East Australian Pipeline Pty Limited v Australian Competition & Consumer Commission
 HCA 44
- The High Court of Australia has handed down a decision on the appropriate method of determining an important component of access prices to natural gas pipelines in Australia.
- The principles laid down by the Court are expressed so as to also apply to access to other types of monopoly assets.
Approved Access Regimes Relate to Monopoly Assets in Australia
The National Third Party Access Code for Natural Gas Pipeline Systems ("the Code") establishes a national access regime for natural gas pipeline systems within the framework of a National Competition Policy.1
The Australian Competition Tribunal aptly observed:
"The setting of a tariff for a monopoly service provider, whether for gas, electricity or other services, is a difficult matter that has vexed regulators, service providers, producers and consumers in various parts of the world. …[A] corpus of economic theory has developed and, as will be seen, its existence is taken for granted by the form of the Code."2
The appellant, East Australian Pipeline Pty Limited ("EAPL") purchased the Moomba to Sydney Pipeline System ("the Pipeline") from the Commonwealth Government in 1994. It had been in operation since the latter half of the 1970's, and was a pipeline covered by the Code.
A dispute arose between EAPL and the regulator, the Australian Competition and Consumer Commission (“the ACCC”). This related to the setting of a "Reference Tariff" which would form the basis of the charges which EAPL as monopoly owner would be entitled to charge users for access to natural gas. The Code provided that the Reference Tariff was in part determined by calculating the "Initial Capital Base" ("ICB") of the pipeline.
EAPL made submissions as to an appropriate ICB, the last of which on 4th December 2002 estimated the ICB to arrange between $784 million and $998 million. The ACCC in its final approval released on 8th December 2003 rejected EAPL's ICB estimate and set its own figure for ICB of $545.4 million.
Appeals to the Tribunal and the Federal Court
EAPL appealed to the Australian Competition Tribunal on 19 December 2003, which found in its favour. The ACCC in turn appealed to the full bench of the Federal Court of Australia, which reversed the decision of the Tribunal. EAPL then obtained a grant of special leave to appeal to the High Court of Australia.
Relevant Provisions of the Code
Section 8.10 of the Code provides a scheme for the calculation of the Initial Capital Base, although as will be seen, there was controversy over whether this Section should be applied as whole, or whether it embodied elements of a linear process:
Initial Capital Base - Existing Pipelines
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:
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;
- the value that would result from applying the 'depreciated optimised replacement cost' methodology in valuing the Covered Pipeline;
- the value that would result from applying other well recognised asset valuation methodologies in valuing the Covered Pipeline;
- the advantages and disadvantages of each valuation methodology applied under paragraphs (a), (b) and (c);
- international best practice of Pipelines in comparable situations and the impact on the international competitiveness of energy consuming industries;
- 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 reasonable expectations of persons under the regulatory regime that applied to the Pipeline prior to the commencement of the Code;
- the impact on the economically efficient utilisation of gas resources;
- 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);
- the price paid for any asset recently purchased by the Service Provider and the circumstances of that purchase; and
- any other factors the Relevant Regulator considers relevant."
Section 8.11 of the Code provided:
"The Initial Capital Base for covered pipelines were in existence of the commencement of the Code normally should not fall outside the range of values determined under paragraphs (a) and (b) of Section 8.10."
Argument before the High Court of Australia
The ACCC in its determination gave considerable weight to the factors listed under section 8.10 (f), in a manner which EAPL argued denied the proper emphasis on the valuation methods laid down under sections 8.10 (b) and (c).
On appeal, the ACCC argued that it was required to look at the elements of Section 8.10 as a whole, and that it was enough if the result of its determination "fitted" into Section 8.10,. The ACCC also argued that the broad terms of Subsection 8.10 (k) would support its determination.
Decision on Appeal
The High Court3 allowed the appeal, rejecting the submission of the ACCC that it was required to consider section 8.10 as a whole. Rather, the Court found as a matter of construction that the section laid down a process, whereby three steps must be followed in their proper order to set an ICB:
First, a value for the asset base must be chosen by reference to "well recognised asset valuation methodologies" in accordance with sub-sections 8.10 (a) to (c).
Secondly, the advantages and disadvantages of each of the possible “well recognised asset valuation methodologies” must be assessed (as per sub-section 8.10 (d)).
Thirdly, the factors set out in Subsections 8.10 (e) to (k) must be considered as they may bear on the choice of methodology and/or oblige an adjustment of value derived from a chosen methodology.
The Court noted in particular that any departure from this process would result in uncertainty, which in turn would complicate the task of any service provider in preparing a proposed access arrangement of an established pipeline, and it would also render more risky or uncertain the task of establishing a rate of return on investment, which could distort future investment decisions about essential infrastructure.
The majority stated the following principle in regard to prescribed access regimes in general:
"…stripped to essentials, such a regime is at least intended to allow efficient costs recovery to a service provider and at the same time ensure pricing arrangements for the consuming public which reflect the benefits of competition, despite the provision of such services by monopolies. The balancing of those objectives probably has a natural flow‑on effect for future investment in infrastructure in Australia. The greater the degree of uncertainty and unpredictability in the regulatory process, the greater will be the perceived risk of investment. The greater the perceived risk of investment, the higher will be the returns sought."
The emphasis by the High Court of Australia on requirements of certainty and predictability in the process of setting prices for access to monopoly assets, whilst general, will be of assistance to lower courts, owners, regulators and investors alike.
It should be recognised that the language adopted by the High Court of Australia is applicable to prescribed access regimes in relation to other monopoly assets as well as natural gas pipelines.
1The Code derives it’s authority from a Natural Gas Pipelines Access Agreement signed by the Federal, State and Territory Governments of Australia on 7 November 1997, following which it was enacted via legislation of the Parliament of South Australia.
2 Application by East Australian Pipeline Limited (2004) ATPR ¶42-006 at 48,801 .
3 Judgment of Gleeson CJ, Heydon and Crennan JJ. Gummow and Hayne JJ concurred in the result.
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