East Australian Pipeline Pty Limited v ACCC & Anor [2007] HCATrans 141 (18 April 2007)

Last Updated: 18 April 2007

[2007] HCATrans 141

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 WEDNESDAY, 18 APRIL 2007, AT 10.18 AM

(Continued from 17/4/07)

Copyright in the High Court of Australia

GLEESON CJ: Yes, Mr Beach.

MR BEACH: Your Honours, what I propose to do is to structure my submissions in six stages. The first stage would be to take your Honours through the methodology used by the Commission in the final decision on the final approval. The second stage is to discuss the errors of law that we contend were made by the Tribunal and found in our favour by the Full Court. The third stage is to provide some submissions to the effect that the Tribunal did not in fact identify any error of fact made by the ACCC in its decision. Contrary to the emphasis that EAPL would give to the matter, we say that the relevant conclusions of the Tribunal and the relevant reasoning of the Full Court on a proper analysis does not delve into questions or areas of fact.

The fourth stage is to briefly deal with the question of materiality of the errors of law found. Your Honours would appreciate that the Full Court only dealt with the first stage of our AD(JR) application, which was the identification of errors of law within the terms of section 5 of the statute. It did not go on and consider whether those errors of law were also jurisdictional errors but of course, if they could be properly described as jurisdictional errors, we say that we would not need to establish materiality in any event and I want to put some submissions on that.

The fifth stage is to deal with the appellant’s contention in terms of absence of reasons and hopefully to establish that there was no relevant absence of reasons by the Full Court. The final stage is to deal with some observations, including some of the questions your Honours raised yesterday in terms of the proper construction and application of section 39(2) of the access law, then to conclude that the Full Court on judicial review did not step outside its relevant boundaries in respect of the findings that were made.

Can I go back to the question of methodology used by the ACCC in coming to the ICB. As I indicated late yesterday just in very brief form, the ACCC’s reasoning towards a mathematical value for the ICB was, for the first step, to go through each of the factors of section 8.10(a) through to (k), go through them in the sequential order set out in section 8.10, to make any quantitative or qualitative evaluations as required by each of those subparagraphs of section 8.10.

That then gave the Commission what I will describe as the relevant universe of factors that it had to consider under section 8.10. What the Commission then did, having identified the various matters under each of those factors, was to then turn back to section 8.1 of the Code, which deals with various objectives, and to analyse each of the 8.10(a) to (k) factors in the light of the objectives. It will be appreciated that some of the (a) to (k) factors are more or less relevant to some of the objectives in section 8.1. Having done that exercise and also considering the boundaries of section 8.12, the normal range being the range for the mathematical value between the DAC, the depreciated actual cost, and DORC, what the Commission then did in its conclusions was to step back and come up with a mathematical value for the ICB.

You will appreciate from section 8.10 of the Code that the only constraint in terms of achieving a mathematical value is, in a sense, the constraint that you have to take into account or have regard to some of the factors under 8.10. That is one constraint, but it is a qualitative constraint. It is not a quantitative constraint. It does not go on to say that after having taken those factors into account you must then take one or more of the mathematical values and use that as the foundation for the mathematical valuation calculation that you do for the ICB. So, although it is a constraint, it is only a qualitative constraint, not a mathematical constraint on how the ICB is achieved.

Section 8.12 is a further loose constraint in the sense that it says that your mathematical value must fall normally within the range of DAC through to ORC, but it does not again tell you how you achieve the mathematical value. It just sets boundaries that are to apply in the usual case, but of course not in all cases. The only other constraint in terms of achieving the mathematical value for the ICB is to look at the qualitative factors in section 8.1. So the difference between the Commission and EAPL and the Tribunal is essentially that EAPL and the Tribunal say you have to take a mathematical value of the ICB which is somehow derived from a mathematical value from one or more of (a) through to (c) per se or one or more of (a) through to (c) with some plus or minus adjustment, having regard to one or more of the factors 8.10(e) through to (k).

We completely disagree with that. We say there is nothing in the Code that says that the ultimate mathematical value that we achieve for the ICB has to have as its foundation any one particular mathematical figure which is derived from a quantitative analysis of any of 8.10(a) through to (k). That is where the area of difference is.

HAYNE J: Do I understand that area of difference as being that it is your contention that there is no other informing principle or consideration?

MR BEACH: That is right. My learned friend yesterday said - - -

HAYNE J: The Commission is completely otherwise unconstrained and unbounded otherwise.

MR BEACH: Otherwise. I did say that there was a further constraint which is more indirect which is section 2.24 of the Code. So that if you have competing objectives under section 8.1 and you are unable to resolve those on the face of 8.1 - and you will see from the last sentence that the relevant regulator may determine how the competing objectives are to be reconciled - that reconciliation takes place by reference back to section 2.24. It is one thing to say, when you look at section 8.1, that what informed section 8.1 and also section 2.24 are certain economic concepts. There is no difference between us on that and there is a very detailed discussion in Re Michael as to the economic concepts of productive, allocative and a third type of dynamic efficiency which informs what is meant by “efficient costs” in section 8.1. It is one thing to say that the section 8.1 objectives are informed by certain economic concepts. It is quite a leap in logic, we say, to say that that means that when you come to setting an ICB, the mathematical value for the ICB under section 8.10, that you have to somehow source that into some economic theory or principle. We say that reasoning does not follow at all.

GLEESON CJ: There may be some connection between these various points that you are addressing in sequence, but does it have any bearing on this issue of construction that you have just identified that there is within the legislative scheme a system of review and the system of review commits to the Tribunal a responsibility to consider the reasonableness of what the ACCC has done? How do you apply a standard of reasonableness to the performance of an exercise of the kind that you have just been describing?

MR BEACH: Let me describe it this way. The Commission balances the 8.10 factors with the 8.1 objectives and comes up with an ICB that by definition it says is reasonable. The Tribunal under section 39(2) can look to see whether what we did was unreasonable in all the circumstances but that does not mean that it just takes our same material, puts our decision to one side and says, “Well, we come up with a different balancing exercise and we think that a different mathematical value for the ICB is reasonable.”

HAYNE J: The whole of the content of the propositions you have just put depends on the content you give to the word “balance” and the content you give to the word “reasonable”. Until those words are given content we have a meaningless proposition.

MR BEACH: Yes.

CRENNAN J: One group of people who would be interested in what 8.10 means would be potential investors and bankers who are lending to potential investors for the purposes of purchasing infrastructure.

MR BEACH: Yes. I accept all of that and, of course, as your Honour appreciates, some of the section 8.1 objectives and section 2.24 do have as front and centre the question of capital investment, so you have to be careful that the ICB must be such as not to discourage capital investments, so you are not going to set an ICB that is below actual cost because that would act as a disincentive to actual investments. I can agree with all of that but still say that does not change the thrust of what I have said about the balancing exercise under section 8.10 because, as I have respectfully submitted, the constraint is a constraint. It is the section 8.1 objectives but that is a qualitative constraint, not a quantitative one in the sense that it does not actually tell you what the precise mathematical value is to be. That is really in the realm of a discretion for the ACCC. Your Honour the Chief Justice asked me essentially just what I have said about construction change by reason of the fact that there is this limited ground of review in the Tribunal for unreasonableness and I say no, the Tribunal cannot make its own finding on reasonableness and then say that is different from the ACCC; ipso facto, what the ACCC did was unreasonable. We would say that the content to be given to unreasonableness is what the Full Court said in the first set of reasons in this case that there has to be some lack of logic, something perverse. Certainly Wednesbury unreasonableness would fall within - although the court quite rightly says it is a matter of the proper construction of the statute, so Wednesbury unreasonableness is one way but not the exhaustive way.

GUMMOW J: What is the room for logic in the construction you have been propounding?

MR BEACH: I say if we balance certain factors and give reasons for that balancing in a way that our own reasoning is internally inconsistent with how we have done the balance – so say we reason (a) and not (a) in the balancing exercise, the Tribunal might say there is an internal illogicality about your underlying reasoning which provides the foundation for the mathematical value that you come up with, therefore that could be a lack of logic. That is the sort of thing that is one way within which unreasonableness may be dealt with.

If your Honours go in the first set of reasons to paragraph 176, the Full Court there say essentially that unreasonableness is not established merely because the Tribunal might, undertaking the balancing exercise for itself, find another view more preferable. Then they, in paragraph 177, deal with the first Epic decision which I will take you to a bit later. After quoting from the Tribunal’s reasoning they say, about line 20 on page 1571 that the question of unreasonableness:

is compatible with the wide view of ‘unreasonableness’ which would pick up logical error or irrationality -

Then 178, third line:

There may be an error in logic or some discontinuity or non sequitur . . . an element of arbitrariness -

So there has to be that found rather than the Tribunal, just looking at the same material, comes up with a different view. That is what distinguishes this type of more limited review from the section 38 review. I think your Honours asked yesterday: limited by reference to what? One possibility is that when section 39 of the law is talking about limited review, it is distinguishing that from the more general review under section 38, which is essentially a de novo or merits type review. That is how we would see the difference between sections 38 and 39.

So if you were to conclude that section 39 allowed the Tribunal to reach its own view of reasonableness on the material and put to one side the ACCC’s to the extent of inconsistency and by definition find the ACCC’s decision to be unreasonable because it was inconsistent with the Tribunal’s own view of reasonableness, you are really back into the territory of section 38 rather than 39. So we respectfully submit that section 39 is more constrained than perhaps what the appellant would submit. I do want to address reasonableness and unreasonableness in section 39 a bit later.

Perhaps I could go back to the methodology used by the ACCC and just very quickly draw attention to some of the passages in the final decision and the final approval that were not dealt with yesterday or were passed over very quickly.

If your Honours go to the appeal book headed “Confidential Folder”. You were taken to page 17C, lines 20 through to about 30 by Mr Gleeson yesterday and I will not revisit that except to draw your Honours’ attention to something that seems to be skipped over a little by EAPL, and I do not say that as a criticism. When you look at the passage at lines 23 to 30 on page 17C you will see in the last half of that paragraph beginning with the sentence “In determining” there is a reference to the three elements of section 8.10(f).

The appellant has put its case on more the economic depreciation concept and I will address that later but in fact section 8.10(f) addresses three factors. Economic depreciation is one factor. The basis on which tariffs have been set or appear to have been set is the second factor. That is quite important because that is essentially part of the foundation for why we have taken our ORC with the kinked approach because – and you will see this a bit later – the 50-year life was used by EAPL since 1994 when the pipeline was purchased. We say that 50 year economic life which formed the basis of their accounting depreciation appears to be at the least an apparent basis for the tariffs that they have set for themselves since 1994. So you do not even have to worry about economic depreciation, you can look at the second element of 8.10(f).

The third element of 8.10(f) is historical returns which in a sense is a composite of the first two elements. If your Honours go over to page 48C, about line 48 your Honours will there see the beginning of the discussion on the Code requirements. We set up for ourselves how we see the legal framework for the setting of the ICB and you will see in the dot points – over the page to 49C – reference to each of the factors under 8.10(k). You then see line 30 at 49C the reference to the section 8.1 objectives. Then at about line 45 there is a reference to the Epic decision which the Commission usefully adopted as a good description of the method.

Just to stop there at one point, there is reference at about line 48 to the proposition in Re Michael that “the regulator must give weight to” these factors. That is 8.10(a) through to (k) as fundamental elements, and that is right, but that again really says nothing at all about the mathematical derivation. We can all agree that each of (a) through to (k) needs to be drilled down, quantified, qualitatively described and assessed. We can all agree that they be treated as fundamental elements in that respect but that still does not tell you at the end of the day what your mathematical valuation for the ICB is.

It is has been used by EAPL in its submissions to suggest that that somehow provides support for the notion that to get a mathematical derivation of ICB you need to start with a mathematical value that you have derived from 8.10(a), (b) or (c) or somewhere else, use that per se or whether plus or minus adjustment and we say the concept of a fundamental element does not say anything about the actual mathematical derivation.

There is a further discussion across the page at page 50C of the relevance of the section 8.1 objectives and its interaction with section 2.24. If you then go to page 62C you will see in the introduction a fairly good summary of what we say the methodology is. At about line 39 it says:

In this section the Commission turns its attention to the various factors to which it is required to have regard under section 8.10 of the Code. Viable options for the ICB produced from this process are then evaluated comparatively in terms of the objectives in section 8.1 of the Code.

The Commission’s conclusions are then set out finally. So that is the whole structure. You go through each of (a) through to (k), you then turn to 8.1. If you need to resolve something within 8.1 that competes, you need to then go to section 2.24 and then you come up with the mathematical derivation.

HAYNE J: Does the Commission’s decision amplify what it meant by the word “viable”? In particular, does it identify the criterion or criteria against which options are assessed for viability?

MR BEACH: Yes, it does that by reference to the section 8.1 objectives that I will come to. So “viable” means viable in terms of be consistent with or meeting the section 8.1 objectives. That is how the framework of the Code is expressed. Then you have a discussion, and I will not take you through each of it, but you will see various headings for each of the factors in 63C. Just to make a couple of points whilst I am passing through this; there was a reference yesterday to depreciated actual cost which is factor (a) and the question was raised why could you not use the price paid by EAPL in 1994, because of course that was the cost to it. In a sense that is right, but factor (a) focuses on the actual capital cost. There is a reference to capital cost of the pipeline, so it is really independent of the particular service provider and focusing on the pipeline itself.

GLEESON CJ: That seems to be common ground.

MR BEACH: Yes, and it is also common ground because, as your Honours appreciate from 8.10(j), there is express reference to a purchase price recently paid by the service provider as being a factor to take into account. So you can see what is the point in having 8.10(j) if 8.10(a) was designed to cover the same work? So there seems to be a distinction in the language between capital cost of the pipeline on the one hand, purchase price on the other. It was said by the appellant that somehow 8.10(a) had been ignored and perhaps this is engaging in an exercise of semantics. It was never ignored. Section 8.10(a), the DAC, sets the lower bound. It is also something that is taken into account, so it is never ignored. It is a fundamental element that has to be considered. But, of course, the actual mathematical derivation of the ICB did not use DAC. So I can agree with “ignored” in that sense, but I cannot, with respect, agree with the concept of “ignored” in any other.

GLEESON CJ: This pipeline was constructed at the beginning of a fairly long period of high inflation. What is the relevance, if any, of that to (a)?

MR BEACH: In terms of (a) what you would do is index it. In other words, you would take the actual cost in 1976 dollars. You would index it to bring it up to 2000, 2003 dollars, and also take off depreciation. I am not sure whether that is a good answer to your Honour’s question. That is the only relevance of inflation. Whatever inflation was in 1976 that is, of course, built into the dollars of the day in 1976, so it is already built into the cost. So that is how the dollars of the day are dealt with then, whatever the inflation rate was in 1976, and inflation beyond that could be dealt with by calculating an indexed actual cost.

HEYDON J: It does not say “indexed”. It says “actual”.

MR BEACH: Yes, that is true. But it might be that you are saying, “Well, we are trying to derive a sensible range in 2003 dollars.” So it does not seem terribly smart to have DAC as the lower range in 1976 dollars and DORC as the upper range in 2003 dollars. It does not actually say it but I would assume that if you are going to have a range it should be current dollars or 2003 dollars for both elements, otherwise you are not comparing like with like.

Then there is a reference to DORC towards the foot of page 63C and top of page 64C. Now, there is a reference there to a draft set of regulatory principles that our learned friends took the Court to yesterday. That document is only relevant in terms of moving from ORC to DORC and the DORC calculation - and of course it was taken into account by the ACCC in doing the DORC calculation but it has nothing to do with the mathematical value for an ICB under section 8.10 where we may want to be considering taking an ORC and adjusting it with this kinked depreciation schedule under 8.10(f). It is dealing with a different subject matter.

Again, if your Honours go to page 65C halfway down about line 35 you will see a very detailed discussion of DORC and that continues through to about page 69C. There is a very great discussion of a lot of expert reports and material that was before the Commission, but it was all in the context of how do you derive a DORC? Do you take an ORC and depreciate it using straight line depreciation or do you take ORC and depreciate using something other than a straight line depreciation method? In other words, do you use a net present value of the future revenue stream between the new asset and the existing asset? Do you use that differential or do you do the net present value of the costs differential into the future between the new asset and the existing asset?

That was all a very nice debate that we had before the Tribunal, but it was all expert material dealing with how you transpose ORC through to DORC. It did not speak to the question of whether you could take ORC and adjust ORC under 8.10(f). That is going to be relevant to something that I will come to later in terms of this so-called no material argument. DORC has a fairly well-recognised set of economic principles. Its underlying working and its methodology seems to be a matter of contest between economists and that is all very interesting, but that material really had nothing to do with and did not speak to what we ultimately did in terms of the mathematical derivation of the ICB, which is to take the ORC and adjust under section 8.10(f).

I will not dwell on pages through to page 75C but, with respect, you cannot understand the Tribunal’s reasons without reading this section of the final decision, nor can you understand fully the Full Court’s reasoning on the Tribunal’s reasons without reading this entire section on the capital base because the Tribunal’s reasons is informed by this. It is the foundation for it. The Full Court’s criticisms of the Tribunal also uses this as the foundation.

In terms of 8.10(f), the discussion of that, as Mr Gleeson demonstrated yesterday, begins at page 75C. Again, at about line 25 you have a reference to the three elements. There is a reference to Epic and then the text is broken up into the component parts, so you have a discussion of the residual economic value of the pipeline and that goes for some time through to the top of page 77C. Can I just note there, we had also done a residual economic value calculation for EAPL in terms of its purchase price. In other words, we looked at its purchase price that it paid in 1994 and looked at economically how much it had derived from its revenue stream to cover depreciation and we calculated a residual economic value which was some 442.8 million. Just to give you a reference, just note this - the draft decision reference appears at appeal book page 402.

There were some further calculations to the Tribunal and also to the Full Court about other calculations based on the 1994 purchase price. Your Honours will see several tables setting that out in this confidential folder at appeal book pages 2C and 3C. The reason why I raise it is that there are references here to calculations done in terms of equals depreciation since 1994 and that is relevant to something I will come to a bit later.

If one goes back to page 77C, we then go on and discuss the 50 year asset life that we have assumed at about line 30. This is the critical part of the reasons because the relevant fact that was identified was that EAPL and, prior to it, the Pipeline Authority of Australia had used a 50 year useful or economic life. That was the factual finding by the ACCC.

Now, that factual finding has never been denied or disputed and, of course, the Tribunal in its decision does not say you have made an error of fact in relation to that 50 year life, so you can lock in the relevant factual finding that a useful or economic life for the pipeline was used by EAPL and its predecessor of 50 years.

We use that fact and say if we are entitled to consider under 8.10(f) how tariffs have been or appear to have been set in the past, certainly so far as EAPL is concerned, we say that it was a reasonable inference for us to draw that they had, in terms of setting their tariffs since 1994, used that 50 year economic life. That, in fact, is the fact and the underlying reasoning, none of which is denied by the Tribunal if you look at the Tribunal’s - - -

GLEESON CJ: Is 559.3 54 per cent of 1092.9?

MR BEACH: I have not done the precise calculations.

GLEESON CJ: I thought Mr Gleeson told us yesterday that the explanation of that last complete sentence on page 77C is that on the basis of a 50 year asset life 46 per cent of the asset life had been used up at the time of the valuation date.

MR BEACH: You see, this is where we disagree. This idea that we have made a finding that there has been recovery of 46 per cent of ORC is wrong. There is no such finding there. What that says is mathematically once we have taken a 50 year asset life in the past and 80 years going forward then the mathematics works out that if ORC is X - - -

GLEESON CJ: I may regret asking this question, but how do you get from 1092.9 to 559.3?

MR BEACH: That is just – I am not sure. The gradients – and there are two gradients of the depreciation profile – are put back into 2003 dollars, but that is not the same thing as saying that somehow in the past EAPL has recovered 46 per cent of ORC. There was no such finding and I will come to it.

GLEESON CJ: But why is it 559.3 and not 659.3 or 459.3?

MR BEACH: That is just the mathematics. If you take the particular ORC and apply the two straight lines with different gradients you will come up with that particular number.

GLEESON CJ: It is based on the assumption of a 50 year life.

MR BEACH: Up to the year 2000 and then beyond it is based upon an 80 year life.

HAYNE J: And this is a critical step in the Commission’s reasoning?

MR BEACH: The step of a 50 year economic life assumed in the past is a foundation for its reasoning as to why up to 2000 it used a particular line for the depreciation profile with a steeper gradient which is a 50 year life gradient than for the life after 2000 which is the 80 years, so it is critical in that sense. It is critical in the sense of saying you, EAPL, have assumed a 50 year life. You appear to have set your tariffs on that. The Pipeline Authority also set a 50 year life. Well, we are going to take that - - -

HAYNE J: I understand the historical facts. What I want to understand is what you say is the chain of reasoning from those historical facts. Accept the historical facts, is it a critical step in the Commission reasoning that it is (1) relevant, (2) important, (3) necessary to give mathematical results to the observation that in the past a 50 year life was used?

MR BEACH: Yes.

HAYNE J: How is that consistent with 8.4(a)? In particular, do you accept that 8.4(a), or 8.4, obliged the Commission to calculate total revenue according to one of the three identified methodologies?

MR BEACH: Yes.

HAYNE J: Second, it is clear that they applied cost of service. Is that right?

MR BEACH: That was at the election of the service provider. The service provider can elect - - -

HAYNE J: Perhaps so, but you have gone along with it. Is that right?

MR BEACH: Yes.

HAYNE J: Third, is it clear that in determining cost of service the total revenue must equal cost of providing all services?

MR BEACH: Yes.

HAYNE J: Next, that that cost is to be calculated on the basis there described. Is that right?

MR BEACH: Yes.

HAYNE J: Does that require an assessment of the value of the capital assets, a return on the value?

MR BEACH: It requires you to come up with a number. Let us call it a regulatory valuation on - - -

HAYNE J: No. Does it require a calculation on the basis of a return on the value of the capital assets that form the covered pipeline?

MR BEACH: Just to break it down there are two concepts within (a). First, you have to come up with a mathematical value for the capital base. Let us say that is X. Then you have to calculate in the future, because that is the initial capital base, and then you have to calculate a rate of return, be that 10 per cent or 12 per cent to give you a rate of return on that figure X into the future.

GLEESON CJ: There may be an ambiguity in the word “value”.

MR BEACH: Can I say that is precisely the debate that we had in the Full Court. We said we are happy to consider that it is a mathematical value. We can all agree with that. We say it is a regulatory - - -

GLEESON CJ: But mathematical value just means number, does it not?

MR BEACH: That is right. In a sense that is all 8.4 can talk about because it is 8.10, 8.11 and 8.12 that give you the self-contained Code to come up with a number. So the word “value” there is not being used in any technical sense. It is just addressing you to the fact that you have to come up with a number - - -

GLEESON CJ: No, sorry. It is in a context. The expression is “return on value”, return on the value of capital assets. That is the context in which the word “value” is used in 8.4

MR BEACH: That is right. The value is taken to be the capital base. How do you get to the capital base? The capital base is calculated under section 8.10. In other words, we disagree with the notion that the word “value” in a definitional provision in 8.4(a) somehow breathes additional life or content into the concept of value outside the regulatory value that is required to be derived for the IBC under section 8.10.

GLEESON CJ: Is it important to your argument that the word “mathematical” should be inserted before the word “value”?

MR BEACH: I am happy to talk about it as a regulatory value.

GLEESON CJ: What you mean is a number, a number fixed by the regulator.

MR BEACH: A number fixed by the regulator having regard to what is required under the self-contained Code of sections 8.10 through to 8.12 with the objectives of 8.1 and ultimately the factors under section 2.24.

HAYNE J: What meaning do you give to the words “is equal to the cost of providing all services and with this cost calculated, et cetera”? All of that swings off, does it, what you describe as a regulatory value which is such number as the ACCC chooses. Is that right?

MR BEACH: That is right, but to describe it like that is not, with respect, giving the sophistication that 8.10 has. The Commission is not at large. I think your Honour has put that proposition to me several times and I have taken your Honour back to 8.10, 8.1 and 2.24, so it is the number that the Commission must come up with applying those objectives. If that task is done properly that is the X - let us assume it is $50 million, then all that 8.4 is saying is that if you use a cost of service methodology the tariffs must be set such that in the future you can recover all your costs. Costs include.....X. Costs include a return on capital as distinct from a return of capital which is due to depreciation. So whatever X is you then have to set a rate of return so that the service provider gets the weight. So that is cost of capital in one sense. That is really the component. So we do not breathe life into 8.4(a) at all.

CRENNAN J: The trouble, Mr Beach, is that all the key terms there are very familiar and they are used all the time by bankers lending in relation to infrastructure. A banker approaching the question of the value of the capital assets would not be looking at a regulatory value of the capital assets. So my question really is how do you get that into the text here using all those very familiar terms?

MR BEACH: Because you have at the end of (a) the emboldened expression “capital base”, so they are just using very loosely a set of language because here they are not being proscriptive, they are just setting out the elements, the general skeleton elements of a cost of service methodology. They are not being proscriptive as to what the rate of return is or the value or the depreciation or the operating, so it is a very general description just designed to show the reader or somebody looking at it these are the three elements of cost of service, but if you want to understand how these concepts are used you have to go to the other parts of the Code and, relevantly, the capital base provisions of 8.10, et cetera, to understand that in turn.

So this is just a colloquial and short form expression because it is not designed to tell you what the capital base is, what your rate of return is, what the depreciation is, it is only designed to impart the information these are the three elements of the a cost of service methodology to distinguish it from the other two elements, the NPV and the internal rate of return methodologies. That is why I say there is too much sought to be gleaned from this. When you understand that this is a limited information or content that is sought to be communicated, you inevitably have to go forward to the specific provisions of 8.10 and see what precisely is going on.

Your Honour asks a good question. I mean, yes, a banker, uninformed, would look at the concept of value and think, market value, what I can sell, what the recent price for it was. A banker might look at the net present value of the future cash flow stream as an appropriate way to value it, as some people value shares, or companies and, accordingly, share value.

CRENNAN J: Then you have an infrastructure. They will look at tariffs, they will look at everything to work out precisely when the loan will paid back and what sort of profits will be made.

MR BEACH: They may, but in terms of value here, as your Honour would appreciate from section 8.10, you are dealing with all sorts of concepts, some of which are recognised valuation concepts, which is 8.10(a) through to (c), and others that have nothing to do with ordinary valuation concepts. A banker is not going to be interested in how the pipeline has been depreciated in the past.

CRENNAN J: They have already been called the non-valuation elements in the calculus but they, as a group, suggest reasons for discounting from the orthodox valuation method which ever one is chosen.

MR BEACH: I will come to that but, yes, you could use a factor (e) through to (k) there but there is nothing within 8.10 that says that is the way it has to be done or that is the way it has to be normally done and I want to come and redress the question of primacy, but in terms of 8.4(a), at the end of the day we say it really takes you nowhere. It takes you back to 8.10 and through to the specific issues which were dealt with by the Full Court. Can I say this, just to give your Honours some references, there is a lot of discussion about this concept of value and the different ways in which people will use it, a lot of discussion of that in the Full Court, appeal book pages 1024 to 1026, 1028, 1031 to 1033, 1106, 1107, 1098, 1104. There is specific discussion on section 8.4, 1105, 1108.

It is not a point that suddenly has occurred to somebody at this level. It was something that was front and centre in the debate in the Full Court and at the end of the day the Full Court did not breathe any life or additional content into value beyond what was in 8.10. It did not see 8.4(a) as reading down, reading up, doing anything to the concepts in the ICB as dealt with in section 8.10 and the Full Court. In fact, in its first set of reasons did in passing refer to section 8.4, though not the debate between us on that point. I have digressed a little bit from where I was with the final decision. If your Honours go back to the - - -

GLEESON CJ: You are on the bottom of page 77C?

MR BEACH: Yes. So you have there the 50 year asset life. Then you have another reference, 78C, to another factor which justifies why the Commission treated the 50 year asset life as being significant and that was because of the expectation of the Eastern Gas Pipeline coming on stream, I think, in the year 2000. The argument goes that if you are a service provider and you anticipate that there is going to be competition in the future with a drop off in your revenue, your commercial imperative would be normally to accelerate your depreciation, so that you can take it from the revenue stream that you derive when you are a monopolist because if you do not take it or accelerate it up front, then you are not going to get it later obviously if you then have competition with the Eastern Gas Pipeline and the reasoning is articulated there as a further reason why the 50 year asset life is something that had significance.

You then fall to 8.10(g) which is at page 79C. Now, interestingly enough, we all talk about concepts of value that we should all be using 8.10(a) through to (c) but, in fact, EAPL itself before the final decision was submitting its own valuation not based upon 8.10(a) through to (c) but, rather, a valuation based upon 8.10(g). There is a discussion of 8.10(g) and the submissions that were made by EAPL about that are addressed earlier in this final decision. You will see that at the foot of page 58C, line 50; 59C at about line 25. You then go forward to appeal book page 61C at about line 20 through to 22 and if you then go back to page 14C you will see at about line 30 in the table the actual ICB that EAPL suggested should be in its access arrangement. It is the figure of 779 million which was not 8.10(a) through to (c) at all. It was 8.10(g).

So you have this situation. EAPL and the Commission are all proceeding nicely along the same path that you do not have to use an 8.10(a) through to (c) factor whether per se or to mathematically adjust it and a plus or minus approach by reference to (e) through to (k). We are all on the same page. EAPL says “We want an ICB under 8.10(g)”. We say no and we come up with something else. It is only when we get to the Tribunal and the Tribunal’s idiosyncratic approach to the Code that we then get this suggestion that somehow the only thing that we can do in deriving a mathematical foundation for the ICB is take a mathematical quantum calculated under (a), (b) or (c) and take some plus or minus approach. Then you get the sort of debate that we are now having here, had in the Full Court, and we say that is all wrong.

It is a bit of a reality check, with respect, to see how EAPL was putting its own position. Its own position was not consistent with all in the way the Tribunal would reason in terms of its primacy issue or its quest for value issue. EAPL did put other calculations for DORC, it put other calculations for economic depreciation, but at the end of the day the access arrangement that it submitted proposed 779 million and the only mathematical derivation for that figure of 779 million had nothing to with 8.10(a) through to (c) and everything to do with how it calculated the reasonable expectations that it says was derived from the regulatory framework at the time up to the point in time when it purchased the pipeline in 1994. That figure of 779 million, you will find that precise figure at page 61C, line 22.

GLEESON CJ: Mr Beach, I just want to be sure I understand the point of departure between the two competing cases about calculating the ICB. The purpose of discounting the optimised replacement cost is to allow for the fact that if you replace it you are getting something new, therefore getting something with a longer life expectancy.

MR BEACH: True.

GLEESON CJ: That is the relevance of the asset life. If what you were replacing only had a life expectancy of 50 years, then you would make a bigger allowance for the new for old factor than you would if what you were replacing had a life expectancy of say 70 years.

MR BEACH: All true and that is why you have this kinked depreciation so that we say going forward we are prepared to assume for your asset an 80 year life. So going forward we are not saying a 50 year life from 2000. In terms of the profile it is an 80 year life, so we give you the benefit of that. This is not a DORC issue, but we have to look back and see what you have done in the past in relation to depreciation and we came up with the solution of saying, well, in the past you yourself had assumed a 50 year economic life. Certainly it appears that EAPL’s tariffs since 1994 were based upon that. That is a basis for taking ORC and having – so in a sense it is a modified DORC but it has got a component which is backward looking because we have to give some - - -

GLEESON CJ: Yes, but this is a question of why you are modifying DORC.

MR BEACH: We are not modifying DORC. We are taking the ORC and doing a depreciation profile that is different to a DORC calculation. The reason that we - - -

GLEESON CJ: Are you still trying to allow for the new for old factor or are you doing something additional?

MR BEACH: No, no. We in part are allowing for the new to old, but if you stop at DORC that is just forward looking and we can all agree upon that. There is no debate. We made an error in our draft decision because we calculated DORC backward looking. That was wrong in principle and we set aside - - -

GLEESON CJ: But you must be doing something additional. In your process of reasoning you are doing something additional to making a new for old allowance.

MR BEACH: Yes.

GLEESON CJ: What is the additional thing you are doing?

MR BEACH: The additional thing is trying to take into account that in the past some depreciation appears to have been recovered.

GLEESON CJ: By whom?

MR BEACH: By EAPL certainly.

GLEESON CJ: Over five years?

MR BEACH: Yes, and also there was some recovery of depreciation by the predecessor, except that they did not recover economic depreciation - - -

GLEESON CJ: It was negative recovery by them, was it not?

MR BEACH: Yes, that is right.

GLEESON CJ: But in order to take account of the fact that over five years EAPL have set depreciation rates that gave it a certain level of recovery, you are applying this 50 year asset life to the whole of the operation of the pipeline up till 1999.

MR BEACH: That is so.

GLEESON CJ: So it is appropriate to make a new for old allowance. Everybody agrees on that.

MR BEACH: Yes.

GLEESON CJ: You say it is additionally appropriate to take account of the fact that for five years EAPL have been charging on the basis of a certain depreciation assumption.

MR BEACH: It is looser than that. It is to say that in the past the various owners culminating in EAPL have used a 50-year economic life. That is the reality for the pipeline.

GLEESON CJ: Yes, but what is the relevance of that? That is a historical fact but what is the relevance of it to the - - -

MR BEACH: Then the relevance is in 8.10(f): how did tariffs in the past appear to have been set? So we say at least for EAPL, tariffs in the past appear to have been set since 1994 on the basis of that 50-year economic life.

GLEESON CJ: The Tribunal, rightly or wrongly, said of that that is irrational.

MR BEACH: No. I am going to come to the reasons later but that is where we part company, with respect. I want to come later to that because I do not actually say that. There is a gloss on the way EAPL has been using paragraph 29 when they should have been focusing on the Commission’s decision and what was identified in paragraph 28 of the Tribunal’s reasons and what the Full Court said about that. I want to come to that because we say the relevant fact is the 50-year economic life. This is the basis upon which EAPL in the past seems to have set tariffs, therefore we are entitled to use a 50-year economic life as a foundational fact as part of our methodology to come up with an ICB which is not a DORC. I will come back to that.

If one goes back to the final decision I was dealing with, 8.10(g), going to page 85C you will see reference to 8.10(j), which is dealing with the asset price recently paid, and you will see the calculations that we did for the 1994 sale price referred to at the top of page 86C between lines 10 and 20. I gave your Honours a reference to appeal book pages 1C-3C which gives the breakdown of those calculations. Those calculations actually tell you what we had actually quantified depreciation to be for EAPL since 1994. It is just, with respect, not right to say that we were somehow saying that since 1994 EAPL have recovered 46 per cent of ORC. That is something we never said. These sorts of calculations that were put before the Tribunal demonstrate the complete opposite.

As I say, once we have gone through all of the factors, we then come back to the section 8.1 objectives and your Honours will see the discussion of that beginning at the foot of page 88C, about line 53. Then what happens is that we go through each of these objectives. The first one is efficient costs, 89C. We observe at about line 40 that the Court of Appeal in Re Michael had talked about DAC and DORC as having an acceptability for the purposes of economic efficiency. DORC is usually the favourite. If you were just looking at efficient costs and no other objective, if you were just looking at section 8.1(a), DORC is a very good candidate because DORC is really designed to provide the value that somebody looking to purchase the asset would place as a second-hand value without constructing the new asset.

Another way to look at it is that DORC is looked at as the figure that if tariffs were set on the basis of that, there would not then be a risk of bypass by a competitor, whereas if it was set above DORC, the tariffs would be too high in making it economic for - - -

GLEESON CJ: DORC is also what an insurance company would pay if terrorists blew up this pipeline, is it not, and destroyed it completely?

MR BEACH: I think that is being generous to the insurance industry.

GLEESON CJ: They would give you replacement cost with a new for old allowance, would they not?

MR BEACH: Yes, but this is optimised replacement cost so this is everything to deal with the new technology and the new developments and the new steels and material and all the rest of it, whereas your insurer might give you the equivalent of the old jalopy.

GLEESON CJ: It depends on the terms of the insurance policy.

MR BEACH: Yes. There is a reference at the foot of page 89C to the economic value and we say why we cannot use the economic value of 1.7 billion because that is just not going to produce efficient costs. We also say at the foot of 90C at about line 40 – we discuss this 50 year life point and we conclude that taking an ORC with the kinked depreciation would be consistent with efficient costs. Part of the reason for that is that in Re Michael when Re Michael was considering the concept of efficient costs it did not foreclose looking at past costs as distinct from future costs.

You have a methodology tied into 8.1 and it looks like it is a good check, then you go on to the next objective at the top of page 91C which is replicating a competitive market. We go through that and so forth. We deal with the purchase price at 94C, line 30. I do not have time to go over this, but if your Honours have the time it will demonstrate that we then tie everything that we have looked at under (a) through to (k) back to a consideration and the balancing of the objectives under section 8.1.

It is only then that we come to the conclusion at page 96C. I think there was a suggestion by Mr Gleeson yesterday when he referred to the Full Court’s reasons at 192 that the Commission had not identified in the final decision what we gave weight to other than under section 8.10(f) and, with respect, that description is not accurate. What we gave weight to is everything that precedes the conclusion at line 20 on page 96C. In other words, we gave weight to all of the factors (a) through to (k), weight to all of the objectives under section 8.1 and then engaged in the balancing exercise which is summarised then at 96C. At line 20 on 96C we refer to the range, 8.11. We then explain in the next paragraph why EAPL’s reasonable expectations under 8.10(g) does not satisfy the requirements. Then at line 30, the passage which is the central passage:

For the purposes of the MSP access arrangement the Commission has determined a value for the ICB of $559 million. To support this valuation, the Commission has given considerable weight –

Those words “considerable weight” show exactly what is going on. We have weighed everything. We have given considerable weight to section 8.10 but it is not a calculation under 8.10(f) nor is it a calculation under 8.10(b). It is a calculation under 8.10 generally, and the mathematical derivation that has been come up with is balancing all of the factors in 8.10 with considerable weight being given to section 8.10(f).

In the Full Court, EAPL’s submission was along the lines, “Well, you were doing this characterisation under 8.10(f). When you look at 8.10(f) it just does not justify it”. Of course, we can agree. Section 8.10(f) on its own does not say anything about doing an ORC with the adjustment that we have done, but we never did the calculation under 8.10(f). Rather we did the calculation under section 8.10 in its entirety. It is also right to say, “Well, how can you do this calculation under 8.10(b), the DORC?” Well, you cannot, because ORC through to DORC requires you to only look forward rather than to look backwards. So it is of course trite to say that you cannot do this calculation under 8.10(b), but we did not do the calculation under 8.10(b).

As I say, generally we did the calculation under section 8.10 and there is nothing in the Code that says that we cannot take particular elements as long as we take all factors into account, weight them in accordance with the section 8.1 objectives. There is nothing to say that we cannot take part of element (b), part of element (f), part of any other element, in terms of deriving the mathematical figure. In a sense perhaps the Commission has been too precise.

I mean if you stand back from this, another way that you could have done this was just to say, “Here are the factors 8.10(a) through to (k). This throws up a range of numbers. We will take the median value or the average value”. In a sense we have drilled down to give some transparency but in a sense the Code never required us to do that in the first place. But drilling down as we have into the mathematics - - -

GLEESON CJ: You may well be right about that, but the methodology that has in fact been applied by the Commission is, as you say, transparent, which then exposes its methodology to a judgment about reasonableness.

MR BEACH: Reasonableness in all the circumstances.

GLEESON CJ: Yes, because the Tribunal has a duty. The grounds of application for review being as they are, the Tribunal has a duty to decide whether what the ACCC has done is unreasonable.

MR BEACH: We are not quarrelling with that. We agree. We are just – we start off saying, when you look at what we have done it is consistent with the legal framework of section 8.10, whereas the Tribunal’s later point is that what you have done is not in conformity with the proper construction of the Code, and I will come through to that.

GLEESON CJ: 54 per cent of 109.2.9 is something a little in excess of 590. If the figures were not precisely 46 and 54 but 46.X per cent then that may explain, does it, 559.3?

MR BEACH: I am sure that is where the 46 per cent comes from.

GLEESON CJ: Approximately, 46 point something per cent probably.

MR BEACH: This is not any set of calculations or reasoning that we are doing which is somehow magically EAPL since 1994 have recovered $400 million.

GLEESON CJ: I imagine that the valuation date in 1999 is not the anniversary of the construction of the pipeline.

MR BEACH: No, it would not be, no. Just going back to page 96C, we can here see at about line 48:

Having regard to all the relevant factors in section 8.10 of the Code, the Commission considers –

the 559 figure to meet the section 8.1 objectives. That is where we are at. Now, we say there is nothing contrary to the Code in that approach. It is exactly how the structure of the Code is designed to operate. We then explain why the DAC is not going to be useful. We also explain at the top of 97C why a DORC is not what we consider to be appropriate. Then about line 19 at page 97C we again talk about the value that we have come up with. Also that value is fortified by other considerations and that is dealt with from line 25 on page 97C.

GLEESON CJ: But the issue of reasonableness then comes to this, does it not? The Commission has said the owners or the operators of this pipeline since it was constructed have been, for their own purposes, depreciating on the basis of an assumed 50 year life expectancy. Therefore, and this is the word to which the issue of reasonableness applies, therefore, when we come to establish an ICB and in the course of so doing look at optimised replacement costs bearing in mind that a new for old adjustment will have to be made and bearing in mind the other factors in section 8.10 it is reasonable or it is appropriate to assume that 46 point something per cent of the life of the asset has been used up at valuation date.

MR BEACH: No, there is no finding of an assumption of 46 per cent recovery or $400 million plus recovery - - -

GLEESON CJ: All right, let me put it another way. The Tribunal has a duty to decide whether what the ACCC did was reasonable.

MR BEACH: In all the circumstances. This is why I am taking you to these passages - - -

GLEESON CJ: So therefore it has a duty to understand what the Tribunal did, in other words why the Tribunal came to this result.

MR BEACH: With the reasons informing it.

GLEESON CJ: Yes. So somewhere along the line the Tribunal has found the historical facts and then said “Therefore, it is reasonable or it is appropriate to come up with this result” and the task for the Tribunal is to decide what is built into that word “therefore” because unless it does that the Tribunal cannot discharge its review responsibility of deciding whether what has been done is unreasonable. So the question is the content of that word “therefore”. Why is it appropriate or reasonable to go from the historical observation about the way people have behaved in the past to the conclusion that the ICB is 559.3?

MR BEACH: Because the ICB is designed to be a value that balances all factors. A balancing of all factors requires us to look at all sorts of numbers including the optimised replacement cost that appreciated and also backwards.

GLEESON CJ: Yes, but as you have perfectly correctly said, what the ACCC did not do was what you sometimes see judges doing in calculating damages or imposing sentences. The ACCC did not – if I can use this expression – undertake an instinctive synthesis. The ACCC undertook a calculation.

MR BEACH: It did take the instinctive synthesis because it came up with a number and then said is that a number that we should use to meet all of the section 8.1 objectives and that is why I am taking you to these conclusions. So if you focus on the number of 559 million – forget how it is derived for the moment – because do not forget it has to be unreasonable in all the circumstances – you focus on the number of 559 million and then look at the section 8.1 objectives and all the other numbers and the fortification of why that 559 million is appropriate and that was what I was just taking you to on page 97C of the reasons.

That is the task which we undertook, and that is the task that the Tribunal has to look at to determine whether what we did was unreasonable in all the circumstances, not good enough for them to say “We do not like this little bit of derivation” or “We think that you might have reasoned this even though you did not say it in your decision”, but let us hypothesise we think you might have reasoned this way, and if you did reason that way that is irrational. That still does not tell you whether the ICB of 559 million is unreasonable in all the circumstances and the reasonableness of what we did is illuminated by the passages at page 96C through to 98C.

GLEESON CJ: What, if any, relevance to a judgment of the Tribunal about the reasonableness of what the ACCC did is the known historical fact of what the ACCC did in its first draft?

MR BEACH: With respect, irrelevant, unless parts of the draft decision are picked up in the final decision, which they are. There is a discussion of the economic depreciation. I took you to one passage about that and Mr Gleeson took you to another passage yesterday in the draft decision that is incorporated by reference into the final decision.

GLEESON CJ: Is the Tribunal entitled to say, “We know what you are trying to do here. We know that from the first draft and we know that from the fact that the figure that you came up with on the second try was not very different from your first figure.”?

MR BEACH: Your Honour, I do not intend that this sound in any way disrespectful, but that was boxing at shadows which did not exist and I will explain why that is the case. The first point is that the application for review before the Tribunal by EAPL did not raise a ground of predetermination. Second, there is no ground of predetermination or bias or whatever else you want to call it in section 39(2) in terms of the review grounds.

GLEESON CJ: I was not really suggesting anything like that. What I was rather suggesting was that the Tribunal seems to have suggested.

MR BEACH: It did suggest that to Mr Gleeson and he gratefully accepted that during the running of the - - -

GLEESON CJ: I thought in its reasoning the Tribunal rather – or at least it gave me the impression that, rather, it was saying that therefore in the reasoning of the Tribunal is, in terms now of paragraph (f) rather than paragraph (b), the same thing as they were originally trying to achieve under paragraph (b).

MR BEACH: They never go on and say, “You, the ACCC, did not discharge your statutory function under section 8.10 because of this reasoning to some predetermined result.” They have some observations that really go nowhere and at the end of the day the Full Court said were obiter. Let us step back a moment and look at the substance. The draft decision came up with a figure of, say, 550-odd million. Let us assume that for the moment. That was a figure that also was derived from looking at all of the factors and engaging in a similar balancing exercise. The draft decision is one stage of the process, so it is not unremarkable - - -

GLEESON CJ: Their first figure was 539 million.

MR BEACH: Yes. But it is not unremarkable that the final decision – actual mathematical value for the ICB may, unless something extraordinary is happening, balancing all of the same objectives and considerations, is going to be in the same order of magnitude or ballpark because you have lots of submissions by the parties, interested persons, which the ACCC takes into account in terms of its process before it publishes the draft decision.

You would not expect, intuitively, the actual mathematical value for the ICB between the draft decision and the final decision to change dramatically, unless there is, of course, some new fact which comes into existence. So, if you forget whether we used wrongly a backward looking DORC, then did the correct calculation for DORC but did a separate calculation for ORC and the section 8.10(f) in the final decision, you stand back and look at the mathematical values, there is nothing sinister about us ultimately coming up with a figure within a similar range.

GLEESON CJ: No. It is a question of reasonableness. In other words, I got the impression – I think it is in paragraph 29 of the Tribunal’s reasons – that they deal with this, but I got the impression that the Tribunal said, “You have moved from paragraph (b) to paragraph (f) but you are still trying to achieve the same result not because it is the result you achieved before but because it is a result that you think is reasonable.”

MR BEACH: Your Honour puts it more reasonably than it was put to me before the Tribunal; I can say that. That reasoning was after paragraph 29. That reasoning begins at paragraph 32 and it went nowhere because we were sort of damned with it but it was just left dangling. I argued in the Full Court that they took into account irrelevant considerations and the Full Court declined to deal with the issue, saying it was obiter. But putting that to one side, paragraph 32 deals with it and it is said at about page 674 at about line 28 that “because the ICB has to be set aside in any event, it’s not necessary for us to deal with it”.

So we have all of the damning statements, yet none of the legal content that enables us to challenge it directly. With respect to the Tribunal, we suspect what informs their opinion in terms of this predetermination is the idiosyncrasy of doing this methodology in the first place of using ORC plus 8.10(f). In other words, it is the infection of their understanding of the Code and the thinking that we are doing something idiosyncratic that they are then not able to label, “You’re doing something idiosyncratic because that’s the only way you can reason to a predetermined result”.

GLEESON CJ: When I said paragraph 29, I think I had in mind the last sentence of paragraph 30, which I think is related to paragraph 29.

MR BEACH: I think it is related to paragraphs 25 through to 28, but I will come back – I keep saying that but I will – and address that. We say rather you have the Tribunal saying what we did was idiosyncratic, contrary to the Code. The icing on the cake for the Tribunal was, “That was the only way you could do it. Why were you doing that? You must have been reasoning to a predetermined result”. Why else would you put that in there at that part of the reasons other than to make that point? That seems to be the flavour of what has been done and we say it is all wrong. I will come back and deal with that. That was the final decision. I will just give your Honours - - -

HAYNE J: Just before you pass from that and particularly by reference to 96C, line 50 or thereabouts, you see the Commission referring to the importance of the 8.1 factors. They particularly identify (a), (b) and (d). If you go to the 8.1 factors, is any one of those factors backward-looking as distinct from forward-looking?

MR BEACH: Section 8.1(b) is backward-looking in the sense of the EGP because it is looking at replicating the outcomes of the competitive market. If you have competition with the EGP coming in, you are going to accelerate depreciation before then, so that was one part of the reasoning.

HAYNE J: In particular, is 8.1(a), recovery of efficient costs of delivering the service over the expected life, in any respect backward-looking?

MR BEACH: This is an issue that was raised in the decision. If your Honour goes to page 89C at about line 40, it says:

The Court of Appeal observed that ‘the DAC and DORC . . . the concept of economic efficiency.’

DORC is forward-looking; we can all agree with that:

However, as noted above, the Court of Appeal does not appear to limit the recovery of efficient costs to forward-looking costs.

So, in a sense, that is right. I mean we are entitled to look in terms of what EAPL have done in the past since 1994 and see whether they have recovered their efficient costs or not. If they came along and said - - -

HAYNE J: No, no. My question was narrower than that. Is the objective in 8.1(a) requiring the regulator to look forward, to look forward and back or to look only back? That is, are the costs that are referred to in 8.1(a) costs looking forward?

MR BEACH: Primarily forward, but there is a backward looking component because it does not give you the temporal limitation and Re Michael does not say it is just only about forward looking. So we could look back to 1994 and see whether EAPL has recovered its efficient costs or not as being a factor to consider. I have dealt with 8.1(b). 8.1(d) is in fact backward looking “not distorting investment decisions”. So you would look back to the time when EAPL purchased the pipeline and you might look at that as one matter. One thing is you may not want to give it less than what it paid, otherwise that would distort investment unless there were good reason for it. So the distorting of investment decisions is not only forward looking.

Now, can I just go to page 253C, section 2.13, compliance with tariff principles. You will see there a discussion on that and I do not need to take you to the detail of that. Page 341C is the ultimate decision. Now, you have not yet been taken to the final approval. That begins at page 381C. Your Honours will appreciate that this is the decision that rejects the equal access arrangement and has the ACCC drafting and approving its own. To be clear about it, if your Honours have handy the Access Code and if you go back to section 2.19 you will see there that after the final decision I have just taken you to, the service provider has to submit a “revised Access Arrangement”. Then your Honours will see in (a), (b) or (c) in section 2.19 that the regulator may be satisfied if it takes into account what was said in the final decision or not, or (c) in any other case does not approve. That is of course what happened here. We did not approve it. Then in section 2.20, if the regulator does not approve then it can draft its own and that is the decision that actually goes before the Tribunal.

Your Honours will see that in section 2.26. It is the decision under section 2.20(a). So you really need to look at the final approval together with the final decision. There is not much change, but it is something that needs to be looked at. If I can just take your Honours to that, page 388C. You will see at page 388C at line 15 a reference again to EAPL’s proposed ICB under 8.10(g) - nothing to do with an 8.10(a), (b) or (c) valuation or a plus or minus mathematical evaluation or adjustment of it – an 8.10(g) figure.

Then if you go to the discussion on the initial capital base which is dealt with at page 399C you will see at the foot of that page at about line 50 the discussion. You will see page 400C, line 30, “Construction of DORC from ORC”. Then you will see the application of section 8.10(f) dealt with at page 403C, about line 12. Now, EAPL said to us between the final decision and the final approval, “Well, you’ve only looked at economic depreciation and your methodology does not work for that” and we said, “No, we actually looked at the other elements of 8.10(f) including how the tariffs appear to have been set in the past” and if your Honours look at line 38:

The Commission’s Final Decision gave weight to the fact that, until the year 2000, EAPL assumed a useful life of 50 years for the pipeline. EAPL submitted that the Commission ought not to have given weight to the 50 year asset life assumed by EAPL as this was used for accounting purposes –

We deal with that. We say:

Notwithstanding EAPL’s comments, the Commission considers that the 50 year asset life is the basis on which tariffs appear to have been set –

Nobody has ever quibbled with that. There is not one finding by the Tribunal that has ever said, “You, the Commission, said that. That was an error of fact or that that was an unreasonable finding.” And, it is unchallengeable and:

It is clear from EAPL’s statutory accounts that EAPL assumed a useful life of 50 years –

not one challenge to that fact –

Moreover, EAPL’s ‘reasonable expectations’ valuation, which represented EAPL’s estimated future cash flows as at 1998, is based on an assumed asset life –

not one challenge to that. Then at the time of the sale there had been a 50 year life. At the top of page 404C:

The Commission considers that the evidence suggests that the assumed 50 year life was more than an accounting convention –

So those are the facts, not one challenge to that. Instead, we now have this case that was put in the Full Court and now put to this Court that suddenly we are into some amorphous statements in paragraph 29 of the Tribunal’s first set of reasons which has nothing to do with the actual findings that were in fact made or the chain of reasoning that is set out in the Commission’s final decision and the Commission’s final approval.

Having said that, and I am sorry I have taken a bit longer than I intended, I would like to go to the Tribunal’s decision, paragraph 19, and I want to deal with what we say were legal errors made by the Tribunal, as correctly identified by the Full Court. If your Honours go to paragraph 19, it is clear that we can all agree that just in terms of methodology you would go through the factors (a) through to (k) in the sequence that they are set out in the Code. That is a given. There is no contest about that.

What we say paragraph 19 is all about is giving some primacy to the known valuation methods in (a) through to (c) with (e) through to (k) being some check or some basis for doing some sort of plus and minus approach for a mathematical value that is derived from any one or more of (a) through to (c). We say there is no such primacy or subordination between 8.10(a) to (c) on the one hand and 8.10(e) through to (k) on the other.

You can see in the Tribunal’s language at about line 48 of that paragraph it says:

Those factors would not normally (and perhaps would never) permit recognised valuation methods to be put to one side.

Of course, nobody is saying that we should not do (a) through to (k), that is all a given. What they are saying there is when they say that “Those factors would not normally permit valuations to be put to one side”, they are saying, “You wouldn’t normally not use those mathematical figures with some plus or minus approach or perhaps no plus or minus approach”. That is, with respect, a fair reading of what is being said there and the words “(and perhaps would never)” is just fortifying my point.

It is also apparent too that that sort of primary/secondary sort of analysis is what informs the Tribunal’s reasons at paragraph 25, just moving forward to there for a moment. If you look at paragraph 25 at about the third line:

However, it was contended that it was a fundamental error in principle for the ACCC to put aside known valuation methodologies –

So that is where we are at. They are saying you cannot take an ORC with a section 8.10. It was an error of principle to put aside in the sense of not using the known valuation methods in the way the Tribunal was saying you should use in paragraph 19. We say a fair reading of paragraph 19 together with paragraph 25 is saying you cannot do something idiosyncratic like taking a bit out of 8.10(b) and putting a bit of 8.10(f) and coming up with a mathematical figure. You have to take a known valuation method. You may be able to plus or minus that through 8.10(e) through to (k) but that is as far as you go.

That is what we say is the fair reading of the Tribunal’s reasoning. If that is right – and we say that is a legal error of the sort that was identified in the first set of reasons in the Full Court, and I will just give your Honours the reference to the Full Court reasons: paragraphs 183 to 184 and 186. Notice the structure of paragraph 19. You have what we say is a primary and secondary divide and then you have the Tribunal discussing Re Michael. EAPL says here and they said in the Full Court that the Tribunal were quite happy with Re Michael and there was no difference of principle in relation to the proper construction of the Code, but you ask yourself the question: if that is right, why does the Tribunal devote almost a page to trying to distinguish Re Michael, say it adopted a constrained reading of the Code and it is something that curiously an administrative tribunal did not consider itself to be bound by? It was only put there - - -

HEYDON J: Was it bound by it – bound, strictly speaking? Appeals do not go from the Tribunal to the Full Court or the Court of Appeal of Western Australia.

MR BEACH: I accept that. Let me put it another way. If it was a Full Federal Court, they would say in accordance with what your Honours said in Marlborough Gold Mines - - -

HEYDON J: The Full Federal Court is not bound by a decision of the Court of Appeal of Western Australia.

MR BEACH: That was loose language, your Honour. It was something that was entitled to be given more respect than the respect that the Tribunal gave it.

HEYDON J: They said that it was entitled to considerable respect. One infers that it was given considerable respect.

MR BEACH: They ought to have applied it. There was no reason not to apply it in relation to what it said about the proper construction of the Code. After all, if it was a single judge of the Federal Court sitting at first instance, the ASC v Marlborough Gold Mine Case would say unless the single judge said that it was clearly wrong, given that it is essentially uniform legislation, that that judge ought to apply it. How does that principle change merely because you have a tribunal? A fortiori we would have thought that an administrative tribunal of them all should have applied it.

GLEESON CJ: Can you just identify what you say are the inconsistencies between the Tribunal’s approach and the approach taken in Re Michael?

MR BEACH: I am dealing with this first one of primacy because if your Honours go to paragraph 74 of Re Michael there is no division between the primacy and the secondary components. If your Honours go to paragraph 74, there are two aspects that are inconsistent with what the Tribunal has said. First of all, paragraph 74 says:

The task of the Regulator under s 8.10 appears not to be simply one of valuation, however, despite the reference to value in s 8.4(a).

So we have all been around the merry-go-round on 8.4(a) and everybody is consistent with it not being something that really dictates how one looks at 8.10.

It is described in ss 8.8 and 8.10 as “establishing” the Capital Base. The factors identified in s 8.10(e)-(j) require the Regulator to consider a variety of other considerations . . . These various factors bring into account a number of matters which are not directly related to the value...The process is more than one of mere valuation. There is, necessarily, a discretionary evaluation of what weight should be attached to each of these factors - - -

GLEESON CJ: Well, if you look at the word “simply” in the first sentence and the word “mere” in the sentence that you just quoted, is that inconsistent with what the Full Court did?

MR BEACH: We say it is, but I will come to deal with this quest for value issue – sorry. I took your Honour’s question to be what the Tribunal did.

GLEESON CJ: I am sorry, the Tribunal. You are right.

MR BEACH: Quest for value, we will come back to it. We say it is inconsistent, but put that to one side. It seems here that it is a discretionary evaluation of what weight should be attached to each of the factors. In other words, you have to give primary weight to sections 8.10(a) through to (c) and secondary weight to (e) to (k) in the sense that, you know, you really ought not to put aside known valuation methods with or without an adjustment. There is no suggestion of that sort of ranking.

GLEESON CJ: Maybe from your point of view it is not necessary to interpolate the words “mathematical” or “regulatory” before the word “value” in 8.4. It is sufficient to put in parenthesis after the word “value,” “as hereafter established.”

MR BEACH: I accept that. That is a better way of – the reason why I wanted to qualify with an adjective “as hereafter established” then starts to beg the question again. Look, I think it is perhaps a distinction without a difference. I do not know. But you can see paragraph 74 and none of the reasoning in Re Michael breathes life into this question of primacy.

EPAL’s submissions yesterday focussed on the last sentence of paragraph 19 and this is the sentence:

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

It was said there that that is the qualification that denies the primacy submission that we made to the Full Federal Court on the finding by the Full Federal Court, but we say no, not at all. When you read that sentence the assessment of value is referring back, we would say on a fair reading, to what was said earlier which is your recognised valuation methods and what that sentence is saying in unusual circumstances one or more of those factors, that is (e) through to (k), may have significant effect upon the more usual concepts of valuation, ie, this plus or minus approach. But there is something also wrong with that sentence in that it uses the expression “in unusual circumstances”. Well, where is that set anywhere in the Code?

It is not said in the Code, it is not reflected in Re Michael. Is that just some intuitive approach to somebody who is focussed through the prism of setting a mathematical value for a pipeline based upon some recognised or known valuation method? If so, it does not really grab at all and is not consistent with what is said in the Code.

GLEESON CJ: What is the significance, if any, of 8.11 on this issue?

MR BEACH: We say that is all in our favour. Let me explain why. Because 8.11 is interesting because it is setting the boundary posts for the mathematical value. In other words, you have already calculated a DAC under section 8.10(a) as the lower bound, and you have set a DORC under 8.10(b) as the upper bound. That is the only mathematical constraint. It leaves it free within that range to come up with a mathematical value as long as you apply the methodology of 8.10, 8.1 and 2.24 correctly. Even then it is not a definitive boundary because all it says is that it would normally fall within the range. So even then the boundaries are amorphous. There is a greyness even in relation to that and, of course, our ICB that we came up with does fall within that range. There is no issue about that.

So we say that rather confirms when the Code or the authors of the Code wanted to drill down into terms of mathematical precision of a sort, all that they were prepared to do was set the goal posts or boundaries or whatever else you would like to do it. Now let me go back to Re Michael - - -

HAYNE J: Why would it do that if the Code relevantly provides its own dictionary of value?

MR BEACH: It probably does that as – it may be more atmospherics. It may be because it may have been a sop to infrastructure owners so that – it is hard to know. There is no provision about it being, you know, definite. So there is a level of imprecision about it but it does tell you that the Code - when you come up with a mathematical value, it would be an unusual case if that mathematical value fell outside the DAC to DORC range.

HAYNE J: But the proposition that the Code provides its own dictionary of value is essential to your argument, is it not?

MR BEACH: Yes, but I used section 8.11 as part of that Code.

HAYNE J: I understand that, yes.

MR BEACH: It is not something divorced from my Code. It is part of the Code. It is one of the constraints, one of the looser quantitative constraints, but that is still not inconsistent.

HAYNE J: It is perhaps a little removed from the current field of discourse, but some limited light might be cast on the argument by reference to BHP Petroleum v Balfour 180 CLR 474 at 479 to 480. I do not suggest you deal with it now but that was a taxing case where the argument was that the Act provided its own dictionary of what in that case was the wellhead petroleum operation and the Court referred to the consequences that would follow from so understanding the legislation. As I say, a little way removed but the underlying ideas are ones to which after the adjournment you may wish to return.

MR BEACH: Yes, I am grateful for that. I will look at that over the luncheon period. Can I go back to Re Michael and what the Tribunal said about it at paragraph 20. About line 30 the Tribunal seemed to be suggesting that there was something artificial about Re Michael because Re Michael was trying to find an error sufficient to enable intervention and that:

That was not easy where the Code gives the regulator a large area of discretion.

So the first point struck against Re Michael is that looking at the context there was something artificial about what it was doing. It was stretching itself to find legal error and that is where you then get the next sentence at about line 35:

That caused some straining of the construction of the Code -

There has not been identified what that straining is, but I took the Tribunal through Re Michael in some detail because we had used that as the foundation for our final decision and it was never identified what that was unless you infer, and we say you ought infer, from what is meant by the Tribunal there as saying that paragraph 74 was too broadly expressed. There is this primacy and subordination question. There is this quest for value in terms of a known value. Then it says:

and the result should be confined to the facts of the case.

You ask yourself, “How does that make sense if the Code construction is the Code construction?” The facts of the case do not affect the Code construction. There has not been identified what the fact is that made what was said by Re Michael in paragraph 74 to be wrong because it depended upon some particular factual inquiry. We can all agree that the facts in Re Michael were the flipside. The regulator in his draft decision in Western Australia had basically indicated that he was going to give it a DORC but that was only half what had been paid for the pipeline. There was an argument about the relevance of what the service provider paid for the pipeline and how that needed to be taken into account by the regulator. Those were the facts, but to say that does not point to any reason to distinguish or throw doubt on the proper construction of what was said in Re Michael.

In a sense, the statement before the sentence “That caused some straining”, “the regulator a large area of discretion” – that is in fact a point in our favour. It was really the Tribunal that was putting its own views of the world about valuations, plus or minus and all the rest of it when in fact there were enormous ranges of discretions available to the regulator in that case and the Commission in this case in terms of what it was doing.

I will address a separate submission on discretion after lunch but whilst we have Re Michael can I just indicate that there were a number of paragraphs of Re Michael that did refer to the elements of discretion available to the regulator under the Code. Can I just read out these numbers. These are paragraphs of Re Michael: 59, 64, 66, 67, 73, 74, 75, 76, 78, 84, 85, 136.

GLEESON CJ: I understand it to be common ground that the word “discretion” in section 39(2)(a)(ii) covers the kind of discretion involved in making a final judgment about what the ICB ought to be.

MR BEACH: That is so. In fact, if you go – perhaps I will deal with this point now. It is easy enough to deal with. If you go to the original application for review to the Tribunal you will see this appears at appeal book page 3. In paragraph 11 it is said that:

In improving its own access arrangement the Commission exercised its discretion incorrectly and/or unreasonably in all the circumstances, when it decided that, in the calculation of reference tariffs:

(a) the initial capital base –

We did a very full submission on this to the Tribunal about what “discretion” meant and also in the Full Federal Court. Can I give your Honours the references to that. You will find our submissions to the Full Court at page 853 of the appeal book. If you go to page 853 you will see there that we did a detailed submission about what “discretion” meant starting at paragraph 15, line 30. What we did was analyse for the Full Court what was meant by that and then we did a table showing the various discretions.

I do not think anything turns on it but a similar submission was made by us to the Tribunal. It was slightly more detailed. I can give your Honours a copy of that if your Honours would find it of assistance. We do have some multiple copies of that.

GLEESON CJ: Perhaps you could do that after lunch.

MR BEACH: Yes. Can I go back to – I do have copies here – just the extracts of the - - -

GLEESON CJ: Thank you.

MR BEACH: I have just given you the cover page and that part of the submission to the Tribunal that deals with the concept.

Can I then just identify for you in terms of Re Michael, the criticisms that we made before the Full Federal Court about what the Tribunal had done with Re Michael seem to have been accepted by the Full Court. The passages out of the first set of reasons in the Full Court are at paragraphs 130, 166, 167, 184 and 187 where the Full Court ultimately concluded that the Tribunal ought to have applied Re Michael.

In EAPL’s reply submission filed in this Court, there was from paragraph 12 a taking of issue with us and the Full Court about its findings and criticisms of the Tribunal in relation to the primacy question. I do not want to be too technical about this, but there is nothing in the notice of appeal that challenges the findings in the Full Court about what the Tribunal were doing in relation to this primacy question. The notice of appeal only identifies in ground 5 at page 1625 that the Full Court at paragraph 196 of its reasons had misapprehended the second respondent’s reasoning. Paragraph 196 of the Full Court’s first set of reasons deals with a more general concept. I will address that later. It does not deal with the earlier paragraphs dealing with primacy, 103, Re Michael, 184, and the primacy question again, paragraph 186 of the Full Court’s reasons.

We also say in relation to paragraph 15 of the reply submission that what EAPL say there is not a fair assessment, that paragraph 19 of the Tribunal is fairly to be read that there should be primacy in the usual case. What EAPL seem to do is twist that around the other way in the last sentence of paragraph 15 by saying:

In other words, rather than asserting the primacy of valuation over non-valuation factors, the statement merely denies, at least in normal circumstances, the primacy of the non-valuation factors –

We say that is not a fair assessment. Paragraph 16 of the reply, we say, is not a fair assessment. It seems to be somehow contended that Re Michael establishes some ranking. It does not. All that Re Michael does is say that each of the elements of section 8.10 are fundamental elements. It does not say anything at all about the ranking of them or the mathematical quantification. Contrary to paragraph 17 of EAPL’s reply where it seems that EAPL would contend that whatever was said about primacy at paragraph 19, it was not influential in what the Full Court later said. We said it directly feeds into and infects what was said by the Tribunal at paragraph 25.

Also, contrary to EAPL’s reply submission in paragraph 18, we did not put aside any known valuation methods. I took your Honours to the final decision and the final approval. We went through all known valuation methods and factors, considered them all. We did not put any to one side. Ultimately what occurred was that we mathematically derived the ICB in the way that I suggested, but that is not inconsistent with considering all known valuation methods and considering the pros and cons of their utilisation.

One then moves to paragraph 25 of the Tribunal’s reasons. This is where we say the essential construction error is located and we say a fair reading of paragraph 25 is that the Tribunal was saying it is not in accordance with the proper construction of the Code that you take a part of an element of 8.10(b) and part of 8.10(f) and derive an ICB, because that is not something that is reflected in and of 8.10(a) to (k) if you look at them singularly and you are just not permitted to do it.

So the underlying theme or assumption upon which that proposition is based is you derive your mathematical valuations under each of the factors. You have got to use one of those figures with some plus or minus adjustment that seems to be the theme underlying what is said in paragraph 25, and we say that is just flawed for the reasons that I have indicated and it is also not consistent with Re Michael.

HEYDON J: It was not (a) or (b), was it, the method used by the Commission? Paragraph 25 speaks of it being an error in principle for the Commission to put aside known valuation methodologies.

MR BEACH: That is right.

HEYDON J: It was not (a) or (b).

MR BEACH: It was not (a) or (b).

HEYDON J: Was it any other well recognised asset valuation methodology?

MR BEACH: No, no. What we did was idiosyncratic.

HEYDON J: Very well. So the question is, are you at liberty to adopt a valuation method other than (a), (b) or (c) unless (k) is relevant? It does not say, for example, any other non-recognised asset valuation methodology. It seems to be trying to limit the range.

MR BEACH: This is with the Tribunal trying to limit the range.

HEYDON J: No, the legislature is trying to limit the range in section 8.10.

MR BEACH: No it does not limit the range. The range is only limited by 8.11. Section 8.10 is in a sense unlimited. If you just looked at 8.10 without anything further, it is unlimited because 8.10(k), as your Honour is I suppose indicating to me, is any other factor considered relevant.

HEYDON J: Do you rely on (k)?

MR BEACH: We have relied upon (k) as an alternative to relying upon 8.10(f) and we did put a submission to the Full Court that it was wrong for the Tribunal to say that merely because the reasons do not articulate it, that that was therefore something that could not be relied upon.

MR GLEESON: And that is what the Tribunal dealt with in paragraph 30?

MR BEACH: Yes. But you can come up with a figure under 8.10(g), that is the equal submission to us. They came up with a figure of 779 million, so it is not just (a), (b) or (c). You could come up with one under (f). You could say the residual economic value, that would be in (f) or you could be - - -

HEYDON J: The problem is, though, it says, “the following factors should be considered”.

MR BEACH: Yes.

HEYDON J: That means (a) to (j), each of them must be considered.

MR BEACH: That is right.

HEYDON J: Paragraphs (a) and (b) do not apply, (c) does not apply.

MR BEACH: When you say they do not apply though, they were considered?

HEYDON J: The Commission for good reasons did not adopt either of them or any of the three.

MR BEACH: Not as a mathematical quantification, no. But we did take them into account. We analysed them to ultimately justify our mathematical quantification of it. I hope I am not splitting hairs here.

HAYNE J: Well, does it capture your position to say that the Commission observed, in the sense of looked at, all of the factors?

MR BEACH: I think that is downplaying it. That is at a minimum. They not only looked at them, they then analysed them in accordance with the objectives under section 8.1. So they looked at them all. They looked at 8.10(j) which was the purchase price and the residual economic value on the purchase price. Now, they did not use that figure, but they did say in their reasoning we are allowing a figure higher than that so that is not going to distort investment decisions or that is something that is important to the service provider.

So even though they did not use say the 8.10(j) purchase price with whatever modification you like under 8.10(j), that does not mean to say that they did not take it into account or that they did not consider that it had significant weight. That is why I suppose I react against a downgrading of where you looked at that and put it to one side. No, we did not. We looked at that and we then weighed it and we did more than observe it.

HEYDON J: Well, to take the words of the Tribunal, the methodology of the Commission’s own which adjusted ORC in a novel fashion has to be fitted in to (d) to (j), does it not, unless one excludes (k)?

MR BEACH: We do not have to fit it in at all - it is a novel fashion under 8.10. Method is under 8.10.

HEYDON J: You did not fit it in at all. You were taking into account something that goes beyond what Parliament has enumerated as the relevant factors.

MR BEACH: No, because we are fitting it into 8.10. If you look at 8.10 collectively, we are fitting it into 8.10 – it is just that we are not fitting it into 8.10(f) exclusively, or 8.10(b) exclusively because the opening words of 8.10 are - - -

GUMMOW J: Is 8.10 – when it says should be considered, is that directory or mandatory.

MR BEACH: We have taken that as mandatory.

GUMMOW J: I would have thought so.

MR BEACH: Yes. So we have to take it into account and that is - this is the EAPL argument that you can - it is a sort of an atomistic approach that what taking it into account means that you not only have to mathematically quantify under each of (a) through to (k), but when you step back and then say “Now, how am I going to derive an ICB dealing with the competing objective of section 8.1” I have to go back to that atomistic approach and pluck a number out of a properly constructed DORC or a number out of the recent purchase price for the pipeline by the service provider or the DAC or the market value or whatever, and we say though that is wrong, that is not what the language of 8.10 is.

Now, of course the Tribunal said the opposite and that is why we say this is a case about legal error. If we are right this is a case about legal error because when they are talking about a fundamental error in principle they are talking about the section 8.10 Code framework and saying that you cannot do it, saying there is no support in the Code. Now, they do go on and say “or in the material received by the ACCC” and this is the next point that I want to come to. In paragraph 26 they say what that expert material was.

HAYNE J: Just before you go on, can I continue a moment with the questions that Justice Heydon and Justice Gummow were directing your mind to. You say that the factors had to be taken into account, that is the 8.10 matters had to be taken into account by the Commission. Is that right?

MR BEACH: Yes.

HAYNE J: Once you take that step that it is more than bare observation of their existence, does it follow that the matters that are to be considered are to be assessed against some standard or criterion and does it further follow that the standard or criterion against which they are to be assessed is more precisely formulated than the six objectives articulated in 8.1? You say no.

MR BEACH: That is right.

HAYNE J: The argument against you is that there is an intervening step, namely, a standard which is more precise than, articulated more precisely, more definitely, than simply assessing a number and asking whether that will achieve any or all of the objectives.

MR BEACH: You have to look at the objectives in totality. There are conflicting ones, and you then go back to section 2.24. But you ask yourself, “Where has it been identified in the Code or anywhere that there is some further principle enunciated in the Code that is designed to be narrower than section 8.1?” If somebody identifies it for me one day - - -

HAYNE J: We have had our debate about value and 8.4.

MR BEACH: It is not a principle, your Honour, it is informational content about the elements of cost of service and it is a definitional provision. Just dealing with the known material question, paragraph 26 of the Tribunal’s reasons identifies some material but all of that material was about ORC going to DORC. I took your Honours to the final decision where there was a debate between the parties about how you calculate DORC – do you do it on a straight-line depreciation or do you do DORC on a net present value approach either for revenue or for costs. So, in a sense, that material did not speak to the question of what we were doing. It was speaking to another question about how you transpose yourself from ORC to DORC.

There was no report saying that there is an economic theory which overlays this idiosyncratic Code and section 8.10 because if it is idiosyncratic, there is no economic theory; it is sui generis. It is something that has not been built up as some economic theory such that there is literature saying that if you do something novel by taking an ORC and modifying it with section 8.10(f), you are doing something contrary to established economic theory. The only economic theory that was being discussed by the parties in this material in these reports was the theory of how you moved from an ORC to DORC, and that material was discussed in the final decision and that material was dealt with in the discussion moving from ORC to DORC.

So when the Tribunal says there was no material, that does not ipso facto establish unreasonableness. It is surely not being suggested by the Tribunal that every time we do something we have to have an expert report. We are the regulator. So it cannot be right just to say that no material per se is unreasonable. It must be something more than that. It must be, “You are doing something contrary to well-established economic theory or principles,” but the only well-established economic theory or principle that is identified in paragraph 26 of the material was the theory of moving from ORC to DORC. I can give your Honours the references to where you would find that material. I say you do not need to read any of it but if your Honours have the time.

The statement of principles that my friend took you to yesterday which began at appeal book page 130 was all about talking about how you might do a DORC, and in any event it actually did not deal with the regulatory framework of the Gas Access Code. It was dealing with the electricity provision. Your Honours can see that, and I will give your Honours the references, at appeal book 189, 190 and 192, where there is a discussion of how you move to DORC. But we are not into that field at the moment. We are into this ORC plus 8.10(f), which is not what that report was directed towards.

At appeal book page 62 there is a discussion of an analogous concept by the New Zealand Ministry of Commerce and that was all about how you derive what is known as an “optimised deprival value” which is another concept that is linked to what is called “optimised depreciated replacement cost” which is the same as a DORC and that appears at page 72 and again that is moving from ORC to DORC.

You have a report at page 314 that EAPL gave to the Commission and page 321 – again it was all about a DORC valuation. You have the first Sinclair Knight Merz report at appeal book page 333. That was again about how you calculate – and this is described as the ODRC at page 334 but it was all about a DORC calculation. Appeal book page 358 is a letter from what looks like Australia Pipeline Trust. That is again about how you calculate a DORC and that appears at page 360.

You have a report by Agility at appeal book page 341 which is all about – it is headed “The Construction of DORC From ORC”. You have an appeal book page 365 which is a “Construction of DORC from ORC”, appeal book page 373, a letter of 21 September 2000 which is all about how you calculate the DORC depreciation, Professor King’s report of February 2001, appeal book page 411, which is all about a report on the construction of DORC from ORC.

GUMMOW J: Are you saying that ORC is a well-recognised asset valuation methodology within section 8.10(c)?

MR BEACH: I do not think we have actually said that.

GUMMOW J: I did not think so.

MR BEACH: When people have taken ORC they have usually gone to DORC and this is the point.

GUMMOW J: Exactly.

MR BEACH: The question is whether under section 8.10 we can step back and say we can take an ORC and adjust it in some other way. But these reports here do not speak to that question, they speak to how a properly calculated DORC is done under section 8.10(f). None of them is asked to opine on the question: could you ever under section 8.10 take an ORC and adjust it? You ask yourself: how could they opine on it? If this is a sui generis Code this is a legal question, not an economic question. It is a question on the proper construction of the Code as to whether you can do that, not a matter for economic theory. As I say, it is all very well for EAPL to say economic concepts overlay the Code. We can all agree with that, but they do not overlay them to such an extent as to tell you how you go about taking into account the factors 8.10(a) through to (k) and then trying to fit them within the section 8.1 objectives and then balancing those objectives to come up with an ICB.

HAYNE J: In understanding that process, forming part, as it does, of the cost of service inquiry spoken of in 8.4, what are we to make of the fact that the “Rate of Return” specified in 8.30 is a rate of return “commensurate with prevailing conditions”, that is, it is a present inquiry, not a past or future inquiry? What are we to make of the fact that the depreciation schedule spoken of in 8.32 is future looking, “is the basis upon which the assets that form part of the Capital Base are to be depreciated”, on any view plainly future looking? Are you not then at once injecting something foreign into the process by permitting this past depreciation treatment to affect the identification of value?

MR BEACH: No. Let me break that all down and let me deal with rate of return. Let us say you come up with an initial capital base of, say, 500 million, so the idea is that the service provider has $500 million worth of its capital invested in the pipeline. The question is, what reward should it get for risking that capital? So it depends upon how risky the asset is. So that you are looking into the future about its revenue stream, you are looking at what are described as equity beaters, rates of return on the capital asset pricing model to see what risk is there in terms of your future cash flow stream derived from the asset. So necessarily it is looking forward, but the foundation is that you are starting with your $500 million which is X, so it is speaking to a different concept.

The other point, your Honour, is the depreciation schedule in section 8.32. That is speaking to a different concept as well. Go back to my example of your $500 million, you have that, that is your capital base, then the question is, how do you actually depreciate it in the future? We are not at that step. We are at the prior step of coming up with your ICB or your $500 million.

HAYNE J: You would have it that ACCC can determine a number for that capital base that is divorced from the cost to the particular service provider?

MR BEACH: No.

HAYNE J: Is that not the inevitable consequence of your submission?

MR BEACH: No, it is not. The costs to the service provider was what it paid originally for it, and we have done calculations for that in terms of indexing the 1994 price and depreciating it. We have done a residual economic value for that, and all of those figures are at or under the amount that we allowed. Of course, the final figure itself was reduced because the interconnect was taken out. So if you are looking at actual cost to EAPL, the answer to your Honour’s question is, no.

In terms of the depreciation schedule, that is dealing with a different issue. That is how do you recover your depreciation into the future? Do you do it with a straight line approach which is equal in increments? Do you do it on an economic depreciation which is the net present value? Just to give you one further reference; there was a submission originally made by EAPL, in fact, but it could be kinked into the.....What has been done on depreciation into the future is a different question from how you set the ICB in the first place.

GLEESON CJ: Is that a convenient time?

MR BEACH: Yes, it is.

GLEESON CJ: We will adjourn until 2.15 pm.

AT 12.44 PM LUNCHEON ADJOURNMENT

UPON RESUMING AT 2.15 PM:

GLEESON CJ: Yes, Mr Beach.

MR BEACH: I will just briefly deal with several matters that were raised before lunch. Your Honour Justice Crennan asked about bankers’ perceptions of value and whether that might say anything about the Code construction. One thing about section 8.1(a) is that one of its objectives is to provide a stream of revenue that recovers efficient costs. So it is not all costs. It is rather efficient costs. So the concept of a regulatory valuation, we would say, would depart from the type of valuation that a banker might expect or the way a banker might use the concept of a valuation.

The second matter is your Honour Justice Hayne referred me to the case of BHP Petroleum v Balfour. In my submission, that is distinguishable. The relevant issue seems to have turned on whether the regulator in terms of identifying a wellhead could come up with its own concept of that by arguing that the relevant statute created a dictionary. The opposing view was that a well recognised concept of wellhead ought be used in the calculation of a royalty and the Court there rejected the dictionary argument of the regulator saying that if it was accepted, that would lead to a potential arbitrary exercise of power.

We say the Code in the present case is distinguishable. There would be nothing arbitrary about, on the one hand, arguing that section 8.10, section 8.11, section 8.1, section 2.24 are a Code and the constraints that would be imposed on the ACCC in terms of setting an ICB, that would not lead to any arbitrary results. So the contrasting situation dealt with in the BHP Case, we say, is not the type of contrast that you have in the present case.

The other thing about the present case is that the Code here makes it expressly clear that it is not just using value or valuation in the ordinary accepted sense of that term because it distinguishes what accepted type methods in 8.10(a) to (c) are and then goes on and deals with other factors, whereas in the statutory regime, the Petroleum (Submerged Lands) (Royalty) Act 1967 dealt with in the BHP Case, there was no real constraint. So we say that that case does not detract from the force of the argument that we were putting about the self-contained nature of the Code provided under section 8 of the Access Code in this case.

The third matter is that before lunch your Honour Justice Hayne asked me about depreciation in terms of how that concept was used under section 8.32 of the Code. I will just ask your Honour to note that in the final decision there is a general discussion of depreciation going forward. That is dealt with in a separate section of the final decision. If I can find the page reference I will give your Honour the page reference. It begins at page 108C where there is a detailed discussion of depreciation going forward. Nobody has asserted it. The concept of how depreciation going forward is calculated under section 8.32 and 8.33 speaks to the manner in which the ICB is itself calculated.

Before lunch I was just taking your Honours to the material that was of the type referred to in paragraph 26 of the Tribunal’s reasons which was all about ORC going to DORC. Just some further references. There is a second report of Sinclair Knight Merz at appeal book page 467 where the Commission posed to Sinclair Knight Merz at page 469 of the appeal book some questions about whether they should accept the Agility formulation of DORC or reject it or use some other approach. The retainer was broad but at the end of the day Sinclair Knight Merz really discussed the concept of DORC at page 471.

They also discussed relevant accounting standards insofar as they were applicable to depreciation at page 475 and essentially, in our submission, that report was still in substance the question of moving from ORC to DORC. In fact Sinclair Knight Merz seemed to accept the view that you could do a DORC which was backward looking and that appears at page 484 that the Commission’s final decision agreed that that was incorrect.

There is a Commission publication of the Post-tax revenue handbook at appeal book page 436. Again, that says nothing on the point. There are other reports at appeal book 491 and appeal book page 609 that also discuss depreciation within the DORC concept. There is an Agility public response that was sent to us on 5 November 2002, appeal book page 643. That again discusses the concept of depreciation within the DORC concept. There was also a report on the hypothetical new entrant test and that appears at page 558 but that is not directly on point.

GLEESON CJ: Mr Beach, in 8.10(b) the words “depreciated optimised replacement cost” are in inverted commas. What are they quoting from?

MR BEACH: They are not quoting from anything. That seems to be a label that has been used to describe a particular method that is well recognised by economists and by regulators.

GLEESON CJ: It is not defined anywhere else in the Code.

MR BEACH: No, it is not.

GLEESON CJ: So, the author of the Code assumes, and no doubt rightly, that relevant people reading the Code would understand perfectly well what that expression means.

MR BEACH: Yes.

GLEESON CJ: I was just wondering this: if a well-recognised methodology is taking optimised replacement cost and depreciating it in accordance with that system, the ultimate decision that the ACCC made involved starting with optimised replacement cost, not depreciating it in accordance with the DORC methodology, but discounting it.

MR BEACH: By this kink depreciation that effectively discounted would have otherwise been a DORC, that is exactly right. So it is pretty close to a DORC but it is a different - - -

GLEESON CJ: It is a variation of the DORC.

MR BEACH: It is a variation but I do not describe it as a variation of a DORC because everybody says DORC is DORC and so that is why we have described it as an ORC with 8.10(f).

GLEESON CJ: Did anybody argue at any stage that it is one thing to modify optimised replacement cost in accordance with the methodology that is called DORC because that is internally cohesive but the form of modification that went on in this case did not have any basis in methodology in that the optimised replacement cost would cease to be relevant to anything unless you were depreciating it or discounting it or modifying it in accordance with the DORC methodology?

MR BEACH: That would be EAPL’s contention but let me tell you why that is wrong in a sense. If I was building a new pipeline today and using the best technologies and materials – that is sort of section 8.12, the cost today, that is almost synonymous, not quite, but it is almost synonymous with an ORC. It is right, and we have conceded this all along, that there is no economic theory.....literature or in the reports that says you can take ORC and adjust, but what we have done is explain why we have said, “The optimised replacement cost, that’s a good start for you, the service provider. We’re not talking about the actual value of your piece of equipment with the actual materials, we’re giving you something more than that. But we are even in your favour, assuming the 80-year life point but we’re changing it”.

Let me put this around the other way, against EAPL. There was no expert report before the Commission provided by anybody that said you could not in the idiosyncratic structure of 8.10 do what we have done. Yes, EAPL do not like it and they put submissions to us, but there was no body of economic evidence explaining why that could not be done. I said before you would not expect it if the starting point is that 8.10 is idiosyncratic, but if EAPL ever wanted to put that, that there was something wrong with this in economic principle or theory, it could well have done so and then we would have had to have addressed it.

Their real focus was more on the legal construction point. The no material point, yes, we said there is no report. That is not an issue between the parties. That was not a finding of fact that was within the purview of the Tribunal. That was not contested. There was not any report that explained that we could do what we were doing. The reports before the Commission were all about moving from ORC to DORC, which was a separate exercise.

So when you go back to the Tribunal’s reasons at paragraph 26 there is reference in the first five lines to the “expert opinions.” Now, they are all the ones that I have taken you, which go from ORC to DORC. The fifth line says:

The ACCC did not cite any of that material in support of the reasoning behind its decision as to the ICB.

That is just wrong because we did cite that material. I took your Honours to the final decision where that material was cited in relation to DORC, and DORC was considered. It was not cited for moving from ORC under section 8.10(f) with the kinked depreciation, but that material had nothing to do with that exercise. That material was all in the universe of how do you conduct or carry out a properly calculated DORC? The last sentence of 26:

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.

There was no economic theory other than moving from ORC to DORC, so the principle being referred to must be some principle being derived from section 8.10 but 8.10 is idiosyncratic and it is a question of the proper construction, which is a legal issue. How can you say that if our construction was right that that was wrong in principle? You cannot. If principle means economic principle, where were the expert reports before us to say that what we were doing was wrong in economic theory? There were none. All of the economic reports put to us were all about moving from ORC to DORC. Just going back to paragraph 25, there is a reference there in the third line:

it was a fundamental error in principle for the ACCC to put aside known valuation methodologies -

Well, it did not. It took them all into account, as I indicated, in setting the ICB. It did not use the mathematical derivation from one of those known valuation methodologies, but if I am right on the Code construction, then that point also falls away. So the idea that that somehow involves a factual error or something that the Federal Court on judicial review cannot look into, it just does not work. It was either not established on the final decision or it was based upon the misconceived premise of the proper construction of the Code.

It is not a matter of fact, that stipulation. In fact in paragraphs 25 and 26 there are no relevant matters of fact where we are said to have made a finding of fact that was in error. It was all predicated on the wrong view of the proper construction of the Code. It has been put that there was an absence of reasons given by the Full Court to its criticism of what the Tribunal said, that we had “put aside known valuation methodologies”, in paragraph 25, but they did not need to say anything, the Full Court, because it was transparent from the final decision, which they refer to as to how we had taken into account those valuations.

The only other point was then a question of construction. Was that an error of principle in the construction? Of course, the Full Court did give its reasons as to why it thought that the Tribunal had erred. So we disagree with the idea that somehow 25 and 26 is delving into factual questions or issues that the Federal Court on judicial review could not get into.

Now, it was also the point – and I just discussed this briefly before lunch – that in paragraph 79 of EAPL’s submissions it seems to be taking a different view of Re Michael about what Michael said about fundamental elements and seems to have breathed life into that to suggest that you could only take into account (a) to (k)’s fundamental elements if you took an atomistic approach and took mathematical values from any of (a) or (c) and adjusted them. We just say that is wrong. That is not what Re Michael in fact said.

You move from paragraphs 25 and 26 of the Tribunal’s reasons to paragraph 27 and again there is no new factual error. It is all the same points about the construction. So 25 through to 27 are all about the proper construction of the Code and the Full Court’s identification of the errors in those paragraphs therefore amounted to identification of errors of law because, as I say, life is thought to be breathed into the words, which is not supportable in principle, on the second line of page 672, but as I have explained, the only principle was the Code. There was nothing in economic theory one way or the other about what we were doing.

Now, we would have thought that if the Full Court’s reasoning about paragraphs 25 through to 27 is correct, that would be sufficient. If those errors of law have been properly identified, you do not need to get into what is said in paragraphs 28 and 29 about section 8.10(f) specifically. We say that for the reason that when the Tribunal set aside our decision it had to stand in our shoes and make its own decision. In making its own decision if it had had this primacy, subordinate, quest for value type misconstruction of the Code in its mind, then it was not, when it was coming to set the ICB for itself, in a position to ask itself the proper questions.

So, on one view the Full Court did not need to move beyond paragraphs 25, 26 and 27 of the Tribunal’s reasons in identifying errors of law. That would have been sufficient to set aside the decision of the Tribunal and the decision of the Tribunal was that the order was made on 19 May 2005 at appeal book pages 711 and 712.

Before moving on to paragraphs 28, 29 and 30, can I say something about two other issues, the first issue being the quest for value aspect and the second issue being the section 8.12 aspect. Now, I think probably enough has been said to indicate that we treat and the Full Court appears to have treated, and we say correctly, that the quest for value referred to in paragraph 19 of the Tribunal’s reasons was not a quest for a mathematical value or a regulatory value or the value which was thrown up by all elements of section 8.10. It in fact was a reference back to 8.10(a), (b) and (c). We say that is a fair reading and is also consistent with what the Tribunal said at paragraph 25 when it talked about us as having made “a fundamental error in principle” for putting “aside known valuation methodologies”.

That criticism is the mirror image of what the Tribunal thought was the proper approach, which was a quest for a well-recognised value which you might then take a plus or minus approach to. The Full Court dealt with that, we say correctly, at paragraphs 123 through to 130. There is preliminary discussion and then again at paragraph 185. The Full Court at paragraph 128 had some difficultly with the Tribunal’s quest for value and then dealt with the matter at paragraph 185 and I might say that paragraph 185 also made reference to section 8.4(a).

It was said by EAPL that the Full Court at paragraph 196 of the Full Court’s reasons has misconstrued what the Tribunal said. If your Honours go to paragraph 196 of the Full Court’s reasons we say that whatever is said in 196 does not detract from what is said prior to that in terms of the identification of error of law so if the Full Court expressed itself infelicitously, and we do not say that it did, that would not matter because it has correctly identified the errors of law at an earlier point between paragraphs 181 through to 195. Your Honours will also note that the Full Court is using slightly looser language as a conclusion, it uses the language in the first line:

The error into which the Tribunal fell, in substance -

But that was not to deny how it had specifically dealt with errors prior to that point in time. In fact, the generality of that statement, we say, is correct. The whole flavour of paragraphs 19 and 25 through to 27 of the Tribunal’s reasons is that we were doing something idiosyncratic and the Code rather commanded that we take a well-recognised value as the foundation for the mathematical evaluation and either use that standing alone like a DORC or a purchase price or modify it with some sort of plus or minus approach from (e) through to (k).

So we say there is no misconstruction and it is interesting that the notice of appeal focuses on paragraph 196 as a misconstruction but does not focus on the earlier paragraphs as the relevant misconstruction and we say that there is, in a sense, a certain element of artificiality in taking the general conclusion without attacking the specific identification of error in the paragraphs leading up to paragraph 196.

The other point was about section 8.12. In a sense there has always been ambiguity in what the Tribunal said about section 8.12. If your Honours go back to the Tribunal’s reasons at paragraph 16, the ambiguity arises in the fourth and fifth lines, the expression “would be consistent with that principle”. The question is what did that principle mean? Did it mean discrimination or did it mean actual cost? It could mean actual cost. If it did not mean actual cost then that was an error because there are substantial differences between section 8.12, on the one hand, and section 8.10. As your Honours will appreciate, section 8.12 proceeds on the basis of actual cost. It does not require efficient costs or optimised costs.

In a sense you could have a situation where the service provider might gold plate a facility for the purposes of getting a higher return on investment and the statement by the Tribunal in paragraph 14:

It is assumed that the operator will build the pipeline in the most cost efficient manner -

I am not sure that that can be said at all in relation to section 8.12. It does not say that one way or the other. It just says whatever your cost is, that is going to be the ICB. No doubt though, if there was a suggestion of gold plating it may be that the Commission could do something in terms of the rate of return or something like that. It is difficult to know.

You can see that 8.12 is talking about actual cost. It does not talk about efficient, it does not look back at questions of history, questions of reasonable expectation. It certainly does not deal with depreciation ultimately so if the Tribunal in 16 was trying to align the elements of a calculation under 8.12 with the elements under 8.10 it just does not work.

If the Tribunal was wanting to express itself in terms of no discrimination then the comment is superfluous, as the Full Court rightly said. What we are dealing with here is the proper application of section 8.10. The suggestion of whether there is or there is not discrimination between the owners of existing pipelines as distinct from those who are building new pipelines is really completely irrelevant to the present case and the present exercise – an irrelevant consideration and dealt with as such in another part of our AD(JR) application. The Full Court essentially said as much in paragraphs 123 to 125 and also said that the “no discrimination in principle” observation was an irrelevance at paragraph 182.

So you might ask yourself the question, “Why was the Tribunal referring to section 8.12 at all?” It is a matter for speculation, but perhaps this thought that it was breathing life into the notion that, because 8.12 was using a recognised concept for setting an ICB, that you had to use a recognised concept for setting an ICB under section 8.10 feeding back into this argument that 8.12 fortifies a conclusion that you cannot do something idiosyncratic or novel under 8.10. If that is what has been put it just does not hold.

Your Honours will appreciate from EAPL’s written submissions at paragraph 65 that they say the case is all about section 8.10(f), the methodology under section 8.10(f) and the errors under section 8.10(f). We say that the case is significantly broader and paragraphs 25 to 27 are not about 8.10(f) at all but broader concepts. That seems fairly clear because if you go to the last sentence of paragraph 27, it says:

Before considering what course should be followed in view of this conclusion, we should deal with some of the points argued.

So they reach a conclusion that what we have done is not in conformity with section 8.10 without any necessity to delve down into the detail of constructions of section 8.10(f) or calculations under section 8.10(f). That is why we say that the structure of the reasons is a lot broader than EAPL would contend. It may be that they then went through 8.10(f) because having decided that they were essentially going to be able to set aside the ICB, they might have wanted to have debunked the section 8.10(f) issues to allow them a free reign to then impose a DORC for themselves. It is not entirely clear, but at the least, we would say, up until paragraph 28, you are not dealing with 8.10(f) as a separate issue.

That is also fortified by the first sentence of 8.10(f):

It is implicit in what we have said that we cannot see any reasonable basis upon which reference to s 8.10(f) could justify the method of adjusting ORC –

Then they go through various matters. Now, this paragraph tracks very closely those parts of the final decision that I took your Honours to before lunch. If your Honours just track through paragraph 28 your Honours will see a reference in the third line first to the reference to the “economic depreciation.” Then about six lines down:

That rejection (even if correct) provides no independent support for the choice made.

Nobody was arguing that it did. All that we did was take economic depreciation as we had to consider it and say we were not going to use this. So that does not say anything about a lack of logic in terms of our findings, because we did not say because we could negative economic depreciation that that suddenly breathes life into our hybrid approach. Then they deal with the factual question. The seventh line:

The second was a conclusion that a 50 year asset life had been assumed in the past.

Now, this is my point, they do not identify that we made an error of fact, and that was the very foundation for the decision that was made. All that they say is that it is not clear how this fits with section 8.10(f). So they do not say that what were doing does not fit within section 8.10(f). Then they say:

The most that could be deduced from the material before the ACCC was that the tariffs set . . . may have been calculated on the basis of a 50 year asset life –

That is what we said that they may have been deducible from that and they do not say that that is an erroneous or an irrational or an unreasonable conclusion. What they say is that:

the setting of that market tariff cannot be assumed to have been calculated on a basis in any way comparable with the way in which the Code sets a regulated tariff.

That is all true, but that is not something that is saying anything about our factual finding. Of course a market tariff is going to be different from the regulated tariff. That is almost a truism in this field, but that does not deny at all how we have used the 50 year asset life. Then they refer to the third matter. I should stop there. Also within that at about line 33 they say:

There is no logical or rational link between the accounting treatment of depreciation in the past on the one hand and the true estimate of the life of the pipeline in relation to the forward looking deduction of DORC from ORC on the other.

We can agree with that, but that is where the Tribunal misconceived what was going on, because we were not using in our final decision the past accounting treatment to deduce a DORC from ORC. We were doing something else and, as the Full Court said, that was an erroneous understanding on the Tribunal’s part. So where there is identification of a lack of a logical or rational link, we say that was on the misconceived apprehension that we were using this to go from DORC to ORC. Then they refer to the third matter of the Eastern Gas Pipeline. They say, “Again, the link with s 8.10(f) is difficult to detect.” They do not say you cannot detect it.

Then they say:

there is no logical or rational connection between the actual and potential loss of market share to EGP on the one hand and the calculation of DORC from ORC on the other.

But again that was a misconception, because we had not used the EGP to move from a DORC to an ORC as the Full Court said. So on the two bits of our chain of reasoning in relation to section 8.10(f), as identified in the final decision where they say there was a lack of logical or rational link, both of those observations were based upon a false foundation that what we were doing was moving from DORC to ORC, and it is clear in the final decision that we were not moving from an ORC to a DORC in those passages. Those are the only two findings of a logical or a rational link being missing. EAPL has referred to paragraph 30 of the Tribunal’s submissions and said the Full Court did not deal with paragraph 30, where in the last sentence there is a reference to:

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.

But nobody has ever argued that that reference in paragraph 30 to a lack of logical or rational connection had any additional content over and above the asserted lack of logic or rational connection dealt with in paragraph 28. If the Full Court has said that those were errors made by the Tribunal in relation to paragraph 28, it did not need to go on and say anything further about paragraph 30, because there was no additional point made about any further lack of logic or rational connection. Another way to put that point in relation to paragraph 30 is to say that if the reference to the lack of logical or rational connection goes beyond paragraph 28 and embraces 25 through to 27 and the construction points, then, because the Full Court has dealt with those, that was sufficient in terms of its chain of reasoning.

Can I come to paragraph 29 because this seems to be where the appellant wants to breathe life into this paragraph and these findings as if the whole case and what the Tribunal was doing all turned on paragraph 29. You would appreciate that it is a little bit counterintuitive to suggest that the case before the Tribunal was rising and falling on paragraph 29 when the Tribunal made such an effort to deal with these other more general observations in paragraphs 1 through to 28 and took the time and trouble to deal specifically with our expressed findings in terms of section 8.10(f) in paragraph 28. If you go to the first line of paragraph 29 it says:

Indeed, it seems to us that the ACCC has misconstrued s 8.10(f) of the Code.

Now contrary to what was said by EAPL yesterday, there is no alternative construction argument advanced by the Tribunal in paragraph 29 that was not already advanced in the earlier paragraphs, and the finding is that we misconstrued section 8.10(f). Where do you find the content to that? The only content you can give to that is to go back and look again at paragraphs 25 through to 28 and also paragraph 19. That is one reason why the Full Court may have thought that 29 does not take the matter any further, because we have already dealt with the misconstruction point.

GLEESON CJ: Presumably, on either of the competing approaches to the meaning of 8.10, whatever adjustment is made, if an adjustment is made, to some other figure, however that other figure is derived, the adjustment has to be made in pursuit of some statutory purpose. I do not understand you to argue that the ACCC is at large under section 8.10 in the sense that it could do anything other than pursue the purpose, whatever the purpose is, of the Code.

MR BEACH: That is so.

GLEESON CJ: So this part of the reasoning of the Tribunal, as I understand it, seems to be saying, what was the ACCC trying to achieve by making this adjustment to ORC to reach ICB? What was the statutory objective that was being served by making this adjustment?

MR BEACH: That is in our reasons and they are either good or bad on their face and that is why the Tribunal spent such time and effort in paragraph 28 trying to unravel our reasons and saying there was a lack of logic or irrational connection, but, of course, the Tribunal’s whole premise for the criticism was misconceived because they were thinking that we were making the adjustment in the context of moving from ORC or DORC.

GLEESON CJ: What do you say was the statutory purpose that was being served by this adjustment? To produce a reasonable tariff?

MR BEACH: To produce an ICB that complied with the principles of 8.10, 8.1, 8.11.

GLEESON CJ: Yes, in aid of getting a reasonable rate of access. The ultimate objective that is being served by fixing an ICB is ultimately to produce a tariff.

MR BEACH: Yes, that is one component that you can then use to calculate a return on capital which is one cost item which, together with other cost items, you aggregate and you make sure that there is a revenue stream that is sufficient to enable the service provider to recover all of those costs.

GLEESON CJ: But not over-recover them.

MR BEACH: If it is a cost of service, yes, you have to identify – I suppose building blocks is a good expression. You have to identify each of the different types of costs including the cost of capital which is your rate of return on the ICB. You aggregate them all together in your cost of service methodology and then you make sure that the tariff is sufficient to deliver a revenue stream and you have to make four casts of volume throughput, that the tariff is sufficient to deliver a revenue stream over the life of the access arrangement that is sufficient to cover the building block costs. There might be incentive mechanisms, but I do not need to go into that to try and better the benchmarks.

CRENNAN J: Does not the last sentence of paragraph 29 show that the Tribunal perfectly understood the rationale for the ACCC’s approach on this occasion?

MR BEACH: I think it completely misunderstood it because it does not identify or source itself to any finding of the ACCC which I have taken you to. You can see that in the vagueness of the language. If the Tribunal was serious about saying that the ACCC had found as a fact that there had been a 46 per cent recovery of ORC since 1994 and we, the Tribunal, say that is wrong for these reasons, they would have expressed themselves in that detailed language.

The very vagueness, what does it mean? Gross over-recovery. By how much and when? But it is better than that for us. I took you to some of the figures where we had actually looked at the 1994 sale price and actually done calculations for depreciation that had been recovered by EAPL, whether accounting or economic, since then. So there was express evidence as to what we were saying was the depreciation that EAPL had charged since 1994. So you ask yourself: they had that express evidence. They do not have any finding to this. There is no content to what it actually means. How is it said that the whole case rises or falls on that? They say it is not possible to draw the conclusion. Where in the Tribunal’s reasons do they articulate where the ACCC ever drew that conclusion?

GLEESON CJ: Bearing in mind that all this is being done in the context of deriving a cost of service for the purpose of a wider exercise of fixing a tariff, is it fair to say that what you are seeking in an ICB is a figure that is a fair reflex of the value of the capital assets taking account of the factors listed in 8.10?

MR BEACH: I am sorry, I cannot agree. There are too many loaded expressions in terms of value and fair - - -

GLEESON CJ: They were expressions taken straight from the Code actually.

MR BEACH: I am quite happy to take any expression from 8.10. I am not happy to take something from 8.4(a) which is a definition in something which is just a skeleton outline of cost of service and breathe life into that concept that is just not expressly reflected in 8.10.

GLEESON CJ: I am just getting to the idea which seems to be what paragraph 29 is about, that whatever you do in fixing the ICB, it has to be relevant in the sense that it has to be rationally related to the exercise that you are engaged in, which is tariff fixing.

MR BEACH: Yes, I agree with that.

GLEESON CJ: And it has to pursue a statutory purpose relevant to that tariff fixing. So if somebody taps you on the shoulder and said, “What have you achieved by adjusting ORC downwards by the method that you have used” - - -

MR BEACH: You see, I think that is the wrong question. “What have you achieved by coming up with a mathematical number of $559 million? Does that achieve the statutory purpose? Does that achieve, as best as you can, the statutory objectives in section 8.1?”

GLEESON CJ: We know what you have achieved by coming up with $559 million. You have achieved a figure that you say is ICB.

MR BEACH: No, but it is more than that. It is a figure that we say conforms with the only purpose that you can derive from the Code which is the statutory objectives under section 8.1. So it is the number itself that is supposed to satisfy the statutory purpose or the statutory objectives.

GLEESON CJ: But the Tribunal is bound to ask itself the question, why is it reasonable to do that? The ground of appeal being there, the Tribunal is obliged to say, is that a reasonable thing to do or an unreasonable thing to do? I am not putting questions of onus.

MR BEACH: In all the circumstances?

GLEESON CJ: Yes.

MR BEACH: Yes.

CRENNAN J: It gets back to why pipelines are covered in the first place. It is because they have no viable competitors. So what the ACCC is trying to do is fix a tariff in a way that would approximately replicate a competitive market.

MR BEACH: That is why I took you to that passage in the final decision that said that the figure of 559 million is also consistent with the hypothetical new entrant test, because the hypothetical new entrant test is designed to do a sort of a notional calculation as if, what would the tariff be if there was a new entrant or the threat of new entry? So it is trying to derive a proxy for competition where there is none.

HAYNE J: That depends upon the subject matter of this figure, 559 million, being properly identified. The subject matter of that figure is the capital assets that form the covered pipeline. Is that right?

MR BEACH: Yes.

HAYNE J: Therefore, once you identify the subject matter as the assets, you must have a figure that is related to those assets in some way. Is that right?

MR BEACH: In the sense that it – well, yes it is the covered pipeline, but I am not sure that - - -

HAYNE J: No, no, what is the relationship other than ACCC’s say so that has to be identified?

MR BEACH: The section 8.1 objectives. That is the relationship at the end of the day. It is not at large. The relationship between the ICB and the covered pipeline is that it must be such as to be said that it does comply with those statutory objectives. That is what the Code says. There is nothing further that is superimposed from any other part of the Code which says there must be an additional relationship and I would like to hear somebody articulate it for me because I would like to deal with that if that is ever going to be the case that is put. I am not saying by your Honours, but I am saying by my friend, if that is the case he is putting.

I would like to see it articulated and I want to deal with it because at the moment I cannot see it. It has never been articulated and all that has been done is somebody has tried to breathe life – and this was dealt with by EAPL and before the Full Court - to breathe life into 8.4(a) in some way which does not really stand any rigorous analysis in the submissions that we have put.

Let me go back to paragraph 29. This is where the case is said to rise or fall. The second sentence of paragraph 29, EAPL said yesterday that that points to a construction. It does not point to a construction at all. That points to some theoretical factual analysis. Then it concludes at the last line on page 672, “The ACCC did not apply that reasoning”. The other thing is that that entire five lines is fallacious because that seems to be taking this - you take a well-recognised value and you do your plus or minus approach and if you are with me on the proper construction of the section 8.10 that that is not required, then this whole construct falls away.

The other thing is factually we have always conceded in our draft decision and our final decision that the economic residual value for the pipeline because there was an under-recovery by the Commonwealth when it owned it, that the economic value was 1.23 billion in 1999 and something like 1.7 billion at the time of the final decision. So those paragraphs are either misconceived or they do not talk about a construction question or they do not go anywhere because it is not said that we applied that reasoning in the present case.

And then the next part of the paragraph – there is a reference:

When the past history of the operation of the MSP is considered . . . it . . . remains, seriously in debit –

we have said that with our economic depreciation of 1.7 billion -

Thus the users of the MSP have been subsidised –

Frankly, I do not know where this is coming from. It is not sourced to anything said by the Commission. This seems to be the Tribunal’s own generalised speculation rather than any finding of error of fact on our part.

So the only real point that EAPL seek to breathe life into is this last sentence. Let me deal with that. First of all, that was not a finding of the Commission and that was conceded by EAPL and it has always been conceded by EAPL. If you go to appeal book page 12 you will see there some submissions that EAPL put to the Tribunal. If you go to page 18(e) on page 18 about line 30. This is EAPL:

there was no finding by the ACCC, and no basis to find, that in the 5 years in which EAPL operated the MSP . . . EAPL made recoveries of 50% -

So they actually concede that we made no finding. What they say is yet that is what is effectively been charged with on the ACCC’s approach. So that is there, it is not evidence, it is not anything, it is a submission. This is where their 46 per cent of ORC comes from. They do not put precise calculations and tabulations before the Tribunal calculating the actual depreciation recovered by the Commonwealth through 1977 to 1994 and EAPL 1994 through to the year 2000 to make that point good. There was some material before the Tribunal which had various accounts in evidence, but nobody sought to do any precise calculations. The first time calculations were in fact done was before the Full Court.

Can I just take your Honours to an aide-mémoire, this appears at appeal book page 1495. They actually do some actual calculations, paragraph 5 showing ORC of $1.12 million, the TPA depreciation of $147 million, EAPL depreciation of $104 million, so they say, on their calculations, there has only been $251.7 million leaving you with $868.3 million rather than our $550-odd million. We, in response to that, put in an aide-mémoire which appears at appeal book page 1504 where we said if you do these calculations properly – do not forget ORC is in 2003 dollars, the TPA accounts are in dollars of the day so you are not comparing apples. If you are going to make the point good you have to take the depreciation in the TPA accounts and in EAPL’s accounts and index it forward bringing it into 2003 dollars so you can make sense of it and only then can you establish your 46 per cent of ORC.

None of this was done before the Tribunal and you can understand why the Full Court then in its second set of reasons said to itself, “We’re not getting into that, that can all go back to the Tribunal”, and it seems to be what it has done. All that was done before the Tribunal was to make this assertion of 46 per cent of ORC with no calculations necessary to show the point and we said, “We never did that”. That is where it was left. We showed the Tribunal what we had done in the final decision and all that you have is the last sentence of paragraph 29.

How this argument developed in the Full Court – can I give your Honours some references. There was a submission that was put by us in the Full Court. It begins at appeal book page 782 and at appeal book page 804 there is a reference to this 46 per cent of ORC. We said in paragraph 33 that we did not do this, this was not the finding and this was not right. Then in 34 we make the point that “If you’re going to make this point that EAPL had recovered 46 per cent of ORC or whatever, you’re going to have to do precise calculations”, and that then, no doubt, encouraged EAPL and the Full Court to do their aide-mémoire that we responded to.

So you have that. Let me give you some references in the transcript where we dealt with section 8.10(f). In terms of this 46 per cent of ORC issue, we dealt with it in our oral submissions at appeal books pages 1267 through to 1275 and we also dealt with it at appeal book pages 1051, 1055, 1065, 1078, 1081, 1083, 1087, 1115, 1124, 1125 to 1126, 1127 through to 1129 and 1261 through to 1267. That is where it was left. I should say in the appeal books you will find the submissions that we put to the Tribunal at first instance.

Perhaps I can give your Honours just a reference to that. You will find that at appeal book page 29 and the relevant extracts are paragraphs 45 through to 47. I will just try and find it for your Honours. It is on pages 39 and 40 of the appeal book. As I think I have said, we do not see the case turning on paragraph 29 and neither did the Full Court. The Full Court seems to have accepted our position on that or at least accepted it to the extent of saying we think this ought to go back to the Tribunal to deal with the depreciation questions and that is why it probably did not descend into the detail of analysing Mr Gleeson’s arguments in detail. He made very fulsome arguments, as usual, which we responded to.

A point is made by Mr Gleeson that there is at least an absence of reasons. Yes, there are an absence of reasons about these points but the Full Court thought there had been an error in the proper construction that was so fundamental it infected not only the Tribunal’s setting aside of the ACCC decision but it also infected the new decision that the Tribunal made on the ICB and that was sufficient to set the decision aside and to remit it and to leave the Tribunal to go through the minutia of what the parties had put to the Full Court on the section 8.10(f) issue.

If your Honours, contrary to the submissions that I have put, do not accept what I have said then the matter would have to go back to the Full Court to deal with the section 8.10(f) issues properly. In other words, if you are not with me on the other errors of law and the materiality of those as being a sufficient justification and you do not accept what I have just said about section 8.10(f), then the matter would need to return to the Full Court so I can deal with the minutia of these section 8.10(f) questions.

Let me move to some more general matters. I did deal with paragraph 30 in passing by saying that there was no additional lack of logic or rationality identified in the Tribunal’s reasons there that have not already been dealt with earlier. Nobody had given any additional content to that and that explains why the Full Court may not have considered it necessary to deal with section 8.10(k), which was our point. Whatever you say about whether we could do this under 8.10(f), we could certainly have done it under 8.10(k). We had the power to do it. It does not matter whether we correctly or incorrectly identified the correct head of power. If we had power to do it under 8.10(k) in any event, then it is an irrelevance as to whether we could have done it under 8.10(f). So the Full Court did not deal with the 8.10(k) issue. If it goes back they might have to deal with that and, as I say, there was no reason for it to go on and deal with the lack of logic in paragraph 30 because there was nothing in addition argued beyond what had already been dealt with in the earlier submissions.

Let me be brief. We say that when properly analysed there is no particular area of fact that the Tribunal was looking at where errors of fact were identified on the part of the Tribunal and the Commission’s decision such that it would have precluded the Full Court from looking at them on judicial review. When properly analysed there are no relevant factual areas, so we say that is not one basis for saying that the Full Court exceeded its normal judicial review function.

The second question is this question of materiality. Can I just briefly say this. Because the Full Court only dealt with paragraph 1 of our AD(JR) application to identify errors of law, it did not need to go on and deal with the last paragraph of our application which identified these errors as also being jurisdictional errors. If they are jurisdictional errors – and we say that they are – the Tribunal’s misconstruction of 8.10 must infect its review function under section 39 such that it could not be said to be properly carrying out its review function under section 39. EAPL makes the submission - - -

GUMMOW J: Why is there jurisdictional error?

MR BEACH: Because we say that the - - -

GUMMOW J: This is jurisdictional error by the Tribunal.

MR BEACH: Yes, by the Tribunal. We say it misconstrued section 8.10. If it misconstrued section 8.10, it never had the proper - - -

GUMMOW J: You can make mistakes of law within jurisdiction, as we all know.

MR BEACH: I am saying that they acted outside.

GUMMOW J: You have to say they acted outside the relevant sections, have you not, which set up the Tribunal’s involvement here?

MR BEACH: We say that they could not embark on - - -

GUMMOW J: You have to take us to the constituent sections and say what the jurisdiction was and how they went outside it.

MR BEACH: But section 39 is the jurisdiction and we say that they could not embark on that exercise of properly discharging the review function under section 39 if they proceeded on an erroneous foundation as to the proper construction of the Code, so we do not have to identify that they made an error about - - -

GUMMOW J: Was there any authority that would suggest that?

MR BEACH: I can give your Honour - - -

GUMMOW J: That is one of the reasons why we have got the AD(JR) Act, is to bring in errors of law because they might not be jurisdictional errors of law.

MR BEACH: That is why we put our primary basis on AD(JR), but there may be a distinction on materiality, because if it is an error of law identified under section 5 of the AD(JR) Act we have to show some degree of materiality in accordance with what the Court said in Bond, whereas if it is jurisdictional error we may not need to show materiality. I suppose what I am saying is EAPL’s submission on materiality is predicated on, these are errors within jurisdiction. These are just errors of law under section 5. I am saying, if you find that these are errors of law but you are not satisfied that they are material, you might have to refer it back, because we would then ask the Full Court to deal with these as jurisdictional errors where we never had to assert materiality. That, of course, is an exercise in futility.

So although the Full Court has not identified these as jurisdictional errors, we say that they are in substance and your Honours should proceed on that. If you accept that then it would be an exercise in futility to say, yes, the Commission succeeds on errors of law but they were not material, then we have the question of whether or not they were jurisdictional errors. We say that they are material because we say they infected the Tribunal’s approach either in setting aside a decision or in setting an ICB for themselves. So either way you look at it we would say they are material.

In a sense, criticism is made of the reasonableness conclusion but another way to look at that is an implicit finding of materiality in one loose sense. In other words, the Full Court had gone beyond what it needed to say but you might say, if it has on one view that fortifies the materiality. In other words, absent the error they think that - - -

GUMMOW J: The reason for the fixation in Bond upon materiality was that the worry was that, having got rid of jurisdictional error and the requirement that the error of law had to get you into jurisdictional error, the result might be too much administrative review, because any hiccup along the way that involved an error of law could attract relief under the new system. Hence, the idea of materiality. That is where it all comes from.

MR BEACH: Yes. I think we have said enough on that question. On the reasonableness conclusion, I think your Honours would appreciate I would refer you to the second set of the Full Court’s reasons where they explained what they meant. In other words, they were saying that because of the Tribunal’s erroneous construction of the Code, they were not satisfied that the unreasonableness conclusion of the Tribunal could stand. So they expressly said that it was in that more limited context together with the question of Code construction. In terms of inadequacy of reasons, our written submissions deal with that and I will not say anything further about that.

There are several final points. Criticism was made of the Full Court’s statement in paragraph 175 that:

the distinction between so called ‘merits review’ and judicial review is somewhat illusory.

Now, the first point is, whatever people might think about that observation, it neither adds nor detracts from what is said elsewhere in the reasons in paragraph 169 through to 180, but, secondly, you have to read what the Full Court said in context. What the Full Court seemed to be saying is that section 39 is not judicial review. It seems to be in part merits review because there are errors of fact. Because there is an unreasonableness component in the second limb of 39(2)(a) that there seems to be some overlap at least in terms of the review function of the Tribunal under sections 39 and the normal basis for judicial review.

Another way to look at what the Full Court said about the matter in paragraph 175 is this; what they seem to be saying is you have got an exercise of discretion that could be as much infected by an error of law as an error of fact. If your Honours go to paragraph 175, that seems to be precisely what they are saying because after the sentence which includes the phrase “somewhat illusory,” they then say:

Error of law informing the exercise of a discretion goes as much to its merits as error of fact.

The other point is they use the expression “somewhat illusory.” It does not really say very much. It is perhaps something that they did not need to say and - - -

GUMMOW J: Are you trying to consume all your available time?

HEYDON J: Mr Gleeson’s available time.

MR BEACH: I need to deal with two more points. One was a suggestion made about Epic. It is said by EAPL at paragraph 95 of its submissions that the Full Court construed unreasonableness in a narrow way. We say that is wrong. They construed it broadly. They rejected Wednesbury unreasonableness. In fact, they went even wider than what was said in the first Epic decision. My friend took your Honours to the second Epic decision, but that did not actually deal with the ambit of unreasonableness as such. That dealt with more a reference to what materials were being looked at.

It was said by EAPL that the Full Court in paragraphs 172 to 178 did not take into account the phrase in all the circumstances. That is wrong. All of the material before the Tribunal that was relevant to the ICB was before the Full Court. There was no suggestion that it was constrained by the four corners of the final decision. It had a look at the additional materials as much as the Tribunal did but on the more limited ICB point. It is also worth noting that in paragraph 177 of the Full Court’s reasons in the extract from Epic No 1, there is a reference to section 39(5) and 39(5) of course picks up all of the additional materials, and that passage is cited with approval in fact by the Full Court, which denies a suggestion that it was taking a very narrow view in all the circumstances.

Finally, on the notice of appeal, we do not agree with what is said there. There are matters that may need to go back to the Full Court but it really depends upon your Honours’ reasoning. I cannot at the moment speculate about all of the possibilities, but I would like the opportunity, depending upon your Honours’ reasons, subsequently, to consider what relief ought to follow rather than trying to deal with hypothetical scenarios now.

For example, your Honours might find that there was an error because there was an absence of reasons. Well, then, it must go back on all issues. Or your Honours might find that there were some errors made by the Full Court but there is not enough for you to be confident about how 8.10(f) is to be dealt with, in which case it may have to go back to the Full Court on that.

Also, there are other grounds in the AD(JR) application which pick up some of these errors in paragraph 1 of our application and put them in a different context of unreasonableness or no evidence or other categorisations. Now, none of those have yet been dealt with. It may be that they will all fall away, I do not know, but I would like the opportunity to put some written submissions in, ultimately, if that is convenient.

GLEESON CJ: We will consider that when we decide what we are going to do about the matter. Thank you, Mr Beach. Yes, Mr Gleeson.

MR GLEESON: Thank you, your Honours. The issue is largely joined. There are only three topics I wish to cover. The first is what did the ACCC do and why. It has been much debated but it seems the ACCC is now saying this, “We did not do a calculation under section 8.10(f). We did not do a calculation under section 8.10(b). What we did do was a calculation under section 8.10, as a whole.”

When one asks, “What do you mean as a whole?”, the only answer they seem to give is, “We were permitted to take an element of (b) and blend it with an element of (f), namely, we took ORC out of (b) and we reduced it by the percentage of used life assumed in the accounts and that we then looked at under section 8.1 together with other things and we adopted it.” They make clear that they did not find that EAPL in the five years had recovered 46 per cent of the $1 billion, they say that this afternoon. We were not saying that.

The reason we reduce ORC by 46 percent is simply by mathematical process of the assumed used up life. When the court then asks, “Why did you do that?”, it is difficult to know what the answer is. Twice today Mr Beach said, “The reason we did it was that we had to take into account that in the past you recovered some depreciation from users”, that was the first answer he gave. The second one was, which I think is the same, “We had to take into account that you had recovered some of your efficient costs”. No other answer was proffered as to why it was done.

The issues which that then crystallises for your Honours, with respect, are these; firstly, why is it that section 8.10(b), which speaks of considering the value derived from DORC, permits you to ignore that value and instead take ORC and do something to it? That is directly contrary to (b).

Secondly, where else in section 8.10 are you permitted to do that exercise? Thirdly, it appears from paragraphs (a), (b), (c) and (d) that the value factors to be considered are limited to those arising from the application of well-recognised asset valuation methodologies and if that is right that excludes what they did. Fourthly, as to paragraph (f), Mr Beach has conceded that the economic depreciation limb does not justify what they did.

That concession which is a correct one means that paragraph 194 of the Full Court’s reasons is wrong. The only limb of paragraph (f) that he says he relies upon is the first limb, the basis upon which tariffs were set in the past, and when asked the question, assuming one of the bases was an assumption of a 50 year life what is the link between that past fact and making a deduction from the forward looking ORC? No answer is really given.

If the implicit answer is, you have recovered super profits, that matter has been dealt with by the Tribunal in paragraph 29 and in paragraph 29 there is no dispute on the facts. What the Tribunal said there is sourced in the calculations of the ACCC. I have handed your Honours the aide-mémoire and the figures are also set out at page 401 of volume 1.

Mr Beach has attempted to justify to your Honours why the Full Court ignored paragraph 29 and why your Honours can simply allow it to be looked at again elsewhere on another day. In our submission, that attempt has failed. When one reads paragraphs 25 to 30 of the Tribunal, while they are compressed, they are clearly a combined set of reasons. Paragraph 28 commences by saying, “It is implicit in what we have said that we cannot see any reasonable basis” to rely upon (f) to do what you did. That is a further explication of 25 to 27.

Paragraph 29 commences with, “Indeed, it seems to us that the ACCC has misconstrued s 8.10(f) of the Code.” That is a further explication of the same matter. Ultimately, unless your Honours were persuaded that the second sentence of paragraph 29 contained a relevant error of law, the appeal should be allowed because that sentence puts a positive construction on paragraph (f) which, if correct, means that on the facts of this case, (f) did not give any reason to lower the capital base.

Your Honour, the fifth matter is that when Mr Beach was asked about paragraph (k) he implicitly said paragraph (k) would authorise the ACCC to devise a novel valuation method even though they did not reason that way. Whether that is correct depends upon whether that can sit with paragraphs (a) to (d). If it were correct, what the regulator would need to do is conscientiously weigh the novel valuation method under (k) against the other factors, in particular, the values under (a) to (d) and it may well be unreasonable to give the novel method 100 per cent weight.

Your Honours, sixthly on this first point, Mr Beach put to your Honour the Chief Justice that in effect it was a happy coincidence that the draft and the final decisions came to the same number.

GLEESON CJ: It did not, actually. One was 539 and one was 559, I think.

MR GLEESON: Yes, and he suggested that it is unsurprising that you go back through a submissions process and when you consider everything you end up pretty close. In fact, of course, the reason they produced essentially the same number was that it was the same calculation that was done. In each case it was ORC reduced by the assumed used up life and the only reason there would be a slight difference between the numbers is if ORC slightly changed between the two decisions.

The identical method is clear from two places. I will give the reference, 69C at line 45, compared with 96C at line 40. So what happened was far from this being some separate weighing of all the factors, the very same calculation was done the first time called DORC, the second time called something generally under 8.10.

GLEESON CJ: I do not take that to be an argument that the second time they did it they were seeking a way of reasoning to a predetermined conclusion. I take that to be an argument, and this is what I understood the Tribunal to be saying or suggesting, that the reason they did it that way on both occasions was substantially the same because reducing ORC by that amount or by that method represented the ACCC’s view of what was reasonable and appropriate, having regard to its powers under 8.10 and the purpose of the Code.

MR GLEESON: It then being the mandate of the Tribunal to ask whether (a) that came within 8.10, given that DORC was now not the source, and (b), even if it did, was it a method which linked the past and the future in a way that was within the bounds of reasonableness.

GLEESON CJ: Reasonable in section 39(2)(a)(ii) presumably means or includes reasonable in the statutory context and having regard to the purposes of the Code.

MR GLEESON: Yes. Another way it might be put without changing the statutory language is, is it a commercially fair valuation having regard to the specific factors in section 8.10 and the more general objectives of the Code which require some attention to the interests of users as well as pipeline owners and investors?

HAYNE J: The essence of it is at 97C between lines 1 and 23. That is the summary of the Commission’s reasons relating what they are doing to the 8.1 purposes and the point to which so much argument has been directed in the course of the last two days is at line 3, “since a 50 year life has been assumed in the past”. Now, we have had all that argument.

MR GLEESON: Yes. To conclude that topic, your Honour asked a question as to whether a submission was put as to whether it was reasonable to divorce ORC from DORC and then adjust it in this fashion. We put that question to the Full Court at page 888 in paragraph 52. Your Honours, the second broad area is the construction of the Code and value. I will not go over what has been said, but could I only offer this, that it is ultimately a commercially fair value having regard to the factors in the Code and the objectives in the Code and it is relevant to look in that context at three matters, the internal considerations in section 8.10 and 8.11, the external considerations in 8.1 and the external considerations in 8.4.

As to what I have called the internal considerations, Mr Beach has wrongly characterised the Tribunal as saying that the valuation methodologies in (a) to (d) necessarily predominate with a rather de minimus plus or minus exercise. The Tribunal clearly recognised the other factors had to be carefully looked at and could have a significant impact on the assessment of value.

In relation to the first external factors, your Honour Justice Hayne asked about 8.1 and whether those factors were forward looking. We would submit that 8.1(a) and (b) are forward looking, 8.1(d) is primarily forward looking, although in a particular case it might pay attention to a past investment decision. In Re Michael statements to that effect were broadly made at paragraphs 141 to 143 and 147 to 152. Most relevantly here, paragraph 8.1(a) is forward looking in the sense of as an efficient pipeline owner what are the capital costs that you would face in respect to this pipeline and that question is well answered by DORC.

If I could give your Honours the reference to paragraph 37 of the Tribunal’s decision – it has not been discussed to date – where the Tribunal said DORC is a good measure of the section 8.1(a) forward looking objective. We submit that is correct in law.

In terms of the third matter, which is section 8.4, we have focused yesterday and today on the cost of service methodology. Could I just note that each of the two other methodologies also employs the capital base as an essential element and because of the internal definition that means that the value of the assets comprising a pipeline are relevant for all three methodologies under the Code.

Could I also draw attention to the concluding words of 8.4 which require those three methodologies to be carried out in accordance with generally accepted industry practice, which again brings in concepts of how these matters operate in the commercial world in a real and fair sense.

Your Honours have mentioned the link with the “Rate of Return” in 8.30 and it would be highly surprising if the commercial concept of the “Rate of Return” in 8.30 was to be applied to a creature set almost without limits, as the ACCC contends.

Your Honours, the final question is just the Tribunal’s decision itself. In relation to paragraph 26, Mr Beach has gone to considerable lengths to persuade your Honours that that finding of fact should be read down. He says it does not mean what it says. It means something more narrowly, namely, in the field of DORC “ORC is only utilised” in a particular manner. The difficulty with that is that that finding that he seeks to impose upon that paragraph was never made by the Full Court. The Full Court in paragraph 193 never came to grips with this paragraph as a finding of fact, and it is not one that your Honours need to make or should make. It is also wrong, because as I showed your Honours in-chief the document from May 1999 – volume 1 page 131 – is not just about DORC. It is generally about how do you fairly strike a value for monopoly assets, including by reference to the past, and to give your Honour one other example, in volume 1 at page 447, one of these documents was the Commission’s own revenue-setting handbook, Post-tax revenue handbook.

The significance of that – and this applies across all infrastructure, not just gas – was that when the Commission looked at all these issues there is no mention here of adjusting ORC in this novel fashion, and on page 447 at line 45 they actually say that the ICB:

for an existing facility – the commercially fair value of comprising assets, derived using relevant principles and criteria such as those set out in the Gas Code.

That, we submit, is a fair summary of how “value” plays into this exercise. Your Honours, I have dealt with paragraph 29, and finally, paragraph 30. Mr Beach has attempted to explain why the Full Court was entitled to ignore it, but on its face, it is a general finding of lack of logical irrational connection between all of their arguments and the adjustment of ORC which they were proposing. Unless there was a relevant error of law in the Tribunal coming to that finding of irrationality, the Tribunal was entitled to set aside the ACCC’s decision.

Your Honours, finally, Mr Beach has urged you, if we were otherwise successful, to allow him to go back to the Full Court to make arguments on section 8.10(f), 8.10(k), jurisdictional errors and absence of reasons. We would submit that unless there is an error of law between
paragraphs 25 and 30 of the Tribunal’s decision, orders should be made as per the notice of appeal. May it please the Court.

GLEESON CJ: Thank you, Mr Gleeson. We will reserve our decision in this matter and we will adjourn until 10.15 tomorrow.

AT 3.56 PM THE MATTER WAS ADJOURNED