCATrans 125 (17 April 2007)

Last Updated: 18 April 2007

[2007] HCATrans 125

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
Sydney No S57 of 2007

B e t w e e n -

EAST AUSTRALIAN PIPELINE PTY LIMITED

Applicant

and

AUSTRALIAN COMPETITION AND CONSUMER COMMISSION

First Respondent

AUSTRALIAN COMPETITION TRIBUNAL

Second Respondent

GLEESON CJ
GUMMOW J
HAYNE J
HEYDON J
CRENNAN J

TRANSCRIPT OF PROCEEDINGS

AT CANBERRA ON TUESDAY, 17 APRIL 2007, AT 10.17 AM

Copyright in the High Court of Australia

MR J.T GLEESON, SC: May it please the Court, I appear with MR N. MANOUSARIDIS for the appellant. (instructed by Middletons)

MR J.B.R. BEACH, QC: If the Court pleases, I appear for the first respondent with MR S.B. LLOYD. (instructed by Deacons)

GLEESON CJ: There is a submission by the second respondent we have received. Mr Gleeson, is your client a subsidiary of AGL Energy Limited?

MR GLEESON: It is not a subsidiary, your Honour, and I am told there is currently no shareholding.

GLEESON CJ: Thank you. Yes, Mr Gleeson.

MR GLEESON: Your Honours, there are two formal matters. The first is in terms of the name of the appellant, that name has been changed and there is an application at page 1630 of volume 4 for the name of change for the appeal.

GUMMOW J: East Australian Pipeline Pty Limited?

MR GLEESON: That is the only change, your Honour.

GLEESON CJ: Yes. That is not opposed, I take it?

MR BEACH: No, your Honour.

GLEESON CJ: Yes, we will make that change.

MR GLEESON: Thank you, your Honour. Your Honours, the second matter is that one of the appeal books is headed “Confidential Folder”. Could I explain that. That is the subject of confidentiality orders in the Federal Court but not yet in this Court. It turns out that the only pages in that book that are still confidential are pages neither party will refer to, and my proposal would simply be that those relevant pages be deleted from the appeal books later on.

GLEESON CJ: That sounds like a good idea.

MR GLEESON: If your Honours please. Can I move to the appeals, your Honours. At the outset our central submission is that the Full Court has applied a standard of review to the decision by the Competition Tribunal which exceeds the limits and scope of judicial review. There are four main aspects we will seek to deal with today. The first is that the language which the Full Court has used in its conclusions and its stated reasons indicate it has substituted its view of the reasonableness of the ACCC’s decision for that of the Tribunal.

The second matter, which is a brief one, is that the court asserted jurisdiction under section 39B of the Judiciary Act but never considered whether any of the so-called errors were jurisdictional or were sufficient to ground a constitutional writ. The third matter is that the court has made a broad assertion that the Tribunal committed errors of law in relation to section 8.10 of the Code, and yet, firstly, some of those errors or alleged errors are not errors of law; secondly, some of them are not errors at all but are the product of the Full Court’s misconstruction of the Tribunal’s reasoning and of the Code and thirdly, there has never been any consideration given to the issue of materiality of the alleged errors.

HEYDON J: That is the same as point 2.

MR GLEESON: Point 3 assumes some of them were errors of law and says even if they were you have not considered whether they had a necessary consequence in the actual decision.

GLEESON CJ: What do you take to be the relationship between the second and third sentences on page 1516?

MR GLEESON: The second sentence is a statement that, for reasons which appear in paragraphs 181 to 199, the Full Court has found errors by the Tribunal in the way it approached the Code but the third sentence jumps from that to say that “We as a court have formed a view that the approach by the primary decision-maker was correct in law”. Stopping there, that is not the question for the Full Court, that is the question for the Tribunal. And then that “We as the court have formed the view that the ACCC’s exercise of discretion reaching the conclusions it did was reasonable”. That is, the court answering the ultimate question for the Tribunal under section 39 of the law, so that the relationship is in fact a jump. Your Honours, lest it be thought that is just an infelicitous expression by the Full Court, when one looks at, for instance, paragraph 199 on page 1579, the court says:

It follows from this analysis that none of the available grounds upon which the Tribunal could interfere . . . had been made out.

Then there is a repeat of the expression “no error”:

nor was the exercise of the ACCC’s discretion . . . incorrect or unreasonable having regard to all the circumstances.

So that the Full Court appears to be saying, “For the reasons we give in the preceding 18 paragraphs, we conclude that the ACCC’s exercise of discretion was not incorrect or unreasonable in all the circumstances”, the very question given to the Tribunal.

Your Honours, the fourth matter, just to finish them at the start, is that the Full Court had no power to set aside the Tribunal’s decision unless it came to a finding that the Tribunal’s reasons on section 8.10(f) were necessarily infected by legal error, especially paragraphs 29 and 30 of the Tribunal’s reasons which dealt squarely with that matter, and yet there is no such finding. Your Honours, the reason I say that is, if the Court has volume 3 also open, in the Tribunal’s reasons at page 672 - - -

HEYDON J: That is volume 2, I think.

MR GLEESON: Sorry, your Honour, volume 2. At paragraph 29 the Tribunal made a positive finding that the primary decision-maker had misconstrued section 8.10(f). The Tribunal propounded a positive construction for that section. The section pointed:

to a set of circumstances in which the combined effect of past history is such as to require a modification of normal valuation methods which may have thrown up an unreasonably high ICB that would cause an unreasonably high tariff.

Now, that is the positive construction placed on 8.10(f). The Tribunal then says:

The ACCC did not apply that reasoning in the present case. There appears to be no proper basis for doing so.

Then the Tribunal moved to a factual matter which was that:

When the past history of the operation of the MSP is considered as a whole, it is plain that the operation has been, and remains, seriously in debit which will never be recovered . . . It is not possible to draw the conclusion that the few years of operation of the MSP by EAPL has caused such a gross over-recovery of depreciation as to require offset in setting the ICB under the regulatory scheme.

So there we have a positive construction placed on (f) and a finding based on that construction that on the facts factor (f) did not have any role to play in the setting of the ICB.

GLEESON CJ: In paragraph 25 on page 671 the Tribunal, in effect, summarised the views that had been developed in the later paragraphs to which you were referring and they accepted a contention that there was a fundamental error in principle made by the ACCC. Was that an error of law, that fundamental error of principle?

MR GLEESON: Your Honour, it was an error both of law and of fact. The reason I say that is that the way the Tribunal puts it in the last sentence of 25, “It was submitted that this had no support in the Code”. Stopping there, that is an error of law. Then it said, “or the material on the subject received by the ACCC”. Now, that is a finding that even if you could use this novel methodology as a matter of law, it would not be reasonable to do so in all the circumstances because when one looks at all of the material received by the ACCC on the subject, none of that material provides any support for the method.

Now, that aspect of a finding of fact is then expanded in paragraph 26, your Honour, which is the more detailed finding as to what the material before the ACCC said on the subject. The reason I say that is an error of fact is that the question under section 39(2) of the law, whether the decision was incorrect or unreasonable in all the circumstances, has been interpreted, at least in the Epic No 2 decision, as being a question of fact in relation to the second limb.

GLEESON CJ: The errors that the Tribunal attributed to the ACCC at least included an error in the interpretation of the Code, did they not?

MR GLEESON: Yes.

GLEESON CJ: If the Federal Court, as a matter of interpretation of the Code, concluded that the Tribunal was wrong in finding that the ACCC had made an error of law of that kind, what was the consequence?

MR GLEESON: Your Honour, the point I am just adverting to is that at least in relation to section 8.10(f), which we see as critical, paragraph 29 of the reasons gives us the construction of the Code which the Tribunal has adopted and then gives us the finding of fact as to why on that construction section 8.10(f) did not justify what the ACCC did.

The point of that submission is that when one looks at the Full Court’s reasons, they have never addressed paragraph 29 or found any error in it. Can I just show your Honours why that is. If your Honours keep paragraph 29 open, in the Full Court’s reasons at page 1555 - - -

HAYNE J: Paragraph?

MR GLEESON: Paragraph 134. The Full Court quotes paragraph 29 of the Tribunal. This is in the context of a general summary of what happened. It is quoted there without comment or criticism. Then when one comes back to the critical paragraphs of the judgment on page 1579 - - -

GUMMOW J: Paragraph?

MR GLEESON: Perhaps I will start on the previous page. At 1578 at 197 the court says:

The Tribunal approached the ACCC’s use of, or reference to, s 8.10(f) of the Code in a somewhat ambivalent manner.

They then referred to what was said by the Tribunal at paragraph 28 and they make some comments on that. That goes over the page through to paragraph 198. What is missing is any attention to paragraph 29. Instead the court goes straight from paragraph 198 down to 199 where they say they conclude:

none of the available grounds . . . had been made out.

Nowhere in this set of reasons does the court say why the construction placed on section 8.10(f) in paragraph 29 is wrong. While your Honours have that, the other critical finding of the Tribunal was the finding at paragraph 30 on page 673.

HAYNE J: Can I just understand what you are engaged in, Mr Gleeson. Is this you putting your best foot forward with your two best points or what are we doing?

MR GLEESON: Your Honour, I was outlining four main points and on the fourth point in terms of an issue of power I was submitting that the court had no power to set aside this decision unless they came to a finding that the Tribunal’s reasons on section 8.10(f) were necessarily infected with legal error.

HAYNE J: So this is a second particular of the fourth of the elements that you propose to develop?

MR GLEESON: Yes, your Honour.

HAYNE J: We are down into the particulars of ground 4 at the moment?

MR GLEESON: Yes, and then I will move to the detailed argument. I am just drawing attention, if I might, to the fact that in paragraph 30 of the Tribunal’s reasons they dealt with the fall-back argument which was that if you cannot do it under (f) can you do it under (k), because (k) allows the ACCC to take into account any other factor it considers relevant. The Tribunal dealt with that on two bases. The first was that that was not the way the reasoning went, but secondly – this is the important one – even if it were permissible to do so, the difficulty remains that there is no logical or rational connection between the arguments advanced on the one hand and the adjustment of ORC as proposed by the ACCC on the other. Now, that is a square finding of irrationality in the way they adjusted ORC.

Again, your Honours will see that paragraph 30 has not been addressed in the place you would expect to see it addressed, immediately before paragraph 199 of the Full Court. So that the conclusion in 199, it follows from this analysis that none of the available grounds had been made out, that not only is it the Full Court answering the Tribunal’s question, but at least two of the critical grounds, T29 and T30, have never been mentioned. Your Honours, that is the opening salvo.

HEYDON J: But if that argument succeeded, what would be the consequence? It would go back, would it, to the Full Court for the Full Court or another Full Court perhaps to reconsider the matter and fill in, if they could, the gaps in the reasoning or what do you say – that is the end of the story on those points and it goes back to the Full Court only on matters which were not determined by the Full Court because they did not have - - -

MR GLEESON: The latter, your Honour. It is the end of the story on the ICB and what is left is, if there was a relevant error in the setting of the ICB which allowed the Tribunal to step in, it then had the full powers as per normal merits review to set the ICB itself. It did that and the ACCC had a second challenge to the way the Tribunal did it and that is a challenge that does not concern your Honours.

HAYNE J: At some point in your argument would you give attention to exactly what it is that your side of the argument is asking this Court to do? The orders as presently framed consist of a lot of setting aside but not much thereafter and at some point you need to articulate with care and precision what exactly are the consequential orders you say this Court should make.

MR GLEESON: Yes. Your Honour, the orders - - -

GUMMOW J: At 1625.

MR GLEESON: Yes. Those orders would affect what I have just put to Justice Heydon because the effect of order 7(a) would be that part of their application to the Full Court that challenged what the Tribunal did in concluding that their determination of the ICB involved a relevant error be dismissed so that is the end then of - - -

GUMMOW J: Where is the application filed by the first respondent? What are you talking about in 7(a)? We need to get this - - -

HEYDON J: We need to know numbers, paragraphs.

HAYNE J: And how does it sit at all with what appears in your written submissions, which is different again. But, there we are, stick with the notice of appeal for the moment.

MR GLEESON: Your Honour, the application is found in volume 2 at page 765. It is a long application and perhaps I should not distract myself from the argument at this point. I can do it now if your Honours wish but the critical point is that they were challenging two things. They were challenging the first set of reasons of the Tribunal to the extent that the Tribunal found error in the way the ACCC dealt with the ICB and then, secondly, they were challenging the way in which the Tribunal set the ICB itself. It is only the first of those matters that the Full Court has dealt with. Perhaps I should come back to that for a more detailed answer.

Your Honours, what I propose then to do is firstly identify what the ACCC did, then to look at the jurisdiction of the Tribunal and then to work through both sets of reasons, if that is convenient. In terms of what the ACCC did, that is found in summary form in volume 4 at page 1577 in paragraph 92.

HEYDON J: 192.

MR GLEESON: 192 commenced on the previous page and then runs over to this page. So the ACCC said:

the Commission has determined a value for the ICB of $559 million. To support this valuation, the Commission has given considerable weight to section 8.10(f) -

Stopping there, it is a valuation, as they call it, and they identify section 8.10(f) as a section to which they have given considerable weight. They do not identify there any other factor in section 8.10 that they have given weight to. In the next paragraph they say that:

The basis of the valuation is ORC -

I think your Honours know that ORC is a species of replacement cost valuation. It stands for “optimised replacement cost.” One asks the question: if I were to build the same pipeline today using current technology but with the same capacity, what would it cost? On the present facts that is about a billion dollars. So the basis of their valuation is ORC:

which the Commission has depreciated on an assumption of a 50 year asset life to 2000 -

and they give a reason –

consistent with the useful asset life previously assumed by EAPL.

Your Honours know the pipeline was built in about 1976 by the Commonwealth. It was sold to EAPL in 1994 and EAPL in its accounts for accounting purposes claimed depreciation over the five years or six years to 2000, which assumed a 50-year life for the pipeline. The amount of that actual depreciation was about $104 million. What the ACCC is doing here, although not saying so in terms, is that because you for that internal purpose assumed a 50-year life, we will assume that in the year 2000 the pipeline is used up consistent with your assumption.

GLEESON CJ: Were the accounting standards on which that depreciation was based before the ACCC? In other words, was the depreciation consistent only with an assumption that the life of the asset was 50 years?

MR GLEESON: I will need to take your Honour more into the facts on that because it was not terribly clear is the short answer and I do not think the accounting standards were before the ACCC, but I want to check that issue if I can.

GLEESON CJ: We have some problems with depreciation ourselves.

MR GLEESON: What has happened is, though – and I will try and give your Honour a better answer to that question – but they have to charge some depreciation within their accounts in order to get a bottom line profit each year. We know the amounts the charged. The amounts they charged over those five years were $104 million. That comes from the accounts. But what the ACCC has done is not say we will depreciate ORC by that $100 million because that would have given a capital base of $900 million. What they have said is we are going to go underneath $100 million and say, because we think you assumed a 50-year asset life, the consequence is that a pipeline built in 1976 has used up the figures about 46 per cent of its asset life by the time we are valuing the pipeline. So what we will do is we will take ORC, which is $1 billion, we will reduce it by 46 per cent and we will get about $550 million. Why? Because for five years, for that purpose, you assumed a 50-year life.

GLEESON CJ: It is the two last sentences of the third paragraph of this quote that bite, is it not? This is why they thought it was reasonable to do what they did or unreasonable to do what you are asking them to do.

MR GLEESON: Yes. So working through the paragraphs, where we have got to in the second paragraph is that the basis of this thing they call a valuation is ORC and then they say they have depreciated it by 46 per cent for a reason, and they give a reason. In the third paragraph they say we are not going to give you DORC, which would be $715 million. At the risk of wearying your Honours, your Honours have probably picked it up from the materials, but DORC, it is now agreed, is a valuation methodology. It is well recognised. You start with ORC, which is a forward-looking construct. What would it cost me today to build a replacement pipeline with the same potential? You then do something to it which is called depreciation, but it is not depreciation in any sense that is dealt with in the High Court accounts. It is, in fact, an adjustment downwards to reflect that the new pipeline has more value than the old pipeline. The new pipeline has more value - - -

GLEESON CJ: It is a new for old allowance.

MR GLEESON: New for old. Primarily new for old. It has more value because 60 years down the track the old pipeline will give up the ghost and the new pipeline will still have 20 years to run. Because it is 60 years down the track you are getting that extra value. When you bring that back to a present day calculation it is a relatively modest amount. It can also have an impact in terms of operating costs. The new pipeline may be cheaper to run. You bring that to account as well. So that is what DORC is and DORC is a well-recognised valuation methodology. On the present facts DORC was going to give at least $715 million, but if it were properly applied it would give about $834 million. That is the issue that does not concern your Honours. That is the one that was dealt with in the second set of reasons, how do you do DORC?

In the third paragraph the Commission says that you cannot have DORC because you assumed a 50-year life in the past.

If the useful life of an asset changes at a particular point in time it is appropriate that the residual value of the asset would then be depreciated over the revised useful life. However, an extension to the useful life should not necessarily lead to an upward revision of the asset value. To do so would allow the asset owner to recover more than the efficient costs - - -

GLEESON CJ: Just pausing there, suppose what increases the life of a pipeline like this is a change in technology in terms of coating of the pipeline and that change in technology produces the result that a pipeline that would previously have lasted only 50 years will now last 70 years. Is the reasoning of the ACCC that if you fix an ICB on the basis of a 70-year lifetime in circumstances where they have been depreciating on the assumption of a 50-year lifetime, they are somehow recovering or will have in the past recovered super profits of some kind?

MR GLEESON: That is not what they have reasoned. If that is what they were thinking of, and that might have been a possible way of reasoning, that is the very issue that paragraph 29 of the Tribunal’s judgment dealt with.

HAYNE J: When in this paragraph they speak of “the useful life of an asset”, are they talking of something that is an objective fact or an estimate made by the owner or operator at a particular time?

MR GLEESON: I am not sure, your Honour. On the present case they were the same. Can I just explain why, in answer to both those last two questions. Whatever was done in the accounts, by 1999 when this appellant put in its first application to the ACCC, it said to the ACCC, “The asset life of our pipeline going forward is 60 years for the main line and 80 years for some of the laterals”, laterals being built to Canberra and the like, built a bit later than the main pipeline. So it put that forward and said, “That is our best opinion, estimate, knowledge, belief as to what life this pipeline has going forwards”. The ACCC accepted that in its process. There was no challenge to whether it be opinion or fact, whether that be the basis for the decision.

So at the time the valuation is being done, to take your Honour the Chief Justice’s question, if the coating fact is the relevant one, it is a known fact. People now know that that is a relevant fact to value, but if I can just explain that a little further, as at the valuation date – and we do not shy from calling it a “valuation date” because the Code says it is a valuation, it is a valuation in a particular way bounded by the rules of the Code but it is ultimately a valuation – at that date the forward-looking life of the asset was 60 years or 80 years. After the valuation date, that is in the course of the process, the example your Honour the Chief Justice gave came home, they discovered, by an improvement in coating technology, you could extend the life of the whole pipeline to 80 years for a small cost. That discovery after the date of the valuation, the Tribunal said, must be put to one side, its post-valuation date, and we have never challenged that. But what we had said was that to the extent that facts are known which bear on value at the valuation date, the critical fact being what is the future life of this pipeline that we are valuing, they are facts that you would not exclude.

What the Tribunal has said is to exclude that knowledge of the actual pipeline you are valuing and to put in its place an assumption inconsistent with that knowledge is something we find to be unreasonable in all the circumstances. So on that limb of “unreasonable in all the circumstances”, that was their evaluative judgment. Now, you will not find anywhere in this set of reasons by the Full Court any reason why they departed from that evaluative judgment and found an error of law in it.

As I mentioned a moment ago, in terms of the question of super profit, as your Honour raised, the very matter that was dealt with in T29 of the Tribunal was that question, namely if, when you look at the operation of the pipeline as a whole there has been a recovery of a super profit, that is something which you could bring to account to modify what otherwise might be the ICB. Now, in the present case the reason that did not work on the facts was that EAPL recovered only $100 million and the Commonwealth recovered negative capital in the first 17 years of the life of the pipeline.

Your Honours may have seen some reference in the papers to the number of $1.2 billion in economic depreciation. That is the measure of the fact that because the Commonwealth was not recovering a commercial return, the pipeline was going backwards. So, your Honours, to that point we have got what the ACCC says it did. Can I just make these observations about what we see at paragraph 192? The first is that what is being done by the ACCC is not a valuation methodology within 8.10(a), (b), (c) or (d). The Full Court accepts that proposition over the page at paragraph 196 in the second-last sentence.

It may be convenient if your Honours have the Code while I put the summary propositions about the paragraph. We have given your Honours by agreement a separate version of the Code, National Third Party Access Code, and separately to that we have given your Honours the South Australian Act which has the law attached. In the Code in your Honours’ versions at page 54, in section 8.10, what the ACCC has done is not within (a), (b), (c) or (d). Each of those paragraphs, (a), (b) and (c) refer to a value resulting from the methodology in (a), the methodology in (b), which is DORC, or (c) “other well recognised asset valuation methodologies”. It is none of those. Then (d), you are required to consider “the advantages and disadvantages of each” of those methodologies. The second point is that the basis of the valuation is said to be ORC. When you read section 8.10 nowhere does it require or commit ORC as the basis for a valuation.

HAYNE J: That is a proposition that is a rather complex proposition, is it not?

MR GLEESON: Yes.

HAYNE J: First, it contains as an element the proposition that ORC is not specifically mentioned in 8.10. Does it go beyond that?

MR GLEESON: Yes, it does, your Honour.

HAYNE J: To go beyond it, do we not need to begin at a much earlier point? What is wrapped up in this proposition that you just advanced?

MR GLEESON: At the risk of seeking to interrogate your Honour as to which earlier point, there are a number of earlier points. Section 8.4, section 3. I will deal with both of them, if I might. What further I am saying is that (a), (b), (c) and (d) tell you to look at values derived from particular methodologies and it is not one of the methodologies. Next, although it is not said anywhere in the Full Court’s reasons or the ACCC decision, the ACCC apparently is propounding this construction, that you can take ORC out of 8.10(b), divorce it from DORC and then having got it, you can do things to it, for example, by reference to (f).

Now, if that is the proposition, and you will not find it in the Full Court’s reasons, we would submit that that is a misconstruction of 8.10(b) because that requires you to consider the value resulting from applying DORC. It does not require you or permit you to say I will take an element in a properly constructed DORC valuation, divorce it from that valuation, divorce it from the value produced by DORC and do something else to it that I think appropriate.

Your Honour, the next step in unpacking that proposition is, if one looks at (f) itself, obviously it does not mention ORC, nor does it in terms give you a value. It says look at three concepts which are assumed to have some overlapping or common meaning. Look at the basis on which tariffs were set in the past, look at economic depreciation and look at historical returns. We submit that if one reads (f), it does not give a warrant to construct a novel valuation methodology.

GUMMOW J: It comes back to the force of the opening phrase “the following factors should be considered”.

MR GLEESON: Yes, and we certainly accept, your Honour, with (f) that if one has considered (a), (b), (c) and (d) conscientiously, what one will have at that stage is either one or perhaps a small group of plausible values for the ICB, the values derived from your analysis of well-recognised valuation methodologies.

HAYNE J: I am sorry, you are going to have to take this more slowly. First, what is the significance of 8.11 for understanding the covering provision of 8.10; second, what exactly is the statutory task that is given to ACCC and then ultimately we will come to what the tasks of the Tribunal and the court are. But your submissions presently assume a number of matters which may well be right, but I need to understand why they are right if they are.

MR GLEESON: Can I do this, your Honour, can I take this course. What I will do is to put in one line, the submission on 8.11 is that it establishes a normal range which will be the values set by paragraphs (a) and (b) and it is a constraint on the way in which the section 8.10 factors are considered. Sometimes, in an abnormal case, you will go higher or lower, that is what it does.

Your Honour Justice Gummow’s question, I was going to add that after one has got down to paragraph (d) and one has either a single or a small set of putative values for the ICB, one opens the frame to some extent and considers factors (e) to (j) which do not in terms give you a value, none of them say, “the value resulting from”, but which provide you with further information by which you might alter the preliminary conclusions that you are coming to under (a) to (d).

GLEESON CJ: These are all called “principles” and in the introduction to section 8 they are said “to provide a high degree of flexibility” and paragraph (k) was presumably inserted in 8.10 in that context. What is the significance of the introductory portion of section 8 and this concept of “principles”?

MR GLEESON: The introduction can be taken into account although they do not form part of the Code. That is page 65, clauses 10.5 and 10.11. As to “principles”, I need to come now to Justice Hayne’s question as to how this fits together as part of the structure and if I can do that I may be able to answer your Honour’s question. If one goes back earlier in the Code to section 2 we have the framework for the setting of an access arrangement. Under 2.2, “If a Pipeline is Covered - - -

GLEESON CJ: Section 2.2 is missing from the bundle I have, mine skips from page 7 to page 12.

HAYNE J: Are we left to look at the second schedule of the South Australian?

MR GLEESON: It is essentially the same, your Honour. Do all your Honours have that problem?

HEYDON J: I have pages 8 to 11, I claim no virtue.

GUMMOW J: I do not.

HAYNE J: Some are favoured, some are not.

MR GLEESON: All should be favoured, your Honour. We have more copies. It is in relatively the same form.

HEYDON J: The library provided, I think, to members of the Court a copy of the Gas Pipelines Access (South Australia) Act 1997 including Schedule 2. The pagination is different but the material we want to look at is in that copy, to save time.

MR GLEESON: It is. Could I inquire, your Honours, how many are missing those pages?

GLEESON CJ: Two of us.

MR GLEESON: Under 2.2:

If a Pipeline is covered –

which this pipeline was in its entirety under the original Code -

the Service Provider must submit a proposed Access Arrangement together with the applicable Access Arrangement Information –

Section 2.5:

An Access Arrangement may include any relevant matter but must include at least the elements described in sections 3.1 to 3.20.

So the origin of the access arrangement is the service provider. In section 2.9, there is a process of public consultation. In 2.13 there is a “draft decision” by the regulator to approve or not approve the access arrangement stating appropriate amendments. In 2.15, there is a process of further submissions, that is round 2. In 2.15(a) there may be a further access arrangement submitted and then in 2.16, there is to be a “final decision”, again approving or not approving.

Section 2.18, if the decision was not to approve, which was this case, the service provider must submit a further advised access arrangement. Then 2.19 there is a further final decision which either accepts the revision or, again, does not approve it. Section 2.20, which is our case, the service provider did not submit a revised access arrangement which the regulator approved, the regulator must draft and approve its own arrangement. That is the source of the decision by the ACCC. Section 2.24 is a constraint on the whole of this section of the Code. There are certain factors that the regulator must take into account. Section 2.26:

A decision by the Relevant Regulator under section 2.20(a) or 2.23 is subject to review by the Relevant Appeals Body –

in this case that is the Competition Tribunal. The next place to go, as I noted in 2.5:

An Access Arrangement . . . must include at least the elements described in sections 3.1 to 3.20.

In 3.1 on page 20:

An Access Arrangement must include a policy on the Service or Services –

Section 3.3, it “must include a Reference Tariff”.

CRENNAN J: That is one of the main points, is it not, of an access arrangement?

MR GLEESON: Yes. Section 3.6 the terms and conditions and various other matters. Then that leads one to section 8 which are the reference tariff principles said to be principles underlying the calculation of the reference tariff.

GUMMOW J: Are we meant to be supplied with a document of 58 pages - you said this is agreed compilation - because we have not been.

MR GLEESON: Your Honour, I went to some trouble to make sure everyone had the right document.

GUMMOW J: All I am asking is - - -

GLEESON CJ: Let me just hand you back mine with the supplementary material and see what we have.

MR GLEESON: Could I be forgiven for asking your Honours this question? Your Honours were meant to be supplied with something looking like that, the National Third Party Access Code which runs for - - -

GLEESON CJ: With a complete copy of it?

MR GLEESON: Yes.

GLEESON CJ: No.

HEYDON J: Mine has got 76 pages plus 20 or 30 unnumbered pages at the back which are largely blank.

GUMMOW J: Your client is paying a lot of money for this operation, Mr Gleeson. At some stage it had better be earned.

MR GLEESON: Would your Honours permit me to do this. I have multiple complete copies of the Code which should have been given to your Honours. Could I hand them up for those who do not have them? It is a complete copy of the Gas Code.

GLEESON CJ: Thank you. What is the difference between this and Schedule 2 of the South Australian legislation?

MR GLEESON: On my inspection, none for the purpose of this appeal. There were seven amendments, none relevant to us.

GUMMOW J: At the moment I am going to stick to Schedule 2 and you can get your house in order at the adjournment, I suppose.

MR GLEESON: If your Honours please. In respect to section 8, which are the reference tariff principles, 8.1 says that:

A Reference Tariff and Reference Tariff Policy should be designed with a view to achieving –

certain objectives, and there is no doubt that there is some incommensurability between those objectives. 8.1(a) speaks of an:

opportunity to earn a stream of revenue that recovers the efficient costs of delivering the Reference Service -

(b) is:

replicating the outcome of a competitive market -

(c) means you do not want it to be so low that the pipeline breaks up; (d) is:

not distorting investment decisions . . . upstream and downstream -

(e) and (f). Then under 8.2 - - -

GUMMOW J: What is the force of this word “should” which is used sometimes? Sometimes the word “must” is used.

MR GLEESON: We read them as essentially the same in this Code.

HAYNE J: But they are plain; that is their virtue.

MR GLEESON: 8.2:

The factors about which the Relevant Regulator must be satisfied -

are there set out, including (a), that:

(a) the revenue to be generated from the sales (or forecast sales) . . . should be established consistently with the principles and according to one of the methodologies contained in this section 8 -

If I could go over to 8.4, a critical element in the process is to establish the total revenue and that is the total amount that you are going to be given an opportunity to earn, not a guarantee, but an opportunity to earn over the entire future-looking life of the pipeline. Now, that can be done in three ways. Cost of service, which is how the present access arrangement was structured, is that your:

Total Revenue is equal to the cost of providing all Services . . . and with this cost to be calculated on the basis of –

three elements. The first is:

(a) a return (Rate of Return) on the value of the capital assets that form the Covered Pipeline -

or are otherwise used to provide the services –

(Capital Base) –

That is the definition in the Code of what the capital base is, and that is confirmed in the definition section, 10.8.

At the very centre of this process, what we mean by the capital base is the value of the capital assets forming the pipeline. That is why we submit the Tribunal was correct to say that this Code is dealing with the universe of valuation, dealing with it in a particular defined statutory way, but the capital base is essentially the value of your assets. Upon that value there will be structured a rate of return.

HAYNE J: You need before you come to those generalities to take account of 8.8, do you not? Just staying with the schedule, the present path we pursue seems to be, as I understand it, 8.4, total revenue to be calculated in one of three ways. The relevant way is cost of service. Is that right? Cost of service has three elements, one of which is rate of return on capital base. Capital base is then amplified by 8.8 and following.

MR GLEESON: Yes, your Honour. I was only drawing attention to the fact that within the definition of “capital base”, and the only place we find that is 8.4(a), the concept we are told is that it is the value of the capital assets that form the pipeline. The reason that is significant is when your Honour comes to 8.9 we are told that later sections, that is 8.15 to 8.29, describe the principles to be applied in adjusting the value of the capital base over time as a result of additions to the capital assets. They are essentially what was the value of your capital base at the start of the period plus additions less depreciation.

GLEESON CJ: It is common ground, as I understand it, that an element of value is life expectancy.

MR GLEESON: Well, not in the sense of – certainly for the Tribunal it is essential to the process.

GLEESON CJ: What is the relevance of the difference between an asset that has an expected life of 50 years and an asset that has an expected life of 80 years? What is its relevance if not to its value?

MR GLEESON: I think I can agree with that, your Honour, yes. So it is a scheme though where you set on day one your initial capital base, which is your initial value. If you then add to the pipeline you can make additions to that capital base. A rate of return is structured on that capital base. Depreciation is charged against it. Operating costs are charged against it. Then you come up with a figure for the total revenue which you will be given an opportunity to earn and then that is divided up into periods which might be five-year periods and then your tariff, which is the end result of it, will be a division of your total revenue which you are given an opportunity to earn in that period divided by your expected customers or sales.

So that structurally brings one then to 8.10 to the factors which must be considered at the time of establishing the capital base for the pipeline in existence at the commencement of the Code. 8.11 gives you the normal range of values. 8.12 says that if it is a pipeline brought into existence after the Code, your initial capital base is primarily the actual capital cost of the assets. As the Tribunal said, the assumption there is that if it is a new pipeline you have spent efficiently in building it.

GLEESON CJ: What do you do with the case of a pipeline whose life expectancy has increased as a result of some technological change after it has been originally constructed but before, as I understand it, the date on which you are engaging in this valuation exercise?

MR GLEESON: According to the Tribunal, you cannot take that new fact into account. You look at the facts at the date you are valuing and establishing the capital base.

GLEESON CJ: I said the fact occurred and was known before the valuation date.

MR GLEESON: Before the valuation date?

GLEESON CJ: Yes.

MR GLEESON: My fault, your Honour. You take it into account because you are valuing in this case at the year 2000 and you take into account everything then known.

GLEESON CJ: What does the ACCC say you should do?

MR GLEESON: They say in appropriate circumstances you can ignore it, for example, here and they say that you cannot take into account the true future-looking life of this asset even though it was known at 2000 and that is why 1 billion becomes 550 million.

GLEESON CJ: Is the question of who is right and who is wrong about that matter simply a question of reasonableness or is it a question of the construction of the Code?

MR GLEESON: It is both, your Honour, because when we look at 8.10, (a), (b), (c) and (d), it is common ground between us that the only well-recognised valuation methodology which was a plausible contender in the present case was DORC and under DORC you do take into account that knowledge as to the future life of the asset. So up to that point the answer is clear; you take that factor into account.

When you then look at the further factors, (e) through to (j), which allows you to open the frame somewhat, and you see what information they offer you, our primary submission is that none of (e) to (j), as a matter of construction, allow you to reverse the conclusion you would come to on DORC. None of them says that that piece of information, properly taken into account in DORC, is now to be written out of the equation. The one the ACCC says they place considerable reliance on is paragraph (f). They do not tell us specifically that they place reliance on any other, so, unless they say otherwise to your Honours I am going to ignore (e) and (g) through to (j). So we are down to (f).

HEYDON J: What about (k)?

MR GLEESON: Section 8.10(k) is the one the Tribunal dealt with in paragraph 30 of the reasons and the Tribunal said that first of all as an almost jurisdictional matter, (k) requires the regulator to form an evaluative judgment that, “I am looking at some other factor and I consider it to be relevant to bring into the list of factors I am considering under section 8.10”, and because they did not do that, they did not reason that way, the Tribunal said it is not possible to reconstruct the reasoning. It was first put that way in argument before the Tribunal.

So that was the first reason against (k), but leave that aside. Assuming the decision had been worded differently, to answer your Honour’s question directly, one can conceive of a possible case where a regulator says, “I’ve looked at (a), (b), (c) and (d) and DORC is the best methodology and prima facie I have an ICB. However, as well as that I have thought up my own valuation methodology, never heard of before, brand new, but it’s occurred to me overnight in the shower and it is in fact, I think, a pretty good valuation methodology. It’s totally inconsistent with DORC but I think it is plausible.” What would then happen under this Code is, assuming the regulator went through that process, the regulator would have to form some evaluative judgments as to whether this new creature really was a candidate as a valuation methodology and then, one would think, give it some serious weighing against the other factors in the section.

One would have to rationally, as part of that process, normally say, “If no person in the field of valuation of pipelines or electricity transmission services or water or gas has ever thought up this way I’ve thought up, is it rational and reasonable for me to say that will be the ICB, all the others are disregarded?” It is possible that if one went through that process a regulator might come to a set of reasons which says “That’s what I do”. But were that to be done, that is the point at which the Tribunal has its limited merits review function - and perhaps I should go to that now in the law which is the Schedule 1 to the South Australian Act in the law. In the definitions in section 2 the relevant appeals body is the Australian Competition Tribunal. Sections 38 and 39 deal with administrative appeals.

If I could start with section 39(1), that deals with the present case which is where the regulator approves its own access arrangement. It then identifies a limited class of persons who may apply for a review including the service provider. Section 39(2) then provides limited grounds upon which the review can be made out.

GLEESON CJ: Just a minute. Is this one of those cases where, if you establish one of the grounds, then the whole matter is open for reconsideration by the reviewing body?

MR GLEESON: Yes.

GLEESON CJ: So if you found, for example, an error in the regulator’s finding of facts, having found that error, the Tribunal then decides the whole matter for itself?

MR GLEESON: Yes. The reason for that is that section 39(6) says that, “Except as otherwise provided” in section 39, most of section 38 applies and it is section 38(9).

GUMMOW J: Just looking at section 39(1)(d), there was no other commercial party “whose interests are adversely affected” who was engaged in this process? So Hardiman is put to one side really and the ACCC becomes incompetent, as it still is today.

GLEESON CJ: The contra dicta.

MR GLEESON: That is correct, your Honour.

GUMMOW J: That is the way it works, is it not?

MR GLEESON: Yes. They can also have a separate role under section 38(8) which was activated in the present case.

GLEESON CJ: What happens in relation to section 39(2) if the applicant establishes an error in the relevant regulator’s interpretation of the Code?

MR GLEESON: Then the Tribunal under section 38(9) has all of the powers there set out.

GLEESON CJ: Which part of section 39(2) makes an error in interpretation of the Code a relevant ground of application?

MR GLEESON: An error in interpretation of the Code would render the exercise of the discretion incorrect.

GUMMOW J: Yes, one does not normally say a discretion is incorrect or exercised incorrectly. Anyhow, it says it “was incorrect or was unreasonable”.

MR GLEESON:

having regard to all the circumstances and - - -

GUMMOW J: You say the notion of “incorrect” picks up an error in construing the Code.

MR GLEESON: Yes.

GLEESON CJ: You do not really have to go beyond saying an error in interpretation of the Code may fall within 39(2)(a)(ii), do you?

MR GLEESON: That is correct, your Honour. Focusing on the second limb of those words, was the exercise of the discretion “unreasonable having regard to all the circumstances”, we submit that that final phrase “having regard to all the circumstances” was quite deliberately inserted in order to make sure that this ground of review was not curtailed by constraints on judicial review. In particular, it is not solely Wednesbury unreasonableness and the Full Court agreed with that. It is not solely irrationality or illogicality on the stated reasons to the extent that may be a ground of judicial review – I do not go into that – but what it does is to require the Tribunal to have regard to all of the circumstances, including all of the materials which the Tribunal can properly look at under subsection 5 and come to its own evaluative judgment whether the exercise of discretion was unreasonable.

GLEESON CJ: Your proposition, which may well be right, that error in interpretation of the Code would or could fall within 39(2)(a)(ii) is going to illustrate, perhaps, the artificiality of separating out errors of law as a particular kind of error when we get to consider the jurisdiction of the Federal Court because if you say what was unreasonable about the decision of the ACCC was or included the approach that the ACCC took to the interpretation of the Code and that involved an error of law, then when it comes to a question of the jurisdiction of the Federal Court as we noticed from the opening paragraphs of the Federal Court’s reasons in the present case, that was a jurisdictional basis on which they fastened.

MR GLEESON: Except that the language they used was “We consider the decision was not unreasonable”, but can I - - -

GUMMOW J: On one view of it they seem to have put themselves back in the shoes of the Tribunal.

MR GLEESON: Your Honours, we read that paragraph – that is what they have done.

GLEESON CJ: What they said was the Tribunal erred in its approach to the interpretation of the Code. We consider that the approach, that is the approach taken to the interpretation of the Code by the ACCC was correct in law.

HAYNE J: The Full Court can be perhaps seen as inverting the proposition at the end of paragraph - or towards the end of paragraph 27 of the Tribunal:

It was incorrect and unreasonable -

See appeal book 671 last three lines to the top of 672:

It was incorrect and unreasonable to adopt a methodology which does not reflect the terms of the Code and which is not supportable in principle.

So you are getting the Full Court saying, “Well, it was reasonable.”

MR GLEESON: I have to come yet in the argument to looking at the five key paragraphs of the Tribunal’s decision, 25 to 30. The submission we have made is that what the Tribunal found was, this is not supported by the Code, you cannot find somewhere in section 8.10 that allows you to do this, but further, it is not supported by any of the material which was before you on this topic and it was irrational and unreasonable.

HAYNE J: Is not the Tribunal to be understood as expressing its finding at least in the terms of section 39(2)(a)(ii):

that the exercise of the relevant Regulator’s discretion was incorrect or was unreasonable having regard to all the circumstances –

and the Tribunal expresses its conclusion in those terms, cumulatively, not alternatively?

MR GLEESON: Yes. What we seek to put is that in coming to the Tribunal’s conclusion it not only grounded it upon no support in the Code, but it grounded it upon saying it was unreasonable in all the circumstances for you to adopt this novel methodology that adjusted ORC by reference to this past event. When we have had a look at all of the material before you on the topic of valuing regulatory assets, none of it provides any support for that method and we are not persuaded, paragraph 30, that there is any rational connection between the arguments you are putting and the way you are adjusting ORC.

HAYNE J: Is the focus on the method or on the result of it? The requirement of 39(2) would be to focus on results, would it not? That is the relevant exercise of discretion.

MR GLEESON: With respect, your Honour, it would be both because, as your Honours have held in - - -

HAYNE J: Why?

MR GLEESON: Because the exercise of the discretion may be incorrect because something has miscarried in the process by which that discretion was exercised or it may - - -

HAYNE J: I understand that, but what do you say is the relevant exercise of discretion, the fixing of a number or the method by which you get to the number?

MR GLEESON: Both, your Honour.

GUMMOW J: You have to start with the chapeau to 39, have you not, which does not help you much? It makes it quite clear this is a limited operation.

MR GLEESON: Yes.

GUMMOW J: That appears both in subsection (2) “only on the grounds” and subsection (5) “not consider any matter other than”.

MR GLEESON: Your Honour, we fully accept that this is not general merits review. It is limited in a range of ways.

GUMMOW J: No, no, no.

MR GLEESON: It is limited, as your Honour says, in (2), they are the only grounds you can put up. It is limited in (5), you can only consider certain materials. Subject to that, you fall back into the more general provisions of section 38 which include the broad powers under section 38(9).

GUMMOW J: Limited review, you say, is designed to make it quite clear that there is no merits review, right?

MR GLEESON: No merits review in the sense of the Tribunal - - -

GUMMOW J: Just a minute. No merits review, but is it not also saying limited review in the sense of something less than what you get by way of review under the AD(JR) Act, for example? Or is it saying something less than the review you get under 75(v) of the Constitution for jurisdictional error? There are three possibilities really.

MR GLEESON: With respect, your Honour, or something more, and the reason it is a something - - -

GUMMOW J: Or is it just setting up its own universe?

MR GLEESON: It is its own universe. If one draws the parallel because of that special language having regard to all the circumstances and because of subsection (5), the statutory task given to the Tribunal is not just to look at the Tribunal’s reasons and look for an error, which might be an AD(JR) error, 75(v) error or a jurisdictional error, it is not that task. The task is to look at all of the circumstances which include a range of materials, to look at the ground which has been put up as the ground of error - it is not a freestanding inquisitorial review - to look at that ground, to bear in mind that we are in a field of discretion with principles involved with a number of factors pointing in different directions, but ultimately for the Tribunal as an administrative body to make its evaluative judgment, was it unreasonable in all the circumstances?

GLEESON CJ: Well, one of the limits is that you do not just start again before the Tribunal and as it were ignore what has gone on before the ACCC.

MR GLEESON: No.

GLEESON CJ: It is a review and it is review upon certain grounds of error.

MR GLEESON: Yes.

GLEESON CJ: But your submission, as I understand it, is that once the Tribunal is satisfied that an identified - that is identified by section 39 - error is shown, then it is the responsibility of the Tribunal to undertake the whole task itself.

MR GLEESON: Yes, and in terms of that first step of “Am I satisfied there is an error”, if we look at subsection (5), although it is worded as a constraint “must not consider any matter other than”, the range of matters that are considered include (ad), the “written submissions” before the regulator, (c) “any reports relied” upon by the regulator, (d) the “draft decision” and the submissions on it - - -

HAYNE J: Yes, but it is a review on the record. It is not rehearing de novo.

MR GLEESON: No. Accept fully, your Honour. The point simply is that the Tribunal is charged with the task to the extent that the grounds put forward by the applicant make it necessary to look at some or all of the materials in subsection (5).

GLEESON CJ: But if there is a difference of judgment, if I can use that expression, or a difference of opinion between the ACCC and the Tribunal about what is reasonable, then it is the opinion of the Tribunal that prevails.

MR GLEESON: Yes.

GLEESON CJ: But what if the Tribunal’s difference of opinion with the ACCC about what is reasonable is affected by a difference of opinion between them about the interpretation of the Code.

MR GLEESON: Well, at the stage of the Tribunal it has to apply the law and so it has to follow its understanding of the law. It may be when it comes to judicial review that will have a consequence for what can be looked at, but at the Tribunal stage if it has to say to itself, they seem to be placing all this weight on section 8.10(f), what does that section mean? What does it properly enable? What does it rationally and reasonably enable? My view is X. It is their statutory mandate, we would suggest, to state that view and apply it in their decision, subject to any judicial review that is then carried out upon them. It is not their due job, we would suggest, their statutory task, to defer to the ACCC and say “Well, you seem to have thought you could do it under (f) if you could - - -

GLEESON CJ: Did the Tribunal in this case say, “We think that the approach of the ACCC was inconsistent with the Code and in addition we think that it was unreasonable”?

MR GLEESON: Yes, on our reading of the decision, yes, and the reason for that is particularly paragraphs 26, 30 and it is also clear in 32 - 26 because they said:

The ACCC received a number of expert opinions as to the appropriate methodology to be used –

That must be the methodology for the setting of the ICB – some on one side, some commissioned by them.

These in turn referred to other expert sources and to ACCC decisions –

They then refer to a particular draft statement of principles by them which had canvassed appropriate methodologies. I will refer your Honours to that document later.

The ACCC did not cite any of that material in support of their reasoning . . . That is not surprising. ORC is only utilised in this field –

the field being the field of valuing infrastructure –

as the starting point from which to deduce DORC . . . There is no support for ORC to be adjusted to take account of past events particularly based upon accounting concepts of depreciation, and to do so is wrong in principle.

Now, when they say wrong in principle that seems to be explained by the next paragraph where they say that, 27:

The terms of s 8.10 and 8.11 give considerable latitude to the ACCC in assessing the ICB, and we have already mentioned the limits –

to our power to interfere, so they are fully cognisant of those two propositions, but in the field of valuation there is considerable room for choice and discretion, however, an error in principle can always be reviewed. So at that point they seem to be saying it is not just a pure question of power, can you do it under (f), but when we look more broadly at the material – at the question of principle, there is an error and at the foot of that page they say “It was incorrect and unreasonable”.

GLEESON CJ: Is it legal principle or economic principle or accounting principle?

MR GLEESON: Principle of valuing infrastructure assets which is heavily - - -

GLEESON CJ: But is it a principle within the expertise of a lawyer or a principle within the expertise of an economist?

MR GLEESON: Primarily, an economist; more particularly economists specialising in regulatory economics. As your Honour sees in that last sentence on that page:

It was incorrect and unreasonable –

they appear to adopt both phrases -

to adopt a methodology which does not reflect the terms of the Code and which is not supportable in principle.

So it seems to be the additional finding that it “is not supportable in principle” which in turn invokes the “unreasonable” limb and then we get to T29 that I have placed weight on and then - - -

GUMMOW J: When they said “be set aside” the actual order they made was at 695, was it not, .....that your client submit a revised agreement. That is the way they exercised their power under 38(9).

MR GLEESON: Yes, and I can explain the process there, your Honour, that having got to that conclusion at the top of 672 they then dealt specifically with the 8.10(f) argument and they dealt with that in 29 and 30.

GUMMOW J: Yes, that is right.

MR GLEESON: At 676, at paragraph 38, what they said was there is this little outstanding issue as to how we are going to do DORC so they have made a judgment that DORC will be the way to set the ICB and they do that perhaps in the previous paragraph at 37 – this is the Tribunal exercising its power under section 38(9) to say, “We will step in and we will set the ICB at DORC. However, there is a question as to how we are going to do DORC”, and they have effectively sent it back to the parties to see if that issue could be sorted out. That was the subject of the second set of reasons so that the ultimate order, made after the second set of reasons, is found on page 711.

MR GLEESON: Your Honour Justice Heydon asked me a question a little earlier. For example, let us assume as a matter of principle you can - as a matter of construction factor (k) allows the regulator to think up novel valuation methodologies.

HAYNE J: You see, that method of expressing it runs together about four thoughts which obscure exactly what 8.10 is about. You presuppose that 8.10 is charting the universe which defines the only ways in which initial capital base is to be determined. You have got to choose between (a) to (k). That is not what 8.10 says.

MR GLEESON: With respect, your Honour, I was not seeking to put that. Can I attempt again. The question I was being asked was how can it ever be anything other than an error of the construction of the Code - - -

GLEESON CJ: If it is an error of principle, or to put the question another way, what room does this Code leave for principles of economics or anything else outside the Code?

MR GLEESON: The answer is that the Code itself invites in the economic principles as an underpinning which will assist in the exercise of discretions. For example, section 8.1 of the Code says that when you are designing a reference tariff you should seek to achieve certain objectives. Some of those objectives quite clearly call up economics: efficient cost, competitive market, efficiency in the level of the tariff. Now, the decision of the Full Court in Western Australia in Re Michael has held that the objectives in 8.1 are a prism through which one carries out the exercise under 8.10. In that decision could I just refer your Honours to these paragraphs. Firstly, paragraph 56:

I am persuaded that the Regulator is required by s 8.10 to take into account factors (a)-(k) and to give weight to them as fundamental elements in the decision of establishing the initial Capital Base.

Now, that paragraph, we submit, is consistent with what the Tribunal has done in saying that you cannot normally put the valuation methods of (a) to (d) to one side. They have to be given weight as fundamental elements along with everything else in section 8.10. Your Honour Justice Hayne, I did not intend to suggest that you only look at (k). We accept that they all need to be looked at. That is the first part. Next at 73:

There are many points, however, at which the principles in s 8 call for evaluation, the exercise of judgment, formation of opinion –

et cetera. 74:

The task of the Regulator under s 8.10 appears not to be simply one of valuation . . . These various factors bring into account a number of matters which are not directly related to the value of the pipeline in the ordinary sense, and which by their nature require the consideration of disparate issues which may tend in different directions. The process is more than one of mere valuation. There is, necessarily, a discretionary valuation of what weight should be attached to each of these factors . . . Factor (k) –

and this was the submission I sought to put –

enables the Regulator to take into account any other factor which the Regulator considers relevant, which in itself requires further evaluation and discretionary judgment by the Regulator.

We submit nothing there is inconsistent with what the Tribunal has said. The Tribunal has never said it is mere valuation. They have never said these other factors are to be ignored. They must be taken into account in the process. In paragraph 75 the court says there is a tension between some of the factors and then the passage I was coming to in 76:

Hence, in seeking to give effect to ss 8.10 and 8.11, the Regulator will be in need of guidance . . . In the absence of express statutory provision in this regard one would normally turn to the general policy and objects of the Act for such guidance. Within s 8, however, s 8.1 contains a statement of principles . . . This suggests prima facie that it is the objectives in s 8.1 which should guide the Regulator in the exercise of the discretion –

So if that is correct, the factors in 8.1 or some of them invite attention to an underlying corpus of regulatory economics.

HAYNE J: Does it then come to a proposition like this, that what is described as an error of principle is the application of a valuation methodology that does not fall within section 8.10(a), (b) or (c)?

MR GLEESON: With respect, your Honour, that is too narrow because the Tribunal has found more than that. They have certainly found that plus more, that (a), (b) and (c) are the parts of section 8.10 speaking of valuation methodologies and they are all defined and well-recognised valuation methodologies. There is no factor in section 8.10 that says that as well as all of them, you can also devise valuation methodologies which appeal to you which are not well known and you can consider them. There is nowhere that is said in 8.10. The only place it might come in would be under paragraph (k) and if it comes in under paragraph (k), which is not what the ACCC said and rather doubtful, you then still have the question of evaluative judgment, “Will I as the regulator dispense with all of the known valuation methodologies and give 100 per cent weight to the one I have thought up?”

GLEESON CJ: But is the question of the weight that you give to any of the considerations mentioned in section 8 always a question of reasonableness, that is to say, a question on which the view of the Tribunal prevails over the view of the ACCC?

MR GLEESON: Yes, and it is a question of fact. A question of fact as in when you are choosing between a range of considerations, some pointing in different directions, such as, was the worker on a journey, there are a number of factors pointing in different directions. The judgment there is a judgment of fact and the Tribunal’s statutory task is to look at all the relevant material before the ACCC, look at the arguments and ask yourself the question, was it unreasonable in all those circumstances to take this novel valuation methodology to adjust ORC in a way no one had done before and call that the ICB? They say, “Yes, that is our judgment”. When one then comes to judicial review, it is fairly hard to see any jurisdictional error because they have asked the right question. When one comes to the AD(JR) Act it was a question for the Tribunal to make that judgment on the question of reasonableness.

GLEESON CJ: There are two possibly different approaches. One is to say the more narrowly constrained by the Code the function of the ACCC, the easier it is for the Tribunal to conclude, or may be for the Tribunal to conclude, that the ACCC made an error in not applying the Code. At the other end of the forensic spectrum it might be said the wider the area of discretion available to the ACCC, the easier it may be for the Tribunal to conclude as a matter of reasonableness that the ACCC’s decision was unreasonable because the weighing or process of evaluation described by the Supreme Court of Western Australia will ultimately express itself in considerations of reasonableness, will it not?

MR GLEESON: It is likely to, your Honour. When one then brings that back to the specifics of the case, the Tribunal quite correctly says, “We are going to focus on the very thing you did. You took this ORC. We do not know where you got it from. You did this thing to it that no one has ever done before, you disregarded, gave no weight to any of the valuation methodologies in (a), (b) and (c), you have not called it (k) but even if you did, our finding is there is no logical or rational connection, therefore we have our mandate under 39(2) to step in and take the review further.”

GUMMOW J: Can I just ask you two questions? What was the discretion being exercised by the regulator? There was no discretion at all, was there? They had to make up their mind. They had to weigh various matters to make up their mind, but why would they exercise their discretion?

MR GLEESON: The ultimate discretion – ultimate at its highest level with section 2.20 which was, what access arrangement will I draft and approve on my own?

GUMMOW J: “The Relevant Regulator must” - - -

MR GLEESON: “Draft and approve its own Access Arrangement”, that being an access arrangement which under 2.5 had to include the matters in 3.1 to 3.20 and then we have traced through that chain and at its most specific level it is a discretion to establish the initial capital base which - - -

GUMMOW J: When you say “discretion to establish the initial” where do those words come from?

MR GLEESON: Ultimately from - - -

GUMMOW J: I know the draftsmen of this wretched provision that we are looking at in 39 seems to have misunderstood it, but where does it appear in the text? It seems to me we have to give some special meaning to the use of “discretion” in 39(2)(a)(ii). I do not know what it is at the moment. It is some process of weighing up various possibilities.

GLEESON CJ: Your argument seems to assume, or much of it seems to assume, that the word “discretion” in 39(2)(a)(ii) at least includes the sense in which an award of damages or a fixing of a sentence is described as a discretionary judgment. We may have to ask ourselves whether that is right.

MR GLEESON: Your Honour, could I give a further answer to your Honour’s question?

GUMMOW J: Yes.

MR GLEESON: There is some guidance provided by section 8.6. So within the context of this Code, the manner in which relevantly the capital base is set, which presumably is 8.10 and following, is regarded as involving a discretion insofar as - - -

GUMMOW J: Where does it use that word?

MR GLEESON: It does not, your Honour. I am just giving attention to the only part where it is used. But to the extent it can be given meaning, the meaning would be, I suggest, because the manner in which you are asked to establish the capital base is such that when you consider the various factors you could produce a range of values, that is to be treated as the exercise of discretions, various discretions, ie, so within 8.10 itself - - -

GUMMOW J: It just means permissible area of choice, does it?

MR GLEESON: Yes.

GLEESON CJ: That is certainly the way the Tribunal seems to have approached this. Did the Tribunal deal with this question that Justice Gummow has raised, that is the construction of section 39(2)?

MR GLEESON: It referred to the section generally at the beginning of its reasons. It did not give detailed attention to this issue, your Honour.

GUMMOW J: Maybe it did not get any submissions.

MR GLEESON: I was just going to indicate, though, within section 8.10 itself, your Honour, (a), (b) and (c) would have a fairly small element of discretion within them in the sense the Code is using it, but (d), requiring you to consider advantages and disadvantages of competing valuation methodologies, requires some evaluative judgments to be made as to which is better or worse for the task at hand. Then (e) to (j) require you to look at factors which do not give you a value but somehow bring them to play in the course of establishing a value for the capital base. That is regarded as a form of discretion.

GUMMOW J: Another question I wanted to ask you is, can you indicate what areas of review permitted under section 5 of the AD(JR) Act would not be within section 39(2)? In other words, the word “limited” review has been used. To what extent is what is provided in section 39(2) more limited than what is spelled out in such precise detail in section 5 of the AD(JR) Act? Take the “rules of natural justice”, for example, or failure to observe procedures, taking into account “irrelevant consideration” and so on and so forth.

MR GLEESON: If I could deal with them separately. As to (a) and (b), which are the procedural issues of natural justice and not complying with the procedures required by law, giving those rules the specific content within the Code, in particular section 220, which spells out what the natural justice is, if the ACCC ignored those rules for public consultation and submission and the like and proceeded to give something which it called a decision, then arguably that would be an incorrect exercise of the discretion because something had gone wrong in the process.

HAYNE J: Or would it be a (2)(a)(iii), the occasion for exercising had not arisen - had not arisen because the precursor steps had not been taken, perhaps?

MR GLEESON: Yes, perhaps - - -

HAYNE J: It would not cover the particularly gross form of natural justice where there is actual bias for - - -

MR GLEESON: Which we would submit would probably come within an incorrect exercise of the discretion because in the process there had been that failure. As to the next group, which are irrelevant considerations, failure to take into account relevant considerations, an error of law, they would naturally come within an incorrect exercise of the discretion.

GUMMOW J: Wait a minute. (1)(e) is spelt out in great detail in subsection (2).

MR GLEESON: Yes, and that, we would submit, would - - -

GUMMOW J: Take bad faith, for example.

MR GLEESON: Yes. That would be something that could be considered certainly under a heading of an incorrect exercise of discretion and probably under the heading of an unreasonable exercise of discretion, but the area where – to reverse your Honour’s question – section 39 may be broader than the AD(JR), if that is the question, is that in section 5(2)(g) one needs to find the:

exercise of a power that is so unreasonable that no reasonable person could have so exercised the power -

That, we would submit, is a tougher ground of review than asking whether it is unreasonable in all the circumstances. Part of the reason that section 39 is drafted as it is, including subsection (5), is to say it is the mandate of the Tribunal to look at all of those materials, which may include expert reports, economists’ reports, submissions, draft decisions and the like, and then to stand back and ask this overall question: do they render the decision unreasonable in all the circumstances?

HAYNE J: That expression is not unlike fourth class House v The King 55 CLR 505 and the expression that “If upon the facts it is unreasonable or plainly unjust”. It may or may not be desirable to look at 2(a)(ii) through the prism of House but there are some similarities.

MR GLEESON: Yes, and to the extent it is the requirement, upon the facts it is plainly unreasonable or unjust, there is the similarity of in this case the facts are the section 39(5) material plus or minus the grounds of review which provide the prism of how you are to look at those facts, but something - - -

HAYNE J: The drafter’s use of the expression “discretion” may well seek to draw on the understanding of discretion as used in House which was, after all, a sentencing case.

MR GLEESON: Yes.

GLEESON CJ: Would that expression “unreasonable”, et cetera, embrace the classic ground of complaint about a discretionary decision, that is to say, failed to take into account something that had to be taken into account, or took into account an irrelevant consideration?

MR GLEESON: The answer to that, your Honour, is probably yes, although it may also come into the incorrect exercise of the discretion in the sense that the procedure miscarried along the way, but it may also be in terms of the product of the reasoning process. The fact that something so important has not been taken into account means that the end product can never be described as a reasonable exercise of the discretion. Your Honours, just to conclude Re Michael, I had mentioned the paragraphs 73 through to 76. The Full Court considered that there was some radical divergence between these paragraphs and what the Tribunal did in this case. We submit there is none. Can I just complete the remaining paragraphs.

GUMMOW J: Is there any attention in Re Michael to these matters we have been debating for the last quarter of an hour or so?

MR GLEESON: Not squarely, your Honour. The difficulty with the factual construct of Re Michael was that it was an attempt to obtain prerogative relief - - -

GUMMOW J: I see that – certiorari.

MR GLEESON: - - - in respect of a draft decision of a regulator and there was much argument as to whether there was any jurisdiction. In the end, the court said “We’ve got jurisdiction but, in fact, what we’ll do is make some declarations”. The declarations which the court made in Re Michael are found at page 572 of the report in the Western Australian Reports and when one looks at those declarations one can see that they deal with matters far removed from the facts of the present case.

HEYDON J: Interlocutory declarations.

MR GLEESON: Interlocutory declarations and for the purpose of - - -

GUMMOW J: No such creature. That is what was said.

HAYNE J: Declarations of right, are they?

MR GLEESON: They were declarations ostensibly for the purpose of giving guidance to the regulator who was halfway through the draft process to go back and come up with a different draft and that was the subject of much debate in the case. The Tribunal has been criticised for the way - - -

GUMMOW J: A case called Bass in this Court where we said something about that, before this too.

MR GLEESON: Yes, criticised by the Full Court for what it said. The Full Court said “This case is of direct relevance and application to the case before you. You are an administrative body, you should have followed it”. The Tribunal said firstly, it is a case - - -

GUMMOW J: You were in it, I see.

MR GLEESON: Another one of my great losses, your Honour. I will deal with this briefly. The Tribunal said firstly, the facts are removed from our facts. If your Honours look at page 572 you will not see a word there about section 8.10(f), for example.

Secondly, the Tribunal said it is a prerogative relief case, not a case about section 39(2). That is also correct. The other part I needed to show your Honours in the judgment, and the only place where section 8.10(f) seems to get a mention, is on page 559 in paragraphs 168 to 169. Paragraph 168 really just summarises section 8.10(f). Paragraph 169 talks about (g) and then has a statement to this effect at the bottom of the page:

Section 8.10(f) and (g), therefore, reflect the relevance of the historical returns and tariffs and depreciation, as well as the reasonable expectations of the service provider before the commencement of the Code, in the establishment of the initial Capital Base for the purposes of the Code. In a particular case one or more of those considerations might suggest a lower or a higher Capital Base than would be established were it not for (f) and (g) –

That is no way inconsistent with what the Tribunal said at paragraph 29 that I took you to, namely, these are factors, non-valuation factors, which in an unusual case may require modification to the results you otherwise are putatively heading towards. So, far from this case being something which the Tribunal has blatantly disregarded being squarely on point, there is no such discrepancy. Your Honours, there is one decision, it is of the Tribunal, which has attempted to grapple with section 39(2). Could I refer to that. It is the Application by EPIC Energy South Australia Pty Ltd [2003] ACompT 5; (2004) ATPR 41-977. Justice Cooper was presiding in the Tribunal. The relevant part is between paragraphs 8 to 16. Paragraph 11 picks up the matter your Honour Justice Hayne raised.

GUMMOW J: Yes, because House v The King is within a judicial hierarchy.

MR GLEESON: Yes. So this decision says it is not just “Wednesbury unreasonableness”, it is more than that. It may be the product of an error in the decision-making process. It may be more than that. Paragraph 13:

the applicant [must] establish such error to the satisfaction of the Tribunal on the basis of the limited matters . . . It is nevertheless a review by a specialist Tribunal with the power to substitute its own decision on the merits to correct established reviewable error.

That is the proposition I was seeking to put to your Honour the Chief Justice.

GLEESON CJ: Did this deal with the question of what is the discretionary aspect of the decision?

MR GLEESON: Only to the extent that paragraphs 14 and 15 give some explication of what “unreasonable in all the circumstances” means, but not otherwise, your Honour. The importance of 14 and 15 for our argument is that his Honour says:

There is within the phrase a causative relationship between the character of a decision as “unreasonable” and all of the relevant circumstances which cause the decision to acquire that characteristic. The ordinary meaning of s 39(2)(a)(ii) is that the exercise of the relevant Regulator’s discretion is unreasonable because the totality of the relevant circumstances, viewed objectively, render it so.

15. The question for the Tribunal in each case must be whether, in the judgment of the Tribunal, having regard to all relevant circumstances, the decision in its effect and operation is unreasonable for the reasons particularised by the applicant . . . It is a straightforward factual test based upon the Tribunal’s own appraisal of all the relevant materials.

Now, that is the reason why I put to your Honour the Chief Justice that it is a factual test under 39(2) as to what is unreasonable and where we have here a decision by the Tribunal which has asked itself the right question, which has concluded that it is unreasonable, that being ultimately a decision of fact in that sense, where is the ground on judicial review to intervene.

The next task I have, and I do not wish to weary your Honours but I have to do it, is to compare the critical paragraphs of both sets of reasons because our argument is that the court has not engaged in judicial review in part because it has either misconstrued what the Tribunal has - - -

GUMMOW J: But do we not have to understand what the court’s mandate was?

MR GLEESON: Yes. So, your Honour the court - - -

GUMMOW J: Because you are not comparing apples and apples.

MR GLEESON: No. When we come to the court’s mandate the introduction is in - - -

GUMMOW J: We are comparing this idiosyncratic system under the Access Code with the court’s.....which is not idiosyncratic.

MR GLEESON: Yes. Can I deal with that, your Honour. In page 1558 of volume 4, paragraph 144, the Court summarised the ACCC’s seven grounds of review. The first ground was said to be:

Error of law in the construction and application of ss 8.10 and 8.11 of the Code in the Tribunal’s reasons –

the first set of reasons, the ones before your Honours. The second ground was:

Error of law in the approach taken by the Tribunal to its own review function –

in its second set of reasons. They are the ones not before your Honours – that is the stage two exercise: how do you do DORC?

There is then 3, 4, 5, 6 and then 7, “Jurisdictional errors”, “not authorised by” the law or “beyond power”. When the court discussed its own jurisdiction the conclusions are found on pages 1563 to 1564 and the first conclusion, paragraph 161, last sentence, is that there is “jurisdiction under the AD(JR) Act”. At that point the court has not identified which ground within section 5 it is dealing with but presumably it is section 5(1)(f).

The second ground of jurisdiction is paragraph 162, section 39B of the Judiciary Act, mandamus, certiorari, and the third ground also in that paragraph is declaratory relief. When the court discussed the Tribunal’s jurisdiction at paragraph 175 the court said at line 21:

It has been said on more than one occasion that the distinction between so called ‘merits review’ and judicial review is somewhat illusory.

We take issue with that statement. At 176 when the court discussed the unreasonableness ground they quoted at 177 what Justice Cooper said in the first Epic Energy decision but did not deal with what he said in the second decision, notwithstanding both parties had cited it to the court. It may be that the court has taken an unduly narrow view of section 39(2) which explains part of its error in intervening too readily on judicial review.

GUMMOW J: Would you just say that again, Mr Gleeson.

MR GLEESON: It may be that the Full Court has taken a too narrow view of what the Tribunal is permitted to do under section 39(2) and having said there is very little the Tribunal can do it then more readily said, “We sitting on judicial review have found error of law in what you did”. So, in part, this page and the next page may indicate where the court has started to misconceive its task. The fact that the court did not refer to what Justice Cooper said in the second Epic decision when it was highly relevant and cited by both parties is, we submit, significant.

What we see on 1571 is that at the end of paragraph 177 the court says, well, unreasonableness might “pick up logical error or irrationality” - it is not limited to Wednesbury unreasonableness. Then, in 178 they explain unreasonableness as being a:

want of reason. That is to say the particular discretion exercised by the ACCC is not justified by reference to its stated reasons. There may be error in logic . . . It may be that the decision has an element of arbitrariness about it because there is an absence of reason –

What the Court has not done there is paid any attention to section 39(2) where it says “unreasonable” in “all the circumstances” and that it may only be by looking at the relevant materials that the Tribunal does come to the conclusion of unreasonableness. That really explains, with respect, why it is that in the balance of the Court’s decision they have never dealt with critical paragraphs like 26, 29 and 30 of the Tribunal because they seem to be saying the Tribunal sits there and looks at what the ACCC has done on its face, a bit like the Tribunal was doing judicial review because merits review and judicial review are somewhat illusory, the borderline. You look at what the ACCC is doing on its face. Does it look to have irrationality or arbitrariness? If not, it stands.

Now that, we submit, has unduly narrowed section 39(2) and it explains perhaps why the court has never grappled with that part of the Tribunal’s decision which did look at the facts. That is why the court has never found an error in that part of the Tribunal’s decision because they have essentially ignored it. Your Honours, then at paragraph 181, the court returns to the first ground of review.

GUMMOW J: That sentence in paragraph 175:

It has been said on more than one occasion that the distinction between so called ‘merits review’ and judicial review is somewhat illusory –

is denied by the whole federal structure of the AAT Act, is it not?

MR GLEESON: Your Honour, we searched to find the High Court case where that has been said and we could not find it.

HEYDON J: Who said it? If it was not the High Court, who said it? The Federal Court.

GUMMOW J: The Parliament certainly has not said it, because it has two distinct pieces of legislation.

HAYNE J: There are some authors that have offered this opinion. I think Professor Aronson’s work comes close to an opinion that proximates this, but I think it does the author less than justice to express it in these terms.

MR GLEESON: They seem to be saying, because it is a pretty much illusory distinction, the Tribunal’s task is to look for error in the stated reasons of the ACCC, in which case the review to the Tribunal would be a small exercise. You would say, “Look at the ACCC’s decision, look at the grounds of review, provide an answer”. What they have ignored here is the section 39(5) mandate to look at that raft of materials including reports, submissions and the like. That seems to lead straight into paragraph 181 where they say we uphold the first ground of review.

GUMMOW J: But on the other hand, Mr Gleeson, the meaning you want to give to “unreasonable” in 39(2) ignores the cautions which have attended Wednesbury and goes beyond that, and hence one might think that 39(2) idiosyncratically, although its called limited, I think on your submission does have some taint, if I can use that word, of merits review. It may be that is what the court had in mind here.

HEYDON J: Your argument is that it is merits review but limited.

MR GLEESON: It is merits review by an administrative body limited in four or five ways - - -

GUMMOW J: Just stopping there for a minute, this damnation of merits review is usually adopted when we are talking about the relationship of courts to administrative bodies. This is an intra-administrative operation.

MR GLEESON: Intra-administrative and therefore there is no constraint from the federal system on the Tribunal needing to show deference to decisions by the ACCC. We submit it is an important part of this system that your regulator is an administrative body. You get one right of review to a further administrative body deliberately comprised of a Federal Court judge and persons specialised in economics, business, law and other matters as per the Trade Practices Act in the establishment of this Tribunal, and they are given this task to look at all the materials and answer whether it is unreasonable. If you succeed before that body as we did, you are then liable to lose that decision only within the grounds of strict judicial review. Your Honours, I was coming to 181.

GUMMOW J: Well, that is what the case is all about here, I suppose.

MR GLEESON: Yes. Your Honour, 181 seems to be the paragraph in which the conclusion is reached that the first ground of review is made out. So 181 accepts the first ground of review from paragraph 144. Just to understand the overall reasoning I will come back to 182 through to 199 which are the reasons, but when we go to paragraph 200 on page 1579 the Full Court says:

Having found in favour of the ACCC in relation to the first and principal ground of review, it is not necessary to give any detailed consideration to the remaining grounds. The question of the approach taken by the Tribunal to its review function has been subsumed in the general discussion relating to ground 1.

That is the reference to ground 2 in paragraph 144 and that statement is wrong because ground 2 related to the second set of reasons which the court has simply not dealt with. The short point is that none of grounds 2 to 7 are the subject of any decision.

HEYDON J: But in a perfect world we would look through 181 to 199, would we not, and we would find some point of construction advanced by the ACCC and perhaps a point of construction dealt with by the Tribunal. We would find some submissions by both parties as to which was right and then we would find a little passage setting out which was right and which was wrong. Do we find those things?

MR GLEESON: No, your Honour. Nowhere in the17 or 18 paragraphs do you find first of all paragraphs 29 or 30 of the Tribunal’s decision referred to. Secondly, you do not find the submission we put on those paragraphs to the Full Court. I will give your Honours the reference later, but unsurprisingly, about 40 pages of transcript of the Full Court are devoted to our argument defending what the Tribunal did on section 8.10(f) and none of that has been referred to and then, of course, it has not been rejected.

That is our second ground of appeal that if this is a judgment that the Tribunal made an error on 8.10(f) which entitled the Full Court to set aside the Tribunal’s decision where are the reasons addressing the Tribunal’s decision and our submissions for that conclusion? The short answer is there are not because the court stopped short.

GLEESON CJ: Is one of the respects in which this review is limited to be found in a comparison between the grounds of review under this procedure and the capacity of the Tribunal to review determinations of the ACCC under Part IX of the Trade Practices Act?

MR GLEESON: Which I believe is merits review.

GLEESON CJ: Whatever label you attach to it, if you want to contrast one form of review with another form of review you may contrast the review by this Tribunal of decisions of this Commission under the Trade Practices Act Part IX with the kind of review that we are concerned with.

MR GLEESON: We accept that, your Honour, yes. Your Honours, in the 17 paragraphs of reasoning they fall into two groups. Paragraph 182 of the Full Court through to 189, they fall into a first group because they are what we call the preliminary attacks on the Tribunal on the so-called primacy for value issue.

I will seek to show your Honours that in fact there is no error of law that the court has identified there and, in any event, that issue did not have any necessary consequence in the Tribunal’s decision. The second group of paragraphs run from 190 to 198 and they are the paragraphs which attempt to deal with the critical paragraphs of the Tribunal, which are paragraphs 25 to 30. Again with those I will seek to show there is no - - -

GUMMOW J: Mr Gleeson, are there any authorities – I am sure there are – which bear upon section 102 of the Trade Practices Act explaining the powers and functions of the Tribunal when dealing with the Commission?

MR GLEESON: Yes, there are, your Honour. We will get them over the adjournment.

GUMMOW J: It may help flesh out the point the Chief Justice is making.

MR GLEESON: Is that a convenient time, your Honour?

GLEESON CJ: Yes. We will adjourn until 2.15.

AT 12.44 PM LUNCHEON ADJOURNMENT

UPON RESUMING AT 2.15 PM:

GLEESON CJ: Yes, Mr Gleeson.

MR GLEESON: Your Honours, the authorities on sections 101 and 102 of the Trade Practices Act include two decisions of the Tribunal, Re 7-Eleven Stores (1998) ATPR 41-666 at 41-451 - that was Justice von Doussa presiding - and more recently the Tribunal again in Qantas Airways Limited (2005) ATPR 42-065 at paragraph 136, Justice Goldberg presiding. In terms of discretion - - -

GUMMOW J: What do they tell us?

MR GLEESON: Basically what the Chief Justice said, namely under that section, it is a hearing de novo, it does not involve any analysis of the Commission’s reasoning process, there is no requirement to demonstrate error, the Tribunal asks itself the relevant questions directly. In terms of discretion - your Honours are of course familiar with what some of your Honours said in Coal and Allied [2000] HCA 47; 203 CLR 194 at paragraph 19, one meaning of “discretion” was:

a decision-making process in which “no one [consideration] and no combination of [considerations] is necessarily determinative of the result”.

That is perhaps this case –

Rather, the decision-maker is allowed some latitude as to the choice of decision to be made.

One of the curious things about the Code and similar forms of modern instruments is that in an attempt to be more precise as to what are the relevant considerations in the Code which in one sense narrows the discretion, it produces more possible combinations of end result, particularly where the factors are sometimes incommensurate. But that, we submit, is part of the task of the Tribunal under the law to look at the result, look at all the material and determine whether it considers the result unreasonable.

Your Honours, we have done an exercise which may assist which is to index the appeal books with the material under section 39(5) in its various headings. I would seek to offer that index to the Court, if I might, for this purpose, namely to indicate the breadth of the material which the Tribunal was required to look at under section 39(5).

GLEESON CJ: Thank you.

MR GLEESON: For instance, the reports which it is required to look at, which is paragraph (c), were many and various. Some are in the appeal books, some are not, but that being the breadth of the task under 39(2), to consider that material and determine whether the decision was unreasonable was one we submit the Tribunal did without error of law.

Coming to the 18 paragraphs of the matter. If your Honours could open the Full Court commencing at paragraph 182 and the Tribunal commencing at paragraph 16.

GLEESON CJ: What page is the Tribunal?

MR GLEESON: Page 667. First of all, there is no criticism of the Tribunal prior to paragraph 16. That is important because the Tribunal there has properly identified the task before it and in paragraph 13 has recognised that, “The ICB is entirely a creature of the Code”. In paragraph 16 the Tribunal says:

There is no indication in the Code that there is to be discrimination in principle between the operators of existing as opposed to new pipelines . . . it can be assumed that the objective of the Code in relation to an existing pipeline is to attribute to it a value that would be consistent with that principle.

Then the Tribunal explains what it means, given that the ICB for a new pipeline is the actual cost, “it cannot be suggested that the Code contemplates” a subsidy or a bonus and “It can be assumed that the same would flow through to an existing pipeline.” That is paragraph 16 on page 667. Your Honours, that statement that there is no discrimination in principle, we submit, is consistent with what has been said in this Court about the concept of discrimination, for example, Justice Gaudron in Street v Queensland Bar Association [1989] HCA 53; (1989) 168 CLR 461 at 570. There is no error of law in that statement. It simply says the fact that the pipelines have a difference, namely, one is new and one is old, does not justify a discrimination in principle where with the old pipeline the regulator has some open-ended ability to give subsidies or bonuses. Now, when one looks at paragraph 182 of the Full Court, they criticise the Tribunal for failing to pay attention - - -

GUMMOW J: What paragraph in the court?

MR GLEESON: Paragraph 182.

GUMMOW J: Thank you.

MR GLEESON: The criticism is you have not paid, “sufficient attention to the various factors which s 8.10” refers to. A little further down:

The point is not so much that there is not to be discrimination in principle between the operators of existing as opposed to new pipelines but rather that the ICB of an existing pipeline is to be determined in quite a different manner from that of a new pipeline.

So the Full Court is not saying you got it wrong, there is discrimination. They are just saying, well, although there is not discrimination, obviously it is a different set of factors which you have to look at to set the ICB and that is a point the Tribunal has clearly recognised. The Tribunal’s findings - - -

HAYNE J: Much turns on what their Honours wrap up in the last proposition in that paragraph, “What is clear is that different principles”. What are the different principles?

MR GLEESON: Well, that we will come to in the further paragraphs. But to say there is an error in paragraph 16 where the Tribunal has simply said no discrimination in the sense that – they give a sense for no discrimination – you cannot use section 8.10 to give subsidies or bonuses because you think that is a good thing, the Full Court has not disagreed with that as a statement of the Code. Paragraphs 17 and 18 of the Tribunal are not criticised. Paragraph 17 deals with 8.10(a) which is called a depreciated actual cost. Could I mention there, your Honour the Chief Justice raised a question this morning about how does the forward-looking life of the asset come into valuation? Of course for some valuation methodologies such as this one, it is irrelevant. You simply look at what was paid and what has been depreciated. In that paragraph near the end the Tribunal says:

It is reasonably clear from the balance of the Code (particularly ss 8.32-8.35) that normally the depreciation to which reference is made is the economic concept of depreciation rather than the accounting concept of depreciation - - -

GLEESON CJ: Now, what is the difference?

MR GLEESON: The difference is best explained – if your Honours keep that page open but go to page 860. This was an appendix which the ACCC proffered to the Court and at the foot of the page it explained accounting depreciation as reflecting:

the notional reduction in the value of the asset. The profile of the accounting depreciation allowance is not necessarily dependent on company revenues. Instead it may reflect a desire for convenience or simplicity and perhaps shaped by statutory requirements.

Then accounting depreciation provides a true link between your revenues and the return on capital. Could I just invite your Honours to read the example and then I will explain it if it is not completely clear.

HEYDON J: You do not know who the author of this was, I mean apart from the condition.

MR GLEESON: This is the ACCC summarising.

HEYDON J: It is annexed to the counsel’s submission.

MR GLEESON: It was an explanation of technical concepts in this respect we agreed and another source of the material which is perhaps a more primary source is that in the draft decision of the ACCC they said much the same thing.

GUMMOW J: Anyhow, you adopt this, do you?

MR GLEESON: Yes.

HEYDON J: You adopt it as an explanation for what it said in the decisions under consideration.

MR GLEESON: Yes, and the essential difference being economic depreciation gives you some real link between the revenues you are generating in a profit and loss sense and the return on your capital. So that if in the first year you received $10 million in revenue you had too many dollars in operating costs and you required a rate of return of five per cent, as the sums there work out, your value is now $97 million at the end of the year. The relevance of it here is of course with this pipeline, because the Commonwealth did not recover a reasonable rate of return, although it spent several hundreds of millions of dollars buying the pipeline, by 1994 in economic terms there was $1.2 billion invested in the pipeline that still had to be recovered from users in order to fully recover a reasonable return over the life of the pipeline.

GLEESON CJ: But depreciation is a concept that is employed for different purposes, is it not? I mean, if you are an entrepreneur who builds hotels and you build two hotels, one in Zimbabwe and one in Paris, you will expect or require probably a return of capital from your Zimbabwe investment in a much shorter time than you would look to for a return of capital from your Paris investment. So, in accordance with your policy, you might look to write off that asset in X years in the case of the Zimbabwe hotel, and X + Y years in the case of the Paris hotel, but when you have written both hotels off completely for your own purposes, whatever they might be, it does not mean they are valueless.

MR GLEESON: Following on from your Honour’s question, if one were valuing the hotel on a replacement cost basis you might say its value today is $100 million. You might then say under this approach paragraph (f) requires me to look at some past factors to see whether I should make some modification to the primary valuation method of $100 million. The central point in this case is the Tribunal has found that properly construing and applying (f) in the present case would not reduce the DORC value, it would if anything, increase it. Your Honours will notice in paragraph (f) that the middle concept is the economic depreciation of the covered pipeline. It is the pipeline viewed as the entity which was built in 1976 and lasts for a period that one is considering the economic depreciation of.

I think I need to make it more specific. Could I ask your Honours to keep this open but look at volume 1 at page 397 where as part of the draft decision the ACCC explained what economic depreciation is and at line 50 said:

In the case of the MSP assets it would appear that the book depreciation values were not fully reflected in tariffs in addition to a commercial rate of return. This is demonstrated in Table 2.7, which presents the economic depreciation analysis of the MSP from its commencement of operations until its sale –

in 1994. Over the page, the table in a more complicated fashion does the simplified example your Honours saw on page 861, that it starts with an opening cost of assets built in 1977 of $226m, makes assumptions about a commercial rate of return – yes - and then shows at the end of the first year the Commonwealth has gone backwards by $30 million. It follows that analysis through and says as a covered pipeline, by the time you get to 1994 you have gone substantially backwards in terms of the recovery of a commercial rate of return.

The question then under paragraph (f) is whether that is what is meant by economic depreciation of the covered pipeline and the Commission has found that here we see clearly that economic depreciation would give you a value which shows if anything DORC is too low. DORC should be raised up to $1.2 billion.

The Commission then says, perhaps taking up your Honour’s point on page 399, line 30:

The fact that very little allowance has been made for depreciation in the past suggests that the maximum valuation permitted under the Code (that is, DORC) should be used to set the initial capital base.

If the Commission had said to us “We are actually going to increase DORC because in terms of the whole pipeline there is an under-recovery of depreciation”, then clearly there would be a pretty good counter-argument that said “Why should we be getting, as a monopoly profit, the commercial return which the Commonwealth chose not to recover.” But what happened with this figure was that it was not used to increase our capital base, it was simply when you look at this figure, that you are required to look at under (f), it tells you there is no reason to lower the capital base below DORC. Your Honours, could I then come in the Tribunal’s reasons to - - -

HAYNE J: Just before you leave that, just so that I understand it a little further, at page 398 underneath the table in the half dozen lines or so appearing underneath the table, the conclusion is drawn that monopoly rents had not been achieved. And seeing this collection of things which are to be found in (f), a way in which (f) would be engaged, perhaps not the only way in which (f) may be engaged, but (f) presumably may be engaged if an existing pipeline comes under this system and the owner has during earlier years been able to exact a monopoly rent. In that event in taking account of that fact, you may diminish perhaps the value that is to be taken to account in the calculation.

MR GLEESON: We would accept that entirely, your Honour, and that appears to be what the Tribunal accepted in paragraph 29 that we are going to come to, that where you have got - - -

HAYNE J: But consideration of the kind spoken of in the chapeau to 8.10 does not require consideration only in the sense of this is a factor which has a positive effect on the calculation that I arrive at. Consideration includes the case where you look at a set of factors and say, “Yes, well, that didn’t happen. Therefore I need not adjust what otherwise I would achieve.”

MR GLEESON: Yes, your Honour. In the present case, for example, if we look at paragraph (e), what happened was that the Commission had a look at overseas and said, “We haven’t found anything of interest or use. There’s nothing in the (e) box.” The only submission we were making on (f) was that when you have a look at the (f) box, if you were to apply the (f) box what it would do is give you a figure even higher than the figure that the valuation methodologies were pointing to for this very reason, that monopoly rents had not been extracted in the past. Therefore, we say, having looked at (f), that the reasonable approach would be to say “No information of interest, move on to (g)”. That finding, your Honour, is referred to on 398 which is a finding of fact, although it has an evaluative conclusory element in it, we submit is the finding which the Tribunal has itself come to at paragraph 29, and that is the end of (f).

GLEESON CJ: Just before you move from the Commission’s reasoning, could I ask you about page 400, the paragraph that includes line 30. It begins with the words, “The conclusion for the regulator is fairly clear”. Is that a paragraph in which the Commission expresses what it was doing or what it was setting out to do?

MR GLEESON: At that stage, yes. This is in the draft, your Honour, not the final. What they were doing in the draft, they were trying to give a lot of weight to the price which EAPL paid when it bought from the Commonwealth in 1994. That was heavily criticised by us in the next stage of the submissions process and they moved away from that, that not becoming the basis of the final decision.

GLEESON CJ: This was because you said it is a forward-looking concept?

MR GLEESON: Because that concept – yes. DORC is forward looking. This is backward looking. But not only that - - -

GLEESON CJ: Is it part of your argument that the concern that is reflected in this paragraph, even though no longer expressed in this way, continued into the final conclusion of the Commission’s – is it part of your argument that they were trying to find a way to make an adjustment or a tweak, if you like, for the circumstance that to an extent this pipeline was government subsidised?

MR GLEESON: We ran that argument before the Tribunal and we did not obtain a definite finding on it. It was an argument which had strength (a) because that is what is in the draft; and (b) what happened was that in the draft – and this is quite remarkable – if your Honours look at page 409 at line 30, the Commission adopted DORC as the ICB. However, when they calculated - - -

GLEESON CJ: But you pointed out to them that they had misunderstood DORC.

MR GLEESON: They totally misunderstood DORC, so what they said was in the final, “You’re right, we can’t do DORC that way so DORC is now at least $715 million. We’ve now decided, looking at the Code again, DORC is a bad thing. We don’t do DORC. We do the very same thing we did last time which is ORC depreciated in the peculiar way except this time we don’t call it DORC, we call it something coming out of section 8.10 generally. We don’t tell you where but we tell you we’ve put a lot of weight on (f).”

What the Tribunal said was that there are some cases where on the privatisation of an asset the price paid for the asset may be relevant under a well-recognised valuation methodology. It may sometimes be a Spencer Case arms length transaction. Even if it was, the fact is it happened in 1995 and you are valuing the asset in 2000, so you would not simply go from 1995 to 2000 but it was common ground between everyone that the circumstances of the asset sale did not qualify as a Spencer Case sale between arms length buyer and purchaser. There were too many unusual aspects of the legislative scheme by which the new owner was bound to keep doing things like supplying AGL for 20 years at a certain price, et cetera, for it to qualify under paragraph (c).

I only mention that because the Tribunal said in an appropriate case the purchase price might be a well-recognised asset valuation methodology under 8.10(c) but in this case the Tribunal has not proceeded on that basis. That being so, what relevance did the purchase price have left in the analysis? But ultimately what the Tribunal said was, where – because they had otherwise found error they did not need to reach a conclusion and find error on this ground.

GLEESON CJ: Was the Commission trying to preserve for people who get future access to this pipeline the benefit of the initial government subsidy?

MR GLEESON: In one sense, yes, and also saying, in effect, having – “Because you bought it for 540 million in 1994, even though six years have passed, we want to lock you in at that price as the price which will be the starting ICB for the next X years of the life of this pipeline.” Those two propositions have a linkage, but it is true that there was in their draft reasoning a gravitational pull where purchase price seemed to have attraction to them but the Tribunal’s point, quite correctly, was come back and look at 8.10(a) to (j) or (k), even, and you have to get this within the language of the thing. They certainly moved away from purchase price ostensibly when this criticism was pointed out. Your Honours, could I then come to the Tribunal at paragraph 19.

GUMMOW J: Just stopping there for a minute though, this Access Code would have been framed when the significance of government funding was well understood, would it not?

MR GLEESON: Temporarily, yes, and so the question was - - -

GUMMOW J: But they do not seem to have specifically turned their mind to it in framing their principles.

MR GLEESON: And they have not framed it as a factor. Indeed - - -

GUMMOW J: Yes, I understand what you are saying.

MR GLEESON: Yes. As economic depreciation of the covered pipeline it is almost the opposite, namely just treated as a pipeline with a life and with an economic value, and it is true there is a fundamental principle under this Code, it keeps popping up everywhere, that they do not want users to pay more than once the total economic value of the pipeline. You see that, for instance, in section - - -

GUMMOW J: Footnote 52 on page 400 is another example:

A similar situation arises where capital infrastructure has been partially funded by direct user contributions

That situation would have worried the Commission as well, I think, for the same reasons maybe.

MR GLEESON: Yes. I will just give a reference, 8.33(d), where it talks about economic depreciation. It says you depreciate it so that people pay once the economic value of the pipeline. So the way it would work, to give an example, is this, if I might. Assume the DORC value is $850 million. Assume that you make a finding of fact that monopoly rents of $200 million have been recovered in the past. Is $830 million too much to allow if this service provider can have an opportunity of recovering that through the tariff over the next 50 years on top of the 200 million which has already been recovered? Now, whether it will or will not will then require some judgments as to what return is built into each, but it is an example of (f) in some cases factually providing information which would permit you to adjust the result under (b). Your Honours, can I come to paragraph 19 of the Tribunal which the Full Court - - -

HAYNE J: Again, I am sorry to delay you. I know you are anxious to get on. I understand that.

MR GLEESON: I am happy talking about this for weeks, your Honour.

HAYNE J: Is the Code then to be read through the lens that it is looking to set the maximum level of recovery, and the maximum level of recovery is fixed by reference to the market? It is not concerned to look backwards, save to the extent provided by (f), to what has happened to the past and (f) is concerned to lower what otherwise would be the maximum?

MR GLEESON: Lower or potentially raise. As Re Michael said, you might in an appropriate case say, “I need to raise” because of the negative monopoly rent recovery, but subject to that, broadly, yes, your Honour. Can I mention (g) is another factor that looks back to the past? Subsection (g) says if someone did have expectations underpinned by the former regulatory regime and on that basis made an investment decision such that to give them the value which made sense in economics would be inappropriate, you might make an adjustment under (g). It looks back in that sense.

So we accept that there is a role within the language of the Code to look back, but there is not a general role to say, “I can take a forward looking fork and knock 46 per cent off it because of an assumption you made in your accounts.” That is not within the language. Your Honour, that is why I am not agreeing 100 per cent with your Honour’s question because I do not want to overstate it. When your Honour looks at the factors in 8.1, which according to Re Michael are the prism, some of those factors might allow some sort of attention to the past, because one of the factors is the legitimate business expectations of the service provider. Again, that seems to underpin (f) and (g), perhaps. But, in general, the past is constrained in the manner we discussed.

GLEESON CJ: Could you just remind us again, I think you have probably already told us, but why does everybody agree that paragraph (a) is not relevant here, because of the pipeline authority’s intrusion?

MR GLEESON: The actual cost was, say, $350 million. That was money spent in the 1970s and the early 1980s. If you depreciated that using historical cost accounting, you would get a figure of about $100 million. It is relevant in the sense that it is the bottom end of the range under section 8.11. You cannot get less than 100. But the parties were agreed that, in valuing an asset in 2000, to take that piece of raw information under (a), would be so far removed from a real and sensible and plausible valuation that it not be given any real weight. That is the first answer to your Honour’s question.

The second answer is the one which the Tribunal has in fact implicitly raised in paragraph 17 in the last sentence. There are also questions as to how DAC should be adjusted to take account of time and currency. If any of your Honours are experts in current cost accounting, in current cost accounting you would inflate the actual purchase price from 1977 dollars to 2000 dollars and you would therefore have a might higher base than the 350 million from which you would then take an appropriate depreciation allowance. None of those questions had to be decided because everyone said “little weight to 8.10(a)”.

GLEESON CJ: The reason I asked the question is this, it may be of some interest that although it was not workable in this case, and everybody agreed it was not workable in this case, upfront in (a) is the most obvious way of doing it.

MR GLEESON: Yes.

GLEESON CJ: In a case where it can be done that way.

MR GLEESON: In a sense, that is what appealed to the Tribunal by saying that if it is a brand new pipeline under 8.12 there is only one test, what did it cost you to build it, and that is assumed to be efficient. Section 8.10(a) is the historical parallel for 8.12, its actual cost less depreciation. We do not shy away from the Tribunal saying when you read the Code as a whole it is relevant to look at how you would do it with a new pipeline. There is presumably some underlying consistency being achieved, not exactitude, but some underlying consistency. Your Honour is correct, 8.10(a) in that sense is where you would start.

If you do DAC, in the historical cost accounting sense, with most old infrastructure assets it will tend to produce a low value. On the other hand, (b), which is replacement cost, will tend to produce a higher value because the cost of building the pipeline today tends to be higher. What the Tribunal then said is, “In this case we all agree (a) is not of interest, (b) looks good, a good plausible candidate in economics. If I give you (b) I know that that will be a good efficient result. There is nothing under (c), (d) sends be back to (b) and when I have done that exercise” and this is paragraph 19 of the reasons, “I look at the other factors to see what further information they give me.”

Now, if your Honours look at 19 the first sentence says you look at (a), (b), (c) and (d) before you turn to the following paragraphs. That is unexceptional. The other paragraphs are to be:

considered in the light of the analysis of recognised valuation methods which the section assumes already to have taken place.

That is unexceptional:

The factors to which those other subparagraphs direct attention could assist in [firstly] the choice between methods –

They might tell you that for a particular pipeline DAC is in fact the better method, or they could:

lead to some adjustment of the result of the chosen method.

So they can produce adjustment. Then the Tribunal says, and apparently the court severely criticises this:

Those factors would not normally (and perhaps would never) permit recognised valuation methods to be put to one side. In particular, those factors do not warrant departing from a quest for value and entering upon a quest for some form of justice or equity.

Could I also emphasise the last sentence because the Full Court has given it no attention:

In unusual circumstances, one or more of those factors may have a significant effect upon the assessment of value.

That is the Tribunal recognising that depending upon the facts the factors from (e) to (k) may have a significant effect upon the assessment of value. The only caution they are making is that normally you cannot put the methods in (a) to (d) to one side. Normally they will have fundamental weight in the analysis the same way that the following factors also have weight. The Tribunal is cautioning and we submit it is consistent with giving the Code a faithful interpretation. You cannot depart from the quest for value as defined in the Code and enter upon a quest for justice or equity.

GLEESON CJ: What is wrong with justice or equity bearing in mind that one of the objectives of the Code, according to the introduction to Schedule 2, is to provide rights of access to natural gas pipelines on conditions that are fair and reasonable for both service providers and users? What is that except equity?

MR GLEESON: What it is, if I can offer your Honour this reading, is that the Tribunal is saying you cannot enter upon some general open-ended quest for justice or equity, eg, as per paragraph 16. You cannot simply aim to give subsidies to consumers by fixing artificially low figures or bonuses to operators by artificially high figures. But to the extent that the specific factors in the Code embody those concerns to reach a result that has a degree of fairness between user and operator, then of course you can and must take account of them. That is the very thing which the Tribunal has then said in paragraph 29, because that is a section or a factor where the Tribunal recognises that the combined effect of past history requires a modification of methods which have thrown up an unreasonably high ICB or an unreasonably high tariff. Why is that? It is your Honour’s example. It is where there is in truth a recovery of super profits in the past such that the ICB you are looking at would be an unreasonable result.

When you read 29 together with 16 and 19 the Tribunal is clearly recognising that to the extent the statutory language embodies notions of justice or equity, fine, but their only concern is you cannot throw away the value factors and just ask yourself a general question, “What do I think would be a fair thing for consumers?” If someone said, “Well, look, I think 500 million would be a fair thing for consumers because the Commonwealth subsidised them in the past and I want to keep subsidising them”, that would be throwing away the language of the Code.

HAYNE J: To make good that proposition depends upon what content you are giving the words “value of the capital assets” in 8.4(a), is it not?

MR GLEESON: Yes, your Honour, yes.

HAYNE J: Do you propose at some point to amplify the meaning to be given to that expression?

MR GLEESON: Yes. Your Honour, the value in 8.4(a) is a valuation to be derived following the process set out in 8.10, observing the constraints in 8.11 and to the extent necessary, having regard to more general objectives in the Code such as 8.1 and possibly 2.24. That is the first part to the answer. The second part is, that in doing the 8.10 exercise, the values derived from the valuation methodologies in paragraphs (a), (b), (c) and (d) must be given fundamental weight in the establishment of the ICB. Further, thirdly, none of the factors in (e) to (k), save possibly (k), are a warrant to create a novel valuation methodology which will be used as the ICB disregarding (a), (b), (c), (d).

Your Honours, that last sentence of T19 we submit is important because it is a recognition by the Tribunal that these other factors may have a significant effect upon the assessment of value and the introductory sentence to T20 indicates that the Tribunal accepts that Re Michael was such a case where the non-valuation factors did have a significant impact on the assessment of value. They accept that is something that can happen under this Code. The reason for that is set out over the page, which is that, in a sense it was the opposite to the present case. The privateer paid the Western Australian Government twice DORC and if they were given DORC as the capital base as per the draft decision they were likely to be in a lot of financial trouble.

So in that case the question was whether the purchase price which doubled DORC could be somehow put within any of the factors in 8.10 and the Full Court held that it might come in under (j) and they said it might possibly come in under (c) as a Spencer Case valuation but the facts had not been sufficiently looked at. The significance for the present purpose is that that is another example of the Tribunal recognising that the other factors may have a significant impact on the assessment of value.

Could your Honours compare that with what the Court says commencing at 183. What the Court does, we submit unfairly, is to break up paragraph 19 of the reasons into two sections. The first is dealt with in 183, the second is dealt with in 185 but the last sentence of paragraph 19 is not dealt with at all.

Dealing then with the first part at the top of page 1573 the court says:

It is implicit in this passage that the Tribunal was giving a primacy to the valuation methodologies –

The Tribunal does not say “primacy”. What they say is you cannot put the recognised valuation methods to one side in the same way that the other factors may have a significant effect on value. They all have to be given weight. Yet this seems to be the point that has troubled the Full Court.

If your Honours look at a 184, the Court says:

This construction is not warranted by ss 8.10 and 8.11.

The court then makes five further statements, all of which are intended to be criticisms of the Tribunal, none of which are relevant to what the Tribunal said. The first is, the task is not simply one of valuation, the Tribunal never said it was.

The second is the process requires more than mere valuation. The Tribunal agrees. The third is, it does not follow that the figure so determined has to be referable to what the Tribunal called a recognised valuation. The Tribunal did not say it had to be so referable. The fourth is, an ICB determined under 8.10 does not have to be equivalent to one of the methodologies in (a) (b) and (c). The Tribunal did not say it had to be. Put shortly, the factors in (e) to (k) are not in every case subordinate to, or of lesser significance than, (a) (b) and (c). The Tribunal did not say they were.

Your Honours have said various times that on judicial review a court should not be astute to seek error in the reasons of a tribunal. In this case this is a classic example of the court looking for error and it has mischaracterised exactly what the Tribunal has done. Your Honours see the same in paragraph 185 where the next bit of the Tribunal’s paragraph is attacked. Can I just draw attention to the last sentence of 185, “It is not a quest for a commercial or market valuation”. The Tribunal never said it was.

Paragraph 186 is, with respect, a most difficult paragraph to follow. The first sentence says:

Section 8.10 of the Code recognises that the values derived from . . . (a), (b) and (c) may be adjusted or varied depending upon the relative consideration and extent of that consideration given to the factors found in subpars (e) to (k) –

Correct. The second sentence says “The Tribunal recognised this”. Correct. The third sentence says –

However, we do not agree that it is correct to say as the Tribunal did ‘those factors would not normally (and perhaps would never) permit recognised valuation methods to be put to one side’.

One begs to ask for the reason for not agreeing with that. It appears to be the fourth sentence –

Of course, s 8.11 of the Code must be taken into account, but that is not to say that the figures derived by reference to . . . (a), (b) and (c) cannot be varied or altered depending upon the extent and weight of the consideration for factors referred to in subpars (e) to (k).

Fourth sentence equals the first sentence. One begs to ask what is the error of law where the court is so radically differing from the tribunal. They both seem to be in furious agreement that you logically look at (a), (b) and (c) first and then you look at the others to see if you should vary or alter the preliminary results you have. Now, your Honours, that is of some importance because this is said to be the error, according to the ACCC submissions, which underpins the entire Tribunal decision.

Your Honours, there is then a section on Re Michael and I have made a submission on that topic before. Now, all of that down to paragraph 189 is the preliminary skirmish and so far it is hard to see what the difference is. We then come to the attack. The attack starts at paragraph 190 on paragraph 25 of the Tribunal’s reasons. To understand the preface to that, if your Honours were to go to paragraph 21 of the reasons of the Tribunal, the Tribunal says:

It is necessary to refer to the facts in greater detail before examining how the ACCC applied s 8.10 in this case and the criticisms advanced by EAPL –

So we are now moving to the facts. We are then going to look at how the ACCC applied it and then we are going to look at the criticisms. In 22 the Tribunal looks at the context and the context includes what EAPL originally proposed, the draft decision and the final decision. I mention that because they are all the section 39(5) materials. We see that EAPL originally proposed an ICB based on DORC. That was based on an assumed life of 60 to 80 years. At line 15 there is the reference to the revision to the asset life. Line 22:

In the Draft Decision, the ACCC determined what it called DORC . . . based upon an asset life of 50 years and straight line depreciation.

23 EAPL criticised that proposal –

including putting forward a DORC of upwards of 768 million and also a figure of upwards of 784 million based on 8.10(g) –

In the Final Decision the ACCC maintained the preference for straight line depreciation. It accepted that DORC should be the product of the expected useful life of the pipeline looking forward which it accepted as 80 years.

I said to your Honour Justice Hayne this morning that the estimate by the pipeline owner was accepted by the ACCC.

It calculated a DORC value of $715.1 million. However, it rejected DORC as the measure of value. It adopted a value for the ICB of $559 million based upon adjusting ORC according to the useful asset life assumed in the past –

and so on.

In paragraph 25 we get the summary submission which is accepted:

it was contended that it was a fundamental error in principle for the ACCC to put aside known valuation methodologies and devise a methodology of its own which adjusted ORC in a novel fashion.

The contended for error was a composite error. It was putting aside something, (a), (b), (c), and (d), and devising this novel methodology. That is the error. It is the two step composite error:

It was submitted that this had no support in the Code or the material on the subject receive by the ACCC and is properly described as idiosyncratic.

If your Honours compare 190 of the Full Court’s reasons:

the Tribunal erred -

Now, what is the error?

It is not correct to say that the ACCC ‘put aside known evaluation methodologies’. Rather, the ACCC was accepting a known evaluation methodology and giving consideration to other factors -

So there is no error of law there. This is saying we think, as the Full Court, that we would view what the ACCC did in this process from draft through to final decision in a different way you did.

HAYNE J: There is a radical difference, is there not, in the understanding of the effect of Schedule 2? As I read these passages of the Full Court their Honours are saying that 8.10 requires a process of decision making by ACCC in which the only relevant considerations are those identified in 8.10. Perhaps you may add to those the introductory provisions but leave that aside. The only relevant considerations are those identified within the four corners of the schedule and critically the task is not otherwise defined whether by reference to an a priori understanding of value or otherwise.

That may be contrasted with what I would understand underpins your earlier description of attribution of composite or two part error as being an assertion that depends upon the unstated premise that value is a concept that has a meaning separate from the process required by 8.10, in particular value is to be identified as something akin to market value. True it is you then have to set about the task of determining that value having regard to the various considerations specified in 8.10 and elsewhere, but you start with an a priori concept of value.

MR GLEESON: Your Honour, we do not read the Tribunal as saying you have an a priori concept of market value which determines or controls the exercise under section 8.10.

HAYNE J: That is that you give to 8.4(a) and the words “a return . . . on the value of the capital assets” a meaning that attributes or gives content to the word “value” separate from and additional to the various elements that are found in 8.10. Otherwise, how do you make good this proposition that there was this double form of error that you earlier identified?

MR GLEESON: The double form of error is they have put aside the known valuation methodologies because they are (a), (b), (c) and (d). They have looked at them and said, “None of them are going to have any weight in our ICB.” At that point what they have said is we have got, in effect, a clean slate because none of them are in there even as a putative value or as a contender. But they then have to do something else. What they then have to do is to devise a methodology which adjusts ORC in a novel fashion because they tell us - - -

HAYNE J: That is in error if, but only if, value has some meaning. If we are simply concerned with process, ACCC went through the process. If we are concerned with striking value where value is to be given some meaning additional to, different from the factors, then I understand the argument. If we are not I am not following you.

MR GLEESON: If value is to be given the meaning as per your Honour’s first proposition, then it is fairly clear they have not done that. But assume it is not. Assume we are looking at it as per these factors. They have gone through (a), (b), (c) and (c) and they have said “Nothing there of interest. We’ve got an empty box.” Why are we not, I ask, still permitted to request of them, “Which of the remaining factors in (e) to (k) was the factor upon which you first of all constructed ORC and then depreciated in the novel fashion in which you say you did?” And, if it is not in any of (e) to (k), where is their statutory mandate to give an ICB so constructed?

GLEESON CJ: As a matter if history, did the initial capital base that the ACCC calculated in their first draft of their reasons coincide with the value they calculated in their corrected reasons?

MR GLEESON: Within a few dollars, yes. When I say within a few dollars, the only variation was that because ORC had moved up or down a few dollars - - -

GLEESON CJ: It was about 539 million, as I recollect the figure.

MR GLEESON: It is in that order.

GLEESON CJ: So they produced some draft reasons in which they said “The initial capital base is $539 million and we base that on paragraph (b)”, and you then said, “Hang on, you’ve made a mistake there. You misunderstood DORC” and they said, “You’re quite right, we did misunderstand DORC and we’re going to do this in a different way and we come up with an ICB of $539 million.”

MR GLEESON: Yes. And, in answer to the question, “Which factor did you use this time?”, they say, “We gave considerable weight to (f) but apart from that they do not identify any factor as allowing them to now do what they agree they could not do under (b), and so the centrepiece of our defence of the Tribunal’s decision was, what was the factor between (e) to (k) which permitted them to do what they did?

GLEESON CJ: But bearing in mind that the results were the same or practically the same both times and bearing in mind that we know what they were trying to do under (b) in the first place by reference to a paragraph that we looked at earlier, is it possible to infer that they were trying to do the same thing by another means on the second occasion?

MR GLEESON: Yes, and that was our case. The way we then tested it was to say well, sometimes it is possible in this world to achieve such fortuitously attractive events, but tell us where under (e) to (k) you can now do to ORC what you accept you cannot do under (b)? Therefore, irrespective of whether we are right or not on values having some independent fusing effect, the centrepiece of the appeal became how do you get this creature out of (f), especially when we know from as early as your draft decision that in economic depreciation terms there has not been an over recovery of monopoly rent and further, when you look at (f), it does not say the value to be obtained from et cetera, et cetera. It just talks about some factors. You look at those factors and they provide you with a piece of information. Instead they claim that (f) has given them a mandate to construct this novel valuation methodology.

GLEESON CJ: Where do we find in the amended or final reasons of the ACCC the clearest statement of their methodology that brought them to the same result as they had come to by their defective methodology?

MR GLEESON: In the misnamed “Confidential Folder”. Could I hand to your Honours, if it assists, a chronology of the key passages in the decision itself and then I will - - -

GLEESON CJ: Thank you.

MR GLEESON: Page 14C, 30. DORC, Commission’s final decision, DORC is $715 million. ICB:

$559 million
ORC written down on basis of a 50 year asset life, the depreciation rate assumed by EAPL in the past.

In the executive summary at page 17C, lines 20 to 35, in particular line 32:

The Commission did not consider it appropriate to revalue the asset base upwards -

Then the draft decision is referred to at page 53C at line 30 and across the page, 52C at line 20 we see the method adopted in the draft. At 56C at line 30 - - -

GLEESON CJ: Just before you pass 53C, the paragraph above line 30, “The Commission interpreted”, what is the significance of that?

MR GLEESON: That is the material your Honours looked at from the draft decision which is the economic depreciation value of 1.29 billion under (f). That is their reason why they are not adopting 1.29 billion.

GLEESON CJ: Thank you.

MR GLEESON: At page 56C, at line 35, just so EAPL’s position was clear, it was arguing that 940 million, its DORC value would not be unreasonable, but it proposed a lower value of 740 million which was a compromise for some of the past factors, in particular, the reasonable expectations. Then 63C, lines 40 to 60, the Commission starts to reconsider how DORC is to be done and 68C at line 45 the Commission says that DORC methodologies provide a conceptually “sound economic basis”.

GLEESON CJ: Is the life of the pipeline relevant to the DORC methodology?

MR GLEESON: The future looking life, yes, based on information.

GLEESON CJ: So a technological change after 1975 but before 1999, or whatever was the date on which this was being done, that extended the life of the pipeline would be relevant to DORC?

MR GLEESON: Yes.

HEYDON J: Page 69C, line 31 I think says that.

MR GLEESON: Yes. At line 45 they say:

In its Draft Decision the Commission calculated a value for DORC on the basis of an asset life of 50 years, which was the asset life that EAPL assumed in the past for depreciation purposes.

NERA – that is their expert – said that was all wrong. DORC is “forward-looking” and that was “consistent with expert evidence” in Re Michael. Now, 70C seems to be the concession:

This suggests that the DORC should be a product of the expected useful life of the pipeline today, which the Commission accepts is 80 years.

Now, your Honour, that is the small wrinkle that they - - -

GLEESON CJ: Yes, but how did they get down from 715.1 to 500 and whatever it was?

MR GLEESON: They have looked at DORC. If you then go to 74C they say we will look at the 8.10(d) exercise later on when we discuss section 8.1. Section 8.10(e) on page 75C at line 20 they say that is not very informative. Section 8.10(f) at line 35, they correctly at this point refer to the passage from Re Michael I took the Court to, (f) might point to a higher or lower ICB than what might otherwise be the case.

Then they go to the residual economic value figure. That figure had gone from 1.29 billion to 1.7 billion. That is the factor we say applies under (f). They give their reasons for not giving us 1.7 billion at the bottom of the next page. That is fine because we did not ask for it. We just said that (f), when you looked at it, confirmed that our figure was reasonable. The critical part comes on 77C between lines 30 to 55. So, we did it in the draft this way. The next paragraph in a master of understatement they say:

As mentioned earlier, the Commission’s use of past rates of recovery of depreciation to determine a value for DORC has since received some criticism.

Well, everyone condemned it:

The argument is that DORC is meant to be a forward-looking concept and hence past depreciation is an irrelevant consideration. Whether this is correct or not –

well, they had accepted earlier at page 70C this was a correct criticism. We come to the magic words –

section 8.10(f) makes it clear, however, that the level of recovery of depreciation since EAPL acquired the pipeline and EAPL’s assumption of a 50 year asset life may still be relevant factors in the Commission’s determination of the value of the ICB.

One asks why, but then the next sentence says:

That is, even if the DORC methodology demands that depreciation is based on the revised asset life, the Code does not prevent the Commission taking into account the basis upon which the pipeline has been depreciated in the past –

We apply this. We get $559.3 million.

GUMMOW J: The bite is in the words, “does not prevent”.

MR GLEESON: “Does not prevent”. So they accept you cannot do it under (b), they do not tell you how you do it under (f) and they just say, “does not prevent”, and we get the same result. That is essentially it. It is that paragraph. There is a little bit more to the similar effect. I will just give your Honours the reference. They discuss 8.10(k) on page 86C and following. The short point is that they do not try and place the ORC under 8.10(k). It is about other things and that all gets rejected.

Then at the bottom of 88C they start some discussion of section 8.1. They talk about efficient costs under 8.1(a). So I am just indicating, your Honour, there is some discussion of the 8.1 factors. DORC gets a reasonably good run in this section, but ultimately they come back to their final conclusions at 96C and 97C. The passage at 96C is the one the Full Court quoted and nowhere here do they say where you get it from except they have given weight to (f).

GLEESON CJ: How long did they APL own this pipeline at the relevant date?

MR GLEESON: Five years.

GLEESON CJ: So for five years the APL had been charging users of the pipeline on a basis that, amongst other things, recovered EAPL’s costs on an assumption as to depreciation that the asset had a 50-year lifespan. Let it be assumed that since the asset had a longer lifespan that meant they were inflating their costs in relation to the matter of depreciation and they were doing that for five years. What is the connection between the assumed inflated costs that they were recovering over five years and the difference between DORC and $559 million?

MR GLEESON: None, because it has not been identified. What your Honour’s question focuses on is accounting depreciation not economic depreciation, but leave that aside for a moment. The amount of accounting depreciation sitting in their accounts for those five years, based on that assumption, was $100 million. So the ACCC has not said, “We will take DORC and we will make an adjustment downwards from DORC because we think your $100 million, we call that super profit”, it is not. They have not done that, what they have said is “We’ve looked at DORC, we put that to one side. In its place we put ORC minus 46 percent”, lo and behold $539 million. Although in the critical passage I took your Honours to at page 77C where they say:

8.10(f) makes it clear, however, that the level of recovery of depreciation since EAPL acquired the pipeline and EAPL’s assumption of a 50 year asset life may still be relevant –

they have not, in fact, looked at the level of recovery of depreciation in either an accounting sense or an economic sense. They have simply said, “Because for that purpose you assumed 50 years, we take 46 percent off your ORC.”

GLEESON CJ: ORC is ORC minus a new for old allowance, is it not?

MR GLEESON: Yes.

GLEESON CJ: In their draft reasons they calculated DORC at 540 million. In their later reasons they calculated DORC at 779 million but they did not treat that as the ICB. What they treated as the ICB was ORC minus 46 percent which came out at the same figure that they had mistakenly calculated DORC at in the earlier reasons.

MR GLEESON: Yes, because it in fact used the same method. It was the identical method ORC minus the percentage of used up life you assumed in your accounts, and then said the Code does not prevent us doing that which we now acknowledge we cannot do under (b).

GLEESON CJ: But the percentage of used up life assumed in accounts was only assumed for five years.

MR GLEESON: Assumed for five years and assumed as a basis of recovering about $100 million. But they were not interested in the actual recovery, contrary to this paragraph at 77C. What they were interested in was getting back to the 46 per cent reduction. The end result is - at its most polite it can be called a hybrid creature, it could be called other things, there is a forward looking creature, “What would it cost me to build a new one today”, modified by a past fact, “What asset life did you assume in your accounts?” The two magically produce that which is not DORC.

So what the Tribunal said was, “It is our task under 39(2) to have a look at this creature to see whether it is supportable in the Code, whether it has any support in the material that was before you and whether you can persuade us that there is some rational and reasonable basis upon which you would take ORC, even assuming you are allowed to, and take 46 per cent off it because you made an assumption in your accounts which we all know is no longer the best information”. What rational basis is there for doing that as a matter of this Code? They said, “We were not persuaded there is one”. That was the critical element of their decision. The Full Court has never shown what the error of law is in the Tribunal coming to that conclusion. They have stopped short.

GLEESON CJ: Have you agreed with Mr Beach on a division of time?

MR GLEESON: The answer is no, your Honour.

GLEESON CJ: You and Mr Beach should make an agreement on division of time between now and 10.15 tomorrow. If you do not, we will engage in some alternative dispute resolution.

MR GLEESON: Your Honours, I have mentioned a number of times today that figure of $100 million. We have a two-page document which explains where those numbers come from in the evidence, which I seek to hand up, in particular, paragraphs 1 to 5 I have covered. Paragraph 6 is the Tribunal’s finding in paragraph 29 and paragraph 8 is the factual material underpinning it. Your Honours, the other document which may assist is, in the appeal books at page 1306 there is a chart which was before the Full Court in colour. If I could hand it up, it is page 1306. The red line is what the ACCC did. The ACCC starts with an ORC of a bit over a billion dollars and says, “We will treat you as if by the year 2000 you have used up 46 per cent of your ORC. So your capital base will be about $550 million”.

The purple line is the straight line DORC adopted by the ACCC, straight line in the sense that you start with ORC and, in doing the new for old, you just make an assumption that it works pro rata. If you make that assumption, the straight line DORC is $715 million.

What the Tribunal has in fact done, which is the more correct method in principle, is what is called net present value DORC where the correct way of doing the new for old is to say, “What deduction do I make from the ORC for the fact that the new pipeline will have a longer life?” That is a deduction which then gets discounted back to present day dollars, and your Honours see that the blue line is higher than the purple line. The difference between the blue and the green relates to your Honour the Chief Justice’s question about coating.

The blue line, which is the Tribunal’s decision, says you can only have regard to information known at the valuation date and because of that in the year 2037 the main line will be used up and so on the green line was the original approach which allowed account to be taken of the coating which would have given a slightly higher number. So in graphic form the red line is the ACCC’s ICB, the purple line is the ACCC’s DORC and the blue line is the current decision by the Tribunal as to the ICB and DORC.

GLEESON CJ: Mr Gleeson, I am sorry to keep harping on paragraph (a). I realise it is common ground, that it is irrelevant to this or only marginally relevant, but what does the expression “actual capital cost” mean in paragraph (a)? Is it the cost of construction of the original pipeline?

MR GLEESON: Yes.

GLEESON CJ: Why is it not the cost to EAPL?

MR GLEESON: Justice Gyles asked that question and we all agreed it was the cost of construction. Everyone has proceeded on that basis.

GLEESON CJ: You see, if it had just happened to be or was capable of covering the cost to EAPL, the asset was only relatively recently acquired by EAPL and had been acquired only five years earlier and you could quite easily take the cost to EAPL of the pipeline and subtract the accumulated depreciation.

MR GLEESON: Apart from giving your Honour the unsatisfactory answer that we all agreed its irrelevant, but the better answer was that, looking at the words, it is the actual capital cost of the covered pipeline and that is a reference to not the purchase decision by this service provider, but it is the covered pipeline. So it takes you back to the building of it, and the depreciation you have to subtract is the depreciation charged to users prior to the commencement of the Code. It is taking you back to all depreciation which has been charged to any person who was a user of that covered pipeline over the entire period before the Code came in.

GLEESON CJ: Yes.

MR GLEESON: It persuaded others, your Honour. Your Honours, I have come to 25 of the Tribunal’s reasons. That was also the construction placed on it by Re Michael at paragraph 163, if I can mention that. Could I come to paragraph 26 of the Tribunal’s reasons, which I have read before as being here is the Tribunal looking at the material which was before the ACCC. I would wish to show your Honours one of those pieces of material for a specific purpose. It is the one which the Tribunal thought particular significant. It is the 27 May 1999 draft Statement of Principles for the Regulation of Electricity Transmission Revenues. The purpose is to show your Honours that it is one of the documents which did look at the justice and equity issues arising from the past, the 8.10(f) factors, and did not suggest that ORC was to be utilised in that vein. Your Honours see that is the finding which the Tribunal has made at line 40:

ORC is only utilised in this field as the starting point from which to deduce DORC.

They came to that finding based on all this material. The reason I am going to it is that if you look at what the court has done at paragraph 193, the court has criticised this finding as being a misunderstanding of section 8.10.

However, when one reads paragraph 126, it is not a finding about 8.10 at all, it is a finding about expert material. The document is in volume 1 at page 131. The Electricity Code is a little different. Your Honours see on 138 that there are a range of considerations which are not identical to the present but they are overlapping. At page 174 under section 3.4 - and this is the ACCC’s own document in the electricity area - they say one of the most contentious topics is - - -

GUMMOW J: Why are we looking at this?

MR GLEESON: Paragraph 26 of the Tribunal’s reasons is a finding of fact that none of the material before the ACCC supported the use of ORC in this fashion.

GUMMOW J: I see.

MR GLEESON: The Full Court has found error in that on the ground that the finding misconstrues the Code. That misconstrues - so this is one of the supposed errors of law. It is based on a misconstruction of what the Tribunal was doing. I am only seeking to indicate there was at least some evidence upon which this finding of fact could have been made. I am directing your Honour to that page, 174, lines 35 to 55 where the Tribunal says:

There is no clear economic answer and questions of equity connected with the past pricing . . . can also be important –

So that is the justice and equity factor. At the foot of the page there is a reference to:

The ORC valuation would have to be adjusted to take account of depreciation (D), resulting in a DORC valuation.

So there is ORC to DORC – that is the way ORC is used. There is one other part I need to refer to – perhaps two parts. At page 189 there is a general discussion of the problems of asset valuation methodologies for existing assets. At line 35 there is an explanation why DORC is a good solution.

GUMMOW J: Did any of this material treat at all the experience in the United States and Canada with oil and gas utilities, which I imagine is pretty extensive?

MR GLEESON: The answer is to some extent - - -

GUMMOW J: And access regimes thereunder.

MR GLEESON: To some extent is the answer, your Honour. Before the Tribunal a series of expert reports were commissioned on our side and by the ACCC and they were all referring to whatever material was available to grapple with this problem of valuing existing pipelines.

GUMMOW J: I mean, I would not want to disparage the Bar from the South Australian legislation, but I doubt if Schedule 2 sprung unaided to mind.

MR GLEESON: Yes. Can I just give your Honours the - - -

GUMMOW J: There must be some provenance to it.

MR GLEESON: - - - the last reference, it is important. At page 191 between lines 15 and 32 we see essentially the 8.10(f) factors being discussed in other terms and at line 30 – so two points about it. Firstly, there is no discussion here in the context where you would expect it of ORC being adjusted in this novel fashion. Secondly, at line 30 the Commission actually says:

This does not undermine the economic rational for DORC, and logical support for the DORC methodology is provided by the economic efficiency features of DORC, as discussed above.

So that is paragraph 26 of the Tribunal. If your Honours then return to paragraph 193 of the Full Court, not only is there that error that the court is dealing with something the Tribunal was not saying, if your Honours could read the last sentence of 193, it says:

Although DORC is a forward-looking concept, that is not to say that the ORC, from which is derived the DORC, cannot be ‘tweaked’ or adjusted or varied by reference, for example, to the factors set out in subpar (f) –

Now, that is the same language as the ACCC – Code does not prevent – as opposed to where does the Code empower ORC to be used as the basis which is then to be ‘tweaked’ under (f). Paragraph 194 – this is probably one of the most egregious errors by the court:

It was also open to the ACCC to take into account the amounts EAPL had used for depreciation in the past in determining the extent of the adjustment to be made to ORC . . . in relation to ‘ the economic depreciation –

Now, that has confused a point on which the parties were at common ground that accounting depreciation is not economic depreciation and the amounts that had been used in the past were $100 million and that is not what they did. That leads to 195, and when one now looks at the second sentence:

We do not agree that the methodology adopted by the ACCC was incorrect or unreasonable. That methodology was in conformity with the terms of the Code.

We can clearly see that the Full Court is coming to these ultimate conclusions on the questions before the Tribunal without having grappled with the Tribunal’s reasons. Your Honour, 196 again has misconstruction all through it. Here we find the summary error. This is the error that you fell into:

The error into which the Tribunal fell, in substance, was that it rejected the ACCC’s determination of the ICB as an accepted or ‘known’ valuation methodology –

That is probably elliptical – you rejected it since it was not an accepted valuation methodology. Two sentences down:

However, s 8.10 of the Code does not require the establishing of the ICB solely by reference to a well recognised . . . or a known valuation methodology.

Now, that is not the reason why the Tribunal found error. They did not say it had to be solely a well-recognised valuation methodology. They said, you put to one side those methodologies and what you put in its place had no source in the Code and was irrational. So they have never dealt with the target. The next bit is difficult:

True it is that the ACCC was obliged to ‘consider’ . . . valuation methods but it was also obliged to ‘consider’ –

everything else, true:

At the end of the day the ICB . . . was not a valuation in accordance with –

(a), (b) or (c). True.

Rather it was the determination or establishment of the ICB after having considered all the factors set out in subpars (a) to (k) of s 8.10.

We submit that the Code does not permit the ACCC to just ritually incant. I have looked at all the factors. My answer is ORC minus 46 per cent. You must be able to know where it comes from? At 197:

The Tribunal approached the ACCC’s use of, or reference to, s 8.10(f) of the Code in a somewhat ambivalent manner.

They then make a few criticisms of paragraph 28 of the reasons, but as we saw this morning, there was absolutely no ambivalence about the Tribunal. The Tribunal, in paragraph 29, gave a very clear and direct meaning to (f) and explained why the ACCC had misconstrued it, and not having dealt with that, in our submission, when one looks at paragraph 199 to say it follows from this analysis that none of the available grounds had been made out, beggars belief when the critical grounds have not even been considered.

Your Honours, in the supplementary reasons which commence - - -

GLEESON CJ: Just before you go, apart from paragraph 199, that is really expressing a conclusion by reference to paragraph 39(2)(a)(ii)?

MR GLEESON: Yes.

GLEESON CJ: Was the Full Court in deciding that the decision of the Tribunal that the exercise of the ACCC’s discretion was unreasonable having regard to all the circumstances was a conclusion that was no open to the Tribunal? Presumably the Full Court was not deciding for itself that it thought the ACCC’s approach was more reasonable than the Tribunal’s approach?

MR GLEESON: If it were doing that, obviously there is a problem, but if it were elliptically saying what your Honour has just suggested, it were not open to you, assuming Epic 2 is correct, it was a question of fact for the Tribunal looking at all the circumstances, do we consider the decision unreasonable, and them having come to that conclusion critically on 8.10(f) in the way I have belaboured, it would have been necessary for the Full Court to say, “Here is the error that the Tribunal made on section 8.10(f) and therefore it was not open to you to do what you did,” or, “Here is one of the earlier errors which had a necessary consequence in your ultimate decision under 39(2).”

Instead of that they seemed to have proceeded on the basis, “Because we think none of the grounds were made out, we set aside.” There are a whole series of missing propositions, we submit, that would needed to have been there to fill that gap. Now, in the supplementary reasons at 1615 at paragraph 5 the court says, well, if paragraph 4 looks a bit broad, of course read it down, what we really meant was that it:

was part of a conclusion that the grounds for a review of the decision of the ACCC by the Tribunal set out in s 39(2)(a) . . . had not been established having regard to the Tribunal’s reasoning in its interpretation and application of ss 8.10 and 8.11 of the Code.

Then they reassert something in paragraph 6 which takes the argument no further. Then in paragraph 7 they go part way towards dealing with our complaint about what unreasonableness means in Epic 2. This time they quote Epic 2 at paragraph 15, but they do not quote the critical paragraphs 13 and 14 I took your Honours to. Then they make a statement at the end of paragraph 7 that we are not being exhaustive. Then they make a statement which the ACCC now seizes upon:

Nothing we said in relation to s 8.10(f) of the Code, (see pars [193] and [194] in particular), was intended to preclude consideration by the Tribunal of the question whether the approach taken by the ACCC to the depreciated figures which it did adopt was erroneous . . . The particular exercise of that discretion remains subject to review by the Tribunal, albeit within the constraints discussed in relation to the scope of s 8.10(f) of the Code.

Now, what that seems to say is we do not depart from 193 and 194. So if your Honours have 193 and 194 handy back on page 1577, they are saying, “As we told you in 193, ORC can be tweaked under (f) to reach an ICB.” So they maintain that as a proposition of law, but providing no reasoning content as to where one gets that under the Code. Paragraph 194 they maintain that what the ACCC did could be justified as economic depreciation, totally contrary to what economic depreciation is. Then, more critically, not a word said about paragraphs 29 or 30 of the Tribunal.

I know it is late in the day and I have wearied your Honours too much, but this point is important. What they have said at paragraph 8 of the supplementary reasons is, “Look, we do not resile from 193 and 194, but do not worry. You can have another go. You can go back to the Tribunal. We have not answered all the questions under (f). You can have another argument. They can have another argument. You can do it within the confines of 193 and 194 because they are the law and we will set aside the Tribunal’s decision to enable you to have that further argument.”

We submit, on judicial review, the failure to deal with the actual basis upon which the Tribunal dealt with (f), the failure to deal with paragraph 29, is a fundamental error and the court simply was not empowered to do this exercise of setting aside to allow people to have another go without finding a relevant error. It is at that point that the materiality issue really is critical in this case because the most critical part of the Tribunal’s decision has never been dealt with and yet their decision is being set aside.

Your Honours, on the ground of lack of reasons, it is now apparent that not only has paragraph 29 not been discussed, but no argument put by us before the Full Court on the topic has been recognised or dealt with. Could I simply give your Honours the reference to where those matters were addressed in the argument. They were addressed by us in writing in volume 2 between pages 876 and 889 and they were addressed orally in volume 3 between pages 1167 and 1229, especially pages 1220 through to 1229. If your Honours were to look only at page 1220 of volume 3 the significance is that after a long attempt by me to put the argument under (f), Justice Goldberg paraphrased the argument which I have attempted to put today as well. He commenced it at line 48 of the book. He put the exercise of look at (a), (b), (c) and (d) you come up with DORC, and then over the page:

Then you are considering (e) through to (k). In the course of doing that you come and look at (f), and you say, “I’m interested in knowing whether there has been any recovery of economic depreciation prior to 2003. The reason I want to do that is because, if I apply DORC and don’t take into account whether there has been that economic depreciation, I might - - -

GUMMOW J: You do not need to read us all of this, Mr Gleeson, really.

MR GLEESON: I do not, your Honour.

GUMMOW J: We can follow along you know.

MR GLEESON: Sorry, your Honours have the submission I am making about it. In terms of the question about the notice of appeal which is in volume 4 at page 1625, the orders that we seek in this appeal are as set out on that page subject to two additions to clarify the matters. I will give your Honours this in writing tomorrow, but the first is that in paragraph 7(b), “the balance of the application”, that can be defined as follows “being grounds (a)(ii), 1 to 7 and any subsequent ground referring to such ground”. That carves out the matters. And in paragraph 8, we should have asked for the costs of this appeal and of the appeal below to date.

GUMMOW J: What about 7(a), what specificity are you going to give that?

MR GLEESON: Section 7(a) is anything not preserved by 7(b).

GUMMOW J: I see.

MR GLEESON: May it please your Honours.

GLEESON CJ: Thank you, Mr Gleeson. Yes, Mr Beach.

MR BEACH: Your Honour, in the time available, can I perhaps start with the Full Court’s first set of reasons and explain some fundamental differences between the Commission’s position and EAPL’s position on this appeal as to precisely the findings that the Tribunal were making in relation to section 8.10 and 8.10(f) and what findings the Full Court was making about the Tribunal’s findings.

GUMMOW J: Just before you do that, what I have not got in my mind at the moment is the placement of this. This is a State access regime, is it not, within the meaning of Part IIIA of the Trade Practices Act?

MR BEACH: Yes.

GUMMOW J: How does it fit in or not fit in?

MR BEACH: It does not fit in at all with Part IIIA. It only fits in in terms of allowing the Commission to exercise the powers or perform the duties - - -

GUMMOW J: The only relevant sections are 44ZZM, is that right?

MR BEACH: Yes.

GUMMOW J: The review by the Tribunal in 44ZP, which is a re-arbitration of an access dispute, is a completely different sort of operation.

MR BEACH: That is not relevant to this exercise.

GUMMOW J: Yes.

MR BEACH: Could I take your Honours briefly to the Tribunal’s reasons and can I take your Honours to paragraph 25. We say paragraph 25 encapsulates the central error of law that the Full Court ultimately identified. Paragraph 28 of the Tribunal’s reasons is the only paragraph of the Tribunal’s reasons that deals with what the ACCC’s findings were in relation to section 8.10(f), and tomorrow I will take you through what the Full Court says about those findings, but you would appreciate from paragraph 28 that there is not one finding by the ACCC of this so-called recovery of 46 per cent of ORC argument that seems to be front and centre in my learned friend’s submissions.

What EAPL seem to want to do is to finesse out of paragraph 29 somehow a proposition that first the ACCC found effectively that there had been a 46 per cent recovery of ORC and that the Tribunal had found that to be incorrect. That is a flawed analysis because, if your Honours go back to the passages of the final decision that you were taken to by EAPL, the only relevant findings that the ACCC made in relation to section 8.10(f) are those findings that are dealt with by the Tribunal in paragraph 28.

Paragraph 29 does not contain or embody any findings of the ACCC. What the Tribunal is there saying is, “Well, we think that the effect of what the ACCC has done amounts possibly to a conclusion of over-recovery”, which is the last sentence but that was never a finding made by the ACCC. It was denied by the ACCC at first instance in the Tribunal. It was denied again in the Full Court, and if there was no finding made by the ACCC, there could hardly be an identification of error by the Tribunal in relation to the non-finding and that is why the Full Court does not address paragraph 29 separately.

The Full Court seems to have accepted our argument that there had been no finding of this 46 per cent recovery of ORC, so that all that was left for the content of paragraph 29 was the first sentence that we, the Tribunal, think “that the ACCC has misconstrued s 8.10(f)”. That misconstruction argument is really the same misconstruction argument that begins at paragraph 25 of the Tribunal’s reasons and goes through to paragraph 28 of the Tribunal’s reasons and the Full Court deal with that set of construction arguments in some detail, and I will tomorrow to explain why what the Full Court said was unremarkable and is perfectly correct.

That is why you do not find any discussion of paragraph 29 because there was no finding of the ACCC and the Full Court did not need to deal with that separately if it had already knocked off the construction arguments and the misconstruction arguments of the Tribunal as illuminated in paragraphs 25 through to 28.

GLEESON CJ: Mr Beach, I think the Full Court said the ACCC did not use and the ACCC did not have to use any of the valuation methodologies referred to in paragraphs (a), (b) and (c). At some reasonably early stage of your submissions, it would help us if you could summarise the methodology the ACCC did use.

MR BEACH: Yes, I will start off with that tomorrow by taking you back to the final decision and also the final approval, which is actually the decision under review. It is the final approval document which is the decision under section 2.20. Essentially, what we did and just perhaps 30 seconds if your Honour could indulge me - - -

GLEESON CJ: Yes, sure.

MR BEACH: - - - was we did essentially this. Section 8.10 says we had to have regard to the matters (a) through to (k), so if you go through our final decision and our final approval, we go through each of the factors, (a) through to (k), we consider them, but there is no part of 8.10 that then says you have to take a particular quantification out of (b) or (a) or (c) and then create the ICB using that solely or with a plus or minus adjustment. All that 8.10 is designed to do is to say you have to consider these matters. That is how our articulation of our reasoning and our final decision proceeds. We then stand back and say, having regard to the objectives in section 8.1, how do we calculate an ICB which gives a balanced measure to each of those factors? What we did then was come up with the ICB which mathematically we showed was an ORC with the kinked depreciation but we did not have to - - -

GLEESON CJ: But that is the question, what does the process of coming up with involve?

MR BEACH: The process of coming up is first, we have to go through each of factors (a) through to (k) and identify the factors and mathematically quantify them, so we quantify a DAC, we quantify a DORC, we quantify the purchase price of equal paid. We have to come up with a mathematical ICB at the end of the day, call it a regulatory valuation. That is what the language of 8.4(a) is designed to reflect.

GLEESON CJ: You have to come up with a number.

MR BEACH: We have to come up with a number. We came up with a number by saying “optimise replacement costs”. That gives you a good feel for what the cost of replacing the asset would be today. Normally you might do a DORC which is just forward looking, but because other elements of 8.10, such as 8.10(f), say you also have to look in the past at economic depreciation, how tariffs have been set and whether there has been recovery of depreciation, we have said we cannot use a plain vanilla DORC. We have to do something to reflect the reality that 8.10(f) tells us we have to have some measure of backward looking and so the best and perhaps the elegant solution that we come up with is to have this kinked depreciation so that the prior 50 year life has a steeper gradient for your line
for depreciation up to 2000 which gives some measure for 8.10(f) and we are going forward with the 80 year life.

GLEESON CJ: That is a description of what you have done, but why have you done it?

MR BEACH: Yes, we have done it because we have to balance all of the factors in 8.10(a) through to (k) - - -

HAYNE J: With guidance about how to balance them, or completely free?

MR BEACH: Not completely free. The guidance, in terms of how we balance them, is derived from the objectives under section 8.1. That is why we have a detailed description of each of the objectives in section 8.1 and of course, if there are competing objectives in section 8.1, then Re Michael told us to go back to look at section 2.24 and to work out the competition between the competing objectives in 8.1 by reference to the factors in section 2.24 and that is precisely what we did.

GLEESON CJ: Thank you. We will adjourn until 10.15 tomorrow morning.

AT 4.19 PM THE MATTER WAS ADJOURNED
UNTIL WEDNESDAY, 18 APRIL 2007