Legal Briefing No. 73

Number 73

3 November 2004

Determining whether government agencies are subject to the Trade Practices Act

Marcus Bezzi

Sydney
Marcus Bezzi Senior Executive Lawyer
T 02 9581 7470
F 02 9581 7413
marcus.bezzi@ags.gov.au

Emma Gill

Adelaide
Emma Gill Senior Lawyer
T 08 8205 4265
F 08 8205 4499
emma.gill@ags.gov.au

The High Court has allowed an appeal that will assist
government departments, agencies and authorities to decide
whether their activities could involve carrying on a business
and are subject to the provisions of the Trade Practices
Act 1974 (Cth) (TPA).

In NT Power Generation Pty Ltd v Power
and Water Authority [2004] HCA 48, 6 October 2004, the
High Court considered
s 46 of the TPA (misuse of market power) in the context
of dealings between a government-owned power company and
a potential competitor. The Court has clarified the scope
of s 2B of the TPA introduced in 1995, in the context of
the introduction of National Competition Policy. That section
abolished Crown immunity defences by applying the TPA to
state and territory governments and their agencies 'so
far as' they carry on a business.

The majority justices
in the High Court (McHugh ACJ, Gummow, Callinan and Heydon
JJ) upheld the s 46 claim against Power
and Water Authority (PAWA). They held that PAWA's
refusal to enable NT Power Generation Pty Ltd (NT Power)
to distribute and sell electricity using its transmission
and distribution network was a misuse of power in the market
for the supply of services for the transport of electricity
along PAWA's infrastructure and in the electricity
supply/sale market in the Northern Territory [63].

Kirby
J in dissent dismissed the s 46 claim. He did not regard
the conduct engaged in as involving a 'taking
advantage of' for a purpose which contravened the
Act as it arose for 'governmental reasons' [202].
He also did not accept that the conduct was anti-competitive
within s 46 [203].

The majority judgment deals with:

  • The phrase 'carrying on a business' in s
    2B of the TPA. This was construed broadly. The Court considered
    that s 2B required an answer to the question 'what
    business was PAWA carrying on?' So far as PAWA
    was carrying on that business, s 46 applied to it [70].
  • Whether Gasgo, a wholly owned subsidiary of PAWA was 'the
    Crown'. The majority concluded that Gasgo was not.
    The reasoning on that issue is likely to be of broader
    interest to the Commonwealth and Commonwealth authorities
    because legislative obligations may not apply or may
    be different if the entity concerned is not 'the
    Crown' [161–165].
  • The
    scope of 'derivative Crown immunity'. That
    is, the extension of Crown immunity to third parties
    who are dealing with the Crown. The majority concluded
    that
    this immunity applies when application of a law would
    cause some impairment to proprietary, contractual and
    other legal
    rights and interests of the government and not otherwise
    [170]. Prejudice to the financial, economic or commercial
    interests of the Crown alone would be insufficient to
    give rise to immunity [170–173].

The ACCC and the
Attorneys-General for New South Wales, Western Australia
and South Australia intervened in the
proceedings because of the wide impact expected of a
High Court determination on the issues relating to the
scope
of the application of the TPA to activities of government
entities and 'Crown immunity'.

The facts

NT Power, generated electricity at a plant which
was built to supply a mine in the Northern Territory. It
wished to
sell power to consumers within the Northern Territory.
It could not sell power without access to the existing
electricity transmission and distribution infrastructure
in and around Darwin and Katherine. That infrastructure
was owned by PAWA.

PAWA is a body corporate constituted
under s 4 of the Power and Water Authority Act (NT), and
is subject to
the directions
of the Minister for Essential Services for the Northern
Territory (under s 16 of that Act).

NT Power requested
that PAWA supply the electricity transmission and distribution
infrastructure services needed for its
plan to sell electricity to consumers in competition
with PAWA. PAWA rejected the request. NT Power sought
to obtain
gas to power its power station. Gasgo had a long-term
contract with local NT gas suppliers (the Mereenie suppliers)
which
gave it the right to purchase Mereenie gas before it
was offered to others. NT Power asked Gasgo for an undertaking
that it would not use this right to stop NT Power being
supplied with gas. Gasgo refused to give the undertaking.

The
orders

In summary:

  • the High Court allowed
    the appeal from the Full Court of the Federal Court;
  • the orders of the Full Federal Court made on 2 October
    2002 were set aside; and
  • the matter
    was remitted to Mansfield J, the judge at first instance,
    for determination of the claim against the
    second respondent and consideration of the quantum
    of damages, costs of the trial, and the form of other
    relief.

The
section 2B issue

The majority found one matter was not controversial – PAWA
was carrying on a very substantial business [52]. The
Court found there were many references in PAWA's
internal documents revealing that its officers perceived
it to be
carrying on a business. This was also found in the
content of PAWA's 1998 Annual Report.

The annual report
used words and phrases such as 'core
business', 'commercialisation', 'commercial
services' and 'in a commercial manner' [53],
[54].

The Court found that these statements in the
annual report amounted to 'informal admissions',
and that, as they were made in a document produced under
a statutory
duty, were of the 'utmost solemnity' [55].

Carrying
on a business – the correct construction
of section 2B

The construction of s 2B proposed by PAWA
was that it was not 'carrying on a business' in
denying access to its infrastructure. The majority
stated [67]:

PAWA proceeded on an erroneous construction
of s 2B. It may be accepted that the conduct proscribed
by the
Act,
if it is to fall within s 2B, must be engaged in
in the course of PAWA carrying on a business. But the
conduct
need not itself be the actual business engaged in. … But
where such an authority 'carries on a business' this
removes the governmental obstacle to curial examination
of its conduct in order to see whether s 46 has been
contravened.

The majority continued [68]:

The Act is seeking to advance
the broad goal of promoting competition. Certain provisions
of the Act, particularly
Pt IV, necessarily turn to a significant degree on
expressions which are not precise or formally exact.
One example
is "market":
there can be overlapping markets with blurred limits
and disagreements between bona fide and reasonable
experts
about their definition, as in this case. Other examples
are "substantial", "competition", "arrangement", "understanding", "purpose" and "reason" (which
need only be a "substantial" purpose
or reason: s 4F). It is not appropriate to subject
the
application
of this type of legislation to a process of anatomising,
filleting and dissecting in the fashion advocated
by PAWA.

Examining the meaning of the term 'business',
the Court stated [69]:

Nothing in the Act limits the
meaning of "business" by
reference to the criteria for market definition. Businesses
often operate across the boundaries of separate markets.
PAWA's use of its infrastructure assets was a
part of its carrying on of a business, whether or not
it was
in a market for their acquisition, sale or hire. … Further,
s 2A, which uses substantially the same language
as s 2B, applies the Act as a whole to Commonwealth
businesses.

The
majority held that the conduct of PAWA in denying access
to its infrastructure, simply in order to protect
its revenue
position, was conduct designed to secure PAWA's
position as part of its carrying on of a business [72].

Section
46 can interfere with property rights and be an alternative
access regime

In the context of discussing whether s
46 is an alternative access regime to that found in Pt
IIIA of the Act,
the Court rejected an argument that s 46 should not
be permitted
to interfere with property rights [85]:


Lee J, who was of the opinion that s 46 'does not
purport to interfere with the due exercise of rights
of property per se', gave various examples of the
supposed inability of one competitor to obtain access to
the real
or personal property of another. However, private traders
could be obliged to supply goods or services against
their will before s 2B was enacted, provided the preconditions
to s 46 liability were satisfied. Lee J accepted that
this
was so for intellectual property rights … The
fact that s 46 can apply to intellectual property
rights, and
hence to the market power which they can give, suggests
that it can apply to the use of market power derived
from other property rights not specifically mentioned
in the
Act. It follows that, provided the notoriously difficult
task of satisfying the criteria of liability can
be carried out, s 46 can be used to create access
regimes,
and that
s 2B is not to be read down as if it could not.

PAWA's
refusal to supply did not involve the granting, refusing
to grant, revoking, suspending or varying of licences
within s 2C(1)(b) of the TPA

PAWA would have a defence
to an allegation of contravention of s 46 if it could demonstrate
that its conduct was
within the scope of s 2C (activities that are not business)
and
specifically s 2C(1)(b) of the TPA. The majority found
that PAWA would fail for two reasons [100], [101]:

  • Section 2C(1)(b) only applies to the mere doing of
    the acts relating to licences. If the only basis on which
    PAWA had been said to carry on a business was that
    it entered
    into agreements with persons whom it then appointed
    as
    licensees to generate, store, reticulate and sell
    electricity within the meaning of s 25(1) of the Electricity
    Act,
    it would fall within the exception in s 2C(1)(b). But
    PAWA was said to carry on a business for other, quite
    different
    reasons. Hence, it is irrelevant whether PAWA's
    refusal to make infrastructure services available
    to NT Power was
    a refusal to grant a licence.
  • A 'licence' in s 2C(3) means a licence
    that 'allows
    the licensee to supply goods or services'. In
    discussing the definition of 'licence' the
    majority stated that [102]:

    NT Power had been authorised
    or allowed to supply goods (namely electricity)
    by the licence of 26 June 1998.
    If NT Power had not received that licence,
    s 27(1) of the Electricity Act would have made it unlawful for NT
    Power to supply electricity; however, with the
    licence
    it was entirely lawful for
    it to do so, since the licence gave it an excuse
    or authority to do so. NT Power's
    difficulty thereafter was not that it was not allowed to supply electricity.
    Rather its difficulty was that it could not supply it. It could not
    take advantage of its pre-existing licence
    to supply electricity
    unless PAWA provided it with
    transmission and distribution services that only PAWA could provide.

In
conclusion, the majority said that PAWA could not rely
on s 2C(1)(b), as PAWA's carrying on of a business
did not rest only on the grant of licences and the
permission NT Power sought from PAWA was not a permission
to sell goods
or services [103].

Contravention of section 46

Was there an electricity infrastructure
market or an electricity carriage market?

NT Power's
allegation that these two markets existed was put in issue
by PAWA. However, PAWA admitted the existence of the electricity transmission
market and the electricity distribution market.

PAWA's submission
that there could not be a market for electricity infrastructure and electricity
carriage, because there had not been any transactions in those
markets was not accepted by the majority. The majority affirmed the High
Court's
decision in Queensland Wire (1989) 167 CLR 177 in this regard, and further
stated that there was 'the potential' for dealings in transmission
and distribution services [109], [110].

The majority also rejected PAWA's
contention that the absence of a direction from the Minister for Essential
Services under s 16 of the PAWA Act precluded
the existence of a market [111]. The majority held that markets cannot
appear and disappear at the whim of a minister.

Section 46(4)(c) and
market power

PAWA submitted that it could not breach s 46
as it lacked market power. The majority also rejected this
point. They
stated [114]:

PAWA's conduct can be analysed as taking
advantage of market power in the market for the sale
of electricity which arose from its control of the
infrastructure for the purpose of injuring NT Power in that market.

When
considering s 46(4)(c), the majority stated that the reference
in the section to 'conduct', could not assist in the construction
of s 46(1), which is focused on the 'power' of the defendant
[115]. The majority also stated that the reference to 'power' in
s 46(4)(c) does not require that a corporation be an active supplier
to have market power.

Taking advantage of proprietary rights, not market
power?

PAWA submitted that it was entitled, as owner of the infrastructure
assets, to decline to consent to the use of them by others. In
considering and
distinguishing Dowling v Dalgety Australia Ltd (1992) 34 FCR 109,
the majority stated at
[124]:

… PAWA did take advantage of market power, because
it was only by virtue of its control of the market or
markets for the supply
of services for the transport
of electricity along its infrastructure, including its transmission
and distribution network, and the absence of other suppliers,
that PAWA could in a commercial
sense withhold access to its infrastructure; if PAWA had
been operating in a competitive market for the supply
of access
services, it would be very unlikely
that it would have been able to stand by and allow a competitor
to supply access services.

and at [125]

Further, to suggest that there is a distinction
between taking advantage of market power and taking advantage
of property rights
is to suggest
a false dichotomy, which lacks any basis in the language of s
46. As already
discussed,
property rights can be a source of market power attracting liability
under s 46 and intellectual property rights are often a very
clear source of
market power.

Conclusions on section 46

The majority found that a direction
had not been given by the minister that NT Power be refused
access to the
PAWA infrastructure
[127]–[132]. The majority stated that [153]:

[D]espite the fact that
PAWA did not supply access to its infrastructure to others,
that there were transmission/distribution
markets
and that PAWA had
a substantial degree of power in them; that the Minister did
not give any s 16 direction to refuse NT Power access on 26 August
1998; that
even
if he had, that does not prevent a finding that PAWA took advantage
of its market power for proscribed purposes; that the trial judge
did not
err in
applying s 46 to the facts he found; and that any adverse consequences
caused by the
application of s 46 to PAWA are not reasons for adopting a narrower
construction of the section.

Section 46 and Gasgo

Gasgo's role in the trial

Gasgo is a company in which
PAWA beneficially holds all the issued shares. The major
issue at the trial for Gasgo
was whether it
was a part of the
NT Government and therefore an 'emanation of the Crown' or
entitled to 'derivative Crown immunity'.

Is Gasgo
part of the NT Government?

In examining whether Gasgo was an 'emanation
of the Crown' [161]–[165],
the majority looked towards the articles of Gasgo, and commented
that 'it
is unsatisfactory that an inquiry into whether a corporation
is 'an emanation
of the Crown' should have to be undertaken in such
circumstances where its status does not depend on any specific
statute.' They
further said that [164]:

Although acquired specifically for
the purpose of entering the Mereenie Agreement and others
like it, Gasgo was a trading
corporation.
Its
articles of association
took the form, apparently, of standard trading company
articles. Its shares were owned by PAWA. It sold gas to
NT Gas, the
largest shareholder
in which
was AGL Pipelines (NT) Pty Ltd. NT Gas, which constructed
and has a lease over the relevant gas pipeline from its
owners, a bank
consortium, in
turn sold
gas to PAWA. ... The interpolation of non-governmental
entities in this contractual and physical chain of supply
undermines
the characterisation
of the trading
corporation Gasgo as part of the Northern Territory Government.
There is nothing to suggest that the directors of Gasgo
do not have the
usual
duties
and functions
of directors.

Is Gasgo protected by 'derivative Crown
immunity'?

In considering whether its refusal to permit
NT Power to source gas from the Mereenie suppliers was
protected by 'derivative Crown immunity',
the majority referred to Wynyard Investments Pty Ltd
v Commissioner for Railways (NSW) (1955) 93 CLR 376 and Bradken
Consolidated Ltd v Broken Hill Proprietary
Co Ltd (1979) 145 CLR 107 at 137. These cases had dealt
with the various classes of derivative Crown immunity and
its scope. The class of derivative immunity
involved in this matter arises when a provision, if applied
to a particular individual or corporation, would adversely
affect a proprietary right or interest
or legal, equitable or statutory interest of the Crown.
In considering this class of immunity, the majority stated
[170]:

The object, to adapt what was said by Kitto J [in
Wynyard], is to ascertain whether the application of
s 46 to Gasgo "would be, for a legal reason,
an interference with some right, interest, power, authority,
privilege, immunity or purpose belonging or pertaining" to
the Government. More recently,
this Court said that the interference to be looked for
is a "divesting" of "property,
rights, interests or prerogatives" belonging to
the government.

The majority found that no proprietary right
or interest or contractual right or prerogative of the
NT Government
would
be affected,
for neither PAWA nor
any other part of the NT Government have any such rights,
interests or prerogatives as against the Mereenie suppliers
under the
Mereenie agreement
[172]. Gasgo
acknowledged that no legally enforceable right was prejudiced,
and that the prejudice arising from the application of
the TPA was financial
[173].
The
Court refused to extend the law regarding derivative Crown
immunity to cover such interests [173].

The majority concluded
that since Gasgo was not part of the NT Government, and
since it could not claim derivative
Crown
immunity
before 19
August 1994, its reliance on cl 2.26 of the Mereenie agreement
was open to
scrutiny under
s 46 of the TPA [190].

Kirby J's dissenting judgment

'Take advantage' and 'purpose'

In
Kirby J's view, the appeal should have been dismissed.
He approached the case as a 'comparatively simple
one' which 'turns essentially
on the statutory notions of 'take advantage of' and 'purpose' [202].

Kirby
J did not accept that it was not open to the governmental
authorities in the Northern Territory, and the first
respondent, acting under
the territory legislation, to delay the immediate commencement
of a regime
affording
unimpeded access to the first respondent's electricity
supply infrastructure [202]. He stated that [202]:

[T]his
was a governmental decision concerning the use of the
infrastructure of a public agency based on governmental
reasons.
It was informed
by governmental conclusions about the gradual implementation
of a new
competition policy
in public business-type authorities and the use of
publicly funded resources for
overall public benefit. It was not a purely commercial
or business decision attracting the operation of the
TPA.

Kirby J went on to state [203]:

Even more importantly,
I do not accept that the conduct of the appellant was
anti-competitive within s 46
of the TPA.
It is
one thing, under
that section,
to redress the misuse of market power, including
by the use of the resources and the property of a
corporation to the
marketing disadvantage
of a
would-be competitor. But s 46 of the TPA does not
give
the would-be
competitor the
right to demand and use, as its own, the property
of another corporation. It merely
prevents that other corporation from misuse of
its power
to prevent the entry of the other into the market.

In
considering the United States Supreme Court authority
of Verizon Communications Inc v Law Offices
of Curtis
V Trinko, LLP 72 USLW
4114 at 4119 (2004),
which held that the US Sherman Act did not give
judges carte blanche to insist
that a monopolist alter its way of doing business
whenever some other approach might
yield greater competition, Kirby J stated [204]:

No
doubt others will contrast the energetic deployment of
trade practices law in the circumstances of
this case, affecting
a governmental corporation
having
governmental obligations to the public welfare,
with the repeated
refusal of this Court in recent times to do
the same thing where the corporation
concerned
was private, successfully defending its market
power against smaller private would-be competitors.

Text of the decision is available at <http://www.austlii.edu.au/au/cases/cth/high_ct/2004/48.html>

Marcus Bezzi is a Senior Executive Lawyer based in Sydney.
He is one of our most experienced trade practices lawyers
and leads our Trade Practices team. Marcus has had conduct
of a number of significant trade practices matters including
Universal Music, Fila and the Qantas/Air New Zealand merger.
He recently assisted the ACCC in its intervention in the
High Court proceedings NT Power v PAWA. Marcus has significant
experience in handling matters arising under the Trade
Practices Act and advising government departments and agencies
on these issues.

Emma Gill is a Senior Lawyer based in Adelaide.
She has specialised in the area of trade practices for
over two
years and spent the first three months of 2004 working
in the AGS Legal Unit at the ACCC's office in Canberra.
Emma has been involved in a number of trade practices matters
for the ACCC including the recent Boral/Adelaide Brighton
takeover bid. She worked with Marcus Bezzi in assisting
the ACCC in its intervention in the High Court proceedings
in NT Power v PAWA.

AGS contacts

For further information please contact any
of our national team of specialist competition and trade
practices lawyers:

Canberra

Tony Burslem

02 6253 7460

Sydney

Ian McNeilly

02 9581 7541

Melbourne

Ross McClure

03 9242 1395

Brisbane

Glenn Owbridge

07 3360 5654

Perth

Nick Gvozdin

08 9268 1119

Adelaide

Sarah Court

08 8205 4211

Hobart

David Wilson

03 6220 5471

Darwin

Jude Lee

08 8943 1405

ISSN 1448-4803 (Print)
ISSN 2204-6283 (Online)

For enquiries regarding supply of issues, change of address
details etc.
T 02 6253 7052 F 02 6253 7313 E ags@ags.gov.au

The material in this briefing is provided to AGS clients
for general information only and should not be relied upon
for the purpose of a particular matter. Please contact
AGS before any action or decision is taken on the basis
of any of the material in this briefing.

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