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.