ConnectEast Pty Ltd v CityLink Melbourne Limited (No 2)
[2024] VSC 788
•18 December 2024
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
COMMERCIAL LIST
S ECI 2020 04353
| CONNECTEAST PTY LTD (ACN 101 213 263) | Plaintiff |
| v | |
| CITYLINK MELBOURNE LIMITED (ACN 070 810 678) | Defendant |
---
JUDGE: | Stynes J |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 13-16, 20-23, 27-30 November, 20-21 December 2023 |
DATE OF JUDGMENT: | 18 December 2024 |
CASE MAY BE CITED AS: | ConnectEast Pty Ltd v CityLink Melbourne Limited (No 2) |
MEDIUM NEUTRAL CITATION: | [2024] VSC 788 |
---
RESTITUTION – Claim for monies had and received – Whether roaming fee withheld under contract exceeded statutory cap.
TOLL ROADS – Interoperability – Roaming fees – Link roaming service – Net incremental marginal cost – Methodology to determine net incremental marginal cost – Whether roaming fee withheld under contract exceeded net incremental marginal cost of providing Link roaming service – Melbourne City Link Act 1995, ss 93AA, 93AB.
EVIDENCE – Burden of proof – Weight of plaintiff’s evidence where important evidence peculiarly in defendant’s knowledge – Evidence Act 2008 (Vic), s 140(2) – Blatch v Archer (1774) 1 Cowp 63, Gerard Cassegrain & Co Pty Limited v Cassegrain (2013) 87 NSWLR 284, applied.
EXPERT ESTIMATIONS – Assessment of reliability of expert estimates – Sun Insurance Office v Clark [1912] AC 443, Australia and New Zealand Banking Group Ltd v Federal Commission of Taxation (1994) 119 ALR 727, Placer (Granny Smith) Pty Ltd v Thiess Contractors Pty Ltd [2003] HCA 10, Pathways Investments Pty Ltd v National Australia Bank Ltd [2012] VSC 97, applied.
LIMITATION OF ACTIONS – Contract – Contract implied by law includes restitutionary claim – Whether mistake discoverable through reasonable diligence – Limitation of Actions Act 1958 (Vic), ss 5(1)(a), 27(c).
WORDS AND PHRASES – ‘Net incremental marginal cost’, ‘additional cost’, ‘incremental cost’, ‘avoidable cost’, ‘indirect costs’, ‘common costs’, ‘net of any savings’.
---
APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Philip Solomon KC with Andrew Barraclough | Gilbert + Tobin |
| For the Defendant | Jeffery Gleeson KC with Albert Dinelli KC and Jess Moir | King & Wood Mallesons |
A Contents
A.. Introduction
B.. Issues that arise for determination and a summary of the decision
C.. Background
C.1 The parties
C.2 The introduction of interoperability
C.3 The Roaming Agreements and interoperability
C.4 Transurban costs and cost centres
C.5 Procedural history
D.. Melbourne City Link Act 1995 (Vic)
E... Issue 1 – What is the proper construction of the MCL Act
E.1 Applicable legal principles
E.2 What is the meaning of NIMC?
E.2.1 What costs should be included in the NIMC?
E.2.2 Meaning of ‘net of any savings’
F... Issue 2 – What is the appropriate method of ascertaining the amount that represents the NIMC
F.1 Introduction
F.1.1 Professor Lyon
F.1.2 Mr Balchin
F.1.3 The question addressed by the experts
F.1.4 The starting point – Transurban’s accounts and the Transurban Model
F.1.5 Areas of agreement
F.1.6 The counterfactual scenarios employed to identify additional costs
F.1.7 The experts’ conclusions as to NIMC
F.2 Professor Lyon’s methodology
F.2.1 Introduction
F.2.2 Instructions
F.2.3 The Transurban Model
F.2.4 Lyon Adjusted Transurban Model
F.2.5 CML’s submissions in support of Professor Lyon’s methodology
F.2.6 ConnectEast’s submissions opposing Professor Lyon’s methodology
F.3 Mr Balchin’s methodology
F.3.1 Instructions and assumptions and availability of information
F.3.2 Mr Balchin’s methodology
F.3.3 CML’s submissions opposing Mr Balchin’s methodology
F.3.4 ConnectEast’s submissions in support of Mr Balchin’s methodology
F.4 Consideration — What is the appropriate method of ascertaining the amount that represents the NIMC?
G.. Issue 3 - What amount represented the NIMC in each of the four sample years
G.1 Introduction
G.2 Applicable legal principles
G.2.1 The burden of proof
G.2.2 The reliability of estimates
G.3 Roaming-specific activities — NIMC associated with the tolling system (average incremental cost)
G.3.1 The activity
G.3.2 The methodology
G.3.3 Submissions
G.3.4 Consideration
G.4 Roaming-specific activities — NIMC associated with daily data transfers / issues assistance
G.4.1 The activity
G.4.2 The methodology
G.4.3 Submissions
G.4.4 Consideration
G.5 Increased retail activities due to roaming — Costs related to additional account holders — NIMC associated with customer communications
G.5.1 The activity
G.5.2 The methodology
G.5.3 Submissions
G.5.4 Consideration
G.6 Increased retail activities due to roaming — Costs related to additional account holders — NIMC associated with e-tags
G.6.1 The activity
G.6.2 The methodology
G.6.3 Submissions
G.6.4 Consideration
G.7 Increased retail activities due to roaming — Costs related to additional account holders — NIMC associated with general customer contacts and issues
G.7.1 The activity
G.7.2 The methodology
G.7.3 Submissions
G.7.4 Consideration
G.8 Increased retail activities due to roaming — Roaming-related contacts and issues — NIMC associated with call centre and resolution costs caused by roaming-specific enquiries
G.8.1 The activity
G.8.2 The methodology
G.8.3 Submissions
G.8.4 Consideration
G.9 Increased retail activities due to roaming — Costs that vary with the level of roaming — NIMC associated with net payments
G.9.1 The activity
G.9.2 The methodology
G.9.3 Submissions and consideration
G.10 Increased retail activities due to roaming — Costs that vary with the level of roaming — NIMC associated with credit management activities
G.10.1 The activity
G.10.2 The methodology
G.10.3 Submissions and consideration
G.11 Increased wider-firm costs as a consequence of roaming — NIMC associated with wider employee costs
G.11.1 The activity
G.11.2 The methodology
G.11.3 Submissions
G.11.4 Consideration
G.12 Increased wider firm costs as a consequence of roaming – the 61 cost centres not applied by Mr Balchin
H.. Issue 4 – Did the Discount Amount exceed, at any time, the legislative cap imposed by s 93AB of the MCL Act?
I.... Issue 5 — Is any claim ConnectEast has against CML statute barred?
I.1 Introduction
I.2 Applicable legal principles
I.3 Background
I.4 Submissions
I.4.1 CML’s submissions
I.4.2 ConnectEast’s submissions
I.5 Consideration
J.... Conclusion
A.. Schedule – Increased wider firm costs – analysis of the 61 cost centres
A.1 Section 1 Cost Centres
A.1.1 IT Systems and Platforms
A.1.2 Customer Functions
A.1.3 Corporate Functions
A.2 Section 2 Cost Centres
HER HONOUR:
A Introduction
The plaintiff (‘ConnectEast’) owns and operates the EastLink tollway (‘EastLink’). The defendant (‘CML’) owns and operates the CityLink tollway (‘CityLink’).
This case concerns the interoperability arrangements between the parties and, more specifically, alleged overpayments by ConnectEast to CML under agreements providing for that interoperability. ConnectEast’s claim is for restitution for monies had and received.
Interoperability is a word used to describe the ability of account holders of one toll road operator to travel (or ‘roam’) on any other toll road in Australia with a single account and have the accrued tolls charged to that account. These arrangements allow for CML account holders who have a Linkt e-tag in their cars to drive on EastLink without having to open a separate account with ConnectEast.
On 11 January 2008, CML and ConnectEast entered into agreements which provide for interoperability between them (‘Roaming Agreements’).
The Roaming Agreements provide, relevantly and amongst other things, that when CML’s account holders travel on EastLink, CML will collect the applicable tolls and fees from their account holders, then pay those tolls and fees to ConnectEast, less an amount referred to under the Roaming Agreements as the ‘Discount Amount’.
The Discount Amount is also referred to by the parties as the ‘roaming fee’, as it represents a fee paid for the provision of the service of collecting the applicable tolls and paying those tolls to the operator of the toll road travelled on. CML provides that service to ConnectEast, and ConnectEast pays a roaming fee to CML, when CML account holders travel on EastLink. In that circumstance and in this proceeding, that service is referred to as the ‘Link roaming service’.
As a consequence of interoperability, CML (or Transurban, as will be explained) undertakes billing and payment functions for more than half of all toll road journeys (referred to as ‘trips’) taken on EastLink. Further, travel on EastLink accounts for around 30% of the total trips taken by CML account holders. Between 1 January 2009 and 31 October 2020, CML collected almost $2 billion of toll revenue on behalf of ConnectEast.
By the Roaming Agreements, the parties agreed the roaming fee in the sum of $0.18 per trip excluding GST, adjusted on 1 July each year by reference to CPI.
The roaming fee that may be imposed by CML for the Link roaming service provided to EastLink is capped by s 93AB(1) of the Melbourne City Link Act 1995 (Vic) (‘MCL Act’). In short, that section provides that the roaming fee ‘must not exceed the amount that represents the net incremental marginal cost to [CML] of providing that Link roaming service’.
The net incremental marginal cost is referred to as the ‘NIMC’ in these reasons.
By statement of claim filed on 23 November 2020 (‘Statement of Claim’), ConnectEast alleges that at all times since 1 January 2009, CML has withheld a Discount Amount from (or charged a roaming fee to) ConnectEast in an amount that exceeds the legislative cap imposed by s 93AB(1).
By concise statement of defence filed on 12 February 2021, CML denies that the amount it withheld exceeded the legislative cap at any relevant time. In respect of claims concerning amounts paid on or before 23 November 2014, CML pleads defences based on the Limitation of Actions Act 1958 (Vic) (‘LA Act’).
The key issues in dispute are:
(a)the proper construction of the MCL Act, including the meaning of NIMC for the purpose of s 93AB(1); and
(b)the appropriate method of calculating the amount that represents the NIMC to CML of providing the Link roaming service.
Both parties engaged experts to assist with these issues. ConnectEast engaged Mr Balchin. CML engaged Professor Lyon. By order made on 26 February 2021, Riordan J, the judge managing this proceeding at that time, directed the parties to file expert reports answering the following question:
What is the ‘net incremental marginal cost’ of providing the ‘Link [r]oaming [s]ervice’ (as those terms are defined in s 93AA of the [MCL Act] as at each of 30 June 2015, 30 June 2017, 30 June 2019 and 30 June 2020?
By virtue of that order, the experts were directed to estimate the NIMC in respect of four sample financial years only and the trial proceeded on that basis.
The experts each prepared primary and reply expert reports, and together prepared a joint report. CML, being the entity whose activities, systems and accounts were the focus of the proceeding, was ordered to file and serve its expert evidence first.
At trial, Mr Balchin and Professor Lyon gave evidence concurrently. Each first gave a two hour presentation to the Court on their expert opinion and they were then cross-examined in turn.
The parties also relied on the evidence of the following lay witnesses, all of whom were cross-examined at trial except Charles Griplas:
(a)For ConnectEast:
(i)Charles Griplas, the CEO of ConnectEast;
(ii)Mark Robinson, Billing & Credit Manager at ConnectEast; and
(iii) Roman Manrique, IT Specialist at Connect East.
(b)For CML:
(i)Christopher Jackson, General Manager for Customer Experience & Operations at Transurban;
(ii)David Mueller, Head of Transport Technology for Victoria at Transurban;
(iii) Jonathan Chaitow, Head of Architecture at Transurban;
(iv) Kellie Hebrard, Head of Revenue Services at Transurban;
(v)Michael Crossley, Platform Manager at Transurban;
(vi)Brendan Bourke, former CEO, Group COO and Group General Manager – Operations at CML; and
(vii)Thomas McKay, Deputy CFO at Transurban.
B Issues that arise for determination and a summary of the decision
Prior to trial, the parties provided to my chambers an agreed list of issues identifying the following issues for determination:
Main issue: Liability
1.Did the “Contractual Discount Amount” exceed, at any time, the legislative cap imposed by s 93AB of the Melbourne City Link Act 1995 (Vic) (the MCL Act), which is the amount that represents the net incremental marginal cost (NIMC) to the Defendant (CityLink) of providing the Link roaming service under the Link roaming agreement to the Plaintiff (ConnectEast)?
Subsidiary issue: statutory interpretation
2. As a matter of statutory construction of the MCL Act:
(a)What is the meaning of the expression “net incremental marginal cost”?
(b) What is the meaning of the expression “Link roaming service”?
(c)What costs should be included in the NIMC to CityLink of providing the Link roaming service to ConnectEast?
Subsidiary issue: Methodology
3.Is the appropriate method of ascertaining the amount that represents the NIMC:
(a) the method proposed by Professor Brendan Lyon;
(b) the method proposed by Mr Jeffrey Balchin; or
(c) a different method?
Subsidiary issue: Ascertaining the NIMC in specified financial years
4.What amount represented the NIMC of providing the Link roaming service for the purposes of s 93AB of the MCL Act in each of the financial years that ended on 30 June 2015, 30 June 2017, 30 June 2019 and 30 June 2020?
Limitations defence
5.Subject to the operation of s 27(c) of the [LA Act], is any claim that ConnectEast has against the Defendant (CityLink) in respect of payments made by ConnectEast to CityLink on or before 23 November 2014 statute barred by operation of s 5(1)(a) of the LA Act?
6.If the answer to question 5 is “yes”, is ConnectEast’s claim an “action for relief from the consequences of a mistake” for the purposes of s 27(c) of the LA Act?
7. If the answers to questions 5 and 6 are “yes”:
(a) When did ConnectEast discover the mistake?
(b)When was the earliest time at which ConnectEast could, with reasonable diligence, have discovered the mistake?
Change of position defence
8.If amounts that ConnectEast paid to CityLink exceeded the amount that CityLink was entitled to charge under the MCL Act, were those amounts received by CityLink in good faith and expended by it in reliance on the validity of the receipt of those amounts, such that CityLink changed its position to its detriment and it would be inequitable for CityLink to repay the amounts?
During the parties’ closing submissions at trial, the issues were refined. Specifically, CML abandoned its change of position defence and the parties agreed that:
(a)ConnectEast’s claim in respect of payments made on or before 23 November 2014 is caught by s 5(1)(a) of the LA Act;
(b)ConnectEast’s claim is an action for relief from the consequences of mistake for the purposes of s 27(c) of the LA Act; and
(c)ConnectEast first discovered the mistake in July 2020. The parties disagree about whether ConnectEast could, with reasonable diligence, have discovered the mistake earlier.
Having regard to the pleadings, the parties’ proposed list of issues, the lay and expert evidence and the parties’ closing submissions, I identified the following issues for determination and provide a summary of my decision:
(a)Issue 1: What is the proper construction of the MCL Act? In particular:
(i)What is the meaning of ‘NIMC’?
(ii)What costs should be included in the NIMC?
(iii)What is the meaning of ‘net of any savings’?
Summary of decision:
(iv)NIMC is defined in the MCL Act to mean the additional cost to CML of providing the Link roaming service (net of any savings).
(v)‘Additional cost’ to CML means the increase in the cost to CML.
(vi)Indirect and common costs of providing the Link roaming service may be included in the NIMC.
(vii)Regardless of how the parties may choose to characterise a particular cost it will only be included in the NIMC:
(1)if it is a cost to CML of providing the Link roaming service to ConnectEast that is additional, that is, an increase to the costs it would incur if it did not provide that service; and
(2)if CML is not reimbursed for that cost, it would be worse off from the provision of the Link roaming service.
(viii)‘Net of any savings’ in the definition of NIMC, requires that the costs included in the determination of the amount that represents the NIMC to CML of providing that Link roaming service take account of costs that are borne by CML, and exclude any costs saved or defrayed by CML.
(b)Issue 2: What is the appropriate method of ascertaining the amount that represents the NIMC?
Summary of decision:
(i)The methodology proposed by Mr Balchin is appropriate to ascertain the amount that represents the NIMC.
(ii)I reject the method proposed by Professor Lyon as inappropriate for the purpose of isolating additional costs to CML of providing the Link roaming service.
(c)Issue 3: What amount represented the NIMC in each of the sample years?
Summary of decision:
Year 2015 ($) 2017 ($) 2019 ($) 2020 ($) Roaming-specific activities NIMC associated with the tolling system (average incremental cost) [REDACTED] [REDACTED] [REDACTED] [REDACTED] NIMC associated with daily data transfers / issues assistance [REDACTED] [REDACTED] [REDACTED] [REDACTED] Increased retail activities due to roaming Costs related to additional account holders NIMC associated with customer communications [REDACTED] [REDACTED] [REDACTED] [REDACTED] NIMC associated with general customer contacts and issues [REDACTED] [REDACTED] [REDACTED] [REDACTED] NIMC associated with e-tags [REDACTED] [REDACTED] [REDACTED] [REDACTED] Roaming-related contacts and issues NIMC associated with call centre costs caused by roaming-specific inquiries [REDACTED] [REDACTED] [REDACTED] [REDACTED] NIMC associated with resolutions costs caused by roaming-specific inquiries [REDACTED] [REDACTED] [REDACTED] [REDACTED] Costs that vary with the level of roaming NIMC associated with net payment costs [REDACTED] [REDACTED] [REDACTED] [REDACTED] NIMC associated with credit management activities [REDACTED] [REDACTED] [REDACTED] [REDACTED] Increased wider-firm costs as a consequence of roaming NIMC associated with wider employee costs [REDACTED] [REDACTED] [REDACTED] [REDACTED] NIMC - total - including tolling system (GLIDe) set-up 2,188,482 1,956,601 1,708,804 1,406,083 (d)Issue 4: Did the Discount Amount exceed, at any time, the legislative cap imposed by s 93AB of the MCL Act?
Summary of decision: Yes it did, in each of the four sample years.
(e)Issue 5: Is any claim ConnectEast has against CML statute barred?
Summary of decision: No.
(i)Sub-section 27(c) of the LA Act operates to postpone the period from which the limitation period would otherwise run.
(ii)The operative mistake was ConnectEast’s failure to appreciate that the Discount Amount which CML was withholding from it was higher than permitted under the MCL Act.
(iii)ConnectEast could not, with reasonable diligence, have discovered that mistake earlier than it did in July 2020.
C Background
C.1 The parties
Each toll road in Australia is subject to a concession agreement which is granted by a state or local government and gives the concessionaire the right to operate the road for a set term (including the right to charge tolls to motorists who travel on the road).
ConnectEast operates one toll road, EastLink.
CML operates one toll road, CityLink.
CML is a wholly-owned subsidiary within the Transurban Group. The Transurban Group is comprised of Transurban Holdings Limited, Transurban International Limited and Transurban Holding Trust (and each of their subsidiaries). In these reasons, unless the contrary intention appears, the term ‘Transurban’ is used to refer to an entity within the Transurban Group (other than CML). That is how the term Transurban was used by the parties during the trial.
Transurban (including CML) currently operates 22 toll roads, 18 of which are in Australia. The concessionaires for five Australian toll roads operated by Transurban entities are 100% owned by Transurban, and the remaining 13 are owned via consortia comprising Transurban entities and other minority investors.
CML does not have any employees of its own. All Transurban employees undertaking work in connection with CityLink are employed by Transurban Limited (or in limited instances, by another entity within Transurban). With the exception of services which CML contracts from parties external to Transurban, CML contracts with Transurban Limited (or in limited instances, with another entity within Transurban) for the provision of all other services required for its business.
Transurban’s retail business does not differentiate between roads. As Mr Jackson (General Manager, Customer Experience & Operations at Transurban) explained:
From a customer’s perspective, an account holder can travel on any Australian toll road and have the tolls for that travel debited to their account, regardless of the retailer the customer has an account with. For Linkt customers, that includes EastLink.
The retail customer-facing side of Transurban’s business, operating under the Linkt brand, is not organised around assets. The services provided under the Linkt brand support customers regardless of which toll road they use. The goal is to provide a seamless toll road experience for the customer. The customer-facing part of Transurban’s business is therefore “road agnostic”.[1]
[1]Witness statement of Christopher Hugh Jackson dated 26 May 2023 [38]-[39], (Joint Tender Bundle (‘JTB’) 820) (‘Jackson Statement’).
As will become apparent in these reasons, this ‘road agnostic’ approach directly impacted how information potentially relevant to the estimation of the NIMC was collected and maintained by Transurban.
C.2 The introduction of interoperability
It is common ground that:
(a)in around 1995, technologies were developed such that electronic tolling through the use of an e-tag was possible. This introduced the concept of interoperability across toll road operators;
(b)CityLink opened in August 1999. The e-tag was introduced as a mechanism to collect tolls on CityLink using an electronic toll collection system known as ‘GATe’;
(c)in or about 2001 the then owners and operators of toll roads in Australia executed a document known as the ‘Memorandum of Understanding Electronic Toll Collection’ (the ‘MoU’), which established the basis and framework for interoperability between toll road operators in Australia. CML has been a signatory since around 2001 or 2002;
(d)in or about 2003 or 2004, Transurban commenced planning for the replacement of GATe;
(e)on 14 October 2004, the concession agreement for EastLink between the State of Victoria, ConnectEast and others came into effect;
(f)in late 2006 to early 2007, CML and ConnectEast began negotiating interoperability arrangements for the CityLink and EastLink toll roads, including the Discount Amount;
(g)the Roaming Agreements between the two parties (discussed below) were executed on 11 January 2008;
(h)EastLink opened in July 2008, and ConnectEast commenced tolling one month later. The Interoperability Commencement Date under the Roaming Agreements was 27 July 2008;
(i)in the same year, ConnectEast also became a signatory to the MoU;
(j)on 1 January 2009, ConnectEast commenced paying the roaming fee to CityLink;
(k)in December 2011, the GATe system used by Transurban was replaced with a new tolling and customer accounting system known as ‘GLIDe’. GLIDe is now used by Transurban for all its Australian toll roads and customers and is in the process of being rolled out across all its North American roads and customers;
(l)as at December 2016, 18 parties had executed the MoU; and
(m)in July 2018, Transurban rebranded all its Australian retail brands as ‘Linkt’. There are around six million Linkt customers across Australia.
C.3 The Roaming Agreements and interoperability
Every toll road operator in Australia is a signatory to the MoU. To give effect to the MoU, each signatory must enter into a roaming agreement with each of the other signatories. Roaming agreements provide for the necessary information exchanges and other administrative arrangements to ensure motorists are charged for the tolls they incur.
In late 2006 to early 2007, CML and ConnectEast began negotiating interoperability arrangements. On 11 January 2008, the parties entered into the Roaming Agreements. They provide for the parties’ respective electronic toll collection systems to be interoperable such that:
(a)when CML’s account holders travel on EastLink, CML will collect the applicable tolls and fees, and then pay those tolls and fees to ConnectEast, less a roaming fee; and
(b)when ConnectEast’s account holders travel on CityLink, ConnectEast will collect the applicable tolls and fees, and then pay those tolls and fees to CML, less the same roaming fee.
This case is concerned with the roaming fee withheld by CML when its account holders travel on EastLink.
The roaming fee agreed to at the time was 18 cents per roaming trip (excluding GST), to be adjusted on 1 July each year by reference to CPI. The quantum of a roaming fee does not impact account holders because it does not change the amount of the toll charged to motorists.
The Roaming Agreements also required ConnectEast to make an upfront capital payment of $4 million (plus GST) to CML for CML’s ‘pre-operational costs’ with respect to interoperability.
The negotiation of the Roaming Agreements was the subject of extensive lay evidence. In particular, that evidence addressed:
(a)the commercial negotiation of the roaming fee in late 2006 and early 2007 as it unfolded against the backdrop of the then anticipated amendments to the MCL Act to impose a statutory cap on the roaming fee CML could charge ConnectEast; and
(b)the scope and intention of the $4 million payment from ConnectEast to CML.
C.4 Transurban costs and cost centres
Although CML is the concessionaire of CityLink, it is a wholly-owned subsidiary of Transurban Holdings Limited. CML does not have any staff. The manner in which Transurban arranges its business and accounts means that costs associated with operating CityLink, including the provision of the Link roaming service to ConnectEast, are incurred by other Transurban entities, rather than CML. For example:
(a)the activities relating to finance (including tax, internal audit and treasury), risk, legal, executive, and other corporate functions of CML are carried out by Transurban;
(b)Transurban arranges physical space for its total workforce of 9,000 people and leases commercial spaces in Melbourne, Sydney and Brisbane. Transurban recruits and develops its staff;
(c)Transurban manages the daily processing and reconciliation of payments to and from ConnectEast that relate to roaming trips by Linkt customers;
(d)the incursion of merchant fees by CML customers who travel on CityLink and EastLink are incurred by Transurban;
(e)Transurban is responsible for the operation of the GLIDe tolling system across all Transurban’s toll roads which involves activities to maintain Transurban’s IT systems including cybersecurity of Transurban’s systems, hardware and software to support Transurban’s employees, managing the operation of Transurban’s IT systems (including responding to GLIDe production issues such as system changes or major incidents), managing storage for Transurban’s systems and providing network connectivity for Transurban’s systems;
(f)Transurban’s retail business has a single brand (called Linkt, as noted above) for its supply of electronic tolling services to motorists in Australia. That is, irrespective of where customers live and travel in Australia, including CityLink, their account is with ‘Linkt’ – they are ‘Linkt’ (i.e., Transurban) customers;
(g)Transurban built and now operates and maintains the Linkt app, which is the principal means by which Linkt customers (including CML account holders) communicate and interact with Transurban in relation to their accounts. It also developed and operates other Linkt digital platforms, including the Linkt website; and
(h)a call centre is operated by Transurban and staffed by its employees (in addition to an offshore team based in Manila which is contracted by Transurban) to receive contacts from Linkt customers. Customers receive support irrespective of the toll road used by the customer.
Transurban records and manages its costs through cost accounts which it refers to as ‘cost centres’. Within Transurban each team performing a particular function is assigned, and manages their costs through, a cost centre or centres. Transurban sets an annual budget for each cost centre and tracks the actual costs incurred by the relevant team against the applicable cost centre. Those accounts are ultimately consolidated into the Transurban Group’s annual financial accounts each financial year.
Transurban’s costs are thereby accounted for according to cost centre, not according to asset. There were approximately 205 cost centres in FY20. There are no cost centres which specifically account for:
(a)Transurban’s retail tolling function at the national level;
(b)interoperability generally; or
(c)the Link roaming service that CML provides to ConnectEast.
There is no suggestion by the parties that CML was required to specifically account for the costs of the Link roaming service by statute or otherwise. The uncontroverted evidence of CML is that for Transurban to structure its accounts to specifically identify the costs to CML of providing the Link roaming service it:
would need to implement … a whole new time recording system where [Transurban] would therefore require staff … to record how they spend every minute in the day. … [F]or [Transurban] that would be a substantial IT investment in the system … then it would create a substantial industry around actually being able to track and monitor all … that information….[2]
[2]Transcript of Proceedings, ConnectEast Pty Ltd v CityLink Melbourne Limited (Supreme Court of Victoria, Stynes J, 13-16, 20-23, 27-30 November, 20-21 December 2023) 596.30-597.7 (‘Transcript’).
To put it another way, Transurban could structure its accounts to specifically identify the costs to CML of providing the Link roaming service but the development and implementation of such a system would, on CML’s evidence, be at significant cost and therefore increase the additional cost of providing the Link roaming service.
The manner in which Transurban organised its accounts did materially impact the experts’ approach to the estimation of the NIMC.
C.5 Procedural history
There are two features of this case that should be mentioned.
The first concerns the sequence and context in which expert evidence was prepared and filed. The experts had access to Transurban’s accounts and a process of asking questions of, and receiving information from, Transurban. However, neither of the experts’ individual reports were informed by CML’s lay evidence. The expert’s initial reports were filed before either party put on lay evidence. The reply report of Professor Lyon was also filed prior to any lay evidence and the reply report of Mr Balchin was filed nine days after ConnectEast filed its lay evidence but prior to any lay evidence of CML. The experts were subsequently provided with the balance of lay evidence and had a chance to consider it before preparing their joint report, and before their presentations delivered at trial.
The second feature is that, by his Order made on 26 February 2020, Riordan J ordered that the expert evidence in this proceeding was to address only four sample years.
D Melbourne City Link Act 1995 (Vic)
There is no statutory obligation imposed on toll road operators to provide interoperability. Interoperability is implemented pursuant to roaming agreements which give effect to the MoU agreed between all toll road operators in Australia. However, statutory obligations are imposed on CML in relation to interoperability with respect to ConnectEast under the MCL Act.
The MCL Act is an extensive statute, the main purposes of which are:
(a)to ratify the agreement for the Melbourne City Link Project;
(b)to give the Link corporation (defined to be CML) certain powers in relation to certain roads; and
(c)to empower the fixing, charging and collection of tolls in relation to the use of vehicles on toll zones.
In 2007, the Road Legislation Amendment Act 2007 (Vic) (‘Amendment Act’) introduced Division 5 into Part 4 of the MCL Act. The division came into effect on 1 January 2009.
One of the express purposes of the Amendment Act was to amend the MCL Act to limit the roaming fee that may be charged by CML for providing a roaming service in relation to the use of EastLink.
The limit to the roaming fee was imposed by the introduction of s 93AB of the MCL Act. It provides that:
Roaming fees
(1)For the duration of the concession period (within the meaning of the Agreement) or the concession period (within the meaning of the EastLink Agreement) whichever expires first, the fee or charge that may be imposed by [CML] on [ConnectEast] under a Link roaming agreement for the provision of a Link roaming service must not exceed the amount that represents the net incremental marginal cost to the relevant corporation of providing that Link roaming service.
(2)Any agreement or arrangement existing on or after the commencement day that is inconsistent with subsection (1) is void to the extent of the inconsistency.
The phrases ‘Link roaming service’ and ‘net incremental marginal cost’ are defined in the MCL Act as follows:
Link roaming service means a service relating to the billing and payment of amounts for tolls and charges relating to the use in EastLink toll zones of a class or classes of vehicles that are registered with [CML].
net incremental marginal cost in relation to a Link roaming service, means—
(a)the additional cost to [CML] of providing the Link roaming service (net of any savings) calculated in accordance with a determination under section 93AC(1); or
(b)the amount that is determined under section 93AC(2) to be the net incremental marginal cost to [CML] of providing the Link roaming service; or
(c)if neither paragraph (a) nor paragraph (b) applies, the additional cost to [CML] of providing the Link roaming service (net of any savings); […].[3]
[3]Melbourne City Link Act 1995 (Vic), s 93AA (‘MCL Act’).
Section 93AC provides for a number of methods by which the NIMC may be determined, as follows:
(1) The Secretary may, by notice published in the Government Gazette, determine the method and criteria to be used for calculating the additional cost to [CML] of providing a Link roaming service.
(2) The Secretary, on the joint application of [CML] and [ConnectEast], may, by notice published in the Government Gazette, determine an amount to be the net incremental marginal cost to [CML] of providing a Link roaming service.
(3) A determination of an amount under subsection (2) may provide for the amount to be a variable amount to be determined in accordance with an agreement existing at the date of the determination between [CML] and [ConnectEast].
(4) The Secretary must not make a determination under subsection (2) unless the Secretary is satisfied that the amount to be determined has been agreed to by [CML] and [ConnectEast].
(5) On the publication in the Government Gazette of a determination under this section, any existing determination under this section is revoked.
It is common ground that there has been no determination under sub-ss 93AC(1) or (2) of the MCL Act and therefore, the applicable definition of NIMC is ‘the additional cost to [CML] of providing the Link roaming service (net of any savings)’.
Both parties relied on the Explanatory Memorandum for the Road Legislation Amendment Bill 2007 (Vic) (‘Amendment Bill’), to identify the purpose of the statutory cap on the roaming fee. CML also relied on the Second Reading speech for the Amendment Bill to explain what the roaming fee was intended to represent.
The Explanatory Memorandum provides:
Once an interoperability agreement, usually called a “roaming agreement”, is entered into between the tollway operators of EastLink and CityLink, those operators will not be able to directly bill the customers of the other operator for the use of their own toll road. Instead, they recover tolls and fees from the other operator who in turn charges those tolls and fees to their own customers. A fee, usually called the “roaming fee”, is charged by each tollway operator to the other for the service of collecting toll revenue from its customers and remitting that revenue to the other operator.
Initially the “roaming fee” will have a disproportionate impact on the operator of EastLink, as CityLink has been in operation for many years and will have a significant customer base when EastLink commences operation. The CityLink Concession Deed does not deal with the commercial aspects of interoperability with other toll roads in Victoria as at that time it was the only toll road in Victoria. The State is committed to ensuring that the roaming fee will permit the operator of CityLink to recover its additional costs in providing the interoperable roaming service to its customers but without allowing CityLink to effectively pass some of its CityLink costs on to the operator of EastLink. Accordingly, this Bill seeks to limit the amount of the roaming fee to the net incremental marginal cost that will be incurred by the operator of CityLink in providing for interoperability.[4]
[4]Explanatory Memorandum, Road Legislation Amendment Bill 2007 (Vic), 6.
The Second Reading speech indicates that the relevant amendments were made ‘to facilitate interoperability between EastLink and CityLink’.[5] The Minister explained:
This amendment reflects the commercial reality that the interoperable arrangements will only be effective once EastLink and CityLink enter into an agreement regarding interoperability. A standard provision in an interoperable arrangement, often called a roaming agreement, is for the payment of a fee called the roaming fee. This fee is not payable by the customers of toll roads but is paid by one toll road operator to another. It represents reimbursement primarily for the cost and effort involved in collecting tolls from its own customers on behalf of another toll road operator.
In order to ensure that CityLink is reimbursed for the fair cost of upgrading its systems to provide for interoperability, the Melbourne City Link Act 1995 will be amended to provide that the roaming fee recoverable by CityLink from EastLink (for the use of EastLink by CityLink account customers) must not exceed the net incremental marginal cost of providing that service. The bill assists in the determination of the roaming fee by enabling the Secretary of the Department of Infrastructure to publish guidelines in the Government Gazette to facilitate the calculation of the net incremental marginal cost. If guidelines are not published, the concessionaires for EastLink and CityLink may simply agree on a roaming fee that does not exceed the net incremental marginal cost.[6]
[5]Victoria, Parliamentary Debates, Legislative Council, 19 April 2007, 918 (the Hon Jon Lenders, Minister for Education).
[6]Victoria, Parliamentary Debates, Legislative Council, 19 April 2007, 918 (the Hon Jon Lenders, Minister for Education).
I am mindful that there is a tension between the words in the MCL Act and how the parties have proceeded, namely:
(a)the key issue in this proceeding concerns the amount that represents the NIMC to CML of providing the Link roaming service. However, it is Transurban that undertakes nearly all the functions and activities related to the billing and payment of tolls and fees for travel on EastLink by CML customers and incurs the related costs. The parties took no issue with that fact, proceeding on the basis that the costs to be included in the amount that represented the NIMC could be costs that have been incurred by Transurban. For example, Mr Balchin explained during the course of trial that he approached his task in the usual way of an economist, to see through artificial corporate structures to identify how costs have been incurred across the corporate group; and
(b)‘Link roaming service’ is defined by reference to vehicles that are ‘registered with [CML]’.[7] As set out in paragraph 37(f) above, since 2018 Transurban (including CML) has only a single brand for its supply of electronic tolling services, Linkt. It would seem a corollary of that fact that since 2018, there are no vehicles which are relevantly ‘registered’ with CML, although this is unclear.
[7]MCL Act, s 93AA.
As the parties have not raised these matters as issues requiring determination, I have not considered them further.
E Issue 1 – What is the proper construction of the MCL Act
E.1 Applicable legal principles
The legal principles to be applied are well-settled and not in dispute. In summary:
(a)the process of statutory construction starts with the actual text of the statute. The text, however, is to be considered in light of the context and purpose of the statute or particular provision;[8]
(b)historical considerations and extrinsic materials cannot be relied on to displace the clear meaning of the text;[9]
(c)the context includes the general purpose and policy of a provision, in particular the mischief it is seeking to remedy;[10]
(d)determination of the purpose of a statute or of particular provisions in a statute may be based upon an express statement of purpose in the statute itself, inference from its text and structure and, where appropriate, reference to extrinsic materials;[11]
(e)it is neither safe nor satisfactory to pull apart the words of a compound phrase, define them each in isolation, and then combine those definitions;[12] and
(f)the effect of the relevant provision is a matter of law for decision by the Court. It is not a matter of fact to be resolved by a preference for one body of expert evidence over another. The meaning of the legislation cannot change according to the evidence of the expert preferred by the Court. However, expert evidence may assist the Court with an understanding of technical (in this case economic) concepts used in the statute and by alerting the Court to the absurd or unreasonable uniqueness which might flow from one or other interpretation of the statute.[13]
[8]Alcan (NT) Alumina Pty Ltd v Commissioner of Territory Revenue (2009) 239 CLR 27, 46-7 [47] (Hayne, Heydon, Crennan and Kiefel JJ).
[9]Alcan (NT) Alumina Pty Ltd v Commissioner of Territory Revenue (2009) 239 CLR 27, 46-7 [47] (Hayne, Heydon, Crennan and Kiefel JJ).
[10]Alcan (NT) Alumina Pty Ltd v Commissioner of Territory Revenue (2009) 239 CLR 27, 46-7 [47] (Hayne, Heydon, Crennan and Kiefel JJ); Certain Lloyd’s Underwriters v Cross (2012) 248 CLR 378, 389-90 [24]-[25] (French CJ and Hayne J).
[11]Certain Lloyd’s Underwriters v Cross (2012) 248 CLR 378, 389-90 [24]-[25] (French CJ and Hayne J).
[12] Lorimer v Smail (1911) 12 CLR 504, 510 (Barton J) quoting, with approval, Lord Halsbury’s reasons in Mersey Docks and Harbour Board v Henderson Bros (1888) 13 App Cas 595, 599.
[13]See Pilbara Infrastructure Pty Ltd v Australian Competition Tribunal (2011) 193 FCR 57, 86-87 [60] (Keane CJ, Mansfield and Middleton JJ). See also, ICRA Rolleston Pty Ltd, Re (2021) 152 ACSR 268, 272 [20] (Flanagan J); Bupa HI Pty Ltd v Andrew Chang Services Pty Ltd [2018] FCA 2033, 21 [46] (Lee J).
E.2 What is the meaning of NIMC?
The parties’ submissions in relation to the proper construction of ‘net incremental marginal cost’ were presented as if the parties were in dispute about this issue. To the contrary, in relation to matters of statutory construction, I consider that the parties were largely aligned.
NIMC is defined in the MCL Act to mean ‘the additional cost to the relevant corporation of providing the Link roaming service (net of any savings)’.
NIMC is not used in any other statutory provision and there is no case law addressing its meaning.
I was informed by the parties that each word within the phrase ’net incremental marginal cost’ is a term that enjoys an established meaning in economics although those terms in combination do not. Having regard to the statutory definition provided for that phrase, it is not appropriate or necessary to pull apart the words of that phrase and define them in isolation and I was not asked to do so.
It is common ground that ‘relevant corporation’ for the purposes of s 93AA and the applicable definition of NIMC is CML.
The Link roaming service is defined in section 93AA of the MCL Act as follows:
Link roaming service means a service relating to the billing and payment of amounts for tolls and charges relating to the use in the EastLink toll zones of a class or classes of vehicles that are registered with [CML].
From the text it is clear, and the parties (each referring to and relying on the opinion of their respective experts) agree, that the Link roaming service comprises:
(a)the collection of tolls by CML from its account holders for roaming trips that its account holders take on EastLink; and
(b)the daily remittance of those tolls to ConnectEast.
It is common ground that the costs CML incurs in receiving a reciprocal roaming service from ConnectEast (i.e., where ConnectEast customers travel on CityLink) are irrelevant to the questions I am required to determine. This is clear from the text and context of the MCL Act which only seeks to regulate the Link roaming service, being the roaming service provided by CML to ConnectEast.
The parties, informed by their experts, agree that within the applicable definition of NIMC, ‘additional cost’ means the increase in the costs to CML of providing the Link roaming service. I accept that construction. It is consistent with the text, context and purpose of the MCL Act.
The parties’ submissions were then directed to:
(a)the types of ‘costs’ that may be included in the calculation of the NIMC. Indeed, the parties’ agreed list of issues for determination included the question – ‘What costs should be included in the NIMC?’; and
(b)the meaning of ‘net of any savings’.
E.2.1 What costs should be included in the NIMC?
ConnectEast submits:
(a)the expression ‘additional cost’ is not a term of art, so it does not have a defined literal meaning that can be identified separately from the context in which it appears. Consequently a purposive construction of the expression is necessary;
(b)the statutory purpose is to leave CML no better off from the provision of the Link roaming service, but also no worse off;
(c)the costs of any functions and activities that are required to perform the Link roaming service can form part of the NIMC (which ensures that CML is left no worse off from the provision of the service), provided that those functions and activities relate to the collection by CML of tolls from its customers for their roaming trips on EastLink and remittance of those tolls to ConnectEast;
(d)the words ‘relate to’ may have a broad or narrow meaning, depending on the relevant statutory context and purpose.[14] The context in which the words ‘relating to’ appear is the prohibition in s 93AB on CML imposing a fee or charge that exceeds an amount that represents the NIMC of providing the Link roaming service;
(e)the purpose of the prohibition is to ensure that CML may recover its additional costs in providing the Link roaming service but without allowing CML to effectively pass some of its CityLink costs on to the operator of EastLink; and
(f)therefore, the roaming fee should not include any costs that CML would incur in the ordinary course of its business, whether or not it provided the Link roaming service.
[14]Secretary, Department of Family and Community Services v Hayward (a pseudonym) (2018) 98 NSWLR 599, 618-619 [67] (Bathurst CJ, Beazley P, Basten, Gleeson and Payne JJA); MetLife Insurance Limited v Australian Financial Complaints Authority Limited (2022) 295 FCR 1, 18-19 [95]-[96] (Middleton, Jackson and Halley JJ).
CML submits:
(a)the purpose of the legislation was to ensure the commercial viability of interoperability, and thereby remedy the inefficiency and inconvenience to customers of opening and managing multiple accounts with different toll road operators;
(b)indirect and common costs are properly regarded as ‘additional costs’. CML asserts that Mr Balchin proceeded on the basis that the NIMC should only comprise costs which were directly caused by the provision of the Link roaming service; that is, costs which were specifically incurred for the purpose of providing the Link roaming service; and
(c)any construction which excludes indirect and/or common costs of providing the Link roaming service (in the manner advanced by ConnectEast) from the NIMC would lead to under-recovery by CML, and would therefore be at odds with the legislative purpose.
E.2.1.1 Consideration
During the course of the hearing, it became apparent that the parties were not in dispute about the types of costs that may be included in the NIMC. Specifically, it was common ground that:
(a)the purpose of Division 5 of Part 4 of the MCL Act, specifically s 93AB is to facilitate interoperability between ConnectEast and CML, by ensuring that CML is able to recover its additional costs of providing the Link roaming service but limiting the roaming fee that may be charged by CML by imposing a statutory cap. The mischief to be addressed by the statutory cap was identified in the Explanatory Memorandum as follows:
the roaming fee will have a disproportionate impact on the operator of EastLink, as CityLink has been in operation for many years and will have a significant customer base when EastLink commences operation. …The State is committed to ensuring that the roaming fee will permit the operator of CityLink to recover its additional costs in providing the interoperable roaming service to its customers but without allowing City Link to effectively pass some of its CityLink costs on to the operator of EastLink.
(b)the roaming fee should not include any costs that CML would incur in the ordinary course of its business, whether or not it provided the Link roaming service; and
(c)indirect and/or common costs of providing the Link roaming service may be included in the NIMC.
The expression ‘common costs’ requires further explanation here because it was used at different points in the proceeding to refer to the following two categories of costs:
(a)costs that CML incurred in order to provide the Link roaming service to ConnectEast as well as roaming services to other toll roads; and
(b)costs that CML incurred in order to provide the Link roaming service as well as the ‘non-roaming’ parts of its own business (i.e., costs that it would incur whether or not it provided roaming services).
It is common ground between the parties that the costs referred to in sub-paragraph 73(b) do not form part of the Link roaming service. CML’s reference to ‘common costs’ in its submissions about the proper construction of the MCL Act is a reference to the costs referred to in sub-paragraph 73(a).
CML’s submission — that any construction of the MCL Act which excludes from the NIMC indirect and/or common costs of providing the Link roaming service would lead to under-recovery by CML — was not resisted by ConnectEast. To the contrary, ConnectEast accepted that some common costs and indirect costs should be included in the amount representing the NIMC. Not because they are costs within those categories but because they were identified as additional costs to CML of providing the Link roaming service. For example, ConnectEast accepts that the amount representing the NIMC should include:
(a)an amount for the indirect costs of additional employees. These costs are addressed in section G.11; and
(b)a proportion of the common costs incurred by CML adding roaming capability to its electronic tolling system. These costs are addressed in section G.3.
The parties, referring to and relying on the opinions of their respective experts, also agreed that costs that can be described as either incremental costs or avoidable costs should be taken into account in the estimation of the NIMC.
Incremental costs to an entity of providing a ‘service’ refers to the additional cost incurred in providing the service in question, compared to the counterfactual where that service is not provided but the entity continues to provide all of its other services. Specifically in relation to the provision of the Link roaming service, the incremental cost to CML comprises those costs that CML would not otherwise have incurred, and so excludes any costs that CML would have incurred in any event to provide retail services to its account holders or roaming services to other toll road operators.
Avoidable costs are essentially the same as the concept of incremental cost, the difference being that it focusses on the extent to which costs would be avoided if the service in question was no longer provided.
This characterisation of costs as avoidable and incremental was relevant to the experts’ consideration of the most appropriate methodology for determining the amount representing the NIMC. As set out in section F.1.5, the experts agreed that methods applicable to the estimation of incremental or avoidable costs were appropriate to estimate the sum representing the NIMC. However, the parties also agreed that those methodologies may fail to account for some common costs that should be included in the NIMC and that a different methodology would need to be applied. The only example of such common costs that arose in this case were the costs incurred by CML adding roaming capability to its tolling system. The assessment of those additional costs is addressed in section G.3.
Against that background and in my view, regardless of how the parties may choose to characterise a particular cost — e.g., direct, indirect, common, incremental or avoidable — it will only be included in the NIMC:
(a)if it is a cost to CML of providing the Link roaming service that is additional, that is, an increase to the costs it would otherwise incur if it did not provide that service; and
(b)if CML is not reimbursed for that cost, it would be worse off from the provision of the Link roaming service.
Such a construction is supported by the text, context and purpose of the MCL Act.
The methodology to be employed to identify and assess such costs is addressed in section F.
E.2.2 Meaning of ‘net of any savings’
The parties are in dispute about the meaning of the phrase ‘net of any savings’ in the definition of NIMC.
E.2.2.1 Submissions
The parties’ submissions on this issue were limited. In short, both parties relied on the position taken by their respective experts.
Mr Balchin opined that ‘net of any savings’ means that the assessment of ’additional costs’ must:
(a)take account of any cost saving or other benefit that may be caused by, or flow from, the provision of the Link roaming service; and
(b)consider only costs that are ultimately borne by CML, and so exclude any costs caused by providing the Link roaming service that CML is able to defray (which he referred to as ‘defrayed costs’).
The example employed by Mr Balchin to explain defrayed costs was the financial institution transaction fees that CML passes through to its account holders by way of surcharge (i.e., credit and debit card surcharges).
CML’s expert Professor Lyon did not agree with Mr Balchin’s approach to defrayed costs. In Professor Lyon’s opinion ‘“net of any savings” refers to any reduction in costs’[15] (regardless of whether those costs can be passed on). Employing the same example of financial institution transaction fees, Professor Lyon opined that the recovery of those fees by CML is revenue and therefore not relevant to the determination of ‘additional costs’. In his view:
… revenue would become a factor if we had been asked to determine the price. We haven’t been asked to determine the price. We’ve been asked to determine the cost which means revenue should not be counted in an avoidable cost calculation. [16]
[15]Joint report of Brendan Lyon and Jeffrey Balchin dated 27 July 2023 [4] (JTB 752) (‘Joint Expert Report’).
[16]Transcript 836.2-11.
On that basis, and as discussed further in section G.9, Professor Lyon included in his NIMC estimate those credit card merchant fees which CML passes on to its account holders by way of surcharges.
Professor Lyon considered that his reliance on audited statements of actual costs and savings in the relevant years satisfied the requirement that the NIMC be net of any savings because those statements can be expected to reflect any reduction or change in costs.
E.2.2.2 Consideration
The ordinary meaning of the words ‘net of any savings’ is ‘exclusive of savings’.[17] A plain reading of paragraph (c) of the definition of NIMC in s 93AA of the MCL Act suggests that any savings that CML makes, relating to the additional costs it has incurred providing the Link roaming service, should be taken into account when determining those additional costs. To put it plainly the inclusion of ‘net of any savings’ in the definition of NIMC, requires that the costs included in the determination of the amount that represents the NIMC to CML of providing the Link roaming service take account of costs that are borne by CML, and exclude any costs saved or defrayed by CML.
[17]The Macquarie dictionary defines the adjective ‘net’ as:
·‘exclusive of deductions, as for charges, expenses, loss, discount, etc.’; and
·‘ultimate; final; after all calculations have been made, or all additions and subtractions have had their effect’.
The text, context and purpose of the MCL Act support that construction. Specifically, such a construction ensures that CML is able to recover the additional costs it actually incurs providing the Link roaming service but no more.
Consistent with that construction is the opinion of Mr Balchin that if CML defrays a cost, for example by passing that cost onto its customer, it does not, as a matter of economic reality, bear that cost. I agree with Mr Balchin.
By comparison, the construction contended for by Professor Lyon undermines the purpose of the statutory cap by allowing CML to recover more than the additional costs it actually incurs in providing the Link roaming service. Specifically, it would permit CML to recover the same costs twice: once from its customer, and once from ConnectEast.
My preferred construction of ‘net of any savings’ is relevant to my consideration of only one category of costs, being those associated with payments, addressed in section G.9.
F Issue 2 – What is the appropriate method of ascertaining the amount that represents the NIMC
F.1 Introduction
Each party retained an expert to assist the Court to determine an appropriate method to ascertain the amount that represents the NIMC for each of the four sample years.
F.1.1 Professor Lyon
CML retained Professor Lyon.
Professor Lyon describes himself in his curriculum vitae (‘CV’) as an ‘infrastructure professional with more than 20 years’ executive experience spanning infrastructure policy, regulation, finance and commercial advisory’.[18] He recorded in his first report that ‘[a] large portion of [his] professional work has involved consideration of infrastructure related payment, pricing and funding mechanisms broadly; and road pricing and tolling specifically’.[19]
[18]Report of Brendan Lyon dated 29 September 2021, Appendix 2 (JTB 54) (‘First Lyon Report’).
[19]First Lyon Report [66] (JTB 19).
Professor Lyon has no qualifications in the field of economics or accounting. He holds a Masters of Business Administration from the Sydney Business School, and an academic position at the University of Wollongong’s faculty of business and law. His CV, annexed to his first report prepared in 2021, recorded his position as Honorary Associate Professor at the University of Wollongong.
His project experience as listed in his CV includes:
(a)the development of financial models or providing financial advice in relation to:
(i)a desalination plant and pipeline;
(ii)the tender of ferry services; and
(iii)the transfer of rail assets;
(b)leading a team to deliver an in-depth investigation into South Australia’s freight transport challenges; and
(c)leading the development of a major transport modelling report to provide high level advice on the whole of supply chain costs that shippers face moving containers to and from Port Botany.
In relation to roaming fees, he gave evidence that in around 2019 he had been appointed by Transport for New South Wales as independent chair of a regulatory review considering a cap on the equivalent fees under NSW legislation. He was assisted in that function by economists, specifically Frontier Economics.
Professor Lyon also received assistance from Frontier Economics in relation to the preparation of his first report, and specifically to address the issue of what ‘the net incremental marginal cost might be’,[20] and ‘resolving what the right estimation approach might be … having regard for the fact that [Professor Lyon is] not a trained economist’.[21]
[20]Transcript 934.6-935.2. See also First Lyon Report [63] (JTB 18).
[21]Transcript 935.3-16.
F.1.2 Mr Balchin
ConnectEast retained Mr Balchin.
Mr Balchin is an economist. He has 25 years of experience in relation to economic regulation issues across the electricity, gas, ports, airports, telecommunications and water infrastructure sectors in Australia and New Zealand. He has advised governments, regulators and major corporations on issues including the development of regulatory frameworks, regulatory price reviews and with respect to the negotiation of charges for unregulated infrastructure services. He has substantial experience applying economic and finance principles to pricing and investment appraisal and associated commercial disputes in unregulated infrastructure and non-infrastructure markets.
F.1.3 The question addressed by the experts
The experts were asked the same question:
What is the “net incremental marginal cost” of providing the Link [r]oaming [s]ervice (as those terms are defined in s 93AA of the [MCL Act]) as at each of 30 June 2015, 30 June 2017, 30 June 2019 and 30 June 2020.
F.1.4 The starting point – Transurban’s accounts and the Transurban Model
It was common ground that the ‘relevant corporation’ for the purpose of s 93AB of the MCL Act is CML and that the additional costs included in the NIMC are the costs incurred by CML to provide the Link roaming service.
As set out in section C.4:
(a)the business functions undertaken for the provision of the Link roaming service are performed by Transurban rather than by CML;
(b)the costs associated with the provision of the Link roaming service are incurred by Transurban;
(c)Transurban manages its costs through cost centres; and
(d)there is neither a cost centre for interoperability generally nor for the Link roaming service specifically.
These facts had a significant impact on the methodologies employed by the experts to estimate NIMC.
To estimate the NIMC, each of the experts effectively ignored the divisions within the Transurban corporate structure and treated costs incurred by any entity within Transurban for the provision of the Link roaming service as CML’s costs for the purposes of s 93AB of the MCL Act. Mr Balchin explained this approach during his presentation at trial:
… there was also some discussion this morning about looking at the cost of the – of the roaming service, whether you should just be looking at the costs to CML as an entity or to the wider group. Now, in part, that's a legal question. To an economist though, we generally talk about the cost of doing something and look through artificial things like where corporate lines are drawn.[22]
[22]Transcript 852.19-26.
As a starting point, Transurban provided each expert excel workbooks for each of the four sample years which constituted its model for estimating the NIMC (the ‘Transurban Model’) and which is described in more detail below. These workbooks included a number of spreadsheets presenting a range of information in respect of the relevant year of every Transurban cost centre except cost centres which related exclusively to New South Wales, Queensland or the United States of America. Included in each workbook was a spreadsheet which sets out the costs contained within each cost centre, broken down into various profit and lost accounts.The cost information was extracted from Transurban’s audited accounts.
Neither party disputes the correctness of the figures in those spreadsheets.
F.1.5 Areas of agreement
There are areas of agreement between the parties and their experts. Relevantly they agreed that costs that can be described as either incremental or avoidable are additional costs that should be taken into account in the estimation of the NIMC.
In relation to the appropriate methodology to ascertain the amount that represents the NIMC, the experts agreed:
(a)the relevant task is one of estimation and they approached it in that way. As was submitted by CML, s 93AB does not call for the precise quantification of the additional cost of the Link roaming service. Rather, s 93AB imposes an upper limit on the amount that can be charged, by reference to ‘the amount that represents the NIMC’. This language tells against a precise calculation;
(b)costs of activities that are likely to increase from the provision of the Link roaming service should be included in the NIMC estimate even if they are difficult to estimate with precision; and
(c)that the task of estimating the additional costs to CML of providing the Link roaming service requires a comparison between:
(i)the cost that are incurred in the factual scenario where the Link roaming service is provided; and
(ii)the cost that would be incurred in the counterfactual scenario where the Link roaming service is not provided,
with the difference being the incremental or avoidable cost of providing the Link roaming service. As Mr Balchin explained, in an economic sense incremental cost is the cost of one more thing and avoidable cost is the cost you avoid by doing one fewer thing, so they are equal to each other. Relevantly, and as agreed by Professor Lyon, the outcome of such a calculation would be a sum that is sufficient for CML to recover the additional cost incurred to provide the Link roaming service (including a commercial return on any capital employed), but no more than this.
F.1.6 The counterfactual scenarios employed to identify additional costs
I should elaborate on the counterfactual scenarios described above because they are relevant to my consideration of each of the experts’ methods and estimates and it is convenient to address them ahead of that consideration.
The costs the experts are trying to identify are those that are additional to CML as a consequence of providing the Link roaming service. Consistent with that task the counterfactual is described loosely as one where the Link roaming service was not provided. I have used the term ‘loosely’ because there appears to be two ways in which that counterfactual may be understood and applied.
The first was referred to during the trial as the ‘one-way roaming counterfactual’. That requires the experts to compare:
(a)the current circumstance where the Link roaming service is provided. Described in full, that circumstance is one where CML account holders are permitted to roam on EastLink and ConnectEast account holders are permitted to roam on CityLink; and
(b)a counterfactual where the only change from the status quo is that CML does not provide the Link roaming service. Described in full, this one-way roaming counterfactual is one where CML account holders are not permitted to roam on EastLink but ConnectEast account holders are permitted to roam on CityLink.
The second was referred to as the ‘no-roaming counterfactual’. That requires the experts to compare:
(a)the current circumstances where the Link roaming service is provided as described in sub-paragraph 115(a); and
(b)a counterfactual where there is no roaming between CML and ConnectEast. In other words, CML account holders can only undertake arranged travel on CityLink and ConnectEast account holders can only undertake arranged travel on EastLink. In this scenario, there is no interoperability between the tolling services provided by CML and ConnectEast.
This counterfactual is said to identify the costs that are incurred to give effect to roaming between those parties. The further question must then be asked — of the costs incurred to give effect to roaming, which costs are associated with the provision of the Link roaming service.
It was submitted by CML that:
(a)the MCL Act requires that the experts employ a one-way counterfactual; and
(b)Mr Balchin’s estimate could not be relied upon because the counterfactual scenario deployed by him was applied inconsistently.
I reject both submissions for the reasons that follow.
The legislation is silent as to the methodology to be employed by any party to determine the amount that represents the NIMC to CML of providing the Link roaming service. As this case demonstrates, a number of different methods may be employed and will vary depending on the information available. What is critical is that the methodology adopted, whatever it may be, results in a reliable estimate of the additional cost to CML of providing the Link roaming service.
Clearly the experts agreed that a comparison between a factual and counterfactual was a useful tool to be deployed in the evaluation of avoidable or incremental costs. However, they applied it quite differently.
It was not immediately clear to me how or when Professor Lyon had deployed it. In response to my question about that, Mr Gleeson explained:
Mr Gleeson: …Professor Lyon, as I say, is not nearly so plagued with the consequences of the counterfactual in this sense because he adopts the roaming one-way in terms in his report and the…
Her Honour: I’m just not sure how he applies it, or when he applies it.
Mr Gleeson: Because of the nature of his methodology, it doesn’t confound the methodology in the same way because what he’s doing is saying I will identify through drivers what the additional costs are. [23]
[23]Transcript 1586.30-1587.8.
I now understand, and as set out in more detail below, Professor Lyon sought to apply the comparison of a factual and a counterfactual very early in his analysis of Transurban cost centres when he asked whether costs within those centres were likely to increase as a consequence of providing the Link roaming service. The inquiry was undertaken at a very high level in relation to Transurban’s costs, before any attempt was made to isolate CML’s cost from Transurban’s and before any attempt was made to allocate costs to interoperability. As my reasons set out, the manner and timing of his application of the comparison undermined the reliability of his estimate.
Mr Balchin sought to apply the no-roaming counterfactual in his analysis. During cross-examination he explained that the one-way roaming counterfactual was inappropriate:
I think the counterfactual whereby the larger of the two toll roads doesn’t provide the roaming service, but the smaller of the two toll roads does is a highly artificial circumstance.
[…]
…I think we quickly get to the conclusion that under that counterfactual, you may well have a lot of current … CityLink customers who would’ve been EastLink customers because only one of the toll roads would’ve … provided the roaming service … which is quite an unrealistic and artificial counterfactual.[24]
[24]Transcript 1327.15-18, 1341.12-21.
The purpose of a counterfactual is to expose the consequences of an alternative circumstance while maintaining the status quo, to the extent possible, for everything but the changed circumstance. In my view, and as identified by Mr Balchin, the one-way roaming counterfactual introduces a highly artificial environment with consequences more difficult to account for than the no-roaming counterfactual.
Therefore, and having regard to:
(a)the concerns expressed by Mr Balchin about the one-way roaming counterfactual; and
(b)the inclusion in the no-roaming counterfactual of the further question namely — of the costs incurred to give effect to roaming, which are associated with the provision of the service,
I am satisfied that, where it is necessary to deploy it, the no-roaming counterfactual proposed by Mr Balchin is better suited to the task of estimating additional costs than, and therefore to be preferred over, the one-way roaming counterfactual preferred by CML.
I do not consider it necessary or helpful to scrutinise this issue further and in particular how it has been deployed by the experts. It is enough to identify the counterfactual as a tool used by the experts and my preference for the no-roaming counterfactual. The more critical task ahead is to consider the methodologies actually employed by the experts and the reliability of the estimates of the NIMC produced by them.
F.1.7 The experts’ conclusions as to NIMC
While both experts agreed the task required them to estimate the NIMC, their conclusions were radically different:
(a)Professor Lyon, CML’s expert, estimated that the NIMC was, for the 2019 reference year, between a ceiling figure of $16,960,398, equivalent to $0.33 per trip and a floor figure of $16,771,319, equivalent to $0.327 per trip (each given number of trips of 51,317,916).
(b)Mr Balchin, ConnectEast’s expert, estimated that the NIMC varied from $1.4 million to $2.17 million depending on the year and assuming GLIDe (Transurban’s electronic tolling system) costs were included, and between $1.26 million and $1.75 million if GLIDe costs were not included. Mr Balchin did not present his estimates on a per trip basis. This is because, for a number of reasons, Mr Balchin says it is implausible to assume that CML’s retail costs vary directly in proportion to the number of trips taken.
F.2 Professor Lyon’s methodology
F.2.1 Introduction
I have concluded that Professor Lyon’s methodology is inappropriate for the task which the experts were required to undertake. I considered Professor Lyon’s methodology in detail. That process revealed:
(a)the starting point for Professor Lyon’s analysis is the Transurban Model. It is therefore necessary to consider the purpose of that model and how it operates; and
(b)the product of Professor Lyon’s analysis is what he refers to as the ‘adjusted version’ of the Transurban Model, noting ‘it is not a separate model but an adjusted version of the Transurban Model’.[25] It is therefore necessary to consider how and why Professor Lyon adjusted the Transurban Model and the effect of those adjustments on the model’s output. In these reasons, I will refer to the output of Professor Lyon’s analysis as the Lyon Adjusted Transurban Model.
[25]First Lyon Report [170] (JTB 32).
The product of those necessary considerations is this lengthy and rather complex section of my reasons, that is:
(a)section F.2.2 – Instructions;
(b)section F.2.3 – the Transurban Model; and
(c)section F.2.4 – the Lyon Adjusted Transurban Model.
My specific reasons for rejecting Professor Lyon’s methodology and accepting the methodology of Mr Balchin are set out in section F.4.
F.2.2 Instructions
Professor Lyon was engaged by CML on about 25 March 2021. Initially he was provided with a brief background to the proceeding and copies of the pleadings, the Expert Witness Code of Conduct, orders concerning expert evidence and the MCL Act. The letter of instruction also stated:
[w]e will provide you with more detailed instructions separately, including the relevant data you will need from CML’s records, in order to answer the Expert Question.[26]
[26]First Lyon Report, Appendix 1 (JTB 48).
Between July and September 2021 Professor Lyon was briefed with materials set out in Appendix 3 of his first report including:
(a)the Transurban Model and supporting documents;
(b)documents described in this proceeding as the ‘initial narratives’ or ‘three-page narratives’ for the cost centres referred to in the Transurban Model. These initial narratives (each between three and four pages) were prepared by Transurban for the purpose of the litigation and provided to Professor Lyon for the purpose of preparing his first report. Professor Lyon relied on them. Those initial narratives include:
(i)a brief description of one or multiple cost centres;
(ii)a breakdown of costs allocated to each cost centre; and
(c)the cost drivers (which are addressed further below) applied in the Transurban Model to allocate costs from the cost centres to the Link roaming service.
Professor Lyon was briefed with further materials for his reply report. Those materials are listed in Appendix 3 of that report and include narratives (comprising two to five pages and referred to at trial as the ‘further narratives’) containing details additional to the initial narratives in respect of 21 cost centres, and one of which was prepared at the request of Professor Lyon.
F.2.3 The Transurban Model
The methodology employed by Professor Lyon to estimate the NIMC is described below. The starting point for his analysis is the Transurban Model prepared by Transurban for each of the sample years. The Transurban Model is comprised of four workbooks (one for each of the four sample years) which I refer to collectively as the Transurban Model. The Transurban Model records that it was prepared on 30 June 2021 for the purpose of the proceeding. The cover sheet explains that:
the model has been developed to calculate the costs associated to providing interoperability services for Citylink (Linkt Melbourne) by showing all cost centres and associated cost elements for relevant year.[27]
[27]Transurban Model: 2020 model (Defendant’s Tender Bundle (‘DTB’) 278), 2019 model (DTB 184), 2017 model (DTB 280), 2015 model (DTB 279).
As set out at paragraph 128(b), Professor Lyon refers to the product of his analysis in his first report as the ‘adjusted version’ of the Transurban Model, noting ‘it is not a separate model, but simply an adjusted version accounting for the various changes required to estimate [his] opinion of NIMC’.[28] ‘Adjusted version’ is a fitting description given Professor Lyon’s model contains the same workbooks with the same spreadsheets except that some of the data inputs have been revised in a few of the spreadsheets. The Lyon Adjusted Transurban Model was not attached to Professor Lyon’s first report. It was provided to Mr Balchin following a request made by Mr Balchin on 14 December 2021.
[28]First Lyon Report [170] (JTB 32).
If I am wrong and CML has incurred additional costs captured in this cost centre, I find that there is no proper basis for me to estimate those costs and I allow nil for them.
A.1.3.3 Executive Management
There are three cost centres comprising the ‘Executive Management’ function:
(a)110441 Group Executive Vic which CML says captures costs associated with the group executive in Victoria and the immediate team which provide high-level strategy and guidance in the Victorian market and seeks to prevent business and financial risks from materialising.
(b)400441 Group Executive of People and Culture which oversees the people and culture function of the entire Transurban business.
(c)400701 Group Executive for Technology which is responsible for the technology function across the entirety of the Transurban business which includes overall management responsibility for the development and performance of systems including GLIDe.
In its closing submissions in respect of each of these cost centres, CML relies on Mr McKay’s evidence that:
[r]oaming and interoperability are integrated within Transurban's customer business. This means that roaming and interoperability affect the day-to-day operations of the business and are consequently among the matters raised with the executive management of the business.[249]
[249]McKay Statement [98]-[99] (JTB 951).
CML submits that roaming increases the size and complexity of Transurban’s business, which increases costs in these costs centres as Transurban staffing requirements increase which flows through to an increased need for people and culture advisors and an executive function to manage the people and culture team.
In relation to 110441 Group Executive Vic, CML asks me to accept as a matter of logic that ‘the scale and significance of the Link roaming service’ and the ‘annual billing and transfer of approximately [$200 million] for approximately 50 million trips made by Linkt customers on EastLink’ means that ‘there would necessarily be some additional work for senior executives in overseeing the processes and systems necessary for the billing and payment of tolls for travel by CML customers on EastLink’, ‘including making decisions about staffing, expenditure and risk management’.
Mr Balchin considered the allowances made by Professor Lyon in his estimate of the NIMC for the time of senior executives. His first report records his opinion that he:
would not expect there to be a material amount of senior executive effort required by the provision of the roaming service unless material issues arose, in which case I would expect there to be documentary evidence of this within the organisation. However, no such records were produced by Transurban in response to my requests.[250]
[250]First Balchin Report [166] (JTB 210-211).
It is not clear to me what particular activities have been undertaken in the four sample years in relation to the provision of the Link roaming service. In the absence of any evidence identifying the activities actually undertaken and the costs incurred, I am not satisfied that there are costs captured by this cost centre that would not have been incurred but for the provision of the Link roaming service.
If I am wrong and CML has incurred additional costs captured in this cost centre, I find that there is no proper basis for me to estimate those costs and I allow nil for them.
A.1.3.4 Procurement and Facilities Management
There are two cost centres comprising the ‘Procurement and Facilities Management’ function:
(a)400430 Procurement Sourcing which captures the costs of the procurement team whose role is said by CML to involve negotiating contracts and managing relationships with key suppliers; and
(b)400812 Facilities Management which captures the cost of the physical space for Transurban’s employees (being a total workforce of approximately 9,000 people and a direct workforce of approximately 3,000 people) and the various support staff required to manage and maintain those sites who are part of Transurban’s facilities team.
In relation to Procurement, CML, relying on the evidence of Mr McKay, submits that:
(a)Transurban’s procurement activities scale with the size of the business;
(b)the provision of the Link roaming service increases the overall number of trips that are taken by Linkt customers; and
(c)the increased size and complexity of Transurban’s business leads to a need for larger supply contracts.
In relation to Facilities Management, CML, relying on the evidence of Mr McKay, submits that the provision of the Link roaming service increases costs because it increases the scale and complexity of Transurban’s business which in turn leads to a larger workforce.
However, I note that Mr McKay also gave evidence under cross-examination that Transurban does not record the number of individuals or the number of hours involved in performing the procurement function which CML says relates to roaming. Further, during the course of its correspondence with Professor Lyon, Transurban noted that its facilities are used for both retail and asset functions, making it impossible to discern additional costs on the metric of headcount alone.
In the absence of any evidence identifying additional costs actually incurred, I am not satisfied that there are costs captured by this cost centre that would not have been incurred but for the provision of the Link roaming service.
If I am wrong and CML has incurred additional costs captured in this cost centre, I find that there is no proper basis for me to estimate those costs and I allow nil for them.
A.1.3.5 Finance
There are five cost centres which fall within the sub-category of wider corporate costs referred to by Mr McKay as the ‘Finance’ function.
The first is ‘400411 Group Accounting’ which captures the costs of the Transurban’s Group accounting team which:
… ensures Transurban meets its regulatory and statutory requirements for auditable financial statements, which must be prepared in accordance with International Accounting Standards. Group accounting is responsible for ensuring that all financial accounting standards are met, including in respect of roaming, ensuring compliance with roaming agreements and interoperability processes.[251]
[251]McKay Statement [37]-[38] (JTB 935).
CML, relying on the evidence of Mr McKay, submits that group-wide services provided by the accounting team are directly related to the performance of the Roaming Agreements by virtue of the following activities:[252]
[252]McKay Statement [41] (JTB 935-937).
(a)Interoperability accounting which involves conducting monthly reconciliations of accounts payable and receivable for interoperability accounts.
(b)Daily cash transfers which involves ensuring that sufficient cash is available for supplier invoices to be paid to other toll road operators.
(c)Reporting which involves preparing formal auditable financial statements for the Transurban Group and subsidiary accounts and undertaking monthly management reporting for retailers and toll road operators, including in respect of roaming fee and interoperability balances with toll road operators.
(d)Assessing roaming and interoperability agreements to determine how to account for its provisions in compliance with accounting standards.
(e)Providing subject matter expertise in designing automated solutions for interoperability accounting.
The second is ‘400415 Tax’ which captures the costs of Transurban’s specialist tax team which ensures that all of its entities comply with any applicable tax legalisation, standards and regulations. Relying on the evidence of Mr McKay, CML submits that the activities undertaken by this cost centre are related to the Link roaming service in that Transurban must:
(a)apply and remit GST for each roaming trip on EastLink;
(b)apply PAYG withholding to the salaries and wages of staff hired to assist in delivering the Link roaming service; and
(c)review and consider the taxation implications of the Roaming Agreements.
The third is ‘400416 Treasury Finance’ which, until November 2020 captured costs of the treasury finance team which was responsible for Transurban’s treasury systems, treasury back office and treasury accounting. Relying on the evidence of Mr McKay, CML submits the activities undertaken by this cost centre relate to roaming. Specifically, Mr McKay gave evidence that:
[f]rom the time I started at Transurban until about October 2018, a component of that roaming fee payment process was manual and required oversight and management by the treasury finance team. Those manual processes included monitoring the payment files that were created to process the roaming payments, logging into the Group’s banking platforms to authorise the release of payment files from CML’s bank account, monitoring the CML bank account to ensure the payments were made and reconciling the movements in the bank account with the accounting payment record.
From October 2018, the treasury team implemented a new treasury management system, Quantum (which records activity in relation to financial products), which was integrated with Workday to create an automated payments platform. Whilst Quantum has largely automated the roaming payment process, the treasury team has responsibility for managing all the Group’s bank accounts, including CML’s account from which roaming payments were made, to ensure there are sufficient funds available at all times.[253]
[253]McKay Statement [62]-[63] (JTB 943).
The fourth is ‘400412 Internal Audit’ which captures the costs of Transurban’s internal audit team which is said to be independent of the Transurban Group’s accounting team. Its purpose is to provide objective internal audit assurance, detect fraud and improve governance, processes and the control environment across Transurban’s operations. Mr McKay gave evidence that the activities of this cost centre are relevant to roaming to the extent that roaming was embedded in the business systems and process the subject of review.
The fifth is ‘400104 Network Strategy and Traffic Analysis’ which captures the costs of Transurban’s traffic modelling and analysis performed for the purpose of revenue and budget forecasting, long range asset valuation and strategic planning and prioritisation. Relying on the evidence of Mr McKay, CML submits that the modelling performed generally takes into account traffic on both CityLink and EastLink and does not distinguish between Linkt customers and ConnectEast customers. It further submits that this cost centre includes activities that concern ConnectEast (forecasting trips on EastLink) as well as roaming and interoperability more generally, and supporting Transurban and CML in forecasting tolls payable and estimating revenue.
CML submits that the provision of the Link roaming service results in additional costs to each of the Finance cost centres.
In relation to:
(a)400411 Group Accounting – CML submits that interoperability accounting is necessary to ensure continuity in the provision of the Link roaming service.
(b)400415 Tax and 400412 Internal Audit – CML submits that the work of the tax and audit teams increases as a result of business growth and increasing complexity in business operations and that if Transurban did not provide roaming, there would be less demand on those teams.
(c)400416 Treasury Finance – the activities of this cost centre directly relate to the management, approval and oversight of the amounts that are paid to ConnectEast on a daily basis and accordingly the provision of the Link roaming service creates work for the Treasury Finance team that would not be required to perform in the absence of the Link roaming service.
(d)400104 Network Strategy and Traffic Analysis – notwithstanding that Mr McKay gave evidence that the costs associated with the modelling and forecasting analysis undertaken by Transurban do not scale with the Link roaming service, CML submits that ‘some part of the activities captured by this cost centre are attributable to the roaming service’.
The evidence before me does support the proposition that there are costs in each of these cost centres that relate to roaming. However, there is no evidence that CML has in fact incurred costs that it would not have incurred but for the provision of the Link roaming service. For example, there is no evidence that:
(a)applicable accounting, taxation and regulatory obligations have changed over time;
(b)the activities associated specifically with the Link roaming service, such as the daily cash transfers or the reconciliation of accounts, are either complex or intensive;
(c)any particular staff were engaged in any particular activity for any particular length of time or did anything other than that which they were and would have been employed to do in any event; and
(d)it was necessary to engage more staff or input from external providers to attend to the activities in these cost centres as a consequence of providing the Link roaming service.
If there were in fact material additional costs incurred by CML or Transurban I would expect there to be some documentary evidence of it but none has been produced.
If I am wrong and CML has incurred additional costs of providing the Link roaming service captured in this cost centre, I find that there is no proper basis for me to estimate those costs and I allow nil for them.
A.1.3.6 People and culture
There are eight cost centres which fall into the sub-category of wider corporate costs referred to by Mr McKay as the ‘People and Culture’ function:
(a)400816 People and Culture Services;
(b)400806 Emerging Talent;
(c)400807 Remuneration and Benefits;
(d)400814 Talent Acquisition and Recruitment;
(e)400817 Leadership Development (WD);
(f)400818 Belonging and Wellbeing;
(g)400819 Group Learning and Development; and
(h)400805 Development and Partnering.
I will address them together.
CML says that because of the Link roaming service, ‘Transurban’s workforce is larger’ and ‘the scale and complexity of Transurban’s business’ has increased, and as a result:
(a)there are increases in people and culture advisers who support the workers undertaking activities necessary for interoperability;
(b)there are additional recruitment costs and costs of ‘wellbeing and belonging initiatives’ because it causes Transurban ‘to hire additional people to do things relating to roaming’;[254]
[254]Transcript 592.21-23.
(c)there are ‘increases in staffing requirements’ resulting in increased remuneration; and
(d)there is ‘more work for the people and culture team in terms of retaining and training the workforce’.
However, again there is no evidence that CML has in fact incurred costs that it would not have incurred but for the provision of the Link roaming service.
The evidence of Mr McKay that CML relies on about the relationship between the activities captured in these cost centres and roaming is cast in vague terms. He says in relation to ‘400807 Remuneration and Benefits’, for example:
[a]lthough it is difficult for me to describe the precise relationship with certainty, as roaming has impacted the complexity of Transurban's business, it has also increased the work and cost of the remuneration and employee benefit function.[255]
[255]McKay Statement [94] (JTB 950).
In relation to ‘400814 Talent Acquisition and Recruitment’, he says the cost centre ‘captures talent acquisition costs’[256] and that ‘roaming has created more work for the people and culture function in terms of hiring new employees’.[257] He does not specify what that ‘work’ comprises or how many new employees were required.
[256]McKay Statement [90] (JTB 950).
[257]McKay Statement [89] (JTB 949).
It should be noted that CML maintains its criticism that Mr Balchin did not specifically address any of the People and Culture function cost centres in his reports, notwithstanding that Professor Lyon also does not specifically address six of the eight cost centres which contributed costs to his NIMC estimate.[258]
[258]400806 Emerging Talent, 400814 Talent Acquisition and Recruitment, 400817 Leadership Development, 400818 Belonging and Wellbeing, 400819 Group Learning and Development and 400805 Development and Partnering.
The only evidence specifically directed to the cost centres ‘400817 Leadership Development’ and ‘400805 Development and Partnering’ are the initial narratives prepared by Transurban. Neither Professor Lyon nor Mr McKay specifically address them. Although Mr McKay makes specific reference in his statement to the cost centres ‘400818 Belonging and Wellbeing’ and ‘400819 Group Learning and Development’, the evidence of the activities and functions captured by them was vague and unhelpful for the purpose of assessing their relationship to the provision of the Link roaming service.
There is no evidence that CML has in fact incurred costs that it would not have incurred but for the provision of the Link roaming service.
If I am wrong and CML has incurred additional costs of providing the Link roaming service which are captured in these cost centres, I find that there is no proper basis for me to estimate those costs and I allow nil for them.
A.2 Section 2 Cost Centres
There are 30 cost centres addressed in section 2 of Appendix C.
CML submits that, based on CML’s lay evidence and Professor Lyon’s reports, ‘the amount that represents the NIMC should also include some amount in respect of each of these cost centres’. For the reasons that follow, I reject that submission.
Each of the costs centres is identified in a table in Appendix C which describes:
(a)the ‘activities and functions’ in a single sentence that has been drawn from Transurban’s initial narratives for each cost centre;
(b)the total cost centre value in 2019; and
(c)the amount that Professor Lyon included in his NIMC (floor) estimate for 2019.
CML did not otherwise make any submissions to explain how any of these cost centres house costs that were additional costs incurred by CML providing the Link roaming service.
Professor Lyon provided a brief opinion in relation to three of the 31 Section 2 Cost Centres in his reports. CML says that he addressed these cost centres ‘at length’. He did not.
(a)His analysis of ‘400600 Risk’ was limited to the remark that:
[t]he costs providing the risk and health and safety function is likely to scale with the size of the workforce, complexity of the services and systems, which [he] expect[s] to increase due to the Link roaming service.[259]
[259]First Lyon Report, Appendix 4, Sample 35 (JTB 136).
The basis of his expectation is unclear.
(b)His analysis of ‘400001 Accounting General’ was limited to:
[a]ll of CityLink and Linkt Melbourne staff bonuses and incentives sit within this account. Therefore, in [his] opinion, a [sic] port of these staff costs and bonuses will scale with the additional function, service requirements and performance as a result of the provision of the Link roaming service to ConnectEast. [260]
[260]First Lyon Report, Appendix 4, Sample 21 (JTB 108).
Again, he provides no analysis of why these costs would scale as he opines.
(c)His analysis of ‘110430 Toll Notices’ was limited to:
this cost account is [sic] factor of the number of journeys/transactions; meaning that in the absence of the Link roaming service some portion of these costs could be avoided...[261]
[261]First Lyon Report, Appendix 4, Sample 38 (JTB 142).
There is no analysis of what portion of the costs could be avoided.
CML says Professor Lyon also made comments about the additionality of other cost centres in his reply report. However, that is a mischaracterisation of the evidence. Professor Lyon merely provides a single sentence description of some of these cost centres without elucidating to any degree how they bear a relationship to the Link roaming service.
CML highlights five cost centres which it says were ‘addressed’ by one of its lay witnesses. For example, CML relies on Mr Jackson’s evidence to assert that the cost centre ‘400508 Customer Data’ houses costs which are additional to the Link roaming service. Mr Jackson’s evidence in this respect is limited to identifying that this cost centre provides ‘a reporting capability for the whole customer function’ which he says ‘drives various programs and reports internally’,[262] and it ‘capture[s] activities undertaken for the purpose of ensuring that customer accounts are in good health’, explaining that a ‘key role of this function is the identification of customers that need to be communicated with in relation to account health and suspension’.[263] It is unclear on what basis it is said that these functions or the costs of them increase as a result of providing the Link roaming service. CML makes no submissions addressing any nexus between the activities captured by this cost centre and the Link roaming service.
[262]Jackson Statement [122] (JTB 851).
[263]Jackson Statement [108], [108(g)] (JTB 846-847).
Another example is CML’s reliance on Mr McKay’s evidence concerning the cost centre ‘400409 GM of Finance’ (GM refers to ‘General Manager). Mr McKay says that:
[t]he provision of the finance and accounting services associated with the roaming service to ConnectEast is part of the day-to-day operation of the business and necessarily forms part of the matters dealt with by the GM of Finance.[264]
[264]McKay Statement [101] (JTB 952).
He concludes that:
[t]he cost of the services provided by the GM of Finance that support the business more generally scale (indirectly) with the roaming service. This is because roaming makes the business larger and more complex and presents specific risks, which requires greater skill in management.[265]
[265]McKay Statement [102] (JTB 952).
Again, that evidence is limited, vague and does not disclose any causal connection between the activities described and any costs incurred by CML providing the Link roaming service.
Mr Balchin explained his reasons for not including any amounts from ‘400409 GM of Finance’ (and various other corporate cost centres) in his NIMC estimate, as follows:
In terms of other corporate costs – such as for the CEO, accounting and finance and so forth – I have not made any allowance for such items. In my view, it is reasonable to assume that if any material costs had resulted in such corporate functions as a consequence of providing the roaming service to ConnectEast that there would be evidence of the activities performed and quantum of cost this entailed. However, no such evidence has been provided in response to my requests. Moreover, in my view, the fact that the roaming service is relatively simple and has now been provided for a long period of time during which the service has remained unchanged provides further grounds to adopt a presumption that no costs of a material nature would have been caused in these wider corporate activities.[266]
[266]First Balchin Report [47] (JTB 172). See also Reply Balchin Report [4(a)(ii)] (JTB 706-707).
There is no evidence that costs were incurred by CML that are captured by any of the Section 2 Cost Centres that would not have been incurred but for the provision of the Link roaming service.
If I am wrong and CML has incurred additional costs captured in any of the Section 2 Cost Centres, I find that there is no proper basis for me to estimate those costs and I allow nil for them.
2
8
0