Case: Associated Provincial Picture Houses Ltd v Wednesbury Corporation [1948] 1 KB 223
Outcome: cited
The grounds on which Telstra relies in these proceedings are set out in the following table (Table), the numerals being the number of the ground in the relevant current form of the application for an order of review: TELSTRA'S GROUNDS PROCEEDINGS Agile LSS 69/2008 Adam LSS 70/2008 Primus LSS 72/2008 Amcom LSS 73/2008 Network Tech LSS 75/2008 TPG LSS 77/2008 Primus ULLS 78/2008 Macquarie ULLS 105/2008 XYZed ULLS 529/2008 PowerTel ULLS 531/2008 Request ULLS 533/2008 Optus ULLS 717/2008 Chime ULLS 718/2008 Primus ULLS (Connections) 719/2008 A Pooling and Allocation Method s 152CR(1)(d) - error of law 5 5 5 5 5 5 2 2 1 1 1 1 1 B ULLS Model Terms s 152AQB(9) procedural ultra vires and failure to take into account relevant consideration 4 4 3 3 3 3 C Call Diversion FD not authorised by Act and made in excess of jurisdiction 4 4 1 D WACC (Weighted Average Cost of Capital) error of law and Wednesbury unreasonableness 6 6 6 6 6 6 3 3 2 2 2 2 2 E Line costs error of law, no evidence and statutory procedural ultra vires 3, 4 3, 4 3, 4 3, 4 3, 4 3, 4 F 2007 LSS Pricing Principles s 152AQA(6) Errors of law and taking into account irrelevant consideration 2 2 2 2 2 2 10 The second respondents can be conceived of as falling into groups according to their legal representation. Mr A Robertson SC with Mr S J Free of counsel appeared for Optus and XYZed. I was told that those companies form part of the Singtel Optus group. Ms M Sloss SC with Mr M J Hoyne of counsel appeared for Agile, Adam, Amcom, Network, Macquarie, PowerTel, Request, Chime and Primus. Mr M J Hoyne of counsel appeared for TPG. 11 In all proceedings Dr J E Griffiths SC and Ms M N Allars appeared for Telstra. Mr J S Hilton SC and Mr M H O'Bryan appeared for ACCC. 193 Ground 6(b) is Wednesbury unreasonableness (cf Associated Provincial Picture Houses Ltd v Wednesbury Corporation [1948] 1 KB 223), both under the general law and as reflected in s 5(1)(e) when read with s 5(2)(g) of the ADJR Act. The FD is said to be illogical, irrational and perverse because it was based on a manifestly erroneous economic analysis. 194 In its amended application for an order of review, Telstra gives particulars of Ground 6 in 10 paragraphs that can be paraphrased as follows: (i) ACCC determined the WACC on the basis of the Capital Asset Pricing Model (CAPM); (ii) A fundamental assumption of the CAPM is that all investors require the same return from investment in a particular asset irrespective of their risk preferences; (iii) Telstra put a "welfare asymmetry argument" to ACCC to the effect that the WACC should be set so as to take sufficient account of the social consequences of underestimating it, such as that necessary investment may not be undertaken because of the perceived inadequacy of the return on capital invested; (iv) ACCC rejected this submission on the ground that it was based on an assumption that all investors have homogeneous expectations as to the return required from a particular asset, when, in practice, they have heterogeneous expectations as to that return; (v) The basis on which ACCC rejected Telstra's submission in (iii) and made the finding in (iv), contradicted a fundamental assumption in ACCC's setting of the WACC using CAPM, namely, that all investors have homogeneous expectations as to the return required from a particular asset; (vi) Further, or in the alternative to (i) to (v) above, ACCC rejected Telstra's submission referred to at (iii) on the basis of the availability of capital at a lower than normal rate of return in relation to an asset; (vii) ACCC's conclusions referred to in (v) and (vi), even if the CAPM economic framework is not adopted, are based on the manifestly erroneous premise of markets being in a state of disequilibrium and/or of investors being irrational; (viii) By reason of (i) to (vi) above, ACCC's setting of the WACC on the basis of an erroneous principle was an error of law; (ix) By reason of (i) to (vii) above, ACCC's setting of the WACC was illogical, irrational and perverse; (x) In the result the FD is invalid (or liable to be set aside) as infected by jurisdictional error on the grounds stated in ss 5(1)(f) and 5(1)(e) (when read with s 5(2)(g)) of the ADJR Act. Some principles of economics 195 It is common ground that a fair or efficient price must include as one component the fair return that Telstra is required to give in return for the equity and loan capital that it needs. In the regulatory framework, the standard practice for calculating this fair return is by reference to an estimate of the regulated firm's WACC. The WACC is a weighted average of: (a) the return that would be required by the providers of debt capital to the firm as a sufficient incentive to provide that debt capital; (b) the return that would be required by the providers of equity capital to the firm as a sufficient incentive to provide that equity capital. 227 In support of proposition (a), Telstra refers to cases in which the ground of review often referred to as Wednesbury unreasonableness has been described. 228 In relation to Telstra's proposition (b), Telstra refers to the discussion of steps (b) to (f) in relation to Ground 6(a) above. 229 In respect of proposition (c), Telstra submits that ACCC's reasons for rejecting the welfare asymmetry argument were fundamentally illogical and perverse in at least two ways. 245 Optus submits that the Wednesbury unreasonableness ground of review does not extend to an error of reasoning in making a finding of fact about a matter that is one of many factual elements in the determination of an access dispute. Non-Optus and XYZed access seekers' submissions 246 The non-Optus and XYZed access seekers, to whom I will refer as the non-Optus access seekers, emphasise that the CAPM and the WACC provide only estimates, and that it is not possible to observe whether the figures that they give are correct or not. They are only formulae, cannot take into account all of the real world effects, and their inputs are unknowns. 247 The non-Optus access seekers identify two major questions on which the expert witnesses disagree: (a) Is it a necessary assumption of the CAPM formula used by ACCC that investors have homogeneous expectations? (b) If it is, is there any illogicality in ACCC's using the CAPM to arrive at the WACC, then rejecting Telstra's welfare asymmetry argument on the basis, inter alia, that investors do not have homogeneous expectations? 249 In their written submissions, the non-Optus access seekers summarise the experts' evidence in relation to these questions, but submit that it is not necessary for the Court to resolve the debate between them. Those parties submit that if the Court should conclude that ACCC's approach is supported by a respectable body of economic thought, that suffices to defeat Telstra's claim based on error of law and Wednesbury unreasonableness. Nonetheless, they submit that the evidence and Telstra's submissions do not demonstrate illogicality in ACCC's reasoning process for a number of reasons on which they elaborate. 250 The non-Optus access seekers distinguish the valuation of land cases relied on by Telstra as turning on the terms of particular statutes. They note that Telstra purports to concede (as it must) that illogicality or unreasonableness do not necessarily constitute reviewable error unless there is a legal principle or statutory provision that attracts that consequence: they cite Re Minister for Immigration and Multicultural Affairs; ex parte Applicant S20 / 2002 (2003) 198 ALR 59 ; [2003] HCA 30 ( S20 ) at 61 per Gleeson CJ. Whether relying on Wednesbury unreasonableness or "illogicality, unreasonableness and perversity", as in S20 , one must identify a particular statutory provision or other legal principle that has been infringed. The non-Optus access seekers submit that Wednesbury unreasonableness is directed at outcomes, whereas S20 illogicality is directed at processes of reasoning: see S20 [2003] HCA 30 ; 198 ALR 59 at 76 per McHugh, Gummow JJ, 88 per Kirby J. 257 In para 6 of its amended application for an order of review, Adam referred to Wednesbury unreasonableness as "further or in the alternative" to the error of law ground, and gave the same particulars of both (see [194] above). In its submissions, however, while acknowledging substantial overlap between the two grounds, Telstra distinguished between them (see [218] (error of law) and [226] ( Wednesbury unreasonableness) above). 261 While I will examine the alleged error, illogicality, irrationality and perversity of which Telstra alleges ACCC was guilty, in my view the alleged inconsistency in reasoning process on which Telstra seizes does not constitute either error of law or Wednesbury unreasonableness, because Telstra has not related it to a particular statutory provision or legal principle that the inconsistency is said to have infringed. The assumptions underlying the CAPM 262 In the report annexed to his first affidavit, filed in the Adam LSS proceeding, Professor Gray noted that the CAPM is mathematically derived under a number of formal assumptions which are set out in most standard finance textbooks. Citing C Jones, Investments: Analysis and Management (John Wiley &amp; Sons Inc, 2002) at 531, Professor Gray listed the assumptions as follows: All investors have identical probability distributions for future rates of return; they have identical (or homogeneous) expectations with respect to the three inputs of the portfolio model (expected returns, the variance of returns and the correlation matrix). Therefore, given a set of security prices and a risk-free rate, all investors use the same information to generate an efficient frontier; All investors have the same one-period time horizon; All investors can borrow or lend money at the exogenously given risk free rate of return and there are no restrictions on short sales of any asset; All assets are marketable (perfectly divisible and perfectly liquid) and there are no transaction costs; There are no personal income taxes investors are indifferent between capital gains and dividends; There is no inflation; There are many investors and no single investor can affect the price of a stock through his or her buying and selling decisions. Investors are price takers and act as if prices are unaffected by their own trades; and Capital markets are in equilibrium. 263 In oral evidence, Professor Gray explained the nature of economic models and the unrealistic nature of the assumptions underlying them as follows (T541): Every assumption of every economic model is unrealistic. ... I should expand upon that, perhaps. The way every economic model works is to start with a set of assumptions that are necessarily unrealistic, which is why they are called assumptions. They are not descriptions of reality. Based on those simplifying assumptions, we apply an internally consistent set of logic or mathematical derivation, and that produces some outputs. When evaluating the use or worth of an economic model, we don't have any regard to the reality of the assumptions. We look at the effectiveness or the use to which the outputs can be put. So that might be, in terms of in this example, determining what an appropriate return would be for a regulated monopoly asset. If the model works, if it's useful, if it explains something or makes some useful predictions that are supported empirically, then it will be a successful model. All of the models in economics are based on a set of assumptions that try to simplify very complex phenomena into something that can be modelled. That is the whole reason for having those assumptions. Indeed, every assumption in every economic model is for that reason unrealistic. That is the whole point of having those assumptions. 270 I see no ground for criticism of ACCC's reasoning process by which it rejected Telstra's capital strike proposition. It was at liberty to consider that in the real world investors do not behave in the way in which the capital strike proposition would have them behave. Accordingly, in this respect ACCC did not behave unreasonably or irrationally, and neither error of law nor Wednesbury unreasonableness is made out. Inconsistency and Application by GasNet Australia (Operations) Pty Ltd [2003] ACompT 6 ; [2004] ATPR 41-978 ; [2003] ACompT 6 284 In my view neither the error of law ground nor the Wednesbury unreasonableness ground is made out in respect of the WACC. E LINE COSTS Introduction 285 Telstra raises two grounds in respect of "line costs" in the Amcom, Adam, Agile, Primus (the acronym "AAAP" has been used to refer to these four access seekers who made a joint submission in the ACCC arbitrations), Network and TPG proceedings. These are all six of the LSS proceedings. I will refer to Adam as representative. 286 Both grounds concern the access seekers' business plans, and, in particular, the question whether those business plans provided a justification for not including a contribution to line costs in the annual charge for access to the LSS (LSS Annual Charge). 385 Telstra contends that s 152DB(1)(b) had the effect, in the circumstances of the present case, of requiring ACCC to inquire into and investigate a particular matter. Telstra submits that this statutory duty may be no less than the duty developed at common law in connection with Wednesbury unreasonableness, and refers to Prasad v Minister for Immigration and Ethnic Affairs (1985) 6 FCR 155 at 169-170 per Wilcox J; Minister for Immigration and Ethnic Affairs v Teoh [1995] HCA 20 ; (1995) 183 CLR 273 ; Minister for Immigration and Citizenship v Le [2007] FCA 1318 ; (2007) 164 FCR 151 at [60] - [79] ; Visa International v Reserve Bank of Australia [2003] FCA 977 ; (2003) 131 FCR 300 at [623] - [627] . That common law rule is that a failure by a decision maker to obtain "centrally relevant" information on a critical issue which the decision maker knows or ought reasonably to know is readily available, may be so unreasonable that no reasonable decision maker would have proceeded to make the decision without making an inquiry with a view to obtaining the information, in default of which the decision will be an invalid exercise of power. 386 Telstra, however, disclaims reliance on Wednesbury unreasonableness ( Wednesbury unreasonableness is recognised by the ADJR Act as a ground of review under ss 5(1)(e) and 5(2)(g) of that Act). 387 The access seekers submit that the duty under s 152DB(1)(b) can be no greater than the common law duty referred to above. This is because, so they argue, the legislative purpose and primary provision of s 152DB(1)(b) is to require ACCC to act as speedily as possible, while the remainder of para (b) sets a limit on this requirement. That remainder does not impose additional obligations on ACCC. 388 Telstra, on the other hand, argues that primacy must be given to the investigation and inquiry mandated by s 152DB(1)(b), and suggests that the duty to act with speed indicates the manner in which that inquiry and investigation are to be undertaken.