09 November 2004
Key Points:
Following Ministerial Directions to achieve long- term policy objectives may still be a misuse of market power under the Trade Practices Act if there is a short term anti-competitive purpose.
When does a Government enterprise become a Government business? We looked at this issue in our last Insights, but an important High Court decision handed down since then highlights the extent to which the Act applies to Government. The decision in NT Power Generation Pty Ltd v Power and Water Authority [2004] HCA 48 (6 October 2004) may mean a review of many Government arrangements to ensure they do not contravene the Trade Practices Act.
The NT Government’s power authority
The Power and Water Authority (PAWA) is a body corporate constituted under the Power and Water Authority Act (NT). It operates a vertically integrated electricity enterprise in which it generated electricity or purchased electricity generated by others. That electricity is then transported from generation sites to distribution points via transmission equipment. Using distribution equipment it then goes from distribution points to the customers. Finally, PAWA charges the customers who buy the electricity.
NT Power wanted access to PAWA’s electricity transmission and distribution infrastructure services so that it could sell electricity to consumers in competition with PAWA. Though there was no safety, technical or other problem preventing PAWA from allowing NT Power to use those services, PAWA rejected the request. This was because NT Power wanted to supply the markets that are cheaper to access, and therefore more profitable. PAWA must also service more remote, and therefore less profitable, places, and this obligation hampered its ability to compete. It seemed that NT Power was trying to cherrypick the most profitable customers. PAWA was to be privatised and an access regime to be put in place, so it was decided not to give NT Power access.
NT Power took legal action, alleging that PAWA had taken advantage of its market power for a prohibited purpose, which is a breach of section 46 of the Trade Practices Act. The Act doesn’t apply to the Crown or its agencies (either State via section 2B or Commonwealth via section 2A of the Act) unless they are "carrying on a business". Since PAWA is a Government authority, NT Power first had to show that it was carrying on a business and was not covered by the Crown immunity.
If it calls itself a business, it probably is one
Many Government agencies describe themselves as business-like in their activities, and PAWA is no exception. That self-description was crucial in this case.
PAWA is required to produce an Annual Report which the Minister then makes public. In its 1998 Report (which was prepared around the time NT Power requested access), references were made to:
This language and the form of the accounts correspond with those in any non-Governmental trading corporation, said the High Court. Furthermore, these phrases were held by the High Court to be admissions. They were made to fulfil statutory duties and in a document which under legislation had to be made public, and as a result "they are of the utmost solemnity. The admissions in relation to the transmission and distribution facilities, in particular, are totally inconsistent with the case on the application of section 2B which PAWA propounded in this litigation."
Apparently as a result of these admissions, the High Court did not consider in detail the factors laid down in JS McMillan v Commonwealth of Australia, ie. were the activities in the nature of Government activities or commercial activities, and were they undertaken with repetition, system and regularity? It did note however that:
However, the extent of the ramifications of these findings are uncertain. In the case the High Court noted that PAWA carried on a substantial retail business as it had sales revenue in one year of $253,181,000 of which $206,272,000 were from power sales. The question turned on whether NT Power had to establish that PAWA was carrying on the business of transmitting or distributing electricity. This is different from other cases, such as The State of New South Wales v. R.T. & Y.E. Falls Investments Pty. Ltd [2003] NSWCA 54, where the court found that the mere fact that an Annual Report stated that a Government compensation scheme was to be operated in a "business-like way" did not convert the compensation scheme into the carrying on of a business.
Ministerial directions and implementing policy don’t matter
Having found that PAWA was carrying on a business and that it breached section 46 in the course of carrying on that business, the High Court next had to ask whether if the business does its actions to implement a public purpose or policy, has it breached the Trade Practices Act?
To breach section 46, a business must not only take advantage of its market power, but must do so for a prohibited reason (in this case, preventing a competitor from entering a market). PAWA said it had done neither of these things as it had declined to give NT Power access because the Minister for Essential Services had given it a direction under section 16 of the PAWA Act (this is a binding direction).
Even if a section 16 direction had been given (and the evidence of that was sketchy), the High Court said it didn’t matter. Assuming it was a binding direction, what PAWA did in response to a direction of the Minister was PAWA’s conduct, and the Minister's accompanying mental state was PAWA's mental state. The mental state of those who advised the Minister to recommend as he did, and of the Minister himself, was to deter or prevent NT Power from participating in the transmission or distribution markets and in the electricity supply market (in which it was likely that its prices would undercut PAWA) until the Northern Territory introduced an access regime.
The Minister did this for what seemed a sound reason: by preventing short-term competition, he hoped to gain time to introduce a proper access regime and thereby ensure the long-term competitiveness of the electricity supply market. NT Power’s entry might also cause PAWA such losses that it would no longer subsidise services to remote communities. He wanted "sensible competition".
As laudable as the underlying policy is, it was simply irrelevant. The High Court said that section 46 does not allow the distinction. It reminded the Government that it was in a different arena:
"In truth, [sensible competition] is a reference to the process by which an inefficient monopolist sought to give itself time to reorganise its affairs by obstructing emerging competition. Paternalistic control from a monopolist is antithetical to competition, and a construction of section 46 which permitted it, even if only in the short term, is inconsistent with the structure of the section and the legislation as a whole."
Derivative crown immunity and the wholly owned subsidiary
Gasgo is a company in which PAWA beneficially holds all the issued shares. It has entered a long-term gas purchase contract, the Mereenie Agreement, with certain suppliers. It has habitually sold the gas supplied to NT Gas Pty Ltd, which on-sells to PAWA. Clause 2.26 of the Mereenie Agreement gives Gasgo a pre-emptive right in relation to the sale of gas by the suppliers to customers other than Gasgo, at the price offered to the third party.
NT Power required gas from the suppliers for its generator, and requested that Gasgo give an undertaking that it would not insist on its pre-emptive rights. Gasgo declined to give that undertaking, and NT Power said that was a breach of section 46. Whether it was has never been determined. The threshold question is whether Crown immunity or derivative Crown immunity apply to Gasgo.
The High Court held Gasgo was not "an emanation of the Crown in right of the Northern Territory". It is a trading corporation, not established by statute, its articles of association are standard, and its directors have no special duties above those normally borne by directors. There are non-Governmental entities in its supply chain. There was insufficient evidence to indicate the NT Government wanted it to share in its immunity.
Derivative Crown immunity is another issue entirely. The question is whether section 46, in preventing enforcement of a clause in a contract between two parties, neither of whom is the Government, caused "some impairment of the existing legal situation of" the Northern Territory Government in this case. The interference to be looked for is a "divesting" of proprietary, contractual and other legal rights and interests belonging to the Government and not otherwise. This pulls back from the wider statement in Bass.
Gasgo acknowledged that no legally enforceable interest of the Northern Territory Government was prejudiced, and that its only prejudice was financial, and invited the court to extend the law. Gasgo did not advance any argument of sufficient merit to justify that extension.
What flows from this decision?
Many Government bodies have assumed they are not affected by the Trade Practices Act and organised their affairs accordingly, but that underlying assumption could be wrong.
Secondly, the trend towards corporatisation and Public Private Partnerships in the public sector is clearly not without costs. If Government agencies wear the trappings of a private business, and assert them in public documents, this case suggests they might have admitted to being a business, with all the consequences under competition law that flow from that fact.
Finally, decisions that are taken for policy reasons or at the request of a Minister aren't quarantined from the Trade Practices Act. Here, the purpose of refusing access was a prohibited one (ie. to prevent a competitor's entry into a market). The underlying policy - a refusal in the short-term would help ensure long-term competitiveness - was irrelevant to finding a breach of section 46. This sets up a tension between the delivery of Government policy (particularly via corporatisation) and Trade Practices Act compliance.
For further information, please contact John Carroll.
