East Australian Pipeline Limited v ACCC & Anor [2007] HCATrans 62 (9 February 2007)

Last Updated: 19 February 2007

[2007] HCATrans 062

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
Sydney No S333 of 2006

B e t w e e n -

EAST AUSTRALIAN PIPELINE LIMITED

Applicant

and

AUSTRALIAN COMPETITION AND CONSUMER COMMISSION

First Respondent

AUSTRALIAN COMPETITION TRIBUNAL

Second Respondent

Application for special leave to appeal

GUMMOW J
HAYNE J
CRENNAN J

TRANSCRIPT OF PROCEEDINGS

AT SYDNEY ON FRIDAY, 9 FEBRUARY 2007, AT 9.58 AM

Copyright in the High Court of Australia

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

MR J.B.R. BEACH, QC: If the Court pleases, I appear for the first respondent with MS M.A.C. PAINTER. (instructed by Deacons)

GUMMOW J: There is a submitting appearance from the Competition Tribunal, the second respondent. Yes, Mr Gleeson.

MR GLEESON: Your Honours, to seek to demonstrate the appeal has strong prospects of success, I would like to go to five parts of the application book. The book is long but there are really only five parts that matter for today. The first is to ask your Honours to go to page 182 to see what the ACCC did. On page 182 the ACCC said it was determining a value for the ICB.

GUMMOW J: Which line, Mr Gleeson?

MR GLEESON: It is at line 8 of the book and it is the first and second lines of the quote:

‘For the purpose 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 to section 8.10(f) –

so they call it a valuation and they say 8.10(f) is an important basis for it. They then set out section 8.10(f) in the rest of that paragraph. In the next paragraph they say:

The basis of the valuation is ORC –

your Honours, “ORC” means optimised replacement cost. It is a hypothetical forward-looking construct. What would it cost someone today to build a brand new pipeline which has the equivalent service potential to the existing pipeline for which we are seeking to set a capital base? So the ACCC says, “The basis for our valuation will be ORC which we are going to depreciate on an assumption of a 50-year asset life to 2000, ie, we’re going to assume up until the year 2000, which is when we’re setting the ICB, the pipeline had a 50-year life”. The significance of that is the pipeline went into service in 1977 when the Commonwealth ran it through the pipeline authority. In 2000, the year in which we are setting the capital base, it is 23 years through what is said to be a 50-year life, so it is 46 per cent used up in accordance with this form of reasoning.

They say, “We do that consistent with the life that my client assumed”. My client was the service provider for six years between 1994 when it bought it from the Commonwealth in 2000 and there is a finding of fact that within its accounts for accounting purposes it depreciated the asset assuming a 50-year life for part of that period. I can inform your Honours, and this is common ground, the actual amount of depreciation charged in that way was $100 million. The effect of what the ACCC has done is to say we start with ORC which is $1.1 billion and we reduce it by 46 per cent and you get a figure in the five hundred millions of dollars because you claimed $100 million in depreciation in your internal accounts and they say we get that from paragraph 8.10(f).

Your Honours, the second point to go to is section 8.10. If I could ask your Honours to go to page 9, 8.10 tells us that there are a series of 10 or possibly 11 mandatory factors which must be considered by the regulator in establishing the initial capital base. The first four factors are values derived from specified valuation methodologies. We see the word “value” in (a), (b) and (c). We see two valuation methodologies defined in (a) and (b), (c) says to look at any other well-recognised valuation methodologies and (d) says to weigh them together.

In the present case paragraph (b), which is called “depreciated optimised replacement cost”, is the DORC methodology. That tells you to start with ORC, the same place the ACCC started with, but, because it is a future looking methodology, depreciate it by reference to a future matter. The future matter is if I build a new pipeline instead of buying the old, it will have a longer life 60 years down the track and therefore I have to bring back in present day terms the value of that extra life and that gives me what is called a depreciated figure.

Your Honours can accept for today at least that the DORC figure is somewhere between 715 and $830 million. The ACCC did not do that. What they did was to take ORC and say we want to depreciate it in the way I have mentioned earlier. What the Tribunal said which the Full Court found to be an error was that because of this mandatory duty to look at the 10 factors, you have to pay attention to the value derived from the methodologies under (a) through to (d). When you have done that, you will have in a preliminary way, as it were, a working value for the pipeline. It will not be your final ICB but it is a working premise. In the present case the working premise was the DORC – that is paragraph (b) – was the only suitable valuation methodology.

What the Tribunal then found was that paragraphs (e) through to (j) open the frame. They are not about values per se. They are about qualitative matters but they will tell you something about the value that you are working with on a putative basis under (a) to (d). The Tribunal fully accepted that they might cause you to alter that value and they said in an unusual case those factors might well produce a very significant impact on the result.

CRENNAN J: In essence his Honour said, did he not, that you would not go to those discretionary matters under (e) to (j) until you had done the exercise under (a) to (d)?

MR GLEESON: You have to do the exercise under (a) to (d).

CRENNAN J: You have to do that as a sine qua non to go into the discretionary matters.

MR GLEESON: But only in the sense of a logical progression through 10 or 11 matters you must consider. So in the present case the first four matters tell you the figure is, I will call it $834 million, and that is because (b) tells you that amount. What you then do is to say when I open the frame, what do the following six or perhaps seven matters tell me further about the exercise before I come up with an ICB. His Honour and the Tribunal did not say, contrary to what the court has found and what the ACCC says, that you only look at the first four matters. The Tribunal clearly said you must look at all of them but what they said is once we go beyond the four, the critical issue in the present case is what does paragraph (f) mean as a matter of construction and what does it allow you to do as a matter of a rational or logical or reasonable use of the factor?

What the Tribunal found was when you come to (f) and it has three sub-factors within it, none of them talk about ORC, none of them give a value as such, but all of them taken together ask you to look to the past and see whether, either the existing pipeline owner or perhaps the predecessor, have recovered too much from users, to put it bluntly. Have they recovered super profits in the past such that the value you are otherwise working towards would, although in economics be sound, which is what DORC is, DORC is very good in economics, but in terms of users is too high.

The third place I need to go to is where the Tribunal gave its positive construction to section 8.10(f) and that is on page 17 in paragraph 29. What they proffered was a positive construction of section 8.10(f) that I have just sought to summarise. Can I just invite your Honours to read the whole of paragraph 29. The construction is found in the first sentence and there is then a finding of fact by the Tribunal that if that be the right construction – I will come to the last sentence of the paragraph:

It is not possible to draw the conclusion that the few years of operation of the MSP by EAPL –

that is the six years –

has caused such a gross over-recovery of depreciation as to require offset –

The reason they are focusing on whether we made a super profit is that it was common ground that the Commonwealth did not make a super profit in the first 17 years of the pipeline.

The other critical finding by the Tribunal is the next paragraph. If I could just ask your Honours to consider that. The ACCC as a fallback said, “If we can’t do it under (f), we can do it under (k)” - (k) is back on page 9 – “That empowers us to consider anything else we think relevant”. The Tribunal in two sentences dismissed that. They said, “Firstly, that’s not what you said in your reasoning but, secondly, even if this were permissible, we find there is no logical or rational connection between taking a forward looking ORC and discounting it by 46 per cent by reference to what was in your accounts”.

That is a finding by the administrative body of irrationality and it is a finding which entitled the Tribunal to intervene because of the scope of its review power. Your Honours, that is the next matter. The review power for this Tribunal is found on pages 5 and 6.

GUMMOW J: It is a rather idiosyncratic system, is it not?

MR GLEESON: Quite, your Honour. Your Honours see the bottom of page 5. It is not Wednesbury review. It is more than that. In section 39(2)(a)(ii), has there been an exercise of discretion that was incorrect?

GUMMOW J: How do you have an incorrect exercise of discretion?

MR GLEESON: For example, you have misconstrued the Code. That is the narrowest form of it but it could be broader than that. But the next one is quite broad:

was unreasonable having regard to all the circumstances –

If I could ask your Honours to go over the page to section 39(5), this is worded as a constraint on the Tribunal. It:

must not consider any matter other than –

but there is then a long list of matters, particularly (a), (ad), (c) and (d), so essentially they look at everything. The statutory mandates look at everything before the ACCC and ask yourself the question: was the decision incorrect or unreasonable in all the circumstances?

CRENNAN J: It seems to be, does it not, a review in relation to matters of fact and law but not a de novo review?

MR GLEESON: Correct. It is not de novo but what it meant in this case, which is why it took seven or eight days before the Tribunal, was that Mr Beach and I argued at great length and great pleasure about the entirety of the economic material which was before the ACCC, so we had a construction debate. Can you do this under (f)? We said you cannot. We also had a rationality debate. Even if you could do it under (f), has anyone ever done it before? Is there any support anywhere in the infrastructure science for taking a forward looking construct and adjusting it by reference to a backward looking event? That debate is what led to the Tribunal making an important finding, if I could take your Honours to that next. It is the finding on page 15.

GUMMOW J: I am sorry, Mr Gleeson. This is what the Tribunal does?

MR GLEESON: That is what they do, and then the court only has judicial review.

GUMMOW J: Then it gets to the court. There was some suggestion of multiple routes to the court.

MR GLEESON: It is an extremely complex scheme, your Honours, but we did not take any constitutional or jurisdictional challenge. We accept - - -

GUMMOW J: I am not suggesting you might have or should have, but it gets to the court under the AD(JR) Act, does it?

MR GLEESON: That is what the court has found, yes.

GUMMOW J: That was the end result, I think.

MR GLEESON: AD(JR) and they have said officer of the Commonwealth and they have said declarations.

GUMMOW J: So the question then is: what is the ground in the AD(JR) Act which picks up an activity by the Tribunal under 39(2)?

MR GLEESON: Exactly. What we submit, respectfully but firmly, is that when one reads the Full Court’s decision, they have never looked at their ground for intervention in a judicial review context.

GUMMOW J: That is what was puzzling me a bit.

MR GLEESON: They have simply said, “We think what the ACCC did was reasonable”. We went back to the Full Court in order not to burden your Honours unnecessarily and we said, “You haven’t done judicial review, you haven’t done your task”. We also said on materiality, “To the extent you make criticisms of what the Tribunal did, where are your reasons. Have you explained that they really are material errors in terms of what the Tribunal reached?” The question we posed for them - - -

GUMMOW J: The point is in a way that what the Federal Court does under the AD(JR) Act is not a replication of 39(2).

MR GLEESON: Not at all, your Honours. That is my next matter. I was just going to give your Honours - the finding on the expert evidence is the finding at page 15. It is in the last sentence of paragraph 25 and it is paragraph 26. They looked at all the expert opinions and the Tribunal found nothing in there provides any rationality to this approach. So, your Honours, when it came to the Full Court, on page 121 at paragraph 4, in terms the Full Court has answered the wrong question:

We consider that the approach taken by the ACCC was correct in law and that the exercise of its discretion . . . was reasonable.

It is just not the question.

GUMMOW J: Wait a minute:

For reasons which are now published, we are of the view that the Tribunal erred in its approach to the interpretation of the Code.

Is that saying there was an error of law which would be an AD(JR) ground?

MR GLEESON: It could be if one then looked at materiality but which they did not look at. It then goes on to say:

We consider that the approach taken by the ACCC was correct in law and that the exercise of its discretion reaching the conclusions it did was reasonable.

Instead of saying was there an error of law in the way in which the Tribunal concluded that the ACCC was unreasonable, the task has been compressed.

If I can then take your Honours to the only other part of the reasoning that matters for today’s purposes - - -

GUMMOW J: I am sorry to interrupt, but we need to know positively what you say were the possible grounds under the AD(JR) Act that could have been engaged.

MR GLEESON: The only possible ground could have been error of law in the construction of section 8.10(f) because it was 8.10(f) upon which the Tribunal - - -

GUMMOW J: That would be section 5(1)(f), would it, of the AD(JR) Act?

MR GLEESON: Yes.

GUMMOW J: Namely:

that the decision involved an error of law, whether or not the error appears on the record of the decision - - -

MR GLEESON: Yes. So we just ask finally where has the Full Court told us what the error of law was in respect to 8.10(f). There can only be three pages where it is found. It commences at 181. In the available time I am going to go – it is the whole of 181 to 183. I am going to go straight to the bottom of 182 if I might where in the last paragraph the court says the Tribunal has misunderstood 8.10:

Although DORC is a forward-looking concept, that is not to say that the ORC, from which is derived the DORC, cannot be ‘tweaked’ . . . by reference, for example, to the factors –

in 8.10. They do not say where in 8.10 or why you can treat ORC as a basis for evaluation and tweak it. If your Honours then go to the next paragraph, 194, in a very curious finding they say:

It was also open to the ACCC to take into account the amounts EAPL had used for depreciation –

that is $100 million –

in determining . . . ‘the economic depreciation –

With respect, the court has totally confused economic depreciation with accounting depreciation. In the next paragraph your Honours see in the fourth line what is really, with respect, mere assertion:

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

One begs to ask why. In the next paragraph, they say 0

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

They are misconstruing, with respect, what the Tribunal did because they seem to be saying the Tribunal said you can only look at known valuation methodologies and the Tribunal - - -

HAYNE J: What kind of error are they there assigning to the Tribunal?

MR GLEESON: I cannot classify it, your Honour. Their error, with respect, is to misconstrue whatever it is they are finding an error in.

HAYNE J: Ultimately your notice of appeal, lengthy as it is, at least to my eye does not immediately identify these jurisdictional issues to which your oral submissions have been directed. Rather we are down and dirty in amongst the detail of ORC, DORC and the like, whereas if there is a leave point here – and I do not know whether there is – it seems to be a point about the function of the court.

MR GLEESON: Your Honour, the error is ours in the draft notice of appeal. It is mine but the essential point is if the Full Court is sitting on judicial review and it is going to intervene, it has to be able to identify an error of law in the construction taken by the Tribunal in 8.10(f) which was material to the result and it has no ground to intervene just because it thinks what the ACCC did was reasonable. The whole of the Full Court’s decision is infected with statements that we think it was a reasonable exercise of discretion.

Your Honours, I can just conclude that by showing that when one gets to 8.10(f), which is what the case is all about, and one tries to see what the error is that the Full Court has found, you read down page 183 and over on page 184 without, with respect, enlightenment. At the end of paragraph 198 the high point is this. The ACCC:

was establishing a two stage method of determining the appropriate amount of depreciation; it was ‘kinking’ the depreciation. This it was entitled to do if it was so disposed.

That is the line, with respect. The question of the Full Court was not that question. There are no reasons given as to why it was entitled to do so if it was disposed. I can conclude by saying even if as a matter of power for some reason that is not identified (f) allowed you to do this strange creature when the Tribunal has found it was irrational, illogical and unreasonable in all the circumstances, this sentence does not ask the right question.

GUMMOW J: Just before you sit down, Mr Gleeson, can you take us to the passage in the Full Court where they located their jurisdiction in the AD(JR) Act?

MR GLEESON: Yes, your Honour.

GUMMOW J: Rather than, for example, in 39B of the Judiciary Act.

MR GLEESON: Your Honours, it is both. It is page 168. Paragraph 157 is the AD(JR) Act and 169 of the book at paragraph 162 is both 39B and declarations. Your Honours, in the notice of appeal - it is a bit long, I submit – we have attempted to raise jurisdiction in paragraph 2 on page 247. Perhaps we have not been - - -

GUMMOW J: But in a way, just focusing again at 162, to fix on 39B in fact is to fix on a narrower focus than the AD(JR) Act because you are into jurisdictional error, more difficult to show and something the AD(JR) Act was anxious to do away with by looking somewhat more broadly at these things.

MR GLEESON: Exactly, your Honour, and the reason we put in the book just some extracts from our submissions was to show that the Full Court was amply apprised of the nature of the arguments that the Tribunal grappled with but what it seems to have done has not addressed the jurisdictional question of its jurisdiction but simply said, “We look at the ACCC and think it’s reasonable”.

GUMMOW J: Yes, we understand that. Where is your ground of appeal where you say “tweaked” can produce - - -

MR GLEESON: Page 247 of the book, paragraph 2 asserts an acting beyond jurisdiction because it made findings on matters which were solely for the Tribunal. In paragraph 4 we assert there was a misapprehension of the nature of jurisdiction. The particular issues I am raising about (f) start from perhaps paragraph 6.

GUMMOW J: Paragraph 4 is the Tribunal’s jurisdiction.

MR GLEESON: Yes.

GUMMOW J: What about the court’s own jurisdiction? Is that dealt with otherwise than in your ground 2?

MR GLEESON: That is paragraph 2 for the court’s own jurisdiction.

GUMMOW J: That needs more than tweaking, I think.

HAYNE J: A clean sheet of paper, I would have thought.

MR GLEESON: .....

GUMMOW J: All right. Yes, Mr Beach.

MR BEACH: What is not said by.....is this, that there is any point of difference in terms of the proper construction of the Code between what the Full Federal Court has said and what was said by the Supreme Court of Western Australia in Re Michael. There has not been an issue raised pointing to the Full Court’s construction statements saying there the Full Court got it wrong, Re Michael is wrong, the Tribunal was correct. So there is not identified a point of general principle in relation to the proper construction of section 8.

GUMMOW J: I think it becomes a visitation case if it is anything, Mr Beach, and you should proceed on that footing in addressing us.

MR BEACH: Yes. In terms of the point of jurisdiction, I think it is fair to say that my friend’s oral address is a significant evolution on what appears in the written material, but can I say this - - -

GUMMOW J: It does not matter, it is on the table now.

MR BEACH: The Full Court were very careful to deal solely with errors of law. You had three members of the Full Court, the President of the Tribunal and also two Deputy Presidents, who were only too well aware of the difference between the Tribunal’s role and the Federal Court’s role on judicial review. If you go to the first Full Court set of reasonings and start with paragraph 4 of those reasons. You will see that on page 121 of the application book. You will see in the second sentence that what the Full Court formed the view about was:

that the Tribunal erred in its approach to the interpretation of the Code.

So it was a legal question, and of course that is then said in the next sentence:

We consider that the approach taken by the ACCC was correct in law –

The implication is that the - - -

HAYNE J: But it is the balance of that sentence.

MR BEACH: I agree and I want to just park that to one side and come back to that because that is explained in the second Full Court set of reasons. If you then go to paragraph 181 of the first set of reasons, you will see again there is a reference to the statement by the Full Court that essentially the Tribunal erred in law. You will see that at the top of page 177, third line. Your Honours will appreciate that paragraphs 181 through to 200 are all of the errors of law that the Full Court has identified in the Tribunal’s reasoning. For example, the first issue about this question of discrimination between new pipelines and existing pipelines is dealt with at paragraph 182. That is a pure question of law.

The second issue is this question that the Tribunal had considered to be given primacy to elements (a) through to (c) of section 8.10 and the Full Court addressed that in paragraphs 183 through to 184 and say that was an error of law, nothing to do with economic concepts but just simply taking the factors of 8.10(a) through to (k) as saying on the proper construction of those, you do not give primacy to (a) to (d) and use (e) through to (k) as some reality check. You do not have a quest for value, which is the next legal error identified at the beginning of paragraph 185. The quest for value that the Tribunal were referring to was a known value of the type set out in (a) through to (c), not a mathematical value which would be simply the number that you might ascribe for the ICB.

The Full Court also made it plain in paragraph 187 that what the Tribunal had said as to the proper construction of section 8.10 departed from Re Michael and the Full Federal Court for themselves considered what was said by Re Michael as to the proper construction of section 8.10 to be unremarkable. That is why I say you now have uniformity of decision on the proper construction questions. The only idiosyncratic decision was in fact the Tribunal in terms of this quest for value and this quest for primacy.

You then have from paragraphs 191 through to 195 a discussion of 8.10(f). Contrary to what my friend says, this case is not all about 8.10(f). The position is this. The Tribunal said you can calculate an ORC and a DORC under 8.10(b). Section 8.10(f) does not refer to DORC or ORC. What the ACCC did in its primary decision was to say we can take a part of element 8.10(b), which is the ORC rather than the DORC, the optimised replacement cost rather than the depreciated optimised replacement cost. We can take a factor from 8.10(f) and together with the other factors, (a) right through to (k), we can come up with an ICB.

That was the criticism. The Tribunal were saying you cannot do that all under 8.10(b). We give a tick to that proposition. Of course you cannot. The Tribunal says you also cannot do all of that under 8.10(f). We give a tick to that. We do not dispute it but that is not what we were doing. We were taking different elements, aggregating them and saying because you have an idiosyncratic statutory regime that was permitted and that is exactly what the Full Federal Court said. We did have the discretion to do that. It did not have to be a loan or recognised value. It did not have to be a quest for value and the Tribunal was simply wrong on the proper construction and that is essentially the errors that have been identified.

Now, it is fair to say, as your Honour Justice Hayne reminded me, that in paragraph 4 and also paragraph 199 the Full Court seems to have gone a little bit further than just dealing with errors of law by making a positive statement that they considered that what the ACCC had done was reasonable.

You would understand that the section 39(2) review function was for unreasonableness so when the Full Federal Court said, “You, the Tribunal got it wrong as a matter of law in finding that what the ACCC did was unreasonable”, the flip side of that explains the positive statement that what they considered was that in terms of the proper construction of the Code, at least, and the methodology, what the ACCC did was reasonable and it is wrong to say that in either of those two paragraphs they descended into the question of merits because you can see from the previous discussion that it was all about the questions of law.

If there was ambiguity about that in the first set of reasons in the Full Court it was clarified in the second set. We all had another go. It seems to be a feature of this litigation to date and what the Full Court said, beginning at page 191 of the application book and by reference specifically to paragraph 5 on page 194, you will see that they refer back to the paragraph that has excited interest in terms of EAPL’s position and they frankly acknowledge in the third line. They say:

We accept that this statement is capable of being read as a statement about the whole of the ACCC’s conclusions. It was not so intended –

What we were really doing, so the Full Court was saying, was making that statement in the context of the legal errors and the proper construction errors. Then, of course, they go on to deal with paragraph [195] in paragraph 6 on that same page.

HAYNE J: Are the orders to which the Full Court ultimately came at 197 orders which are consistent with the Full Court having exercised under the AD(JR), in accordance with that Act, in particular, is it consistent with the identification of errors of law in the Tribunal to set up their own answer? Why not send it back to the Tribunal, “You made an error of law. Do it again”?

MR BEACH: Yes. I would respectfully submit that those orders have that effect. If one looks at page 197, paragraph 4, the orders do provide that:

The matter be remitted to the Australian Competition Tribunal for reconsideration by it according to law.

What they have said in their first two sets of reasons is there are all these legal errors. We are setting aside the Tribunal’s decision on the capital base and telling them to go back and do it again properly in the light of the true position on construction which is also consistent with Re Michael as articulated in the chain of reasons. That is also made clear by necessary implication from page 195, which is the second set of Full Court reasons, paragraph 8. What they say is in 8.10(f), which is my friend’s big point, is that they are not really points of construction or principle. They seem to be mathematical arguments and computations about accounting depreciation, economic depreciation and those type of issues.

What the Full Court has been very careful to do is to say in paragraph 8 that all of those arguments that my friend says there has been no articulation of the reasoning and all the rest of it, all those arguments are preserved to my friend to go back to the Tribunal and argue tomorrow about and that is why – because my friend in the second Full Court hearing said, “Oh, you’ve basically foreclosed us from going back to the Tribunal and putting these points” and that was one of the arguments that we had, and the Full Court said, “No, we didn’t intend to do that” and they make that abundantly clear in terms of 8.10(f) – which seems to be my friend’s big point – not that we agree with anything that he has said about that, mind you, but if he is right or wrong he is going to have another go in the Tribunal and the other point, which is paragraph 9 is the 8.10(g) point that was left alone by the Tribunal in terms of not coming to a final view and was left alone in the Full Court.

We would say all of that identification of legal error, setting an administrative decision aside, remitting it to the Tribunal to deal with a court in accordance with law is an unremarkable procedure and result in terms of an AD(JR) application. Your Honours might have had a chance to look at the terms of the AD(JR) application. It is fair to say that there are a lot of other bells and whistles in that than merely the errors of law but if your Honours go to page 109, paragraph 1, we identify there in the heading the very limbs of the AD(JR) Act that we rely upon and in that section we identify all of the errors of law and they are expansively set out.

We do at page 114 also have grounds dealing with the taking into account of “Irrelevant Considerations”, page 115 “Failure to take relevant considerations into account” and a lot of other limbs. The Full Court basically has said because of the findings on the errors of law it did not need to deal with those other questions and, of course, it has not dealt with any of the questions which arise in terms of the second set of reasons of the Tribunal delivered on 18 March 2005 which begin at page 45.

HAYNE J: What is the central or chief error of law found by the Full Court in what the Tribunal did?

MR BEACH: The question of saying that there was a primacy to be given to devaluation factors of (a) through to (c).

HAYNE J: Where do I find it in their reasons, Mr Beach? I am not saying it is not there but where is it?

MR BEACH: Yes, at the first set of reasons beginning at paragraph 183 at the bottom of page 177. At the bottom of page 177 the Tribunal say in about the fifth line in that quote:

Those other subparagraphs are considered in the light of the analysis of recognised valuation . . . The factors to which those other subparagraphs direct attention could assist in the choice between methods, or lead to some adjustment of the result of the chosen method. Those factors would not normally (and perhaps would never) permit recognised valuation methods to be put to one side.’

That is the point. The Tribunal’s focus is on you should use normally “recognised valuation methods” with (e) to (k) as a check and we say, no, the structure of the Code is idiosyncratic. As Justice Crennan was saying, you might follow the chronological sequence of (a) through (k), but that is a different question from saying you look at (a) through to (c), they are primacy and you can only use (e) to (k) as some reality check or to assist you in determining the selection of which particular known valuation you use.

CRENNAN J: Stripping it right back, are you saying, effectively, well, you could start with DORC instead of ORC, which is something Mr Gleeson raised, but when the discretionary matters kick in you could get in fact the same result which the ACCC did get in this instance where it started with ORC?

MR BEACH: That is exactly right, there is nothing to say you cannot use ORC and adjust it in the way that we did. All that 8.10(b) says, you have to take a calculation for DORC and take it into account and there is no argument that we did a calculation for DORC and took it into account but we just formed the view that DORC was not an appropriate figure to use because we also had to consider how the pipeline had been depreciated in the past and how the economic life for the pipeline had previously been set.

HAYNE J: If that is right, if it was open to ACCC, had its choice to do it, where lies the error of law in the Tribunal?

MR BEACH: The Tribunal’s error of law is to criticise us for saying that we were doing something idiosyncratic because an idiosyncratic ICB under the statute was not a vice. It was the virtue of the statute. The statute said you have to set an individual ICB taking all of these factors into account. It is no error for the ACCC to come up with that and in a way which is not a normal or well recognised valuation. You can see that very clearly. If you go back to the Tribunal’s - - -

HAYNE J: Just before you do. You do not say that the Tribunal misconceived its task. You say that the Tribunal misconceived the Act, section 8.10?

MR BEACH: We say the rest of it but we say the starting point is misconceived, the Act and its proper construction and that that was all that the Full Court then needed to do. My friend says “They did not consider the materiality. There are all these other errors that we, EAPL, say the ACCC made” but our point is we do not agree with any of those points, but it does not matter because your Honours appreciate from the papers that when the Tribunal set aside our decision they stood in our shoes and made their own decision.

So, if they have proceeded on a misapprehension as to the proper construction of the Code and this primacy question, then their ultimate ICB that they set needs to be set aside because it was produced through the distorted lens of looking at (a) to (c) as primacy. That is what they have done. They said, “You the ACCC did something idiosyncratic. We, the Tribunal, think you cannot do that. We, the Tribunal are going to use DORC” which was the second set of reasons.

CRENNAN J: It is not just primacy, I suppose. Justice Gyles, in a sense, is saying you have used half of (b), not the whole of (b), or had regard to half of (b).

MR BEACH: No, we had regard to (b) in its totality because we calculated a DORC but when we came to set the ICB we said we cannot use DORC, we cannot use the recent purchase price. How do we come up with an ICB? We said, well, what is the current replacement cost for the pipeline today, that is ORC, optimised replacement cost, but the statute also tells us we need to do an analysis of what has occurred in the past so we have said, “You people have assumed in your accounts” and there are various other documents in the evidence about this, “a 50 year economic lifetime for the asset in the past. You’ve used that as a basis for your accounting depreciation, put that to one side”, and we have said to ourselves, “Because ORC is for a new asset we have to adjust or to give you an ICB for the existing asset. A way to do that is to do this - - -

CRENNAN J: Forty six per cent.

MR BEACH: There is no – we are not saying it is all in 8.10(f) and we are not saying it is all 8.10(b), it is taking particular elements, plus 8.10(k), which is “any other” relevant factor and coming up with an ICB and the Full Court said, “You are entitled to do that. You do not have to give primacy to (a) through (c). You can do something idiosyncratic and you can amend particular elements” and that is why we say at the end of the day this all rises or falls on which general points of construction of the Code with the Full Court and Re Michael being uniform on the question. I see my light is on.

GUMMOW J: Thank you, Mr Beach. Yes, Mr Gleeson. What do you say about the mileage your opponent seems to get out of the revised reasons of the Full Court?

MR GLEESON: He does not get the mileage because in those reasons the court still does not say what is the error in the way the Tribunal dealt with - - -

GUMMOW J: He then fixes on page 177, paragraph 183, does he not?

MR GLEESON: Yes, on 177, your Honour - in terms of the revised reasons, your Honour, if I could just go to those first. At 194, paragraph 6 of that page says we refer you back to paragraph 195 of the primary judgment. We said there the “methodology was in conformity with the terms of the Code”. That is the paragraph of the primary judgment that never gives any reason answering the question your Honour Justice Crennan raised, why is it that you can take a part of a statutory factor, divorce it from its context in (b) and say, “I’m going to make that the starting point for an exercise.”

CRENNAN J: But then Mr Beach said, “Well, we did calculate a DORC but we simply didn’t use it when we came to consider the factors (e) and onwards.”

MR GLEESON: The problems is, take that for granted, when they come to consider (e) onwards, what they in fact do is start with ORC which is not DORC. He still cannot tell your Honours this morning where he gets ORC from as a starting point of his valuation. He says to you in the negative, “We’re not prevented from doing it. It is an idiosyncratic statute.” That is really the essential point of the Tribunal. Where do you get ORC from as a starting point? He does not tell your Honours how any of the factors in (f) give you the 46 per cent discount. He has never told you that in his submissions. The Full Court has never told us that.

CRENNAN J: He has explained it by reference to what ORC is. There had to be some depreciation.

MR GLEESON: ORC is a forward looking thing and what the Tribunal has found is that to the extent everyone uses ORC in this industry they use it in the DORC fashion. No one has ever used it in the way they do it. The final point he does not address your Honours – and this is relevant jurisdiction – is the irrationality finding. What the Tribunal has found is, even if you could do it under (f) or wherever, we have read all the material and we in the exercise of our jurisdiction find it to be unreasonable in all the circumstances to adopt that figure.

Coming to your Honour Justice Hayne’s question about the order, the order on page 197, with respect, the Full Court could not make the order in paragraph 2(b) setting aside the Tribunal’s decision of an $834 million capital base unless there was an error of law which infected its approach to that matter and that means the Full Court had to find an error of law in the finding of irrationality and you just cannot read in any of this material why that finding has gone.

GUMMOW J: Do you accept the decision of the West Australian court in Michael?

MR GLEESON: It raises no issue for our case. I can tell your Honours why. It did not discuss ORC, it did not discuss 8.10(f), it did not discuss this ad hoc form of - - -

CRENNAN J: It talked about the breadth of the discretions.

MR GLEESON: It talked about the breadth of the discretion. What it did not deal with was can you do this sort of thing under (f) or anywhere else under the Code and, finally, it was judicial review not a case looking at the administrative power of the Tribunal. We do not pretend this case is determining a difference between those two decisions. His Honour correctly distinguished it.

GUMMOW J: We will take a short adjournment.

AT 10.48 AM SHORT ADJOURNMENT

UPON RESUMING AT 10.53 AM:

GUMMOW J: There will be a grant of leave in this matter but we invite, in the sense of an invitation not to be refused, that you redraft your present draft notice of appeal. In particular it should crystallise more than appears now as the complaints you make as to the exercise by the Federal Court of its jurisdiction to deal with the decision of the Tribunal in the way it did.

MR GLEESON: If your Honours please.

HAYNE J: .....and to abbreviate it?

GUMMOW J: Yes. As Justice Hayne says, crystallised in the sense of succinct and abbreviated.

MR GLEESON: If your Honours please.

GUMMOW J: How many volumes were there on the appeal record in the Full Court?

MR GLEESON: There were a lot but your Honours will not need most of them because a lot of it is a different issue so we really will make an effort to get it down to the necessary minimum, which is pretty short.

GUMMOW J: Do you agree with that, Mr Beach?

MR BEACH: It is perhaps a halfway house. We do not agree that a lot of it will not be relevant.

GUMMOW J: Yes. If there are any disputes about the contents of the appeal book it can be referred back through the Registrar to me at some stage.

MR BEACH: Yes.

GUMMOW J: It strikes me that this is not a two-day case but perhaps more than a one-day case so it would be set down on the basis of what one might call one-day plus. Does that conform with your estimations?

MR GLEESON: Yes, your Honour.

GUMMOW J: All right.

AT 10.54 AM THE MATTER WAS CONCLUDED