Case: Application by GasNet Australia (Operations) Pty Ltd [2003] ACompT 6 ; [2004] ATPR 41-978 ; [2003] ACompT 6
Outcome: cited
They also distinguish Application by GasNet Australia (Operations) Pty Ltd [2003] ACompT 6 ; [2004] ATPR 41-978 ; [2003] ACompT 6 (GasNet) at [47] as directed to the need to apply the CAPM in a conventional way. According to their submissions, the Tribunal was not there suggesting that the CAPM formula could be applied only in a way that was consistent with an acceptance of its underlying assumptions. Consideration General 252 As previously noted, Telstra led expert evidence from Professor Stephen Faulkner Gray, Professor of Finance at UQ Business School, University of Queensland, and also the Managing Director of The Strategic Finance Group: SFG Consulting. Also as noted above, Optus led expert evidence from Jason Peter Ockerby, a director of the Competition Economists Group. The non-Optus access seekers led expert evidence from Dr Thomas Nicholas Hird, also of the Competition Economists Group. The three economists provided a "Joint Report of Experts" (Joint Report) to the Court. They also provided their own independent reports and gave extensive oral evidence. The authorities 253 The authorities referred to by Telstra (see [219] above) concerned statutory contexts different from the present one. They required that a "value" or a value of a particular kind or an amount of "compensation" be determined, and in some instances the basic expressions were elaborated upon or defined. Accordingly, the argument was open in those cases that the statute had been misconstrued. 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 6 271 Telstra's contention that there is a fundamental inconsistency in relying on the CAPM and accepting the heterogeneity of investor expectations is well expressed at [68] of Telstra's submissions to ACCC: ...the conventional versions of the Capital Asset Pricing Model (" CAPM "), [to] which both the Commission and the Tribunal refer in their previous regulatory decisions, do not extend in any simple way to heterogeneous investor information and expectations. As a result, if the Commission and the Tribunal genuinely hold the view that investors have heterogeneous information and expectations, they cannot continue to rely on the models they have conventionally used to determine allowed rates-of-return. To do so would be to contradict the requirement the Tribunal has set out in earlier decisions that the CAPM be applied in a manner consistent with its underlying assumptions. The reference in the last section to "earlier decisions" is a reference to the Tribunal's decision in GasNet at [47]. The Tribunal there stated: The ACCC erred in concluding that it was open to it to apply the CAPM in other than the conventional way to produce an outcome which it believed better achieved the objectives of s 8.1. In truth and reality, the use of different values for a risk free rate in the working out of a Rate of Return by the CAPM formula is neither true to the formula nor a conventional use of the CAPM. It is the use of another model based on the CAPM with adjustments made on a pragmatic basis to achieve an outcome which reflects an attempt to modify the model to one which operates by reference to the regulatory period of five years. The CAPM is not a model which is intended to operate in this way. The timescales are dictated by the relevant underlying facts in each case and for present purposes those include the life of the assets and the term of the investment. The reference to "s 8.1" is a reference to s 8.1 of the National Third Party Access Code for Natural Gas Pipeline Systems. Section 8.1 set out the objectives according to which a "Reference Tariff" and "Reference Tariff Policy" were to be designed. I do not think that the Tribunal's observation at [47] set out above is relevant to the question whether ACCC was obliged, in order to be consistent, to accept as according with the real world the assumptions according to which the CAPM was formulated. Inconsistency and the expert evidence 272 I do not find it necessary or think it desirable to attempt to describe comprehensively the effect of the totality of the evidence of the expert witnesses, but certain aspects of the Joint Report, in particular, are noteworthy. 273 The experts agreed that: the required return on equity capital cannot be estimated with great precision; the Sharpe-Lintner CAPM relies on a number of assumptions that are unrealistic, one of which is that of homogeneous investor expectations about the future prospects of each firm; the Sharpe-Lintner CAPM pricing relation can be derived adopting assumptions different from those originally employed by Sharpe and Lintner, one of those different assumptions being that investors have heterogeneous expectations about the future prospects of each firm, but other assumptions are required to arrive at the relation, and the pricing relation may hold only approximately; the Sharpe-Lintner CAPM allows investors to have heterogeneous attitudes towards risk (different levels of risk aversion); the pricing relationship used by ACCC was consistent with that originally developed by Sharpe and Lintner and also that subsequently derived from it using the assumption of heterogeneous expectations and other additional assumptions; heterogeneity of risk aversion is already allowed for in the Sharpe-Lintner CAPM.