FEDERAL COURT OF AUSTRALIA

 

Australian Competition & Consumer Commission v Australian Competition Tribunal

[2006] FCAFC 83

 

ADMINISTRATIVE LAW –judicial review – gas pipelines access law – application for review of decision of Australian Competition Tribunal to vary access arrangement drafted and approved by regulator – review function of the Tribunal – whether Tribunal erred in law as to construction and application of code – function of regulator – whether regulator incorrectly or unreasonably exercised discretion – calculation of reference tariff – factors to be considered in establishing initial capital base – depreciation methodology

CONSTITUTIONAL LAW – co-operative legislative action of parliaments of the Commonwealth and the States – where Commonwealth administrative body or tribunal exercises functions under State law

Constitution: ss 51, 61, 75, 77

Judiciary Act 1903 (Cth): s 39B

Pipeline Authority Act 1973 (Cth)

Trade Practices Act 1974 (Cth): Pt IIIA, ss 44ZZM, 44ZZMA, 44ZZMB, 44ZZOA

Federal Court of Australia Act 1976 (Cth): s 23

Administrative Decisions (Judicial Review) Act 1977 (Cth): Sch 3, ss 5, 6, 8

Moomba‑Sydney Pipeline System Sale Act 1994 (Cth)

Gas Pipelines Access (Commonwealth) Act 1998 (Cth): ss 16, 18, 19

Gas Pipelines Access (South Australia) Act 1997 (SA): Sch 1 ss 38, 39; Sch 2 ss 2, 3, 8

Gas Pipelines Access (NSW) Act 1998 (NSW): ss 10, 16, 18, 19, 21

Gas Pipeline Access Act 1998 (ACT): ss 6, 15, 20

Evidence Act 1958 (Vic): s 55

 

R v Hughes (2000) 202 CLR 535, considered

Re Michael; Ex parte Epic Energy (WA) Nominees Pty Ltd (2002) 25 WAR 511, applied

R v Duncan; Ex parte Australian Iron and Steel Pty Ltd (1983) 158 CLR 535, considered

Re Cram; ex parte NSW Colliery Proprietors’ Association Ltd (1987) 163 CLR 117, considered

R v Cook; ex parte Twigg (1980) 147 CLR 15, cited

R v Toohey; ex parte Northern Land Council (1981) 151 CLR 170, cited

Application by GasNet Australia (Operations) Pty Ltd (2004) ATPR 41‑978, applied

Application by Epic Energy South Australia Pty Ltd (2003) ATPR 41‑932, applied

Morley v National Insurance Co [1967] VR 566, considered

 

 

AUSTRALIAN COMPETITION AND CONSUMER COMMISSION v AUSTRALIAN COMPETITION TRIBUNAL and EAST AUSTRALIAN PIPELINE LIMITED

NSD 1191 OF 2004

 

FRENCH, GOLDBERG AND FINKELSTEIN JJ

2 JUNE 2006

MELBOURNE

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	NSD 1191 OF 2004

 

BETWEEN:	AUSTRALIAN COMPETITION AND CONSUMER COMMISSION Applicant
AND:	AUSTRALIAN COMPETITION TRIBUNAL First Respondent   EAST AUSTRALIAN PIPELINE LIMITED Second Respondent
JUDGES:	FRENCH, GOLDBERG & FINKELSTEIN JJ
DATE OF ORDER:	2 JUNE 2006
WHERE MADE:	MELBOURNE (HEARD IN SYDNEY)

 

THE COURT ORDERS THAT:

 

1. The Australian Competition Tribunal decision of 19 May 2005 is set aside.

 

2. The parties are to file written submissions within seven days as to which, if any, portion of the reasons for the judgment of the Court should be treated as confidential on account of reference to confidential information before the Court.

 

3. The parties are to file submissions within seven days as to any consequential orders which should be made.

 

4. The second respondent is to pay the applicant’s costs of the application.

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	NSD 1191 OF 2004

 

BETWEEN:	AUSTRALIAN COMPETITION AND CONSUMER COMMISSION Applicant
AND:	AUSTRALIAN COMPETITION TRIBUNAL First Respondent   EAST AUSTRALIAN PIPELINE LIMITED Second Respondent

 

JUDGES:	FRENCH, GOLDBERG & FINKELSTEIN JJ
DATE:	2 JUNE 2006
PLACE:	MELBOURNE (HEARD IN SYDNEY)

REASONS FOR JUDGMENT

Introduction

1                     Eastern Australian Pipelines Limited (EAPL) is the owner of the Moomba to Sydney Gas Pipeline. The pipeline is a facility which is covered by the National Third Party Access Code for National Gas Pipeline Systems. The Code gives effect to a National Competition Policy and a National Pipeline Access Agreement made between the Commonwealth, State and Territory Governments in 1995 and 1997 respectively.

2                     Under the Code EAPL is required to propose an Access Arrangement for use of the pipeline system by third parties and to propose a Reference Tariff of charges for such use. The Australian Competition and Consumer Commission (the ACCC) which is designated as a Relevant Regulator under the Code did not approve EAPL’s proposed Access Arrangement. Exercising its powers under the Code, it substituted its own arrangement incorporating a tariff based upon a lower Initial Capital Base (ICB) than that adopted by EAPL.

3                     EAPL challenged the ACCC’s decision in the Australian Competition Tribunal (the Tribunal). On 19 May 2005 the Tribunal varied the ACCC decision so far as it related to the ICB of the pipeline.

4                     The ACCC instituted proceedings in this Court on 26 May 2005 for judicial review of the Tribunal’s decision. For reasons which are now published, we are of the view that the Tribunal erred in its approach to the interpretation of the Code. 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. We will therefore set the Tribunal decision aside and invite submissions from the parties as to the consequential orders that should now be made.

Factual and Procedural History

5                     In 1971 the Australian Gas Company Limited (AGL) and the Coopers Basin Gas Producers (the Producers) entered into an agreement under which AGL was to build a gas pipeline from the Producers’ treatment plant in Moomba, South Australia to Wilton, outside Sydney. AGL established a wholly owned subsidiary called East Australian Pipeline Corporation which it committed to complete the design, construction, operation and maintenance of the pipeline.

6                     The proposal that AGL construct the pipeline was rejected by the Commonwealth Government through the Minister for Minerals and Energy in January 1973. Instead, the Commonwealth undertook to fulfil all obligations arising out of the contracts entered into for its construction and operation. The Commonwealth regarded the proposed pipeline as the first step in a broader plan to establish a national pipeline grid. The pipeline, including lateral lines, is referred to in these reasons as the MSP.

7                     The Pipeline Authority Act 1973 (Cth) established the Pipeline Authority (the PA). The function of the PA was to manage the Commonwealth’s responsibilities in relation to the pipeline. Under terms agreed between the PA, AGL and the Producers, the PA took over the construction, operation and maintenance of the MSP. The arrangement was reflected in a Deed of Covenant and Consent dated 17 May 1974 and a Haulage Agreement between AGL and the PA. The main pipeline was constructed by the PA between 1974 and 1976. Various lateral pipelines were constructed in 1981, 1987 and 1993. The PA was unable to earn commercial returns from the pipeline. By 1994 there had been, to quote the EAPL submissions, ‘a massive under‑recovery of the cost of the pipeline over the first 18 years of the pipeline’s life’.

8                     In November 1993 the Commonwealth Government and AGL entered into the Moomba to Sydney Pipeline 51% Sale Agreement whereby AGL agreed to acquire a 51% interest in the MSP with the balance to be sold by tender. The successful tenderer was Gasinvest Australia Pty Ltd (Gasinvest), a joint venture between Canadian and Malaysian interests. AGL Pipelines (NSW) Pty Ltd and Gasinvest acquired 51% and 49% respectively of the issued shares in EAPL formed by the Commonwealth for the purposes of the sale. By an Asset Purchase Agreement dated 30 June 1994, EAPL agreed to purchase the pipeline for $534.3 million. The transfer of the assets from the PA to EAPL was effected on 30 June 1994 pursuant to the Moomba‑Sydney Pipeline System Sale Act 1994 (Cth). At the same time EAPL made an agreement with AGL Wholesale Gas Limited for the transport of gas. This was known as the Gas Transportation Agreement (GTA). Since June 2000 EAPL has been a subsidiary of the Australian Pipeline Trust (APT). The GTA ended at that time and gas is now transported for AGL, which is the MSP’s most significant customer, under a Gas Transportation Deed. This case concerns the terms and conditions upon which EAPL is required to give access to third parties who wish to use the MSP for the transport of gas. That requirement derives from the National Gas Pipeline Access Scheme. The description of that Scheme follows.

9                     Following the 1993 Hilmer Report, the 1995 National Competition Policy Agreement was made between the Commonwealth, State and Territory Governments. On 7 November 1997 the National Pipeline Access Agreement was signed between those Governments. The parties recognised that certain gas transmission pipeline systems are natural monopolies and require regulation in relation to the granting and terms of access. Pursuant to that agreement South Australia enacted a Gas Pipelines Access (South Australia) Act 1997 (SA) (the SA Gas Act). Schedule 1 to the Act is entitled ‘Third party access to natural gas pipelines’. Schedule 2 sets out the ‘National Third Party Access Code for Natural Gas Pipeline Systems’. Schedules 1 and 2 together comprise what is called the ‘Access Law’. Schedule 2 is referred to as ‘the Code’. The other States, the Northern Territory and the Australian Capital Territory enacted laws which adopted the provisions of the South Australian Act and applied the access law and Code as laws of those States and Territories. The Gas Pipelines Access (Commonwealth) Act 1998 (Cth) (Commonwealth Gas Act) applied to the adjacent area, the external areas (other than Norfolk Island and Antarctica) and the Jervis Bay territory. The Access Acts relevant to the present case are those of South Australia, New South Wales and the Australian Capital Territory. They are respectively:

1. The SA Gas Act

2. The Gas Pipelines Access (NSW) Act 1998 – the NSW Gas Act

3. The Gas Pipeline Access Act 1998 (ACT) – the ACT Gas Act.

10                  The Code came into effect on 14 August 1998. The national regulatory scheme so adopted provides for regulation of access to and use of the pipelines by ‘Relevant Regulators’. Functions were conferred on the ACCC. The Code also provides for a relevant Appeal Body which, according to the circumstances, can be the Tribunal. The term ‘Service Provider’ describes the owner and operator of pipelines. The Code applies to pipelines which are ‘Covered’ by it.

11                  Where a gas pipeline is ‘Covered’ by the Code, the Service Provider is required to submit an ‘Access Arrangement’ to the Relevant Regulator setting out the policies and the basic terms and conditions under which third parties may obtain access to pipeline services. When it submits a proposed Access Arrangement, the Service Provider must also submit applicable Access Arrangement Information. This is to enable users and prospective users and the Relevant Regulator to form an opinion on whether the Access Arrangement complies with the Code. The Code prescribes matters which must be included in an Access Arrangement although any relevant matter may also be included.

12                  An important component of the terms and conditions of the Access Arrangement is the Reference Tariff, which is the charge to third parties for using the pipeline. The basis for the calculation of the Reference Tariff for the MSP under the Access Arrangement proposed by EAPL was the focus of debate before the Tribunal and before this Court in the present case. The Reference Tariff must be designed to accord with the objectives and methodologies set out in s 8 of the Code. The objectives include replication of the outcomes of a competitive market. Total revenue to be derived from the pipeline is to be calculated according to one of the methodologies referred to in s 8.4 of the Code, namely Cost of Service, Internal Rate of Return or Net Present Value (NPV) of the asset. The ICB of the pipeline is an important element informing these methodologies and ultimately the determination of the Reference Tariff. The calculation of the ICB was a key issue in the present case as EAPL and the ACCC took significantly different approaches to it.

13                  From the commencement of operation of the Scheme, the ACCC and the Tribunal were authorised to perform functions as Relevant Regulator and Relevant Appeals Body, respectively, under the access laws of the participating jurisdictions pursuant to s 44ZZM and s 44ZZOA of the Trade Practices Act 1974 (Cth) (the TPA). Those sections provided, until March 2004, that a State or Territory access regime could confer functions or powers on each of them. They were repealed by the Trade Practices Legislation Amendment Act 2003 (No 134) (Cth) and replaced with new ss 44ZZM, 44ZZMA and 44ZZMB. The new sections provided for the conferral of functions, powers and duties on the ACCC and the Tribunal under the State and Territory access laws in more elaborate terms intended to meet constitutional requirements for the exercise of State functions by Commonwealth bodies identified in the case of R v Hughes (2000) 202 CLR 535. The State and Territory Gas Acts continued to provide that the Commonwealth Minister, the ACCC, the National Competition Council (NCC) and the Tribunal have the functions and powers expressed to be conferred upon them under the Access Law.

14                  An Access Arrangement submitted by a Service Provider must be approved by the Relevant Regulator before it can become operative under the Access Code. The approval process is governed by s 2 of the Code. The Relevant Regulator may approve a proposed Access Arrangement only if satisfied that it contains the various elements and meets the principles set out in ss 3.1 to 3.2 of the Code. The most significant of the necessary elements of an Access Arrangement are the Reference Tariff and Reference Tariff Policy for which ss 3.3 to 3.6 provide. They require the Relevant Regulator to ensure that in its opinion the Reference Tariff and Reference Tariff Policy of a proposed Access Arrangement comply with principles set out in s 8 of the Code. Where the Relevant Regulator is not satisfied that the requirements of the Code are met it must give the Service Provider the opportunity to submit a revised version. Where the Relevant Regulator is dissatisfied with a revision, it must draft and approve an Access Arrangement that, in its view, satisfies the requirements of the Code.

15                  On 5 May 1999 EAPL submitted a proposed Access Arrangement to the ACCC for the MSP together with the applicable Access Arrangement information. It proposed a value for the ICB of $666.7 million based on what is called the Depreciated Optimised Replacement Cost (DORC) methodology. The DORC methodology involves an assessment of the Optimised Replacement Cost (ORC) of the asset, which in this case is the pipeline system. That value is to be depreciated by the remaining life of the asset. It is said to underpin the calculation of tariffs because it simulates the operation of a competitive market. It does this by setting tariffs at a level theoretically just short of that required to attract a new entrant competitor – Johnstone DJ, Replacement Cost Asset Valuation and Regulation of Energy Infrastructure Tariffs (2003) 39 Abacus 1.

16                  EAPL’s submission assumed a total economic life of 60 years for the Moomba to Wilton part of the pipeline and 80 years for newer, better protected parts of the system. EAPL’s valuation of the MSP equated to its DORC calculation at that time. It used straight line depreciation to derive its DORC value from the ORC which it assessed at $1,058.6 million. Its value for ORC came from a report prepared by Venton & Associates Pty Ltd (Venton) on 20 June 1999. The report was entitled ‘Optimised Design and Cost Estimate EAPL Pipeline Network’. Included in the Venton ORC estimate was a 10% contingency allowance on various cost factors.

17                  On 28 April 2000 EAPL made an application to the NCC for revocation of coverage under the Code for the MSP main line. At about the same time EAPL submitted its proposed Access Arrangement for the Eastern Gas Pipeline (EGP) which was being constructed between Bass Strait and Sydney. It was completed on 17 August 2000. The effect of its construction was to create basin to basin competition as both Bass Strait and Moomba could supply gas into the Sydney market. AGL had applied in January 2000 to the NCC for a determination that the EGP be covered under the Code. The NCC recommended coverage in July 2000 and the recommendation was accepted by the Minister for Industry, Science and Resources (the Minister) on 16 October 2000. The owners of EGP, Duke Eastern Gas Pipeline Pty Ltd and associated companies applied to the Tribunal to reverse the Minister’s decision. On 4 May 2001 the Tribunal reversed the Minister’s decision and ordered that the EGP not be covered.

18                  On 11 August 2000 APT, which had become the owner of EAPL, wrote to the ACCC advising that EAPL would be revising the Access Arrangement and the Access Arrangement Information it submitted in May 1999.

19                  On 8 September 2000 the NCC recommended to the Minister that Coverage of the MSP not be revoked. The Minister accepted that decision on 16 October 2000.

20                  On 21 September 2000, EAPL wrote to the ACCC about proposed revisions to the Access Arrangement which EAPL had under consideration. It indicated, inter alia, that the MSP could reasonably be expected to have a life of 80 years instead of the 60 years previously proposed and that it would be likely to be refurbished by recoating for that purpose.

21                  The ACCC released a Draft Decision on the EAPL Access Arrangement on 19 December 2000. It proposed not to approve it. It proposed instead that the ICB should be fixed at $502.081 million based on a DORC of $539.1 million adjusted to take account of accumulated deferred taxes.

22                  In June 2001 EAPL lodged a second application with the NCC for revocation of coverage over certain sections of the MSP. In doing so it relied upon the Tribunal’s decision relating to coverage on the EGP. EAPL requested the NCC to consider the revocation of Coverage on the Moomba to Wilton pipeline and the Canberra lateral.

23                  EAPL submitted a revised Access Arrangement on 30 April 2002.

24                  On 23 August 2002 the Full Court of the Supreme Court of Western Australia delivered judgment in Re Michael; Ex parte Epic Energy (WA) Nominees Pty Ltd (2002) 25 WAR 511. EAPL made a submission to the ACCC in the light of Re Michael on 5 November 2002. It submitted an estimated value for DORC between $768 million and $972 million. EAPL submitted that as a result of the Re Michael decision the Draft Decision issued by the ACCC contained fundamental errors of law going to the determination of the ICB and hence to the basis of the Access Arrangement. A week later on 11 November 2002 the ACCC released an Issues Paper inviting comments on EAPL’s submission and the implications of the Re Michael decision. On 4 December 2002 EAPL revised its estimated value of ICB based on reasonable expectations to a range of between $784 million and $998 million. In the meantime the NCC recommended to the Minister that Coverage of the MSP not be revoked.

25                  The ACCC released a Final Decision on 2 October 2003 in which it decided not to approve the revised Access Arrangement. It depreciated ORC for the MSP on the basis of a 50 year asset life to 2000 and an 80 year asset life from 2000 onward. It ‘kinked’ the depreciation. It considered that $559.3 million was an appropriate value for the ICB. It did not maintain its earlier position in the Draft Decision that accumulated deferred taxes should be deducted from the DORC as part of the calculation of the ICB. The ACCC required that EAPL submit any revised Access Arrangement by 23 October 2003.

26                  EAPL submitted its revised Access Arrangement on 23 October 2003. Between 23 October 2003 and 11 November 2003 it also made a number of submissions in response to the ACCC’s Final Decision.

27                  On 19 November 2003 the Minister released his decision that Coverage of the Moomba to Marsden section of the MSP should be revoked with effect from 11 December 2003.

28                  On 8 December 2003 the ACCC released its Final Approval decision which was not to approve the further revised Access Arrangement. At the same time it approved its own Access Arrangement pursuant to s 2.20(a) of the Code. EAPL had decided not to incorporate that section of the pipeline from Wagga Wagga to Culcairn, known as the ‘Interconnect’, in its Access Arrangement. The ACCC in its Final Approval adopted an ICB value of $545.4 million which represented the ICB fixed in its decision of 2 October 2003, less the value of the Interconnect.

29                  On 19 December 2003 EAPL applied to the Tribunal for review of the ACCC’s Final Approval on various grounds. It contended that the ACCC had made errors in relevant findings of fact and/or exercised its discretion incorrectly or unreasonably in the circumstances. In particular it alleged that the ACCC exercised its discretion incorrectly when it ascribed a value of $545.5 million to the ICB and in its calculation of the Weighted Average Cost of Capital (WACC). The Tribunal heard the application over eight days in February, March and April 2004.

30                  On 8 July 2004 the Tribunal published reasons for decision in which it held that the ICB proposed by the ACCC should be set aside. It held that the ICB should accord with DORC calculated upon ORC and should include a 7.5% contingency for omissions. The depreciation calculation should assume a life for the MSP as it stood and be based upon NPV calculated in relation to cost. The Tribunal then adjourned the application to enable the parties to consider its reasons and to propose orders to give effect to them.

31                  On 4 August 2004 the ACCC filed an application in the Federal Court of Australia for an order of review of the Tribunal’s decision.

32                  On 18 March 2005 the Tribunal published additional reasons flowing from points of difference between the parties as to the manner in which its earlier reasons should be implemented. The points of difference concerned the method of depreciating ORC. The first was whether the assessment should be made from the point of view of a hypothetical new entrant (HNE) or an incumbent. The second was whether the discount should be at the rate of the WACC or at a risk free rate. The third was whether, if the WACC applied, it was to be calculated before or after tax.

33                  The Tribunal held that the ICB should be based upon DORC with tax on an HNE basis and that the discount rate was to be post‑tax WACC. The ACCC had also provided a submission as to apportionment between Uncovered and Covered portions of the pipeline which were accepted by EAPL. The Tribunal ordered that the proceedings stand over to enable a minute of orders to be brought in.

34                  On 19 May 2005 the Tribunal formally varied the decision of the ACCC so far as it related to the ICB of the pipeline. It held that the ACCC had erred in putting aside known valuation methodologies and devising a method of its own which adjusted the ORC in a novel fashion. It varied the ACCC’s determination of the ICB from $545.43 million to $834.66 million.

35                  On 26 May 2005 the ACCC filed an amended application for an order of review in the Federal Court. Its application invoked the original jurisdiction of the Court under the Administrative Decisions (Judicial Review) Act 1977 (Cth) (ADJR Act) and the Judiciary Act 1903 (Cth). It sought an order setting aside the Tribunal’s decision and, alternatively, the issue of a writ of certiorari quashing that decision. In addition, and in the alternative, the ACCC sought declarations as to the validity of its calculation of the ICB in its Final Decision and Final Approval and that the Tribunal had acted ultra vires s 44ZZOA of the TPA. It also sought an order for mandamus compelling the Tribunal to deal with EAPL’s application in accordance with law, and alternatively remitting the matter to the Tribunal for further determination in accordance with law.

The Statutory and Regulatory Framework – The SA Gas Act

36                  The SA Gas Act recites in its Preamble that the Council of Australian Governments agreed, in February 1994, to general principles of competition policy reform to enable third parties, in particular circumstances, to gain access to essential facilities. It recites also that the Council agreed to more specific proposals for the development of free and fair trade in natural gas. The Preamble recites the further agreement of the Commonwealth, the States and Territories in November 1997 to the enactment of legislation to establish a uniform national framework for third party access to all gas pipelines. The framework was to be one which:

‘(a) facilitates the development and operation of a national market for natural gas; and

 

(b) prevents abuse of monopoly power; and

 

(c) promotes a competitive market for natural gas in which customers may choose suppliers, including producers, retailers and traders; and

 

(d) provides rights of access to natural gas pipelines on conditions that are fair and reasonable for the owners and operators of gas transmission and distribution pipelines and persons wishing to use the services of those pipelines; and

 

(e) provides for resolution of disputes.’

37                  The Code is defined in s 9 in the terms set out in par (b) of the preceding definition of Gas Pipeline Access Law.

Statutory Framework – The Access Law – Schedule 1 to the SA Gas Act

38                  Schedule 1 of the SA Gas Act sets out various definitions in s 2. It defines the term ‘Relevant Regulator’, inter alia, thus:

‘(a) in relation to a transmission pipeline, or a matter concerning a transmission pipeline or service provider of a transmission pipeline, means the ACCC;’

 

Paragraphs (b) and (c) of the definition deal with the circumstances in which the ‘local Regulator’ is the Relevant Regulator. They are not material for present purposes. The Relevant Appeals Body is also defined and under par (a) of that definition is:

 

‘in relation to a decision of the Commonwealth Minister or the ACCC, the Australian Competition Tribunal.’

39                  Part 2 of Schedule 1 refers to the Code. It provides, in s 5, that a provision of the Code inconsistent with the provision of the Access Law other than the Code or of an Act of the legislature is of no effect to the extent of the inconsistency. Section 6 of Pt 2 of Schedule 1 provides that the Code may be amended by agreement between the relevant Ministers of the Australian Governments.

40                  Part 3 of Schedule 1 deals with pipelines and is not material for present purposes. Part 4 deals with the arbitration of access disputes. Section 31 provides that a party may appeal ‘to the Court’ on a question of law from a determination of an arbitrator under Pt 4. The Court there referred to is defined in s 9 of the SA Gas Act as the Supreme Court. Section 32 prevents persons from bringing civil proceedings in respect of a matter arising under the Act except in accordance with Pts 5 or 6 of the Act. This is said not to affect the right of a person to apply for an order for review under the ADJR Act (s 32(4)(b)).

41                  Part 6 of Schedule 1 deals with administrative appeals. It provides for persons affected by a decision to be able to apply to a relevant body to review a decision of the Relevant Regulator.

42                  Where the Relevant Regulator makes a decision under the Code to approve the Regulator’s own Access Arrangement or the Regulator’s own revisions of an Access Arrangement in place of an Access Arrangement or revisions submitted for approval by a Service Provider, a Service Provider, inter alia, may apply to the Relevant Appeals Body for a review of the decision (s 39(1)).

43                  The grounds upon which a Service Provider may apply to the Relevant Appeals Body for a review of the decision of the Relevant Regulator are set out in s 39(2) thus:

‘(2) An application under this section –

(a) may be made only on the grounds, to be established by the applicant –

(i) of an error in the relevant Regulator’s findings of facts; or

(ii) that the exercise of the relevant Regulator’s discretion was incorrect or was unreasonable having regard to all the circumstances; or

(iii) that the occasion for exercising the discretion did not arise; and

 

(b) in the case of an application under subsection (1), may not raise any matter that was not raised in submissions to the relevant Regulator before the decision was made.’

44                  There are limitations upon the range of matters which may be considered by the Relevant Appeals Body and these are set out in s 39(5) thus:

‘The relevant appeals body, in reviewing a decision under this section must not consider any matter other than –

 

(a) the application for review and submissions in support of the application (other than, in the case of an application under subsection (1), any matter not raised in submissions to the relevant Regulator before the decision was made);

 

(ab) the relevant access arrangement or proposed access arrangement or revision or proposed revision of an access arrangement, together with any related access arrangement information or proposed access arrangement information;

 

(ac) in the case of an application under subsection (1a) – any notice of a proposed variation of Reference Tariff within an Access Arrangement Period given by the service provider to the relevant Regulator under the Code;

 

(ad) any written submissions made to the relevant Regulator before the decision was made;

 

(c) any reports relied on by the relevant Regulator before the decision was made;

 

(d) any draft decision, and submissions on any draft decision made to the relevant Regulator;

 

(e) the decision of the relevant Regulator and the written record of it and any written reasons for it;

 

(f) the transcript (if any) of any hearing conducted by the relevant Regulator.’

45                  There is an Appendix to Schedule 1 which contains miscellaneous provisions relating to interpretation. According to s 1 of that Appendix its application may be displaced wholly or partly by a contrary intention appearing in the Law. Section 7 requires purposive interpretation thus:

‘(1) In the interpretation of a provision of this Law, the interpretation that will best achieve the purpose or object of this Law is to be preferred to any other interpretation.

 

(2) Subclause (1) applies whether or not the purpose is expressly stated in this Law.’

 

46                  Section 8 of Appendix 1 sets out extrinsic material to which consideration may be given in the interpretation of a provision of the Law if it is ambiguous or obscure.

Statutory Framework – The Access Code – Schedule 2 to the SA Gas Act

47                  Schedule 2 comprises the Access Code. The Code, as it stood at the relevant time, for the purpose of these proceedings, is the Code at November 1997, the original Code having been subject to six amending agreements. The Introduction to the Code, which does not form part of it but which may be considered in its interpretation, states by way of overview:

‘Under the Code, the owner or operator of a Pipeline that is Covered under the Code is required to lodge an Access Arrangement with the Relevant Regulator. The Access Arrangement is similar in many respects to an undertaking under Part IIIA of the Trade Practices Act and is designed to allow the owner or operator of the Covered Pipeline to develop its own Tariffs and other terms and conditions under which access will be made available, subject to the requirements of the Code. The Relevant Regulator will seek comments on the Access Arrangement and then may either accept it or reject it and specify amendments it requires to be made to the Access Arrangement. If rejected, the Access Arrangement must be modified and resubmitted. Under certain circumstances, the Relevant Regulator may draft and approve its own Access Arrangement. The legislation which implements the Code provides for administrative review of certain regulatory decisions made under the Code.’

 

48                  The Introduction describes important features of the Code as including, inter alia:

‘. Coverage – the mechanism by which Pipelines (including distribution systems) become subject to the Code;

. reliance on an up‑front Access Arrangement outlining Services and Reference Tariffs applicable to a Covered Pipeline;

. pricing principles; …’

49                  Section 1.1 of the Code provides that each pipeline listed in Schedule A is a Covered Pipeline from the date of the commencement of the Code. The transmission pipelines in New South Wales and the Australian Capital Territory covered by the Code are set out in Schedule A and include the Moomba to Sydney pipeline system.

50                  At the time of the ACCC’s Final Decision on 8 October 2003 the entire MSP except for the Interconnect was Covered. However on 19 November 2003 the Minister for Industry, Tourism and Resources revoked Coverage of the section of the pipeline between Moomba and Marsden. That decision was to take effect on 11 December 2003. Because of an application for review of the Minister’s decision, which was subsequently withdrawn, it did not take effect until 20 April 2004. The ACCC’s Access Arrangement was drafted to accommodate a partial revocation of Coverage. It appears that the ACCC took the view that the Access Arrangement would continue to apply to such parts of the pipeline as continued to be Covered once the Minister’s decision took effect. That view was not challenged. The ACCC, in its submissions, said that the revocation of coverage of a significant section of the pipeline was relevant to the present proceeding only to the extent that the figures referred to in much of the material before the Tribunal and in the Tribunal’s reasons for decision pertained to the entire MSP. The parties however had agreed on the appropriate methodology (and the consequential results) of adjusting the relevant figure to account for the partial revocation. Revocation of Coverage is dealt with in ss 1.24 to 1.39 of the Code. It is not necessary to set them out in any detail for present purposes.

51                  Section 2 of the Code deals with Access Arrangements. Again there is an italicised introduction which is not part of the Code, but which may be referred to for its interpretation, which gives an overview of the Access Arrangement process. That has already been outlined sufficiently for present purposes.

52                  The substantive provisions of s 2 of the Code provide, inter alia:

‘2.2 If a Pipeline is Covered, the Service Provider must submit a proposed Access Arrangement together with the applicable Access Arrangement Information for the Covered Pipeline to the Relevant Regulator:

 

(a) within 90 days after the Pipeline becomes Covered under section 1.19 or 1.21 if the Covered Pipeline is not described in Schedule A; or

(b) within 90 days after the commencement of the Code if the Covered Pipeline is described in Schedule A.

…

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

 

2.6 Access Arrangement Information must contain such information as in the opinion of the Relevant Regulator would enable Users and Prospective Users to understand the derivation of the elements in the proposed Access Arrangement and to form an opinion as to the compliance of the Access Arrangement with the provisions of the Code.

 

2.7 The Access Arrangement Information may include any relevant information but must include at least the categories of information described in Attachment A.’

 

53                  There then follow provisions for public consultation and for the approval process by the issue from the Regulator of a draft decision. The Relevant Regulator is required to consider any submissions received by the specified date (s 2.15). The Service Provider may, after the date of the draft decision, resubmit the Access Arrangement revised to incorporate or substantially incorporate amendments specified by the Relevant Regulator in its draft decision or otherwise address matters identified by the Relevant Regulator in its draft decision as reasons for requiring the specified amendments (s 2.15A).

54                  Provision is made for the final decision by the Relevant Regulator. The Relevant Regulator is required to provide a copy of its final decision to, inter alia, the Service Provider (s 2.17). If it decides not to approve the Access Arrangement the Service Provider must, by a date specified by the Relevant Regulator, submit a revised Access Arrangement (s 2.18). If the Service Provider submits a revised Access Arrangement the Relevant Regulator must issue a further final decision which either approves or does not approve the revised Access Arrangement (s 2.19). If the Service Provider does not submit a revised Access Arrangement as required or the Relevant Regulator does not approve any revised Access Arrangement submitted under s 2.19, the Relevant Regulator must (s 2.20):

‘(a) in the case of an Access Arrangement submitted under section 2.2, draft and approve its own Access Arrangement, instead of the Access Arrangement proposed by the Service Provider; or

 

(b) in the case of an Access Arrangement submitted voluntarily under section 2.3, not approve the Access Arrangement.’

 

55                  The Code sets out in s 2.24 the matters which the Relevant Regulator must take into account in approving a proposed Access Arrangement and provides for review as specified in s 39 of the Gas Pipelines Access Law.

56                  Section 3 of the Code deals with the content of Access Arrangements. In particular, and relevantly to the present application, ss 3.3 to 3.5 inclusive provide for Reference Tariffs and Reference Tariff Policy thus:

‘3.3 An Access Arrangement must include a Reference Tariff for:

(a) at least one Service that is likely to be sought by a significant part of the market; and

(b) each Service that is likely to be sought by a significant part of the market and for which the Relevant Regulator considers a Reference Tariff should be included.

 

3.4 Unless a Reference Tariff has been determined through a competitive tender process as outlined in sections 3.21 to 3.36, an Access Arrangement and any Reference Tariff included in an Access Arrangement must, in the Relevant Regulator’s opinion, comply with the Reference Tariff Principles described in section 8.

 

3.5 An Access Arrangement must also include a policy describing the principles that are to be used to determine a Reference Tariff (a ReferenceTariff Policy). A Reference Tariff Policy must, in the Relevant Regulator’s opinion, comply with the Reference Tariff Principles described in section 8.’

 

Section 3.6 requires Access Arrangements to include the terms and conditions on which the Service Provider will supply each Reference Service. Those terms and conditions must in the Relevant Regulator’s opinion be reasonable.

 

57                  Access Arrangement periods accepted by the Relevant Regulator may be of any length. However if the period is more than five years the Relevant Regulator is not permitted to approve the Access Arrangement without considering whether mechanisms should be included to address the risk of forecasts upon which the terms of the Access Arrangement are based and approved, proving to be incorrect (s 3.18).

58                  Section 7 of the Code deals with general regulatory and miscellaneous provisions. Section 8 sets out Reference Tariff Principles. The substantive provisions commence at s 8.1 which provides:

‘8.1 A Reference Tariff and Reference Tariff Policy should be designed with a view to achieving the following objectives:

 

(a) providing the Service Provider with the opportunity to earn a stream of revenue that recovers the efficient costs of delivering the Reference Service over the expected life of the assets used in delivering that Service;

(b) replicating the outcome of a competitive market;

(c) ensuring the safe and reliable operation of the Pipeline;

(d) not distorting investment decisions in Pipeline transportation systems or in upstream and downstream industries;

 

(e) efficiency in the level and structure of the Reference Tariff; and

(f) providing an incentive to the Service Provider to reduce costs and to develop the market for Reference and other Services.

 

To the extent that any of these objectives conflict in their application to a particular Reference Tariff determination, the Relevant Regulator may determine the manner in which they can best be reconciled or which of them should prevail.’

 

59                  Under s 8.2, the Relevant Regulator must be satisfied in determining to approve a Reference Tariff and Reference Tariff Policy that the revenue to be generated from the sales or forecast sales of all services over the Access Arrangement period should be established consistently with the principles and according to one of the methodologies contained in s 8 generally (s 8.2(a)). Generally speaking the manner in which a Reference Tariff may vary within an Access Arrangement period through the implementation of a Reference Tariff Policy is within the discretion of the Service Provider. This is subject to the Relevant Regulator being satisfied that the manner of variation of the Reference Tariff is consistent with the objectives set out in s 8.1.

60                  Section 8.4 sets out methodologies for the calculation of total revenue:

‘8.4 The Total Revenue (a portion of which will be recovered from sales of Reference Services) should be calculated according to one of the following methodologies:

 

Cost of Service: The Total Revenue is equal to the cost of providing all Services (some of which may be the forecast of such costs), and with this cost to be calculated on the basis of:

 

(a) a return (Rate of Return) on the value of the capital assets that form the Covered Pipeline or are otherwise used to provide Services (Capital Base);

 

(b) depreciation of the Capital Base (Depreciation); and

(c) the operating, maintenance and other non‑capital costs incurred in providing all Services (Non‑Capital Costs).

 

IRR The Total Revenue will provide a forecast Internal Rate of Return (IRR) for the Covered Pipeline that is consistent with the principles in sections 8.30 and 8.31. The IRR should be calculated on the basis of a forecast of all costs to be incurred in providing such Services (including capital costs) during the Access Arrangement Period.

 

The initial value of the Covered Pipeline in the IRR calculation is to be given by the Capital Base at the commencement of the Access Arrangement Period and the assumed residual value of the Covered Pipeline at the end of the Access Arrangement Period (Residual Value) should be calculated consistently with the principles in this section 8.

 

NPV: The Total Revenue will provide a forecast Net Present Value (NPV) for the Covered Pipeline equal to zero. The NPV should be calculated on the basis of a forecast of all costs to be incurred in providing such Services (including capital costs) during the Access Arrangement Period, and using a discount rate that would provide the Service Provider with a return consistent with the principles in sections 8.30 and 8.31.

 

The initial value of the Covered Pipeline in the NPV calculation is to be given by the Capital Base at the commencement of the Access Arrangement Period and the assumed Residual Value at the end of the Access Arrangement Period should be calculated consistently with the principles in this section 8.

 

The methodology used to calculate the Cost of Service, an IRR or NPV should be in accordance with generally accepted industry practice.

 

However, the methodology used to calculate the Cost of Service, an IRR or NPV may also allow the Service Provider to retain some or all of the benefits arising from efficiency gains under an Incentive Mechanism. The amount of the benefit will be determined by the Relevant Regulator in the range of between 100% and 0% of the total efficiency gains achieved.’

 

Section 8.4 allows for the use of other methodologies providing that the resultant total revenue can be expressed in terms of one of the methodologies described in s 8.4 (s 8.5).

 

61                  Where the prescribed methodologies yield a range of values for Total Revenue the Relevant Regulator may have regard to financial and operational performance factors to select a figure.

62                  The principles for establishing the Capital Base for the Covered Pipeline when a Reference Tariff is first provided for a Reference Service, are set out in ss 8.10 to 8.14. Sections 8.10 to 8.12 provide:

‘8.10 When a Reference Tariff is first proposed for a Reference Service provided by a Covered Pipeline that was in existence at the commencement of the Code, the following factors should be considered in establishing the initial Capital Base for that Pipeline:

 

(a) the value that would result from taking the actual capital cost of the Covered Pipeline and subtracting the accumulated depreciation for those assets charged to Users (or thought to have been charged to Users) prior to the commencement of the Code;

(b) the value that would result from applying the “depreciated optimised replacement cost” methodology in valuing the Covered Pipeline;

(c) the value that would result from applying other well recognised asset valuation methodologies in valuing the Covered Pipeline;

(d) the advantages and disadvantages of each valuation methodology applied under paragraphs (a), (b) and (c);

(e) international best practice of Pipelines in comparable situations and the impact on the international competitiveness of energy consuming industries;

(f) the basis on which Tariffs have been (or appear to have been) set in the past, the economic depreciation of the Covered Pipeline, and the historical returns to the Service Provider from the Covered Pipeline;

(g) the reasonable expectations of persons under the regulatory regime that applied to the Pipeline prior to the commencement of the Code;

(h) the impact on the economically efficient utilisation of gas resources;

(i) the comparability with the cost structure of new Pipelines that may compete with the Pipeline in question (for example, a Pipeline that may by‑pass some or all of the Pipeline in question);

(j) the price paid for any asset recently purchased by the Service Provider and the circumstances of that purchase; and

(k) any other factors the Relevant Regulator considers relevant.

 

8.11 The initial Capital Base for Covered Pipelines that were in existence at the commencement of the Code normally should not fall outside the range of values determined under paragraphs (a) and (b) of section 8.10.

…

8.12 When a Reference Tariff is first proposed for a Reference Service provided by a Covered Pipeline that has come into existence after the commencement of the Code, the initial Capital Base for the Covered Pipeline is, subject to section 8.13, the actual capital cost of those assets at the time they first enter service. A new Pipeline does not need to pass the tests described in section 8.16(a).’

 

There are further provisions relating to the calculation of the ICB after the expiry of an Access Arrangement, the increase of the Capital Base for a Covered Pipeline to recognise additional capital costs incurred in constructing or acquiring new facilities and the determination of tariffs by reference to forecast capital expenditure and new facilities investment (ss 8.14 to 8.22).

 

63                  The Rate of Return which is used in determining a Reference Tariff is covered in ss 8.30 and 8.31 which provide:

‘8.30 The Rate of Return used in determining a Reference Tariff should provide a return which is commensurate with prevailing conditions in the market for funds and the risk involved in delivering the Reference Service (as reflected in the terms and conditions on which the Reference Service is offered and any other risk associated with delivering the Reference Service).

 

8.31 By way of example, the Rate of Return may be set on the basis of a weighted average of the return applicable to each source of funds (equity, debt and any other relevant source of funds). Such returns may be determined on the basis of a well accepted financial model, such as the Capital Asset Pricing Model. In general, the weighted average of the return on funds should be calculated by reference to a financing structure that reflects standard industry structures for a going concern and best practice. However, other approaches may be adopted where the Relevant Regulator is satisfied that to do so would be consistent with the objectives contained in section 8.1.’

64                  Section 10 of the Code contains interpretation provisions and it is useful to have regard to certain of those definitions, which are as follows (s 10.8):

‘“Access Arrangement” means an arrangement for access to a Covered Pipeline that has been approved by the Relevant Regulator.

 

“Access Arrangement Information” means information provided by a Service Provider to the Relevant Regulator pursuant to section 2.2, 2.3, 2.9, 2.28 or 2.30.

 

“Access Arrangement Period” means the period from when an Access Arrangement or revisions to an Access Arrangement take effect (by virtue of a decision pursuant to section 2) until the next Revisions Commencement Date.

…

“Capital Base” has the meaning given in section 8.4.

…

“Coverage/Covered” means, in relation to a Pipeline or part of a Pipeline, that that Pipeline or part of a Pipeline is subject to the provisions of this Code pursuant to sections 1.1, 1.13, 1.20 or 1.21.

…

“Reference Tariff” means a Tariff specified in an Access Arrangement as corresponding to a Reference Service and which has the operation that is described in sections 6.13 and 6.18.

…

“Reference Tariff Policy” has the meaning given in section 3.5.

…

“Relevant Appeals Body” has the meaning given in the Gas Pipelines Access Law.

…

“Relevant Regulator” has the meaning given in the Gas Pipelines Access Law.’

 

Statutory and Regulatory Framework – the ACT Gas Act

65                  Section 6 of the ACT Gas Act provides:

‘6. The Gas Pipelines Access Law applies as a Territory law and, as so applying, may be cited as the Gas Pipelines Access (ACT) Law.’

 

66                  By s 15, jurisdiction is purportedly conferred on the Federal Court with respect to civil and criminal matters arising under the Gas Pipelines Access (ACT) Law. Where cross boundary pipelines are concerned, s 20 provides that the action taken under the Gas Pipelines Access legislation of a scheme participant in whose jurisdictional area a part of the pipeline is situated will be taken also to be action under the Gas Pipelines Access legislation of each other scheme participant in whose jurisdiction area a part of the pipeline is situated.

Statutory and Regulatory Framework – the NSW Gas Act

67                  The NSW Gas Act applies the SA Gas Act as a law of New South Wales which may be referred to as the Gas Pipelines Access (New South Wales) Law. Section 10 confers upon the Commonwealth Minister, the ACCC, the NCC and the Tribunal ‘…the functions and powers conferred or expressed to be conferred on them respectively under the Gas Pipelines Access (New South Wales) Law.’

68                  By s 16 jurisdiction is said to be conferred on the Federal Court in the following terms:

‘16. Jurisdiction is conferred on the Federal Court with respect to:

(a) civil and criminal matters arising under the Gas Pipelines Access (New South Wales) Law, and

 

(b) applications made to the Federal Court under the Administrative Decisions (Judicial Review) Act 1977 of the Commonwealth, as applying as a law of this State under section 18 or 19.’

 

69                 Section 18 of the New South Wales Act provides that the ADJR Actof the Commonwealth applies as a law of New South Wales to any matter arising in relation to a decision of a Code body under the Gas Pipelines Access (New South Wales) Law as if that law were an enactment within the meaning of the ADJR Act and not a law of New South Wales. For the purposes of the application of the ADJR Act as a law of New South Wales, a matter arising in relation to a decision of a Code body under the Gas Pipelines Access (New South Wales) Law is taken to be a matter arising in relation to the laws of the Commonwealth in the same way as if the Gas Pipelines Access (New South Wales) Law were a law of the Commonwealth. It is taken not to be a matter arising in relation to the laws of New South Wales.

70                 The ADJR Act is also said to apply as a law of New South Wales to any matter arising in relation to a decision of a Code body under the Gas Pipelines Access legislation of another scheme participant as if that legislation were an enactment within the meaning of the ADJR Act and not a law of the other scheme participant (s 19(1)). There are similar provisions as in the ACT Act in respect of actions in relation to cross boundary pipelines (s 21). The Act schedules the Access Law and the Code.

Statutory Framework – The Gas Pipelines Access (Commonwealth) Act 1998

71                  The Commonwealth Gas Act, as already noted, applies the Access Law to the adjacent areas in respect of the States and Territories, Jervis Bay and the external territories other than Norfolk Island and Antarctica.

72                  The Act confers jurisdiction on the Federal Court with respect to civil and criminal matters arising under the Gas Pipelines Access (Commonwealth) Law (s 16(1)). It also purports to confer and authorise the exercise of jurisdiction conferred on the Federal Court by the Gas Pipelines Access legislation of scheme participants other than the Commonwealth, with respect to matters arising under the Gas Pipeline Access Laws and applications made to the Federal Court under the ADJR Act ‘as applying under that legislation as a law of that scheme participant’ (s 16(2)).

73                  Any decision of a Code body under the Gas Pipelines Access (Commonwealth) Law or regulations is to be taken to be a decision under an enactment within the meaning of the ADJR Act (s 18(1)). The ADJR Act is also said to apply to (s 19(1)):

‘… any matter arising in relation to a decision of a Code body under the gas pipelines access legislation of a scheme participant other than the Commonwealth as if that legislation were an enactment within the meaning of that Act and not a law of that scheme participant.’

 

74                  Section 19(2) provides:

‘For the purposes of the application of the Administrative Decisions (Judicial Review) Act 1977, a matter arising in relation to a decision of a Code body under the gas pipelines access legislation of a scheme participantother than the Commonwealth:

 

(a) is taken to be a matter arising in relation to laws of the Commonwealth in the same way as if that legislation were a law of the Commonwealth; and

 

(b) is taken not to be a matter arising in relation to laws of that scheme participant.’

 

The Commonwealth Gas Act also effected amendments to other Statutes to facilitate the national scheme. These amendments are set out in Schedule 1 and are effected by section 3. The Act also introduced, via Schedule 1, new provisions into the TPA authorising the ACCC and the Tribunal to perform functions and exercise powers conferred on them by laws of the Commonwealth or of the States or Territories establishing an access regime. These provisions are set out in the next part of these reasons.

 

Statutory Framework – The Trade Practices Act 1974 (Cth)

75                  Section 30(1) of the TPA provides that the Trade Practices Tribunal that existed immediately before s 30(1) commenced, continues to exist as the Australian Competition Tribunal. Part IIIA of the TPA deals with access to services. It binds the Crown in right of the Commonwealth, the States, the Australian Capital Territory and the Northern Territory (s 44E). Division 8 of Pt IIIA deals, inter alia, with the conferral of functions or powers, and more recently the imposition of duties, upon the ACCC and the Tribunal by State access regime laws.

76                  As it stood prior to 1 March 2004, Div 8 contained two provisions relevant for present purposes. They were introduced by Schedule 1 of the Commonwealth Gas Act. Section 44ZZM provided that the ACCC may perform any function conferred on it by and for the purposes of a law of the Commonwealth or of a State or Territory that establishes an access regime, and exercise any power either conferred by that law to facilitate the performance of that function or which is necessary or convenient to permit that function to be performed (s 44ZZM(1)). Such functions or powers were to be conferred in accordance with a relevant agreement between the Commonwealth or the State or Territory concerned (s 44ZZM(2)). Section 44ZZOA provided for the performance of functions and the exercise of powers by the Tribunal under other access regimes.

77                  Division 8 was amended by the Trade Practices Legislation (Amendment) Act 2003 (No 134 of 2003) which amendments relevantly came into effect on 1 March 2004. They were designed to ensure that the provisions of the TPA authorising the conferral of functions or powers or the imposition of duties on Commonwealth authorities including the ACCC and the Tribunal, by laws of the States or Territories, would meet the constitutional requirements set out in Hughes which is discussed later in these reasons. The amending Act repealed ss 44ZZM and 44ZZOA. It inserted a new s 44B which defined ‘State or Territory access regime law’ to mean:

‘(a) a law of a State or Territory that establishes or regulates an access regime; or

(b) a law of a State or Territory that regulates an industry that is subject to an access regime.’

 

and also inserted ss 44ZZM, 44ZZMA and 44ZZMB which made provision for the way in which duties may validly be imposed upon the ACCC or Tribunal under a State or Territory access regime law.

 

Statutory Framework – The ADJR Act

78                  The ADJR Act provides for judicial review of the classes of decision to which the Act applies. It is one of the bases upon which the ACCC invokes the jurisdiction of the Federal Court in the present proceeding.

79                  The terms ‘decision to which this Act applies’ is defined in s 3. The definition of ‘enactment’ which also appears in s 3 includes:

‘(ca) an Act of a State, the Australian Capital Territory or the Northern Territory, or a part of such an Act, described in Schedule 3; …’

 

The reference to Schedule 3 in the definition of enactment and Schedule 3 itself were introduced by the Jurisdiction of Courts Legislation Amendment Act 2000 (No 57 of 2000). The relevant parts of Schedule 3 introduced into the ADJR Act by that amending legislation are as follows:

‘1. What this Schedule does

This Schedule describes Acts of the States, the Australian Capital Territory and the Northern Territory, and parts of such Acts, that are enactments for the purposes of this Act.

 

2. State, ACT and NT Acts, and parts of such Acts, that are enactments

The following are enactments for the purposes of this Act:

…

(d) The Gas Pipelines Access (South Australia) Act 1997 of South Australia, or an Act of another State or of the Australian Capital Territory or the Northern Territory that applies Schedule 1 to that South Australian Act as a law of that other State or of that Territory;’

 

80                  The Explanatory Memorandum to the Bill that became the amending Act stated, inter alia:

‘As a result of the decision in Re Wakim, the purported adoption by States of the ADJR Act fails entirely. The object of the amendments to the ADJR Act is to restore the pre‑Wakim system of judicial review, as it applied to Commonwealth officers and authorities performing functions under State law, but as Federal rather than State jurisdiction.

 

The amendments in the Bill to the ADJR Act will extend the Act’s operation as Commonwealth law to conduct and decisions taken by Commonwealth officers and authorities under powers and functions conferred by specified classes of State or Territory laws. A new Schedule 3 will be added to the ADJR Act which will list those classes of laws. As noted above, the High Court has recognised that, in general, where a Commonwealth officer or authority exercises a power or function validly conferred by a State law, the officer or authority remains a Commonwealth officer or authority, amenable to federal judicial review (Re Cram (1987) 163 CLR 117).

 

The amendments will mean that where a State or Territory law confers functions or powers on a Commonwealth officer or authority, and the law is one of a class listed in new Schedule 3, the Commonwealth ADJR Act will apply as Commonwealth law to those functions or powers. Since the jurisdiction conferred on the Federal Court will be federal jurisdiction, the Federal Court will be able to undertake ADJR review.’

 

81                  Section 8(1) of the ADJR Act relevantly confers jurisdiction on the Court in the following terms:

‘8(1) The Federal Court has jurisdiction to hear and determine applications made to the Federal Court under this Act.’

Statutory Framework – Judiciary Act 1903 (Cth)

82                  Section 39B of the Judiciary Act confers jurisdiction on the Federal Court as follows:

‘(1) Subject to subsections (1B), (1C) and (1EA), the original jurisdiction of the Federal Court of Australia includes jurisdiction with respect to any matter in which a writ of mandamus or prohibition or an injunction is sought against an officer or officers of the Commonwealth.

 

(1A) The original jurisdiction of the Federal Court of Australia also includes jurisdiction in any matter:

 

(a) in which the Commonwealth is seeking an injunction or a declaration; or

 

(b) arising under the Constitution, or involving its interpretation; or

 

(c) arising under any laws made by the Parliament, other than a matter in respect of which a criminal prosecution is instituted or any other criminal matter.’

The EAPL Revised Access Arrangement – 30 April 2002

83                  The revised EAPL Access Arrangement sent to the ACCC on 30 April 2002 was the version to which the ACCC responded when it published its Final Decision in October 2003. The history of subsequent exchanges between EAPL and the ACCC was set out earlier. EAPL also provided a further Revised Access Arrangement Information document on 7 July 2003 and a final revised Access Arrangement and Access Arrangement Information document on 23 October 2003 in the wake of the ACCC’s Final Decision.

84                  The MSP was defined in the revised Access Arrangement to comprise the main pipeline from Moomba to Wilton, lateral pipelines from Dalton to Canberra, Young to Lithgow, Young to Wagga Wagga and Burnt Creek to Griffith. As mentioned previously the pipeline from Wagga Wagga to Culcairn was referred to as the ‘Interconnect’. The Moomba to Wilton pipeline, the Wagga lateral, the Canberra lateral and the Interconnect were jointly designated the ‘Main Line’ in the Access Arrangement. The northern lateral and the Griffith lateral were jointly referred to as ‘Regional Laterals’. All of the pipelines other than the Interconnect were Covered Pipelines under the Code. The Interconnect was treated as part of the Main Line for the purposes of the Access Arrangement.

85                  The categories of service offered under s 5 of the revised Access Arrangement comprised:

(a) a Reference Service for firm transport designated the Firm Service; and

(b) a Negotiable Service with negotiable tariffs and negotiable terms and conditions.

The services were described in more detail in ss 6 and 9. EAPL said it would provide the Firm Service under the Transportation Agreement on terms and conditions consistent with the Access Arrangement including the principles.

 

86                  In s 8.2 EAPL stated the principles applicable to the development of its Reference Tariffs.

87                  In s 8.5 it was stated that the ICB was allocated between the separate pipelines comprising the MSP. If at the time of a review of the Access Arrangement any one or more of the pipelines had ceased to be a Covered Pipeline then the Capital Base as at 1 July 2000 for those pipelines which remained covered would be the amounts set out in a table.

EAPL’s Further Revised Access Arrangement Information – July 2003

88                  Further revised Access Arrangement Information was provided to the ACCC by EAPL in July 2003. In s 3.1.2 EAPL discussed its calculation of DORC:

‘DORC has been calculated by reference to the NPV methodology for deriving DORC from ORC. This forward‑looking methodology is consistent with the methodology and meaning of DORC as set out in the Commission’s Draft Statement of Regulatory Principles and the 1998 Final Decision on the Victorian gas transmission system now owned by GasNet. It is also consistent with the evidence accepted by the WA Supreme Court in the Epic Decision and with the view expressed by the Commission’s consultants.’

 

89                  The economic written down value of the MSP which reflected past under‑recoveries of depreciation and return on assets was said, at s 3.1.3, to reflect the original intention that the pipeline’s costs would be recovered over its life with early under‑recoveries being recouped in later years. Based on the ACCC’s calculation of the economic written down value of $1,291 million at 30 June 1994 EAPL estimated a value of $1,700 million at 30 June 2000.

The ACCC’s Final Decision – 2 October 2003

90                  In its Final Decision the ACCC set out a table identifying differences between various elements of the EAPL proposal as amended and the ACCC’s final decision. Differences relevant for present purposes were as follows:

Elements	EAPL’s Proposal	ACCC’s Final Decision
DORC	$972m Based on the NPV of the first ‘n’ years’ cash flows of a new entrant in a hypothetically contestable market where ‘n’ is the remaining life of the existing asset.	$715m Based on ‘straight line depreciation’ methodology for deriving DORC from ORC.
ICB	$779m Based on EAPL’s ‘reasonable expectations under the prior regulatory regime’. Represents the NPV of EAPL’s cash flows at 1998.	$559m ORC written down on basis of a 50 year asset life, the deprecation rate assumed by EAPL in the past.
Tariff methodology, tariff path and forecast revenue	NPV methodology Price path approach to setting tariffs using the CPI‑X mechanism.	NPV methodology Price path approach to setting tariffs using the CPI‑X mechanism.
	X factors and average nominal revenues specified.	Higher X factors and lower average nominal revenue per year over the Access Arrangement Period set out.
Costs allocation and tariff setting	EAPL proposed allocating costs between two pipeline systems: the main line and regional laterals. Only one Reference Tariff was proposed, and this tariff was divided into a capacity and throughput charge.	The Final Decision accepts the approach proposed by EAPL.

91                  The ACCC’s Final Decision then addressed key issues. The first of these, grouped together, were Reference Tariff methodology, tariffs and revenue. The ACCC observed that as the NPV and price path methodologies used by EAPL are set out in the Code, it could have no objection to their use. It did, however, have concerns with individual parameters proposed by EAPL and had adopted different values for the ICB, rate of return, non‑capital costs and volumes.

92                  The ACCC referred to EAPL’s submission, based on s 8.10(g) of the Code, that the ICB should be valued at $779 million based upon ‘reasonable expectations under the prior regulatory regime’. The ACCC did not accept that an ICB of $779 million was underpinned by the previous regulatory regime or that it formed part of the 1994 Sale Agreement with the Australian Government. It did not consider that EAPL’s figure satisfied the criteria in s 8.10(g). It went on:

‘For the purposes of the Final Decision the Commission considers that the appropriate value for the ICB is $559.3 million. This valuation is based on the optimised replacement cost (ORC) of the assets, which the Commission has, over the period 1976 to 2000, depreciated on the basis of a 50 year asset life (the life assumed in the past by EAPL for depreciation purposes). Future depreciation charges, however, are based on an 80 year asset life, which EAPL submitted is now the useful life of the MSP and which the Commission has accepted. In determining the value for the ICB, the Commission has placed significant weight on section 8.10(f) of the Code which provides for consideration to be given to the basis on which tariffs have been (or appear to have been) set in the past, economic depreciation and historical returns.

 

The Commission did not consider it appropriate to revalue the asset base upwards as a result of the variation to the useful life from 50 to 80 years. Revaluations upwards as a result of extensions to the useful life of an asset would result in the asset owner more than recovering its efficient costs over the life of the asset.’

 

93                  Following a detailed discussion of its Draft Decision, submissions in response to it and its responses to those submissions, the ACCC set out its conclusions on the question of the ICB. It began by observing that s 8.11 of the Code provides that the value of the ICB should not normally fall outside the value of Depreciated Actual Cost (DAC) and DORC. It did not consider that the circumstances of the MSP would warrant a value outside this range. To support its valuation of the ICB at $559 million it gave ‘considerable weight’ to s 8.10(f) of the Code. It took as a starting point the value of ORC which it depreciated on the assumption of a 50 year asset life to 2000 consistent with the useful asset life previously assumed by EAPL. For the period from 2000 onwards the ACCC accepted and used the 80 year life, which EAPL had submitted was the current useful life of the system. This involved what was described as a ‘kinked’ depreciation.

94                  The ACCC said that, having regard to all the relevant factors in s 8.10 of the Code, it considered that a value for the ICB of $559 million best satisfied the objectives contained in s 8.1. It considered that three criteria of s 8.1 were particularly relevant. They were: recovery of efficient costs (s 8.1(a)), replicating the outcomes of a competitive market (s 8.1(b)) and not distorting investment decisions (s 8.1(d)). The ACCC noted the relationship between ss 8.1(a) and 8.1(b) and comments of the Full Court in Re Michael that over time prices in a competitive market would replicate efficient costs.

95                  The ACCC did not consider that a DAC of $100 million would satisfy ss 8.1(a) and 8.1(b) given the policy of the previous owner, which was the Australian Government, not to earn a commercial rate of return. It then said:

‘In addition, the Commission does not consider that a value equal to DORC of $715 million and based on an 80 year life is appropriate, since a 50 year life has been assumed in the past. If the useful life of an asset changes at a particular point in time it is appropriate that the residual value of the asset would then be depreciated over the revised useful life. However, an extension to the useful life should not necessarily lead to an upward revision of the asset value. To do so would allow the asset owner to recover more than the efficient costs of the asset over the life of the asset.’

 

The ACCC considered that a value for the ICB of $559 million based on the useful asset life assumed at 50 years in the past and future depreciation charges based on the current assumed life of 80 years would best allow EAPL to recover efficient costs over the expected life of the pipeline and would replicate the outcomes of a competitive market.

 

96                  The ACCC referred to other matters which it considered supported its conclusion that a value of $559 million best satisfied the s 8.1 criteria. They were as follows:

1. The loss of market share to the EGP.

2. The similarity of tariffs derived from an ICB value of $559 million to those that would be derived under the Hypothetical New Entrant Test (HNET).

 

97                  The ACCC said that the Western Australian Full Court, in Re Michael, had found that the price paid by a Service Provider in acquiring a pipeline prior to the Code was a relevant factor as it could be considered the Service Provider’s investment in the asset. Although the ACCC did not consider the price paid by EAPL in 1994 formed the basis of the ICB, the value of the ICB determined by the ACCC would provide EAPL with the opportunity to recover the price it paid after taking account of depreciation and capital expenditure to that date.

EAPL’s Final Revised Access Arrangement and Access Arrangement Information – 23 October 2003

98                  The final revised Access Arrangement submitted by EAPL offered the same services as its preceding Access Arrangement but different tariff calculations for the alternative Coverage hypotheses.

99                  It set out tariffs for the period 1 January 2004 to 30 June 2009. The revised Access Arrangement submitted on 30 April 2002 had set out tariffs for the period 1 October 2002 to 30 June 2008. At the time of the final revised Access Arrangement 1 July 2009 was the anticipated date at which revisions would commence.

100               The revised Access Arrangement Information submitted on 29 October 2003 was described in its preamble ‘as partially revised’ and as addressing:

‘1. The Commission’s requirement to amend the Access Arrangement Information to reflect the removal of the Interconnect from the Access Arrangement; and

2. EAPL’s proposed change to the Access Arrangement period.’

The ACCC’s Final Approval – 8 December 2003

101               After considering EAPL’s final revised Access Arrangement the ACCC was not satisfied that it had incorporated all the amendments specified in the Final Decision. The ACCC was also not satisfied that EAPL had substantially incorporated or otherwise addressed its reasons for requiring the amendments. Acting pursuant to s 2.19(c) of the Code, the ACCC made a further Final Decision not to approve the final revised Access Arrangement submitted by EAPL on 23 October 2003. Pursuant to s 2.20(a) of the Code the ACCC drafted and approved its own Access Arrangement for the MSP.

102               As described in its Executive Summary, the form of the Access Arrangement approved by the ACCC under s 2.20(a) closely followed that proposed by EAPL which was deliberately drafted to accommodate a partial revocation of Coverage. Like EAPL’s proposed Access Arrangement, the ACCC’s Access Arrangement was expressed to apply to ‘such parts of the MSP as are covered’. The tariffs were expressed without reference to geographic location but on a distance basis.

103               The ACCC set out a tabular overview of differences between its Final Decision, the EAPL final revised Access Arrangement and the ACCC’s Final Approval. That table disclosed the ACCC’s acceptance of EAPL’s decision to remove the Interconnect from the Access Arrangement. The difference between the values adopted in the ACCC’s Final Decision and its Final Approval reflected that removal. This had flow‑on effects to other parameters such as capital expenditure, non‑capital costs, depreciation, revenue and the tariff path. The ICB adopted in the ACCC’s Final decision was $559 million. In EAPL’s revised proposal it was $756.9 million and in the ACCC’s Final Approval it was $545.4 million. The depreciation was shown as $10.5 million on EAPL’s revised proposal and $63.8 million in real 2003 dollars in the ACCC’s Final Approval. EAPL proposed a return on equity of 11.5%. The ACCC’s Final Approval had a return on equity of 11.35%. EAPL’s benchmark rating was BBB, that of the ACCC was BBB+. The ACCC also rejected EAPL’s claims for a cash flow allowance of $6.73 million for equity issuance, debt raising and asymmetric risk. The remaining differences are not central to the present proceedings.

104               In discussing the ICB in its Final Approval the ACCC noted EAPL’s rejection of its value of $559.3 million calculated in July 2003 dollars. The ACCC did not agree with EAPL’s arguments and did not consider that it had addressed the concerns raised in the Final Decision. The value of ICB at $545.4 million (real July 2003) reflected the ACCC’s Final Decision ICB less the value of the Interconnect.

105               The ACCC accepted EAPL’s depreciation methodology in the Final Decision, but did not accept its schedule of depreciation charges. Under the economic depreciation approach proposed by EAPL, depreciation was the residual after other costs were deducted from revenue. Accordingly, the differences in the level of depreciation charges proposed by EAPL and the ACCC could be attributed to the differences in the input factors that comprised the revenue requirements such as the value of the ICB.

106               In relation to the WACC, the ACCC observed that EAPL had accepted an equity beta of 1, forecast inflation and the ACCC’s estimation of the effective tax rate. However EAPL had expressed concerns about the terms of the risk free rate and the credit rating assumed for the derivation of the debt margin. EAPL had further submitted that it should receive additional allowances for equity issuance, debt raising and asymmetric risk. The ACCC disagreed with the arguments put forward by EAPL in relation to the risk free rate and its contention that the 10 year bond rate should form its basis instead of rates matching the length of the regulatory period, which was the ACCC’s requirement. EAPL’s contentions did not undermine the arguments put forward in the Final Decision in support of a BBB+ benchmark.

107               The ACCC maintained its position that the appropriate construction of DORC from ORC was reached by using a straight line approach. It relied upon the reasons given in its Final Decision. EAPL had maintained its earlier arguments that the NPV approach advocated by Agility Management Pty Ltd (Agility) in August 2000 was more appropriate. EAPL had also quoted from a report prepared by National Economic Research Associates (NERA) in connection with the New Zealand Commerce Commission’s Gas Control Inquiry in which report NERA stated:

‘These recent statements by NERA suggest that the Commission’s reliance on NERA’s 2002 Report in regard to the difficulties and uncertainties in the cost‑based calculation [NERA’s approach to DORC] may have been misplaced.’

 

The ACCC considered that reference to NERA’s report in relation to the New Zealand Commerce Commission inquiry had been taken out of context and that EAPL’s conclusion was unfounded. It noted that neither itself nor EAPL considered that the ICB should be established at the value of DORC.

 

108               The ACCC said that in establishing the value of ORC it excluded the 10% contingency allowance which EAPL had included. It considered that the inclusion of an allowance for contingencies might be appropriate when a firm was estimating the costs of constructing a new pipeline. It did not consider that the inclusion was appropriate in determining, for regulatory purposes, the value of ORC of an existing pipeline. The ACCC referred to the observation in the Venton report that it is industry practice for ‘known but not identified items’ to be allowed for in an item called ‘contingency’. The ACCC said:

‘Rather than identify and quantify each of these unspecified items, Venton has applied an across‑the-board 10 per cent as an average cost to cover these items. Venton provided only a few examples of areas which justify the inclusion of a contingency factor.’

 

109               The ACCC saw EAPL’s submission of 23 October 2003 as asserting that the ACCC did not rely on two of the factors mentioned in s 8.10(f), namely the basis for past tariffs and historical returns, but focused solely on the matter of economic depreciation. EAPL argued that the ACCC had erred in its consideration of economic depreciation by having regard to the accounting concept of depreciation rather than the economic concept. The ACCC, in its Final Approval, considered this to be an inaccurate characterisation of its decision. It had regard to s 8.10(f) as a whole and had not restricted its analysis in the manner suggested by EAPL.

110               EAPL had submitted that the proper application of s 8.10(f) required the ACCC to have regard to an economic written down value which it estimated at $1,700 million. This was the initial cost of the MSP less economic depreciation to date. The ACCC considered EAPL’s proposed written down economic value of $1,700 million. However it gave it little weight in establishing the value of the ICB.

111               The ACCC said that its Final Decision gave weight to the fact that until the year 2000 EAPL assumed a useful life of 50 years for the pipeline. EAPL had said that the ACCC ought not to have given weight to the 50 year asset life assumed by it as this was used for accounting purposes only. The ACCC said:

‘Notwithstanding EAPL’s comments, the Commission considers that the 50 year asset life is the basis on which tariffs appear to have been set since 1994. It is clear from EAPL’s statutory accounts that EAPL assumed a useful life of 50 years (32.5 years remaining useful life) for the MSP to 2000. Moreover, EAPL’s “reasonable expectations” valuation, which represented EAPL’s estimated future cash flows as at 1998, is based on an assumed asset life of 50 years. The Australian National Audit Office also noted that estimates of the value of the MSP at the time of the 1994 sale were based on the assumption of a 50 year life.’

 

The ACCC thought that the evidence suggested that the assumed 50 year life was not just an accounting convention as argued by EAPL, but had represented the expected life of the pipeline. The fact that the assumed life was now 80 years could be attributed to factors such as the increasing prospect of Moomba becoming a hub for northern gas and the extension of the technical life of the Moomba to Wilton main line through refurbishment.

 

112               In relation to the ‘reasonable expectation’ criterion under s 8.10(g) of the Code, the ACCC acknowledged EAPL’s submission that the appropriate ICB was represented by the NPV of the cash flows that EAPL would have reasonably expected under the prior regulatory regime which it asserted was at least $784 million. The ACCC had rejected this argument as appeared from the Final Decision. It proceeded on the basis that s 8.10(g) required consideration of reasonable expectations only where they were brought about or underpinned by the prior regulatory regime. The ACCC continued to believe that this was the appropriate construction of that provision.

113               For the purposes of its approved Access Arrangement the ACCC established a value for the ICB of $545.4 million. It stated that:

‘In establishing the value of the ICB the Commission considered all the factors in section 8.10 of the Code and weighed them in accordance with the objectives of section 8.1. The Commission considers that a value for the ICB of $545.4 million (real July 2003) best satisfies the requirements of the Code. The Commission’s revised access arrangement is drafted accordingly.’

 

The Application for Review before the Tribunal

114               The application began with a global statement in paragraph 2 that the ACCC had made errors in relevant findings of fact and that further, or in the alternative, it had exercised its discretion incorrectly or unreasonably in all the circumstances. In the event the contentions advanced in the application all related to the incorrect and/or unreasonable exercise of discretion.

115               EAPL set out a number of contentions in the application which were particularised in some detail about the ways in which the ACCC was said to have exercised its discretion incorrectly and/or unreasonably. The first group of contentions in paragraph 11 of the application attacked the ACCC’s exercise of its discretion as incorrect and/or unreasonable by reference to its decisions, that in the calculation of Reference Tariffs:

‘(a) the initial capital base (ICB) should be set at $545.4 m;

(b) the weighted average cost of capital (WACC) and associated parameters should be based on a return on equity of 11.35%, a risk free rate for a term of 5.5 years and a benchmark rating of BBB+, and should not take into account additional allowances for equity issuance, debt raising and asymmetric risk;

(c) the management fee payable to Agility and the marketing fee payable to Petronas would not be incurred by a prudent service provider acting efficiently and should be excluded from non‑capital costs; and

(d) the initial prices should be 0.03605 c/GJ/km for capacity and 0.00226 c/GJ/km for throughput for the Mainline and 0.04839 c/GJ/km for capacity and 0.00304 c/GJ/km for throughput for the Regionals and that the X factors to be used in the price path adjustment mechanism should be 1.6% for the mainline and 0.6% for the regionals.’

 

116               Paragraph 12 attacked the exercise of the ACCC’s discretion in the terminology and content of specific clauses of its Access Arrangement. Paragraph 13 specifically attacked the ACCC’s exercise of discretion in setting the ICB at $545.4 million in that:

‘(a) when applying section 8.10(b) of the Code the Commission did not take into account, or adequately take into account, the Depreciated Optimised Replacement Cost (DORC) of the MSP determined by applying a net present value depreciation methodology;

(b) the Commission wrongly determined the DORC of the MSP by using a straight line depreciation methodology;

(c) further or in the alternative, the Commission failed to take into account, or adequately take into account, as required by section 8.10(c) of the Code, the value of the MSP determined by applying a net present value depreciation methodology to the optimised replacement cost (ORC);

(d) in determining the ORC of the MSP the Commission wrongly rejected the allowance of 10% recommended by Venton and Associates;

(e) the Commission failed to properly interpret or apply the factors section 8.10(f) of the Code requires the Commission to take into account;

(f) further or in the alternative, the Commission failed to take into account the fact that different pipelines within the MSP were constructed at different times and have different asset lives;

(g) the Commission failed to take into account, or adequately take into account, EAPL’s reasonable expectations as required by section 8.10(g) of the Code;

(h) the Commission wrongly relied upon NERA’s calculation of prices purportedly derived by use of the hypothetical new entrant test (HNET) as a relevant factor to be taken into account under section 8.10(k) of the Code;

(i) the Commission otherwise failed to properly interpret and apply the factors the Code requires the Commission to take into account, including the factors specified in sections 2.24 and 8.1, and failed to appropriately balance those various factors.’

 

117               Paragraph 14 attacked the ACCC’s exercise of discretion in setting the WACC and associated parameters on the basis that:

‘(a) the risk free rate should have been based on at least the 10 year bond rate and not the 5 year bond rate;

(b) the allowance for the cost of debt should have been based on a BBB credit rating and not a BBB+ credit rating; and

(c) allowances should have been made for the costs of debt and equity issuance and asymmetric risk.’

 

118               The Tribunal was asked to vary the decision of the ACCC by substituting for the ICB and WACC determined by the ACCC those proposed by EAPL in its Access Arrangement dated 23 October 2003. An order was also sought to allow the management fee payable to Agility and the marketing fee payable to Petronas as non‑capital costs. It sought an order varying the decision of the ACCC by using ‘appropriate initial prices and X factors for the mainline and for the regionals in the price path adjustment mechanism’.

119               Further orders relating to variation of particular clauses of the ACCC’s Access Arrangement were also sought.

The Tribunal’s Reasons for Decision

120               Notwithstanding the broad scope of the grounds of the application the parties had agreed upon particular issues to be determined before the Tribunal. The Tribunal organised its consideration of those matters under three headings as follows:

1. Initial Capital Base

2. ORC

3. Credit Rating

121               In considering the ACCC’s approach to the fixing of the ICB the Tribunal said that ‘much of the mystery surrounding the establishment of an ICB for an existing pipeline disappears if there is concentration upon the terms of the Code, with the assistance of the Overviews where appropriate’. After setting out the relevant provisions of the Code the Tribunal said (at [13]):

‘The ICB is entirely a creature of the Code and what it is and what it does is defined by the Code. It is one integer in a complex of integers used to arrive at an appropriate Reference Tariff. Whilst there is a considerable amount of discretion built into the system for both the operator and the ACCC, each of them, and the Tribunal, is bound by the Code.’

 

122               The Tribunal’s first point was that, by virtue of s 8.12 of the Code, the actual capital cost of a new pipeline when it first enters service is the ICB for that pipeline as ‘[I]t is assumed that the operator will build the pipeline in the most cost efficient manner’. Its second point was that the ICB as established is not altered or reset save for particular adjustments provided for by the Code such as new facilities investment, capital contributions and capital redundancy. The Tribunal said at [15]: ‘The ICB remains the same amount once established although the capital base as such may be adjusted from time to time in accordance with the provisions of ss 8.14‑8.29’.

123               Importantly the Tribunal found that there is no indication in the Code that there is to be discrimination in principle between the operators of existing pipelines and the operators of new pipelines. Given that the ICB is the actual cost of a new pipeline it could be assumed that the objective of the Code in relation to an existing pipeline is to attribute to it a value consistent with that principle. The Code does not contemplate either a subsidy of consumers by fixing an artificially low figure or a bonus to operators by providing an artificially high figure.

124               We observe that although there may not be any indication in the Code that there is to be discrimination in principle between the operators of existing as opposed to new pipelines, that is not to say that the determination of the ICB of an existing pipeline is to be made in the same way as the determination of the ICB of a new pipeline. Indeed, ss 8.10 and 8.11 provide a different method of determining the ICB of an existing pipeline than ss 8.12 and 8.13 provide for the determination of the ICB of a new pipeline.

125               Although the Tribunal said that ‘it is fundamental that the ICB is the actual cost of a new pipeline’, the structure of ss 8.10 and 8.11 and the factors to be considered in those provisions do not support that proposition.

126               The Tribunal referred to s 8.11 of the Code which requires that s 8.10(a) and (b) will normally set the range of values within which a value pursuant to s 8.10 is to be selected. The Tribunal contrasted DAC, which is a deduction from actual experience and looks back, with DORC, which arrives at an hypothetical value and looks forward. It took ORC as the starting point to ascertain DORC. The amount defined by ORC is depreciated to what might be called a second‑hand value principally because the optimised pipeline would last longer than the existing pipeline. The critical issue in the case as the Tribunal saw it was the method of calculation of that depreciation.

127               The Tribunal said that it follows from s 8.10(c) and (d) that it is necessary to consider other well recognised asset valuation methodologies and to compare the advantages and disadvantages of each methodology under subpars (a), (b) and (c) before turning to the remaining subparagraphs. The factors to which the remaining subparagraphs direct attention could assist in the choice between methods or lead to some adjustment of the result of the chosen method. The Tribunal said (at [19]):

‘Those factors would not normally (and perhaps would never) permit recognised valuation methods to be put to one side. In particular, those factors do not warrant departing from a quest for value and entering upon a quest for some form of justice or equity. If the Reference Tariff is capable of being ‘tweaked’ in that way, that is not to be done by tampering with the ICB. In unusual circumstances, one or more of those factors may have a significant effect upon the assessment of value.’ (emphasis in original)

 

128               We have some difficulty with the Tribunal’s identification of the relevant task before the ACCC as being ‘a quest for value’. Although s 8.10(a), (b) and (c) refer to the ascertainment of ‘the value …’, the task to be undertaken is the establishment of a figure for the ICB. Ultimately the quest is not for the appropriate ‘value’ of the ICB but rather the determination of the figure to be attributed to it having regard to all the factors set out in s 8.10(a) to (k), some of which bear on its value and some of which do not.

129               The Tribunal referred to Re Michael as a case which, while not binding upon it, was entitled to considerable respect. The Tribunal said (at [20]):

‘The reasons of Parker J (with whom the other members of the Court agreed) make a case for concluding that the exercise of that regulator’s discretion was incorrect or unreasonable having regard to all the circumstances. The difficulty was that the Western Australian Supreme Court had no jurisdiction to intervene on that basis. It was necessary to find error sufficient to enable intervention in accordance with the principles of judicial review of administrative decisions. That was not easy where the Code gives the regulator a large area of discretion. That caused some straining of the construction of the Code and the result should be confined to the facts of the case.’

 

The Tribunal was of the opinion that the facts in Re Michael were too far removed from those in the case before it to make it of any real value.

 

130               With respect, we do not accept that the Court’s reasoning in Re Michael involved a strained construction of the Code.

131               At the threshold of its substantive reasoning, at [25], the Tribunal accepted the submission for EAPL that it was a fundamental error in principle for the ACCC to put aside known valuation methodologies and devise a methodology of its own which adjusted ORC in a novel fashion. The Tribunal found that this approach had no support in the Code or the material on the subject received by the ACCC and was properly described as ‘idiosyncratic’.

132               The Tribunal accepted that ss 8.10 and 8.11 of the Code give considerable latitude to the ACCC in assessing the ICB. It acknowledged the limits on its own power to interfere. It accepted also that valuation is far from an exact science and that there is considerable room for choice and discretion in the task which will nearly always have aspects of estimation and approximation. Nevertheless an error in principle could always be reviewed (at [27]):

‘It was incorrect and unreasonable to adopt a methodology which does not reflect the terms of the Code and which is not supportable in principle. We are satisfied that the ICB fixed by the Final Approval cannot stand and must be set aside. Before considering what course should be followed in view of this conclusion, we should deal with some of the points argued.’

 

133               The Tribunal could not discern any reasonable basis upon which reference to s 8.10(f) could justify the method of adjusting ORC chosen by the ACCC. The Final Decision in relation to that factor had dealt with three matters. It rejected a value based upon the economic depreciation of the MSP which would be somewhere between $1291 million calculated by the ACCC in its Draft Decision and $1700 million claimed by EAPL in its updated value. That rejection (even if correct) in the Tribunal’s opinion provided no independent support for the choice made. The second matter was the ACCC’s reliance on the proposition that a 50 year asset life had been assumed in the past. It was not clear to the Tribunal how this fitted with s 8.10(f). The most that could be deduced from material before the ACCC was that tariffs set for non‑AGL customers after 1994 may have been calculated on the basis of a 50 year asset life consistent with certain financial accounting records. The setting of that market tariff could not be assumed to have been done on a basis comparable with the way in which the Code sets a regulated tariff. There was 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. The third matter was the loss of market share to EGP. Here again, the link with s 8.10(f) was difficult to detect. The Tribunal found 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.

134               The Tribunal held that the ACCC had misconstrued s 8.10(f) of the Code. The factors in that section, considered together, pointed to a set of circumstances in which the combined effect of past history was such as to require a modification of normal valuation methods which might throw up an unreasonably high ICB which would cause an unreasonably high tariff. The ACCC did not apply that reasoning in the present case. The Tribunal saw no proper basis for doing so. It said (at [29]):

‘When the past history of the operation of the MSP is considered as a whole, it is plain that the operation has been, and remains, seriously in debit which will never be recovered. Thus the users of the MSP have been subsidised at the expense of the operator of the pipeline. The tariff that was set following acquisition of the pipeline by EAPL can be assumed to be set at a more realistic level and is indeed at a level in excess of that proposed by the ACCC. Thus there would be no tariff ‘shock’ if the EAPL proposal were accepted. It is not possible to draw the conclusion that the few years of operation of the MSP by EAPL has caused such a gross over‑recovery of depreciation as to require offset in setting the ICB under the regulatory regime.’

 

135               The ACCC had taken the view that the tariff it proposed was consistent with the HNET tariff derived by NERA. However the Tribunal rejected that approach as a substitute for deriving the ICB in accordance with ss 8.10 and 8.11.

136               The Tribunal found substance in a submission by EAPL that the ACCC had reasoned to produce a predetermined ICB which would reflect the price paid for the pipeline by EAPL in 1994 on the basis that to allow a greater ICB would be to give a ‘windfall’ to the purchaser of the privatised asset. As the decision in relation to the ICB was to be set aside in any event it was not necessary for the Tribunal to come to any conclusion in relation to that contention. The Tribunal observed, perhaps somewhat unnecessarily in the circumstances, that it would be wrong of the regulator to justify a decision taken for a particular reason by reference to other reasons. It acknowledged the ACCC’s duty to be conscious of the interests of parties other than the proponent of the Access Arrangement and to scrutinise carefully the information provided in support of it. The ACCC, it said, must also have regard to the legitimate business interests of the proponent and not put itself in an adversary position in relation to the proponent so that it might be perceived as a champion of other interests such as those of consumers.

137               The Tribunal observed that, for reasons explained in the Draft Decision of the ACCC, if the purchase by EAPL had been an arm’s length transaction effected before the regulatory regime came into force, then the price paid might well have been a reliable guide to the second hand value of the existing pipeline as a relatively recent market transaction. Reference to that price would have been another well recognised asset valuation methodology within the meaning of s 8.10(c). But the purchase was not an arm’s length transaction in that sense. The price paid was an unreliable guide to the true value of the pipeline at that time. The lack of an open and unconditional tender almost certainly meant that full capital value was not realised. In that sense the Tribunal accepted EAPL might be seen to have received a bargain or a windfall. However the primary quest under the Code was for a proper contemporaneous value from which to deduce a tariff that would replicate a hypothetical competitive market. It was not to provide subsidies to customers.

138               The Tribunal recognised that the ACCC was confronted with the unusual circumstance of the ‘discovery’ of a further 20 years’ life of the main line to Wilton after Coverage and well after lodgment of the Access Arrangement, along with a new basis for deducing DORC from ORC.

139               The Tribunal saw the key to DORC as a comparison between the lifetime of the hypothetical optimised pipeline with the remaining life of the existing pipeline, not of some hypothetical partially optimised pipeline. It was said to be open to the ACCC to take the view that the existing MSP was to be considered as it stood, not as it might stand at some indeterminate time in the future after refurbishment. By the time that was to occur technology might have again changed in various ways. It would have been open to the ACCC to take the view that it would be appropriate to calculate DORC on the basis of the life of the pipeline as it stood, namely 60 years for the Moomba to Wilton section and 80 years for the Young to Culcairn section. That was EAPL’s approach up to the change in ownership. The Tribunal’s reading of the decisions of the ACCC indicated that were it not for the issue caused by the claimed extended life, DORC would be the preferred method of fixing the ICB.

140               The Tribunal said that if it were satisfied that straight line depreciation should be used to deduce DORC from ORC it would be inclined to avoid further delay in the matter and fix the ICB based upon DORC itself. However the theoretical underpinning of DORC had progressed over the years to the point where it could now be recognised that straight line depreciation was too crude a tool to be used where there was the opportunity for a more sophisticated analysis. The materials before the ACCC, including its own Draft Statement of Principles, recognised that a net present value approach was required for the most reliable result to be achieved, albeit based upon costs rather than revenue. The Tribunal recognised that there would always be differences of opinion about the application of these principles to a particular factual situation. Their resolution was the function of the ACCC, rather than the Tribunal. When the matter was reconsidered attention should be directed to the proper application of a NPV approach to depreciation. Where the value attributed to the ICB would have a continuing effect for the balance of the life of the pipeline, it was appropriate that there be a serious effort made to arrive at the correct result.

141               The Tribunal considered whether the Venton contingency of 10% was properly included in the calculation of ORC. It found the ACCC’s reasoning on the exclusion of the contingency to go only to the quantum of Venton’s estimate of the contingency and not to explain the exclusion of the contingency altogether. As there was material on quantum it was preferable, in the Tribunal’s opinion, that it resolve that matter rather than send it back to the ACCC for reconsideration. It did not follow that the 10% contingency originally claimed by EAPL should be allowed in full. It referred to a letter from Venton of 12 May 2003 in which it was stated, inter alia:

‘A more detailed analysis may show that 7.5% would have been a more appropriate allowance.’

 

Absent any alternative percentage being advanced by any other expert in the field, the Tribunal was of opinion that the ORC should include an allowance for contingencies of 7.5%.

 

142               As to the credit rating, the parties were agreed that the Tribunal should determine whether the benchmark credit rating should be BBB or BBB+. EAPL had submitted that the ACCC was wrong and acted unreasonably, concluding that the BBB+ was the appropriate proxy credit rating because:

(a) three of the four companies in the ACCC’s table upon which it had relied had a BBB rating and one had an A rating;

(b) the only reasonable conclusion to be drawn from the table was that EAPL should have been assigned a BBB not a BBB+ rating.

 

The Tribunal accepted EAPL’s submission. It held that the effect of the ACCC’s decision was to distribute part of the A rating of AGL to the other three members of the class in a crude averaging exercise. It found no logic or reason for that approach and no material to suggest it had any support in the theory or practice of statistics. If AGL were put to one side, the only rational conclusion from the chosen class was that a rating of BBB was appropriate.

 

The Application for Review

143               The application by the ACCC for review of the Tribunal’s decision by this Court was said, on its face, to be made pursuant to and invoking the jurisdiction of the Federal Court under:

‘(1) Sections 5 and 6 of the Administrative Decisions (Judicial Review) Act 1977 (“ADJR Act”) (by reason of, inter‑alia, sub‑paragraph 2(d) of Schedule 3 thereto together with the Gas Pipelines Access (South Australia) Act 1997, the Gas Pipelines Access (NSW) Act 1998 and the Gas Pipelines Access Act 1998 (ACT));

 

(2) further or alternatively, Sections 39B(1) and (1A)(a) and (c) of the Judiciary Act 1903;

 

(3) further or alternatively, Section 15 of the Gas Pipelines Access Act 1998 (ACT);

 

(4) further or alternatively, section 163A of the Trade Practices Act 1974; and

 

(5) further or alternatively, the associated and accrued jurisdiction of this Court.’

 

144               There were some seven grounds of review, the first three of which were heavily particularised. There is no point in seeking to reproduce the grounds in detail here. It suffices to say that in summary they were as follows:

1. Error of law in the construction and application of ss 8.10 and 8.11 of the Code in the Tribunal’s reasons for decision published on 8 July 2004.

2. Error of law in the approach taken by the Tribunal to its own review function under s 39(5) of the Access Law in its reasons published on 18 March 2005 and in its findings adverse to the ACCC in those reasons.

3. Taking into account irrelevant considerations relating to its observations on whether the ACCC had reasoned to a predetermined result.

4. Failure to take relevant considerations into account by reference to the terms of the Code and the evidence.

5. Findings made without any or any adequate evidence to support them.

6. Findings that were unreasonable and therefore an improper exercise of power.

7. Jurisdictional errors such that the decision was not authorised by s 39 of the Access Law and, alternatively, was beyond the power conferred by s 44ZZOA of the TPA.

 

145               The relief sought by the ACCC was an order setting aside the decision of the Tribunal and further and alternatively an order for a writ of certiorari quashing the decision. The ACCC also sought declarations that its calculation of the ICB in its Final Decision and Final Approval was valid and in accordance with ss 8.10 and 8.11 of the Code and that the Tribunal had acted ultra vires s 44ZZOA of the TPA and without jurisdiction. In the further alternative, an order for the issue of a writ of mandamus against the Tribunal was sought and further, or alternatively, an order remitting the matter to it for further determination in accordance with law.

The Constitutional and Statutory Basis of the Functions Exercised by the ACCC and the Tribunal

146               The ACCC and the Tribunal in discharging their functions as Relevant Regulator and Appeal Body under the gas access law applicable in this case, do so under one or other of the South Australia, New South Wales or ACT Gas Acts. The Commonwealth Gas Act applies only to the adjacent areas and certain territories not relevant for present purposes. There is no suggestion that the ACCC or the Tribunal was acting under that Act.

147               The proposition that administrative bodies set up under Commonwealth law can exercise functions conferred by State law as part of a co-operative legislative scheme is well established. R v Duncan; Ex parte Australian Iron and Steel Pty Ltd (1983) 158 CLR 535 concerned the powers of the Coal Industry Tribunal constituted by complementary Commonwealth and State Acts and given powers and functions under both statutes. Mason J said (at 563):

‘…the Constitution, when it divides legislative powers between the Parliaments of the Commonwealth and the States, necessarily contemplates that there will be joint co‑operative legislative action to deal with matters that lie beyond the competence of any single legislature. As with an exercise of the executive power for a co‑operative purpose, Commonwealth legislative action for such a purpose is subject to the limitation that the end to be achieved and the means by which it is to be achieved are consistent with and do not contravene the Constitution. It is an integral element in joint legislation for a co‑operative purpose that a legislature, whether Commonwealth or State, can give its authority or office holder a capacity to receive additional powers and functions as may be conferred by another legislature.’

 

148               A Commonwealth administrative body or tribunal which lacks authority under Commonwealth law to exercise functions under State law, cannot validly be given such functions by unilateral State legislative action. In Duncan, Brennan J pointed out that if the Commonwealth Act had merely created the tribunal and vested federal powers in it without reference to State powers any attempt by a State Act to vest similar State powers in the same tribunal would fail. This would not be because of any constitutional incapacity in the Commonwealth tribunal to have and to exercise State power, but because the Commonwealth Act would be construed as requiring the tribunal to have and to exercise only such powers as the Commonwealth Parliament had chosen to vest in it. His Honour’s observation was quoted in the majority joint judgment in Re Cram; ex parte NSW Colliery Proprietors’ Association Ltd (1987) 163 CLR 117 at 127 as explaining ‘[t]he necessity for authorization under the Commonwealth Act for the Tribunal’s exercise of powers conferred by the State Act …’. Duncan and Re Cram both concerned the Coal Industry Tribunal which derived its existence from Commonwealth and State statutes. However the reasoning that it required Commonwealth legislation authorising the exercise of State functions by a Commonwealth tribunal was equally applicable to a body set up under Commonwealth laws only.

149               When a Commonwealth law is purely permissive in relation to the exercise of State functions or powers absent the imposition of any correlative duties, then it seems that the exercise by the Commonwealth authority of functions under State law does not require support from any Commonwealth head of power. However the State law may purport to impose a duty on the Commonwealth authority. There can be no duty imposed by a State law upon a Commonwealth authority unless Commonwealth law authorises and thereby itself imposes the duty. In that event it seems a Commonwealth law, insofar as it imposes a duty to perform the functions or powers purportedly conferred by State law, must be referrable to a Commonwealth head of power.

150               These general observations are reflected in the judgment of the High Court in Hughes which concerned the conferral on the Commonwealth Director of Public Prosecutions of prosecutorial functions for offences under the former Corporations Law (WA). The Court set out two propositions (at 553):

‘The first is that a State by its laws cannot unilaterally invest functions under that law in officers of the Commonwealth; the second is that a State law which purported to grant a wider power or authority than that the acceptance of which was prescribed by Commonwealth law would, to that extent, be inconsistent with the Commonwealth law and invalid under s 109 of the Constitution.’

 

These propositions however did not provide any basis for the imposition by federal law upon Commonwealth officers of duties to perform functions or exercise powers created or conferred by State law. Such a federal law must be supported by a head of power.

 

151               In the Hughes case, as the Court observed at 553, what was involved in the relevant federal legislation was more than a consent or permission by the Commonwealth for the exercise by its officers of additional powers and functions derived entirely from State laws:

‘These additional functions and powers are imposed by federal law as a matter of duty or obligation, lest there be an abdication of State authority with no certainty of its effective replacement.’

 

In that case, as in the present, where there was an intergovernmental agreement, a Commonwealth law imposing duties upon Commonwealth officers or bodies to carry out functions under State law pursuant to the agreement might be seen as ‘incidental to the execution of any power vested…in the Government of the Commonwealth…’ within the meaning of s 51(xxxix) of the Constitution. The relevant power to which such legislation is arguably incidental is the executive power conferred by s 61 of the Constitution. In Hughes the Court quoted at 555 from the observations of Mason J in Duncan that the scope of the executive power:

 

‘… extends to entry into governmental agreements between Commonwealth and States on matters of joint interest, including matters which require for their implementation joint legislative action, so long at any rate as the end to be achieved and the means by which it is to be achieved are consistent with and do not contravene the Constitution.’

 

152               The Court in Hughes said at 555 that it is plain enough that s 51(xxxix) empowers the Parliament to legislate in aid of the exercise of the executive power but added the caveat that ‘… it would be another matter to conclude that this means that the Parliament may legislate in aid of any subject which the Executive Government regards as of national interest and concern …’

153               The Court found that the scope of the executive power and of s 51(xxxix) in aid of it, remained open to some debate which it was unnecessary to continue in that case. However the offences whose prosecution under State law was in issue related to the making of investments in the United States. The Commonwealth law under which the DPP prosecuted them was, in that context, supportable by the trade and commerce power under s 51(i) of the Constitution (trade and commerce with other countries, and among the States) and the external affairs power under s 51(xxix). The Court also observed, at 557, that the judgments in Duncan supported the proposition that the powers conferred upon the parliament by s 51(xxxv) (conciliation and arbitration) and s 51(xxxix) supported legislation to establish a tribunal to exercise federal and State powers where it might better achieve the objects of resolving and settling interstate disputes in the coal industry.

154               There is no constitutional challenge to the validity of the legislative arrangements under which functions and powers are conferred upon the ACCC and the Tribunal in connection with the administration of the SA Gas Act in the present case. The jurisdiction of the Court may, to some extent, be seen as linked to the valid conferral of those functions. It seems reasonable to say, without expressing any concluded view, that the powers and functions conferred upon the ACCC and the Tribunal under the State Gas Access Laws, both before and after the 2004 amendments to the TPA were supportable at least by reference to the interstate trade and commerce power in s 51(i) of the Constitution.

The Jurisdiction of the Court

155               The power of the Commonwealth Parliament to confer jurisdiction on the Federal Court derives from s 77(i) of the Constitution. The matters in respect of which it may confer such jurisdiction, which are relied upon in these proceedings include:

. any matter arising under laws made by the parliament (s 76(ii));

. any matter in which the Commonwealth or a person suing or being sued on behalf of the Commonwealth is a party (s 75(iii));

. any matter in which a writ of mandamus or prohibition or an injunction is sought against an officer of the Commonwealth (s 75(v)).

 

156               Consideration of whether the Court has jurisdiction to hear and determine the ACCC’s application must proceed upon the basis that the functions conferred upon the ACCC and the Tribunal under the gas pipelines access regime remain validly conferred.

157               The first source of jurisdiction asserted is that conferred upon the Court by s 8(1) of the ADJR Act. To attract that jurisdiction the application to the Court must relate to a decision of the Tribunal to which the Act applies within the meaning of that term as defined in s 3. The first requirement is that the Tribunal’s decision was a decision of an administrative character. That is not in dispute. The second requirement is that the decision be made under a relevant enactment. In its application to the Tribunal EAPL stated that it applied under s 39(1) of the ‘Gas Pipelines Access Law’. The relevant provision is s 39 of Schedule 1 of the SA Gas Act. The SA Gas Act was able to be invoked because the MSP passes through South Australia, New South Wales and the ACT. Each of the State and Territory Gas Acts provides that a decision taken under the Gas Pipelines Access legislation of one scheme participant is taken to be made under the Gas Pipelines Access legislation of each other scheme participant under which a part of the relevant pipeline is situated. In this case the Tribunal made its decision under the SA Gas Act and under the provisions of the Gas Access Law scheduled to it. Specifically the decision was made under s 38 of Schedule 1 to the SA Gas Act.

158               It can be stated in passing that the provisions of the NSW and ACT Gas Acts giving effect to the Tribunal’s decision in NSW and the ACT did not alter the character of its decision as one made under the SA Gas Act. The attachment of legal consequences to that decision in New South Wales and the ACT does not make it a decision under the New South Wales or ACT statutes.

159               The Tribunal decision was made under a State law. Its power to make that decision depended ultimately upon the provisions of Pt IIIA of the TPA to which reference was made earlier. That power is not disputed. However it is questionable whether the decision could be treated as one made under the TPA.

160               The jurisdiction conferred upon the Federal Court by the ADJR Act covers administrative decisions made under a law of the Commonwealth and administrative decisions made by a Commonwealth authority under an enactment referred to in par (ca) of the definition of ‘enactment’. The latter category applies to the Tribunal because it is a Commonwealth authority exercising a function conferred by a State law mentioned in Schedule 3, namely the SA Gas Act. Thus the Tribunal’s decision is a decision to which the ADJR Act applies.

161               The constitutional source of the jurisdiction to review the Tribunal decision is to be found in s 75(iii) of the Constitution read with s 77(i). The Tribunal is named as a respondent to the application on the basis that orders are sought which will bind it even though it quite properly takes no substantial part in these proceedings. The matter before the Court is therefore a matter in which the Commonwealth is a party within the meaning of s 75(iii). On that basis the Court’s jurisdiction under the ADJR Act is properly invoked.

162               The ACCC also invoked the jurisdiction conferred by s 39B(1) of the Judiciary Act 1903 (Cth) on the basis that it claims relief by way of mandamus against the Tribunal. Once the jurisdiction to grant mandamus is properly invoked, certiorari may be sought as ancillary relief under s 23 of the Federal Court of Australia Act 1976 (Cth): R v Cook; ex parte Twigg (1980) 147 CLR 15; R v Toohey; ex parte Northern Land Council (1981) 151 CLR 170. The persons comprising the members of the Tribunal are officers of the Commonwealth within the meaning of s 39B(1) even when carrying out functions under State law: Re Cram at 131. The ACCC also relies upon the fact that it seeks declaratory relief under s 39B(1A)(a). These submissions are accepted. The Court has jurisdiction to entertain the applications for mandamus and for declaratory relief and ancillary relief claimed by the ACCC pursuant to the provisions of the Judiciary Act.

163               The ACCC has demonstrated, for the reasons set out above, that the Court has jurisdiction to entertain its application for judicial review of the Tribunal’s decision.

The function of the ACCC as Relevant Regulator

164               It is desirable to have a clear picture of the role of the ACCC as Relevant Regulator in relation to Access Arrangements. Without canvassing again all of the provisions of the Code the steps which the ACCC may be required to take can be summarised as follows:

1. Receipt of Access Arrangements and Access Arrangement Information.

2. Verifying that the Access Arrangement Information enables Prospective Users to understand the derivation of elements in the proposed Access Arrangement and enables them to form an opinion about the compliance of the Access Arrangement with Code requirements (s 2.6).

3. Ensuring that Access Arrangement Information complies with the Code by requiring the Service Provider to make changes if necessary (s 2.9).

4. Notification of the Access Arrangement and Access Arrangement Information to interested persons and to the public (s 2.10).

5. Receipt and consideration of submissions on the proposed Access Arrangement (ss 2.11‑2.12).

6. Issue of a draft decision relating to approval of the Access Arrangement and amendments that are required to be made (s 2.13).

7. Receipt and consideration of submissions on a draft decision (s 2.15).

8. Issue of a final decision which either:

(i) approves the Access Arrangement or a revised Access Arrangement consistent with the draft decision; or

(ii) does not approve the Access Arrangement and sets a date for the submission of a revised version (s 2.16).

9. Approval by the Relevant Regulator of its own Access Arrangement if the Service Provider’s Access Arrangement or revised Access Arrangement has not been approved (s 2.20).

10. When the Service Provider has not submitted an Access Arrangement from the outset, the Relevant Regulator may approve its own Access Arrangement (s 2.23).

11. The Relevant Regulator is required to take into account a number of factors in assessing a proposed Access Arrangement for approval or non‑approval (s 2.24).

 

165               In assessing an Access Arrangement proposal and deciding whether to approve it or not, the ACCC is not at large simply to substitute its own preferred Access Arrangement. In Application by GasNet Australia (Operations) Pty Ltd (2004) ATPR 41‑978 the Tribunal, on which Cooper J presided, held that it was beyond the power of the ACCC as Relevant Regulator not to approve a proposed Access Arrangement simply because it preferred a different Access Arrangement which it thought could better achieve the statutory objectives:

‘[30] This follows because the power of the Relevant Regulator to require amendments, or to itself draft and approve its own AA, does not arise until it is of the opinion that the AA proposed by the Service Provider does not comply with the Code, and in determining the question of compliance, it must act in accordance with s 2.24 of the Code….’

 

This conclusion follows from the language of the Code. But once the threshold of non‑approval is properly crossed, the ACCC is at large in the content of its own Access Arrangement albeit it must be within the framework provided by the Code.

 

166               When considering its own Access Arrangement the role of the ACCC in establishing the ICB for a Covered Pipeline is illuminated by the discussion in Re Michael of the function of the Relevant Regulator in that case. Parker J, who wrote the judgment with which the other members of the Full Court agreed, observed that there are many points at which the principles enunciated in s 8 of the Code call for evaluation, the exercise of judgment, the formation of opinions and other exercises of discretion by the Regulator (at [73]). His Honour described the task of the Regulator under s 8.10 as not simply one of valuation. The task is to ‘establish’ the ICB. After referring to the various factors identified in s 8.10 his Honour said (at [74]):

‘These various factors bring into account a number of matters which are not directly related to the value of the pipeline in the ordinary sense, and which by their nature require the consideration of disparate issues which may well tend in different directions. 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 in the ultimate establishment of the Capital Base. Factor (k) enables the Regulator to take into account any other factor which the Regulator considers relevant, which in itself requires further evaluation and discretionary judgment by the Regulator.’

 

167               His Honour referred also to the principle stated in s 8.11 that the ICB ‘normally should not fall outside the range of values determined under s 8.10(a) and (b).’ He said (at [75]):

‘There is obvious tension between the requirement of s 8.10 to consider factors (c)‑(k) in establishing the Capital Base and the provision in s 8.11 that, normally, the resulting Capital Base should not fall outside the range determined under factors (a) and (b). The process clearly involves the exercise of discretion in the weighing of divergent considerations.’

 

His Honour added that the exercise of the Regulator’s discretion would prima facie be guided by the objectives of the Code set out in s 8.1. These observations accurately reflect the nature of the process to be undertaken by the Relevant Regulator in formulating and approving its own Access Arrangement.

 

168               In summary, the way in which the Code defines the functions of the Relevant Regulator and their exposition in Re Michael and by the Tribunal in GasNet support the following general propositions about the nature of the Relevant Regulator’s functions under the Code:

1. The Relevant Regulator administers the lodgment by Service Providers of Access Arrangements and Access Arrangement Information.

2. The Relevant Regulator invites and receives public and interested party responses to proposed Access Arrangements.

3. The Relevant Regulator supervises proposed Access Arrangements and Access Arrangement Information for compliance with the Code.

4. The Relevant Regulator may not substitute its own Access Arrangement for a proposed Access Arrangement or a revised version thereof unless of the opinion that the proposed Access Arrangement does not comply with the Code.

5. If of the opinion that a proposed Access Arrangement or revised version does not comply with the Code, the Relevant Regulator is empowered to formulate and approve its own Access Arrangement and is, subject to the Code, at large with respect to the terms of that Access Arrangement.

6. In establishing an ICB for the purposes of an Access Arrangement the Relevant Regulator necessarily makes discretionary decisions relating to the weight to be attached to various factors under the Code, the application of the principles established by the Code and the application of the rule that normally the ICB should not fall outside the range of values determined under s 8.10(a) and 8.10(b).

 

The Review Function of the Tribunal

169               As appears from s 39 of Schedule 1 to the SA Gas Act, the role of the Tribunal in reviewing the ACCC’s decision, upon application by a Service Provider, is constrained in two ways. The first constraint is imposed by the limited grounds upon which an application for review can be made. The second is imposed by the limited materials which can be considered by the Tribunal in exercising its review function.

170               The grounds upon which an application can be made to the Tribunal under s 39(1) are confined by s 39(2)(a) to:

(i) error in the ACCC’s findings of fact;

(ii) that the exercise of the ACCC’s discretion was incorrect or was unreasonable having regard to all the circumstances;

(iii) that the occasion for exercising the discretion did not arise.

It is also provided in s 39(2)(b) that an application under subs (1) may not raise any matter not raised in submissions to the ACCC before its decision was made. The constraints in s 39(2) are supported by the listing in s 39(5) of the matters which the Tribunal is permitted to consider. In effect, the Tribunal is limited by s 39(5)(ab) to (f), to the materials which were before the ACCC when it made its decision. It is also implicit in the limitation imposed by s 39(5)(a) that the Tribunal does not have an inquisitorial role in the conduct of a review. It cannot decide the matter on grounds or contentions not put before it by the parties to the review. The review which may be sought by a Service Provider under s 39 is narrower than the review which can be undertaken pursuant to s 38 on the application of other persons adversely affected by a decision of the ACCC as the Relevant Regulator: Application by Epic Energy South Australia Pty Ltd (2003) ATPR 41‑932. Against that background it is necessary to consider the grounds upon which review can be sought and the significance of their content to the nature of the review process.

 

171               The first ground is error in the Relevant Regulator’s finding of facts. Given the limitations imposed by s 39(5) this is a ground which can only be made out by reference to the materials which were before the ACCC. Findings of facts may include findings of the following kind:

1. The existence of an historical fact being an event or circumstance.

2. The existence of a present fact being an event or circumstance.

3. An opinion about the existence of a future fact or circumstance.

The ACCC’s function under the Code involves assessment not only of historical and present facts but also of expert opinion on various matters relevant to the fixing of a Reference Tariff. The term ‘findings of fact’ should be interpreted broadly enough to be meaningful in relation to the function of the ACCC under review. It should encompass opinions formed by the ACCC based upon approaches to the assessment of facts or methodologies which it has chosen to apply. The question of what constitutes a finding of ‘fact’ varies according to the statutory context in which that word or like words are used. In the judgment of McInerney J in Morley v National Insurance Co [1967] VR 566 at 567, a question arose about what constituted a ‘fact’ for the purposes of s 55 of the Evidence Act 1958 (Vic) which makes admissible certain documents containing statements by deceased persons tending to establish any fact. McInerney J said:

 

‘It may be that the phrase “a fact” must be given an expanded meaning equivalent to some matter in issue to be established in the proceedings. Indeed, Wigmore, in his work on Evidence, 3^rd ed., vol 1, p. 1, para. 1, points out that, in one sense, “everything in the cosmos is a fact or a phenomenon”.

 

In my view, it would be contrary to the policy of the legislation to give a restricted meaning to the word “fact” so as to exclude a statement of opinion by an expert.’

 

172               In reaching findings of fact in this broad sense the ACCC will necessarily make choices of a discretionary character as was pointed out in Re Michael. An example is the choice between permitted methodologies for the calculation of total revenue mentioned in s 8.4 of the Code. Such a choice is not a finding of fact. Nor is a finding of fact in error because it is based upon the use of one methodology rather than another. The relative weight to be given to the factors set out in s 8.10 is also a matter of discretion rather than a finding of fact which can be impugned as such.

173               The ground of review that the exercise of the ACCC’s discretion was incorrect or unreasonable having regard to all the circumstances does not concern findings of fact by the ACCC but rather the matters in respect of which it purportedly made choices permitted by the Code. Such choices include the nature of the Reference Service to be offered under the proposed Access Arrangement and the terms and conditions upon which it is to be offered. Within that framework there is the choice of methodology under s 8.4 and the weighing of relevant principles under s 8.1 and consideration of the factors under s 8.10. These matters are elements of the exercise of the discretion conferred upon the ACCC by the Code.

174               The discretion of the ACCC may be incorrectly exercised in the following ways:

(i) Where its exercise is based upon a misconstruction or misapplication of the relevant principles (s 8.1), methodologies (s 8.4) or factors to be considered (s 8.10) in the Code.

(ii) Where its exercise is affected by a failure to have regard to a mandatory relevant factor including any one or more of the requisite principles, methodologies or factors.

(iii) When its exercise is affected by the pursuit of some purpose extraneous to the purposes for which Access Arrangements are provided under the Code.

 

175               Each of these matters is a traditional ground of judicial review. Where such a ground is made out in the context of an administrative review hearing, as distinct from a judicial review hearing, it is appropriate to describe the exercise of the discretion based upon such an error as ‘incorrect’. It has been said on more than one occasion that the distinction between so called ‘merits review’ and judicial review is somewhat illusory. Error of law informing the exercise of a discretion goes as much to its merits as error of fact. In this case, however, factual error is covered by the first ground of review under s 39(2)(a). Where factual error is made out and the exercise of the discretion is based upon it, the exercise of the discretion may also be said to be incorrect.

176               The Tribunal has not been given a purely substitutive function in relation to the review of the ACCC’s discretion. That is to say, if the ACCC has exercised its discretion on correct principles and if the particular exercise of the discretion was open to it within the framework of the Code, the Tribunal is not empowered to set aside that decision simply because it thinks another decision would have been preferable. This is emphasised by the provision in s 39(2)(a)(ii) of the ground of review based on unreasonableness. The exercise of a discretion is not unreasonable simply because another decision‑maker would have come to a different view. On the other hand unreasonableness in s 39(2)(a)(ii) is not limited to cases in which the exercise of the discretion was so unreasonable that no reasonable person could have so exercised it.

177               In Application by Epic Energy the Tribunal (Cooper J presiding) said (at [30]):

‘Section 39(2)(a)(ii) is concerned with the correctness or unreasonableness of an exercise of discretion having regard to the circumstances relevant to the proper exercise of that discretion. Those circumstances are ones which are demonstrable from the matters to which the Tribunal may refer under s 39(5). For the purposes of the subsection, error is made out if it is demonstrated that the exercise of the discretion was so unreasonable on the basis of the matters available to the decision maker that no reasonable decision maker could ever come to it: Associated Provincial Picture Houses Ltd v Wednesbury Corporation [1948] 1 KB 223 at 223‑234. It also deals with the situation where the decision is so far outside the range of decisions open to a reasonable decision maker that it bespeaks of error even though the particular error cannot be identified: House v The King (1936) 55 CLR 499 at 505. For the purposes of s 39(2)(a)(ii) of GPA Law, correctness and reasonableness are to be determined by reference to applicable criteria contained in the Code applied to the matters which were before the relevant Regulator before the decision under review was made.’

 

That passage does not limit the ground of unreasonableness to so called Wednesbury unreasonableness. It is compatible with the wider view of ‘unreasonableness’ which would pick up logical error or irrationality in the decision. The ACCC’s submission which would limit the unreasonableness ground to so called Wednesbury unreasonableness is not accepted.

 

178               The concept of ‘unreasonableness’ imports want of reason. That is to say the particular discretion exercised by the ACCC is not justified by reference to its stated reasons. There may be an error in logic or some discontinuity or non sequitur in the reasoning. It may be that the decision has an element of arbitrariness about it because there is an absence of reason to explain the discretionary choices made by the ACCC in arriving at its conclusion.

179               The third ground, namely ‘that the occasion for exercising the discretion did not arise’ seems to suggest that a condition for the exercise of the ACCC’s discretion had not arisen. It would be more broadly construed to encompass the proposition that, having regard to the nature of the Access Arrangement and Access Arrangement Information submitted by the Service Provider and their compliance with the provisions of the Code including its principles, methodologies and relevant factors, there was no justification for the ACCC to embark upon the exercise of substituting its own Access Arrangement for that proposed.

180               The Tribunal’s approach to the operation of the Code, which is raised in ground 1 of the ACCC’s application can now be considered against the preceding background.

The Tribunal’s Application of the Code

181               By its first ground of review the ACCC contended that the Tribunal erred in applying and interpreting ss 8.10 and 8.11 of the Code. It must be borne in mind that in order for the Tribunal to interfere in the ACCC’s decision, EAPL was obliged under s 39(2) to satisfy the Tribunal that the ACCC had made an error in its finding of facts or that the exercise of its discretion was incorrect or unreasonable having regard to all the circumstances or that the occasion for exercising the discretion did not arrive. It appears from the Tribunal’s reasons that underlying its process was its conclusion that the exercise of the ACCC’s discretion was either incorrect or unreasonable. In reaching this conclusion the Tribunal analysed the Code in terms which satisfy us that it erred in law in its interpretation and application particularly of ss 8.10 and 8.11 of the Code.

182               In par [16] of its reasons the Tribunal stated:

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

 

This statement fails to pay sufficient attention to the various factors which s 8.10 requires to be considered in establishing the ICB for a Covered Pipeline that was in existence at the commencement of the Code. None of those factors are found in s 8.12 which provides, in relation to a Covered Pipeline that has come into existence after the commencement of the Code, that its ICB is, subject to s 8.13, the actual capital cost of the pipeline. The point is not so much that there is not to be discrimination in principle between the operators of existing as opposed to new pipelines but rather that the ICB of an existing pipeline is to be determined in quite a different manner from that of a new pipeline. The determination of the ICB of an existing pipeline under s 8.10 will vary from pipeline to pipeline depending upon the relative weight and consideration given by the regulator to the various factors set out in s 8.10. What is clear is that different principles apply to the determination of the ICB of a pipeline, depending upon whether it is an existing pipeline, in which case ss 8.10 and 8.11 apply, or whether it is a new pipeline, in which case ss 8.12 and 8.13 apply.

 

183               In par [19] of its reasons the Tribunal said:

‘The next point to be noted is that it follows from s 8.10(c) and (d) that it is necessary to consider other well‑recognised asset valuation methodologies and then to compare the advantages and disadvantages of each valuation methodology applied under subparagraphs (a), (b) and (c) before turning to the other subparagraphs. Those other subparagraphs are considered in the light of the analysis of recognised valuation methods which the section assumes already to have taken place. 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.’

 

It is implicit in this passage that the Tribunal was giving a primacy to the valuation methodologies set out in subpars (a), (b) and (c) and then allowing reference to the factors in subpars (e) to (k) to enable a final decision to be made as to the particular valuation method identified in subpars (a), (b) and (c) to be selected as the ICB, albeit with some adjustment.

 

184               This construction is not warranted by ss 8.10 and 8.11. In particular, as was stated in Re Michael (at [74]), the task of the ACCC was not ‘simply one of valuation’. The process to be undertaken is one of establishing the statutory ICB, and it requires more than ‘mere valuation’ (Re Michael at [74]). Section 8.11 makes it clear that the figure for the ICB normally should not fall outside the range of values determined under subpars (a) and (b), but it does not follow that the figure so determined has to be referable to what the Tribunal called a ‘recognised valuation’. If this were the task to be undertaken, s 8.11 would have no operation and would be inconsistent with the significance and primacy the Tribunal attached to subpars (a), (b) and (c). An ICB determined in accordance with s 8.10 does not have to be the equivalent of one or other of the valuation methodologies identified in subpars (a), (b) and (c). Put shortly, the factors in subpars (e) to (k) are not in every case subordinate to, or of lesser significance than, the factors in subpars (a), (b) and (c), although they only arise for consideration, as a matter of logical analysis after the values in subpars (a), (b) and (c) and their advantages and disadvantages have been considered in accordance with subpar (d).

185               In par [19] of its reasons the Tribunal said:

‘In particular, those factors [in subpars (e) to (k)] do not warrant departing from a quest for value and entering upon a quest for some form of justice or equity.’ (emphasis in original)

 

Although the expression ‘the value’ appears in subparagraphs (a), (b) and (c) in s 8.10 it is not a correct analysis of s 8.10 to say that the ACCC is undertaking ‘a quest for value’. As the Tribunal pointed out in par [13] of its reasons ‘the ICB is entirely a creature of the Code’. In undertaking its task under s 8.10, the ACCC is undertaking a search to identify a subject defined by statute – ‘the initial capital base’. This is not an expression of general use, nor is it an expression found in generally accepted accounting principles. It is unique to the Code and, in a sense, idiosyncratic to the Code. The expression ‘the initial capital base’ is not specifically defined as such. Section 10.8 of the Code defines ‘Capital Base’ as having ‘the meaning given in section 8.4’. Its content can be determined from s 8.4(a) of the Code which defines the expression ‘capital base’ as being ‘the value of the capital assets that form the Covered Pipeline or are otherwise used to provide Services’. In short, the quest under s 8.10 is to determine the figure or amount to be attributed to the ICB as defined in the Code. It is not a quest for a commercial or market valuation.

 

186               Section 8.10 of the Code recognises that the values derived from the application of the valuation methodologies referred to in subpars (a), (b) and (c) may be adjusted or varied depending upon the relative consideration and extent of that consideration given to the factors found in subpars (e) to (k) of s 8.10. The Tribunal recognised this when it said in par [19] of its reasons that the factors referred to in subpars (e) to (k) could lead to some adjustment of the result of the chosen method. However, we do not agree that it is correct to say as the Tribunal did ‘those factors would not normally (and perhaps would never) permit recognised valuation methods to be put to one side’. Of course, s 8.11 of the Code must be taken into account, but that is not to say that the figures derived by reference to any of the methodologies referred to in subpars (a), (b) and (c) cannot be varied or altered depending upon the extent and weight of the consideration of the factors referred to in subpars (e) to (k).

187               The Tribunal recognised in par [20] the relevance of the decision of the Full Court in Re Michael. However, the Tribunal appeared to discount the cogency or acceptability of the Full Court’s reasoning. This is found in the Tribunal’s observation at par [20] of its reasons:

‘That [the necessity to find error sufficient to enable intervention in accordance with principles of judicial review of administrative decisions] caused some straining of the construction of the Code and the result should be confined to the facts of the case. In our opinion the facts in that case are too far removed from the present facts to make the reasoning of any real value in resolving this case.’

 

The Tribunal, as an administrative body, ought to have applied the reasoning of the Full Court which, in any event, we consider was of direct relevance and direct application to the issues before the Tribunal.

 

188               We agree, with respect, with the observations of the Full Court particularly at pars [73]‑[75] of the judgment of Parker J (with whom Malcolm CJ and Anderson J agreed) as to the discretionary nature of the task facing the ACCC:

‘[73] There are many points, however, at which the principles enunciated in s 8 call for evaluation, the exercise of judgment, the formation of opinion and other exercises of discretion by the Regulator. With particular reference to the establishment of the initial Capital Base for a Covered Pipeline that was in existence at the commencement of the Code, ss 8.10 and 8.11 provide ready examples of this. While s 8.10(a) and (b) specify two valuation methodologies, s 8.10(c) requires the Regulator to consider other well recognised valuation methodologies. Further, s 8.10(d) requires the Regulator to weigh the advantages and disadvantages of each methodology. Even were the task of the Regulator simply to strike a value for the pipeline, the evidence discloses that each of the s 8.10(a) and (b) methodologies is considerably influenced by subjective and discretionary factors, s 8.10(c) involves potentially a selection from range of methodologies, each of which influenced by further subjective and discretionary factors, and s 8.10(d) clearly calls for evaluation and judgment.

 

[74] 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). 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, including the basis on which past tariffs have been set; the historical returns to the service provider from the pipeline; the reasonable expectations of persons under the regulatory regime that applied to the pipeline prior to the commencement of the Code; and the price paid for any asset recently purchased. These various factors bring into account a number of matters which are not directly related to the value of the pipeline in the ordinary sense, and which by their nature require the consideration ofdisparate issues which may well tend in different directions. 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 in the ultimate establishment of the Capital Base. Factor (k) enables the Regulator to take into account any other factor which the Regulator considers relevant, which in itself requires further evaluation and discretionary judgment by the Regulator.

 

[75]Further, notwithstanding the variety of values and other factors which s 8.10 requires to be considered, there is the principle stated in s 8.11 that the initial capital base “normally should not fall outside the range of values determined under” s 8.10(a) and (b). There is obvious tension between the requirement of s 8.10 to consider factors (c)‑(k) in establishing the Capital Base and the provision in s 8.11 that, normally, the resulting Capital Base should not fall outside the range determined under factors (a) and (b). The process clearly involves the exercise of discretion in the weighing of divergent considerations.’

 

189               There is good reason for this approach. Clearly enough, one key object of the Access Code is to provide a reasonable tariff to the service provider. The assumption is that a reasonable tariff will produce allocative, productive and dynamic efficiencies in the gas market. But in the case of a pipeline in existence at the commencement of the Code there may be dynamic efficiency implications arising from the valuation of the capital base. For example, if the value is set too low this could reduce the incentives for investors to make future investments. If set too high inefficient investment decisions might be made. Moreover, too high a valuation may entrench excessive profits in the future. Thus a degree of flexibility is required. And, on the construction we prefer, that flexibility exists.

190               The Tribunal accepted in par [25] of its reasons the submission of EAPL that:

‘…it was a fundamental error in principle for the ACCC to put aside known valuation methodologies and devise a methodology of its own which adjusted ORC in a novel fashion. It was submitted that this had no support in the Code or the material on the subject received by the ACCC and is properly described as idiosyncratic.’

 

In our view the Tribunal erred in so doing. It is not correct to say that the ACCC ‘put aside known valuation methodologies’. Rather, the ACCC was accepting a known valuation methodology and giving consideration to other factors to which it was directed by s 8.10.

 

191               It is true that in its Draft Decision the ACCC had assessed DORC by reference to the manner in which the assets had been depreciated in the past which had been on the basis of an economic life of 50 years which the ACCC considered to be an appropriate basis for determining the value of DORC. It was pointed out to the ACCC after the Draft Decision was published that it was in error in this respect as DORC is a forward‑looking concept. Accordingly, the ACCC corrected this error in its Final Decision.

192               The ACCC’s reasoning in its Final Decision was as follows:

‘As mentioned earlier, the Commission’s use of past rates of recovery of depreciation to determine a value for DORC has since received some criticism. The argument is that DORC is meant to be a forward‑looking concept and hence past depreciation is an irrelevant consideration. Whether this is correct or not, section 8.10(f) makes it clear, however, that the level of recovery of depreciation since EAPL acquired the pipeline and EAPL’s assumption of a 50 year asset life may still be relevant factors in the Commission’s determination of the value of the ICB. That is, even if the DORC methodology demands that depreciation is based on the revised asset life, the Code does not prevent the Commission taking into account the basis upon which the pipeline has been depreciated in the past in order to determine an ICB. Applying this approach to the revised ORC of $1092.9 million results in an asset valuation of $559.3 million. This figure has been calculated on the basis of a 50 year asset life to 2000, and from then an 80 year life (the useful life proposed by EAPL in 2000 and accepted by the Commission in the Draft Decision).’

 

The ACCC expressed its final conclusion on its determination of the ICB as follows:

 

‘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 to section 8.10(f) of the Code, which requires the Commission to have regard to the basis on which tariffs have been set (or appear to have been set) in the past, the economic depreciation of the pipeline and historical returns to the service provider.

 

The basis of the valuation is ORC, which the Commission has depreciated on the assumption of a 50 year asset life to 2000, consistent with the useful asset life previously assumed by EAPL. From 2000 onwards, the Commission has used an 80 year, the life which EAPL has submitted is the current useful life and which the Commission has accepted. Use of ORC is preferred to some historical measure of costs as ORC reflects the current costs of the assets and eliminates any redundant assets.

…

In addition, the Commission does not consider that a value equal to DORC of $715 million and based on an 80 year life is appropriate, since a 50 year life has been assumed in the past. If the useful life of an asset changes at a particular point in time it is appropriate that the residual value of the asset would then be depreciated over the revised useful life. However, an extension to the useful life should not necessarily lead to an upward revision of the asset value. To do so would allow the asset owner to recover more than the efficient costs of the asset over the life of the asset.

 

Accordingly, the Commission considers that a value for the ICB of $559 million based on the useful asset life assumed in the past (50 years) coupled with future depreciation charges based on the current assumed life (80 years) best allows EAPL to recover the efficient costs over the expected life of the MSP and replicates the outcomes of a competitive market.’

 

193               In par [26] of its reasons the Tribunal stated:

‘ORC is only utilised in this field as the starting point from which to deduce DORC. These are forward looking concepts and the ‘depreciation’ concerned is economic depreciation. 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’.

 

This observation misunderstands the range of factors to be considered under s 8.10 of the Code. Although DORC is a forward‑looking concept, that is not to say that the ORC, from which is derived the DORC, cannot be ‘tweaked’ or adjusted or varied by reference, for example, to the factors set out in subpar (f) of s 8.10 of the Code before reaching a final figure for the ICB, albeit one which uses a forward‑looking figure for depreciation after 2000.

 

194               It was also open to the ACCC to take into account the amounts EAPL had used for depreciation in the past in determining the extent of the adjustment to be made to ORC under s 8.10(f) of the Code in relation to ‘the economic depreciation of the Covered Pipeline’.

195               In par [27] of its reasons the Tribunal was satisfied that ‘the ICB fixed by the Final Approval cannot stand and must be set aside’ because it was ‘incorrect and unreasonable to adopt a methodology which does not reflect the terms of the Code and which is not supportable in principle’. 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. The ACCC had a considerable discretion in determining or establishing the ICB for the pipeline, albeit a discretion circumscribed by the factors set out in s 8.10(a) to (k) of the Code.

196               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. Presumably the Tribunal, consistently with s 39(2) of the Access Law, determined that this approach by the ACCC was an incorrect or unreasonable exercise of discretion. However, s 8.10 of the Code does not require the establishing of the ICB solely by reference to a well recognised (adopting the expression in subpar (c) of s 8.10) or a known valuation methodology. True it is that the ACCC was obliged to ‘consider’ well recognised and established valuation methods but it was also obliged to ‘consider’ all the other factors set out in subpars (d) to (k) of s 8.10. At the end of the day the ICB established by the ACCC was not a valuation in accordance with the valuation methodology referred to in subpar (a) or (b) or another well recognised valuation methodology referred to in subpar (c) of s 8.10. Rather it was the determination or establishment of the ICB after having considered all the factors set out in subpars (a) to (k) of s 8.10.

197               The Tribunal approached the ACCC’s use of, or reference to, s 8.10(f) of the Code in a somewhat ambivalent manner. It will be recalled that subpar (f) required the ACCC to consider:

‘The basis on which Tariffs have been (or appear to have been) set in the past, the economic depreciation of the Covered Pipeline, and the historical returns to the Service Provider from the Covered Pipeline’.

 

The Tribunal criticised the ACCC for rejecting a value based upon the economic depreciation of the pipeline. However, it was open to the ACCC to reject that value so long as it considered the economic depreciation of the pipeline in the sense of taking it into account, which it did. The ACCC was also criticised for concluding that a 50 year asset life had been assumed in the past. However, the Tribunal did not reject outright that conclusion but rather noted that ‘it is not clear how this fits with s 8.10(f)’. And in discussing the ACCC’s approach to the loss of market share to the EGP, the Tribunal only noted that ‘the link with s 8.10(f) is difficult to detect’.

 

198               It may be correct, as the Tribunal has said in par [28] of its reasons that:

‘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.’

 

However, the ACCC was not using the accounting treatment of depreciation in the past for the purpose of a forward‑looking deduction of depreciation in relation to DORC in the future. Rather, what the ACCC was doing 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.

 

199               It follows from this analysis that none of the available grounds upon which the Tribunal could interfere with the ACCC’s determination of the ICB of the MSP had been made out. There was no error in the ACCC’s findings of fact in relation to its determination of the ICB; nor was the exercise of the ACCC’s discretion in reaching that determination incorrect or unreasonable having regard to all the circumstances. It was not suggested that the occasion for the ACCC’s exercise of its discretion had not arisen.

Conclusion

200               Having found in favour of the ACCC in relation to the first and principal ground of review, it is not necessary to give any detailed consideration to the remaining grounds. The question of the approach taken by the Tribunal to its review function has been subsumed in the general discussion relating to ground 1. The Tribunal’s comments about whether the ACCC had reasoned to a predetermined result were obiter and did not have any effect on its decision. The remaining grounds raise no distinct issue which it is necessary to decide here in the light of our conclusions with respect to ground 1.

201               The Tribunal’s decision will be set aside and submissions will be invited from the parties as to the orders that should be made in consequence of that decision.

I certify that the preceding two hundred and two (201) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justices French, Goldberg and Finkelstein.

Associate:

Dated: 2 June 2006

Counsel for the Applicant:	J Beach QC and M Painter
Solicitor for the Applicant:	Deacons
Counsel for the Second Respondent:	J Gleeson S.C. and N L Manousaridis
Solicitor for the Second Respondent:	Middletons
Date of Hearing:	17, 18 and 19 August 2005
Date of Judgment:	2 June 2006