Re: Dr Ken Michael Am; ex parte Epic Energy (WA) Nominees Pty Ltd & Anor [2002] WASCA 231 (23 August 2002)

Re: Dr Ken Michael Am; ex parte Epic Energy (WA) Nominees Pty Ltd & Anor [2002] WASCA 231 (23 August 2002) - WASCA 2002 case summary — Zoe

[168]

In this context, Alinta relied on Rathborne v Abel (1964) 38 ALJR 293 where the issue was whether, in the determination of the fair rent of prescribed premises under the Landlord and Tenant (Amendment) Act 1948-1961 (NSW), the current capital value of the premises might properly be taken into account even though this was not among a list of matters that by s 21(1) the Board was "to have regard to", and even though it was regarded by the members of the Court as "truly material to the fairness of a determination", per Kitto J at 301. As is apparent from the reasons of Barwick CJ at 295 there was a marked contrast between earlier legislation which for this purpose prescribed what his Honour described as almost a mechanical process of calculation, and the scheme of the 1948 Act which was to give a wide discretion "doing no more than to require the Tribunal, the Board, 'to have regard to' a number of matters, which include 'the justice and merits of the case' and 'the circumstances and conduct of the parties'". The generality of such matters and the breadth of discretion which they contemplated, together with the contrast with the previous legislation, were clearly factors which persuaded the Court that the specified matters were not intended implicitly to exclude a factor which was truly material or necessarily central to the legislative task in question. The decision in Rathborne v Able is strongly influenced by the particular statutory scheme which had a "rather different scope and purpose" from the present Code, to borrow the words and view expressed by Gummow J of Rathborne v Able in Australian Capital Television Pty Ltd v Minister for Transport and Communications & Ors (1989) 86 ALR 119 at 145. In that case, in the context of s 94M(1) of the Broadcasting Act 1942 (Cth), in respect of the matters which the Minister was required "to have regard to" when considering whether or not to approve a television license, Gummow J was persuaded that the matters specified were required to be taken into account by the Minister and to be given weight as fundamental elements in his decision. His Honour reached a similar view of the requirement in the Schedule to the Health Insurance Act 1973 (Cth) that the Minister's Advisory Committee "shall have regard to" certain matters when undertaking a general or fee review in Queensland Medical Laboratory & Ors v Blewett & Ors (supra) at 623.

[198]

82 Particular emphasis is placed on s 6.15 by Epic. This subsection provides guidance for an arbitrator under the Code (in Western Australia the Western Australian Gas Disputes Arbitrator: see s 62 of the Act) when a dispute arises between a prospective user and the Service Provider as to the terms and conditions of access. The arbitral procedure is available on notice to the arbitrator by either party and is binding. Section 6.15 requires an arbitrator to apply the provisions of the Access Arrangement for the Covered Pipeline. In addition the arbitrator "must take into account" factors (a) to (h) which replicate or substantially replicate the factors (a) to (f) of s 2.24, although not the general public interest limb of s 2.24(e). In addition, s 6.15(b) and (c) deal specifically with the costs to the Service Provider of providing the disputed access, and the economic value to the Service Provider of any investment the prospective user has agreed to make. With these two additions, which are relevant to the particular case being arbitrated, the requirement that the arbitrator must take into account essentially the s 2.24 factors in determining an access dispute is submitted by Epic as revealing that the s 2.24 factors where intended to be relevant to all aspects of an Access Arrangement, including a reference tariff and a reference tariff policy. The apparent force of this argument appears to be negated, however, by s 6.18. This precludes the arbitrator from making a decision which is inconsistent with the Access Arrangement (which of course contains the reference tariff policy and the reference tariff), or which requires the Service Provider to provide, or the user or prospective user to accept, "a Reference Service at a Tariff other than the Reference Tariff". The effect of s 6.18 is to heavily qualify the scope for decision by an arbitrator. Rather than supporting Epic's position it appears to insulate a reference tariff approved by the Regulator from any arbitral review.

[245]

109 The brief affidavit of Mr Ergas annexes his statement to which these comments are addressed. Alinta does not press all paragraphs of the statement. To and including par 134 the observation may be made that in many passages the statement is not necessarily confined to expressing an opinion from the viewpoint of an economist. In my view, these paragraphs, so far as their admission is pressed, should be received and read only on the basis and to the extent that they are expressing an expert opinion from the viewpoint of an economist. Paragraphs 135 to 146 are advanced under a heading of "abuse of monopoly power". They do not, however, propound any received or accepted economic meaning or usage of that concept. Indeed, what is advanced in par 137 to par 139 is a view of the phrase "use of monopoly power". In general these paragraphs appear to be an attempt to develop and argue a case as to what abuse of monopoly power could or should mean. I would not receive those paragraphs into evidence. Paragraphs 154 to 167 involve the response of Mr Ergas to an issue posed by those instructing him, ie whether there are economic rationales for adopting as the initial capital base a purchase price for an asset which is greater than both Depreciated Optimised Replacement Cost ("DORC") and Depreciated Actual Cost ("DAC") valuations. That issue is posed and answered "having regard to the objectives set out in s 8.1 of the Code and in the introduction to the Code". To deal with such a question it is necessary for Mr Ergas to form views as to the meanings of s 8.1 and the introduction to the Code, and to apply those views the issue posed. It appears to me that what follows is not merely an indication of objective economic theory and concepts, but amounts to an attempt to interpret and apply the Code. It is not possible with any confidence to discern objective theory and opinion from what is influenced by views as to the meaning of the Code. I would not admit these paragraphs. I would also not admit subpars 174(k), (l), (m), (o) or (p) which appear to reflect earlier paragraphs not admitted.

[273]

130 The service provider's legitimate business interests and investment in the pipeline (s 2.24(a)) would appear directly relevant to the objective that access rights by third parties be on conditions that are fair and reasonable for the owners and operators of a pipeline. The investment in this case is relevantly the full purchase price of $2.407 billion, (some other items are also relied on). Within the meaning of s 2.24(a) both that investment and the legitimate business interests of Epic might properly extend to the recovery of that $2.407 billion, at least over the expected life or operation of the pipeline, together with an appropriate return on investment. (In the Regulator's unquestioned finding the expected life of the DBNGP is 70 years). The business interests of Epic might well extend much further than this, but it is unnecessary to explore those matters. There was a submission from Alinta that in the context of this Code the recovery of monopoly prices or tariffs, above the level of economically efficient prices, should not be seen as "legitimate". I find no support in the Act or the Code for such a view. While some expressions of economic theory and passages in the Hilmer Report would suggest that it is against the interests of society as a whole, at least in some situations, for a monopolist to be able to recover monopoly prices or exercise monopoly power in the market, that does not make the enjoyment by a monopolist of a monopoly an illegitimate business interest. On the other hand there may be much scope for the notion of illegitimate, as opposed to legitimate, business interests in the context of arrangements which, for example, constitute a contravention of the Trade Practices Act or involve manipulations of the prices paid for assets with a view to the avoidance of revenue charges. There is no basis shown, however, upon which the interests of Epic in recovering the actual investment it made in the DBNGP when it acquired it from the State, together with a reasonable return on that investment, should be categorised as other than a legitimate business interest for the purposes of s 2.24(a).

[375]

213 Thirdly, in addition to his conclusion noted above that there was no reason to consider a reasonable market valuation to be in excess of a DORC value for the unsupported reason discussed, at Part B: p 154 the Regulator gave two other reasons for concluding that there was no reason to value the initial Capital Base in excess of a DORC value. This was in the context of his consideration of s 8.11. The first reason was what the Regulator described as "the economic arguments". The second reason was that the sale process for the DBNGP, as evidenced by the information memorandum, "would have led to the reasonable expectation that the asset valuation for the DBNGP under the Code would not be in excess of a DORC value." The second of these other reasons is apparently founded on a factual conclusion as to the effect of the information memorandum that was part of the sale process. Earlier, I have dealt with what appears to be the only relevant part of that information memorandum. This is the inclusion by the Sale Steering Committee of an indicative valuation prepared by Price Waterhouse which was based upon a DORC valuation. As already noted Price Waterhouse had been briefed to prepare either a DAC type or a DORC type valuation. Price Waterhouse went on to express the view that a DORC type valuation would be supportable under the Code. I will not repeat what has been said earlier about this. However, at Part B: p 154 of the draft decision the Regulator suggests that this "would have led to the reasonable expectation" that the asset valuation would not be in excess of a DORC value. In Part A: p 18 - p 19 the Regulator deals with the same subject matter. There the Regulator expresses that view and, a few lines later, the different view that "this may have led to reasonable expectations" of a DORC valuation under the Code being likely. There is a significant difference between these two expressions of view, if they are to be relied on to support the conclusion that Epic had that expectation.

At a glance

Court

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Before

Catchwords

Source

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Judgment (455 paragraphs)

Re: Dr Ken Michael Am; ex parte Epic Energy (WA) Nominees Pty Ltd & Anor [2002] WASCA 231 (23 August 2002)

Code Section 2.24 - "Must take into Account"

Code Section 2.24 - First and Third Sentences

Application of s 2.24 Factors to s 3.4 and s 3.5

Interpretation of the Code - General Provisions

Interpretation of the Code - The Hilmer Report - COAG Agreement

Interpretation of the Code - Admission of Expert Evidence

Interpretation of the Code - Meanings of Particular Words or Phrases

Interpretation of the Code - Section 2.24 Factors

Interpretation of the Code - Overview to Section 8

Interpretation of the Code - Section 8.10 and 8.11 Factors

Interpretation of the Code - Other Provisions

Legislation Cited (14)

Cases Cited (64)