AUSTRALIAN COMPETITION TRIBUNAL
Application by East Australian Pipeline Limited [2005] ACompT 1
TRADE PRACTICES – access to gas pipelines – review of decision of Australian Competition and Consumer Commission – Gas Code calculation – Initial Capital Base – Depreciated Optimised Replacement cost method – whether assessment to be made from point of view of hypothetical new entrant or incumbent
PRACTICE AND PROCEDURE – Australian Competition Tribunal – nature of review of decision of Australian Competition and Consumer Commission – ability to raise new issues or change position at or after hearing
COSTS – Australian Competition Tribunal – review of decision of Australian Competition and Consumer Commission – principles
Gas Pipelines Access (South Australia) Act 1997, ss 38, 39
National Third Party Access Code for Natural Gas Pipeline Systems
Application by East Australian Pipeline Limited [2004] ACompT 8, related
Application by Epic Energy South Australia Pty Ltd [2002] ACompT 4, cited
Application by Duke Eastern Gas Pipeline Pty Ltd (2001) ATPR 41-827, applied
APPLICATION UNDER S 39(1) OF THE GAS PIPELINE ACCESS LAW FOR REVIEW OF THE DECISION OF THE AUSTRALIAN COMPETITION AND CONSUMER COMMISSION ON 8 DECEMBER 2003 TO APPROVE ITS OWN ACCESS ARRANGEMENT PURSUANT TO THE PROVISIONS OF THE NATIONAL THIRD PARTY ACCESS CODE FOR NATURAL GAS PIPELINE SYSTEMS AND THE GAS PIPELINE ACCESS LAW
NO 8 OF 2003
GYLES J (Deputy President), MR RC DAVEY and MISS MM STARRS
18 MARCH 2005
SYDNEY
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IN THE AUSTRALIAN COMPETITION TRIBUNAL |
NO 8 OF 2003 |
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RE: |
APPLICATION UNDER S 39(1) OF THE GAS PIPELINE ACCESS LAW FOR REVIEW OF THE DECISION OF THE AUSTRALIAN COMPETITION AND CONSUMER COMMISSION ON 8 DECEMBER 2003 TO APPROVE ITS OWN ACCESS ARRANGEMENT PURSUANT TO THE PROVISIONS OF THE NATIONAL THIRD PARTY ACCESS CODE FOR NATURAL GAS PIPELINE SYSTEMS AND THE GAS PIPELINE ACCESS LAW
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BY: |
EAST AUSTRALIAN PIPELINE LIMITED APPLICANT
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GYLES J (Deputy President) MR RC DAVEY MISS MM STARRS |
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DATE: |
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PLACE: |
SYDNEY |
THE TRIBUNAL ORDERS THAT:
The proceeding stand over to enable a minute of orders to be brought in.
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IN THE AUSTRALIAN COMPETITION TRIBUNAL |
NO 8 OF 2003 |
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RE: |
APPLICATION UNDER S 39(1) OF THE GAS PIPELINE ACCESS LAW FOR REVIEW OF THE DECISION OF THE AUSTRALIAN COMPETITION AND CONSUMER COMMISSION ON 8 DECEMBER 2003 TO APPROVE ITS OWN ACCESS ARRANGEMENT PURSUANT TO THE PROVISIONS OF THE NATIONAL THIRD PARTY ACCESS CODE FOR NATURAL GAS PIPELINE SYSTEMS AND THE GAS PIPELINE ACCESS LAW
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BY: |
EAST AUSTRALIAN PIPELINE LIMITED APPLICANT
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THE TRIBUNAL: |
GYLES J (Deputy President) MR RC DAVEY MISS MM STARRS |
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DATE: |
18 MARCH 2005 |
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PLACE: |
SYDNEY |
REASONS FOR DECISION
1 On 8 July last the Tribunal delivered reasons for decision (Reasons) (Application by East Australian Pipeline Limited [2004] ACompT 8)and adjourned the matter to enable the parties to consider the Reasons and propose orders to give effect to them. These reasons should be read with and as an extension of the Reasons. It transpired that there were a number of points of difference between the parties as to the manner in which those Reasons should be implemented. After a somewhat protracted process, all but three issues of principle have been agreed between the parties. Each concerns the method of depreciating Optimised Replacement Cost (ORC) to arrive at the Depreciated Optimised Replacement Cost (DORC). The first is whether the assessment should be made from the point of view of a hypothetical new entrant (HNE) or an incumbent. The second is whether the discount should be at the rate of the Weighted Average Cost of Capital (WACC) or at a risk free rate. The third is whether, if WACC, it is calculated before or after tax.
2 It is submitted on behalf of East Australian Pipeline Limited (EAPL) that the position of the Australian Competition and Consumer Commission (ACCC) on the first two issues is a new departure from its previous position and so prohibited by s 39(5) of the Gas Law (taking Gas Pipelines Access (South Australia) Act 1997 as an example) which is in the following terms:
‘(5) 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.’
3 Counsel for the ACCC submits that the limitation in that sub-section does not apply as the Tribunal has completed ‘reviewing the decision’ as it has been held that the decision was flawed and should be set aside. The Tribunal does not accept that submission. The jurisdiction which the Tribunal is exercising pursuant to s 38 and s 39 of the Gas Law is to ‘review the decision’ of the ACCC. It is accepted that the Tribunal is to proceed to vary the decision of the ACCC standing in the shoes of the ACCC. It is not possible to divide the ‘review’ in the manner suggested. (See also, Application by Epic Energy South Australia Pty Ltd [2002] ACompT 4 at [26] and [27].)
4 However, giving effect to s 39(5) is not without difficulty in these circumstances. The critical question is the meaning of the term ‘matter’. Does it refer to a topic or subject on the one hand, or to material in the sense of particular documents on the other, or both? If it refers in whole or in part to a topic or subject, what degree of generality is envisaged? Those questions are real in the present case as it has developed.
Hypothetical new entrant or incumbent
5 The Tribunal decided that the DORC methodology (referred to in cl 8.10(b) of the Gas Code) should be applied in fixing the Initial Cost Base (ICB) of the covered portion of the Moomba to Sydney Pipeline (MSP). There is no definition of that methodology in the Gas Code. There was a debate which occupied the attention of the Tribunal as to whether the depreciation of ORC should be ‘straight line’ or on a net present value (NPV) basis. If the latter, there was a question as to whether it should be based upon revenue or costs. The Tribunal decided that NPV methodology based upon costs was appropriate and invited the ACCC to propose DORC calculations accordingly.
6 It is clear from the Reasons that the Tribunal assumed that the calculation of DORC would be made from the viewpoint of an HNE (see [18], [26], [31], [36]–[38] and [51]). That is hardly surprising as that was the way in which the matter was presented in the Final Decision of the ACCC when understood in the light of the history of the matter and the underlying material. In the Final Decision, see particularly that which appears in cl 2.2.7 under the heading ‘Depreciated Optimised Replacement Cost’ and ‘Depreciated Optimised Replacement Cost Methodology’ in the light of that which appears in cl 2.2.4 under the heading ‘Depreciated Optimised Replacement Costs’ and the second last paragraph on p 68. The Final Approval of the ACCC merely maintained the preference for the straight line approach.
7 It is submitted for the ACCC that the methodology chosen by the Tribunal was uncertain and, indeed, had never been utilised in a real situation so far as the material revealed. It was submitted that putting the concept into effect threw up issues which had not been previously identified, including the issues which remain contentious and as the Tribunal had given the ACCC the task of assisting it to arrive at the correct result it was necessary for it to explore those issues including obtaining independent advice upon them. Relying upon that advice the ACCC formed the view that the calculation of DORC should be based upon the position of an incumbent pipeline owner rather than an HNE.
8 The practical difference between the two turned upon the tax concessions which an HNE would receive that would increase the value of the pipeline to it. Consideration of that issue also caused questions to be raised as to the role of taxation in the calculation of DORC in particular and the ICB in general which had not previously been debated.
9 Even a liberal construction of s 39(5) would not permit the Tribunal to consider any reports or other material from external consultants. It is not quite so clear that consideration of submissions from the parties as to the issue may not be considered. The issue has arisen in the course of the review and arises directly from the decision which is being reviewed. On the other hand, there is much to be said for the submission that the sub-section as a whole is aimed at restricting the substance of the limited review on the part of the Tribunal to ‘matter’ (meaning subject matter) raised before the decision under review was made. That view would prohibit consideration of any substantive issue arising thereafter even though it may be relevant to, or arise out of, the decision being reviewed.
10 The Tribunal does not need to finally resolve that question as it is of the opinion that it would not be right in the circumstances of this application to decide the new issue raised even if there were power to do so. The ICB will be based upon DORC assessed on the basis of an HNE with tax treated on that basis. The Tribunal stands in the shoes of the regulator for the relevant purpose (s 38(9) and (12)). It would be contrary to the purpose of a review pursuant to s 38 and s 39 of the Gas Law for a regulator to change its position on a matter of substance post the decision under review, even if that position was simply assumed on all sides or was a result of an inadequate appreciation of the issue, at least in relation to decisions made under the Gas Code.
11 Section 2 of the Gas Code deals with access arrangements. As might be expected, there are a number of time limits within the process laid down. It is desirable in the interests of all directly or indirectly concerned that the decision be made as soon as possible. The extended process in this case is hardly to be seen as normal. Furthermore, s 2 of the Gas Code establishes a detailed process of consultation involving not only the proponent but others with an interest in the decision to be made. That is understandable. There are many interests at stake and many questions to be answered by the regulator. It would not accord with the spirit of that process that a significant matter of substance be dealt with after the process has been completed. Then there is the clear legislative intent reflected in s 39 to limit the scope of review in a case such as this together with the time limit posed by s 38(3) subject to s 38(4). Again, the lengthy progress of this review should not be taken as the norm envisaged in the legislation. In short, it is hardly consistent with a review of the kind envisaged in Pt 6 of the Gas Law that significant new issues of substance would be raised during the review. The same thing would apply, of course, to a new point of substance raised by a proponent in the course of a review by the Tribunal.
12 It may be that the resulting approval may not be as useful a precedent for other cases as it might be if the new matter were considered and decided. That is not of great consequence as all questions can, and should be, dealt with in the context of a particular application having regard to the particular facts applicable. It is preferable that an issue of substance be explored with the benefit of the consultation process envisaged by the Gas Code. Indeed, it does not follow from this decision that DORC will always be the appropriate method of valuing a used gas pipeline for ICB purposes. So much follows from cl 8.10 of the Gas Code. Furthermore, this decision does not preclude a proper consideration of DORC based upon the incumbent rather than an HNE in another case.
Discount rate
13 The models put forward in the course of the application to the ACCC by EAPL for DORC used WACC as the discount rate. The EAPL DORC models were criticised by the ACCC in the Final Decision and Final Approval on various bases but there was no issue taken with the use of WACC in that way. The ACCC now seeks to contend that the cost differences between an old and new pipeline should be discounted at a risk free rate. It is said that whilst WACC may be appropriate for the purpose of discounting revenue it is inappropriate to discount costs and, in particular, costs associated with pipelines. It is contended that capital expenditure risks are specific and not systematic and that operating and maintenance expenditure risks are eliminated by contract. In addition to submitting that it is not open to the ACCC to shift ground in that way by virtue of s 39(5), EAPL argued that the ACCC has not demonstrated the empirical propositions it makes concerning risks, that the use of WACC is expressly referred to in the Gas Code, is consistent with past regulatory decisions of the ACCC and is the conventional measure for discounting in a commercial context such as this.
14 There is again a good case for not permitting the ACCC to raise this novel contention at this stage. We need not repeat what has been said already about the process. Suffice it to say that this debate was not exposed during the course of the process laid down by the Gas Code, that the supporting material relied upon is not permitted to be considered by virtue of s 39(5) and that there is thus not the opportunity to give the topic the full and proper consideration necessary to make a decision which will affect not only the immediate parties to this review but those with an interest in this application and those in this and other regulated industries. A refusal to allow the ACCC to raise this issue in the present case would not inhibit the ACCC in considering the same argument in another case.
15 Furthermore, on the material before this Tribunal, the ACCC has not established that WACC is an inappropriate measure. In the usual case of NPV asset valuation net revenues are used. In that situation WACC would be the usual discount rate since it is the rate of return that a service provider is permitted to earn on an asset. Although cost differences are used for the DORC NPV valuation, that is done to avoid the circularity inherent in the use of regulated tariffs as revenues. If one accepted the ACCC’s argument and did not use WACC in the DORC exercise, then it is arguable that the inability use net revenues would lead to a further distortion. Our conclusion is consistent with the manner in which the Gas Code deals with related topics and with other regulatory actions by the ACCC. If there were a full consideration of the topic by all interested parties in another case, particularly on the basis of more empirical data and expert opinion, this decision does not pre-empt the proper conclusion on that material.
16 EAPL contends that pre-tax WACC should be used as the discount rate rather than post-tax WACC. That was a late development, too late in the view of the Tribunal. There was a considerable discussion of the choice between pre-tax and post-tax WACC in 2.6 of the Final Decision relating to rate of return and the ACCC decided in favour of post-tax WACC. There has been no challenge to that aspect of the decision. Whilst the context is not precisely the same, it would be anomalous to permit EAPL to now raise a similar argument in relation to the calculation of DORC. Again, that is not to say that the matter could not be reopened in another matter with a different history on different material. Post-tax WACC should be used to discount the cost differences.
Costs
17 EAPL seeks an order that the ACCC pay its costs of the hearing pursuant to s 38(10) of the Gas Law on the basis that it has substantially succeeded on the contested issues. That alone would not be sufficient to entitle it to an order for costs (Duke Eastern Gas Pipeline Pty Ltd (2001) ATPR 41-827 at 43196). This proceeding is not inter partes adversary litigation but is rather part of an administrative inquiry which affects wider interests than those simply arising between the immediate parties to the proceeding. The issues which were debated and decided are only part of a much wider controversy, much of which has been settled by agreement during the course of the review. It also needs to be recalled that the Tribunal took a different view to that of EAPL as to the appropriate length of life for the MSP for the purposes of the calculation of DORC. That has significance for the overall result.
18 A costs order by the Tribunal should not reflect a view as to the reasonableness or otherwise of the Final Decision or Final Approval of the ACCC – those determinations are simply the result of the administrative process. Any costs order should be based upon what takes place during the review. The ACCC has a proper role in explaining and, in that sense, defending its decision and should not be deterred from doing so by any undue risk as to costs. That does not mean, of course, that it is entitled to pursue that course regardless of cost and time and regardless of the arguments marshalled by the proponent. As we have said, the proceeding is not strictly adversarial and the ACCC is strictly not a contradictor. Participation in a review of this kind is part of the administrative process, the cost of which is part of the cost of the process in the normal case. Taking all things into consideration the Tribunal is not satisfied that any order for costs should be made in relation to the first hearing, that is, up to the delivery of the Reasons.
19 The situation thereafter is somewhat different. The task of the ACCC was to assist the Tribunal to come to a correct decision based upon the matters and materials which had been before the ACCC within the limits laid down by the Reasons. The ACCC went beyond that role in relation to the two issues which have fallen for determination by the Tribunal. The departures were not due to any difficulty or uncertainty in calculating DORC on the basis that had prevailed up to the delivery of the Reasons. They were a change of position. The ACCC not only took a new position, it also relied upon external reports in relation to the issues contrary to the letter and the spirit of s 39. That conduct has undoubtedly occasioned the expenditure of a great deal of unnecessary time and expense on the part of EAPL, which had objected in due time to the course being taken by the ACCC as being contrary to s 39. On the other hand there is force in the argument that the task the Tribunal asked the ACCC to undertake was novel. It might also be said that the limits of s 39 had not been fully explored in prior cases. Those limits should be clear from now on. Further, the disputed issues are only part of the matter for determination, a great deal of which was settled in the course of the proceeding, either before or during the hearing. EAPL did not succeed on the pre-tax WACC arguments. In all the circumstances and after some hesitation, the Tribunal is not persuaded to make any order for costs of the further hearing.
Orders
20 The ACCC has provided an amended submission as to the application of the Monte Carlo analysis to EAPL’s NPV cost based DORC mid-point estimates. EAPL accepts the submission for the purposes of the proceeding. So does the Tribunal. The ICB should be based upon DORC with tax on an HNE basis and the discount rate is to be post-tax WACC. The ACCC has also provided a submission as to apportionment between the uncovered and covered portions of the pipeline which is accepted by EAPL. The Tribunal will order accordingly. EAPL should bring in a minute of orders to give effect to these reasons that should not be restricted to the disputed issues but which should enable a complete resolution of the process.
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I certify that the preceding twenty (20) numbered paragraphs are a true copy of the Reasons for Ruling herein of the Tribunal. |
Associate:
Dated: 18 March 2005
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Counsel for EAPL: |
JT Gleeson SC, NL Manousaridis |
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Solicitor for EAPL: |
Middletons |
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Counsel for the ACCC: |
JBR Beach QC, MAC Painter |
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Solicitor for the ACCC: |
Deacons |
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Dates of Hearing: |
17–18 February 2005 |
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Date of Decision: |
18 March 2005 |