Queensland Power Trading Corporation T/a Enertrade and Australian Securities and Investments Commission
[2005] AATA 945
•28 September 2005
Administrative
Appeals
Tribunal
DECISION AND REASONS FOR DECISION [2005] AATA 945
ADMINISTRATIVE APPEALS TRIBUNAL )
) No Q2004/992
GENERAL ADMINISTRATIVE DIVISION ) Re QUEENSLAND POWER TRADING CORPORATION T/A ENERTRADE Applicant
And
AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION
Respondent
DECISION
Tribunal Senior Member B J McCabe Date28 September 2005
PlaceBrisbane
Decision 1. The respondent’s decision of 6 December 2004 to reject the application for an exemption from the obligation to hold an Australian Financial Services Licence under Chapter 7 of the Corporations Act 2001 is affirmed.
2. The respondent’s decision of 6 December 2004 ought to be varied with respect to the issue of interim relief beyond 31 October 2005. The question of interim relief beyond 31 October 2005 for the purpose of the applicant transitioning to the Financial Services regime and obtaining an Australian Financial Services Licence is remitted to the respondent.
...................[Sgd]............................
SENIOR MEMBER
CATCHWORDS
CONSTITUTIONAL LAW – State and Commonwealth constitutional relationships – government owned corporations in the state of Queensland – statutory government owned corporations – company government owned corporations – claim of Crown immunity -– applicant and its subsidiaries entitled to invoke Crown immunity as instrumentalities of the Crown in right of the state of Queensland - applicant and its subsidiaries not subject to the provisions of Chapter 7 of the Corporations Act.
CORPORATIONS – Regulation – obligation to hold Australian Financial Services Licence – exemption from holding Australian Financial Services Licence – applicant dealing in electricity derivatives – inadequate alternative regulation – applicant and subsidiaries not exempt from obligation to hold Australian Financial Services Licence.
Government Owned Corporations Act 1993 (Qld) ss 1, 17, 15, 65, 67, 69, 71, 73, 82, 92, 114, 118, 117 122, 123, 124, 133, 140, 171
Corporations Act 2001 (Cth) ss 5A, 5F, 764A, 766A, 911A, 912A, 926A
Corporations Regulations 2001 (Cth) para 7.6.01
Government Owned Corporations (AUSTA Wind-up) Regulation 2000 (Qld)
Government Owned Corporations Regulation 2004 (Cth)
Government Owned Corporations Act 1993 (Qld) ss 1, 5F, 7, 11, 15, 20, 67, 69, 71, 73, 82, 92, 114, 118, 122, 123, 124, 133, 140, 149, 171
Financial Administration and Audit Act 1977 (Qld)
Electricity Act 1994 (Qld) s 3
Queensland Investments Corporation Act 1999 (Qld) s 11
Railways Act 1914 (Qld) s 8
Victorian Arts Centre Act 1979 (Vic) s 4
Development Act 1993 (SA) s 49
South Australian Health Commission Act 1976 (SA)
Electricity Trust of South Australia Act 1946 (SA) s 15
Crime and Misconduct Act 2001 (Qld) s 4
Ombudsman Act 2001 (Qld) s 5
Re Adams and the Tax Agents’ Board (1976) 12 ALR 239; (1976) 1 ALD 251; (1976) 7 ATR 87 AATA
Trajkovski v Telstra Corporation Ltd (1998) 81 FCR 459; (1998) 153 ALR 248; (1998) 27 AAR 21
The King v Hickman; ex parte Fox and Clinton (1945) 70 CLR 598; (1945) 19 ALJR 246
NT Power Generation v Power and Water Authority (2004) 210 ALR 312; (2004) 79 ALJR 1; (2004) ATPR 42-021; [2004] HCA 48
Lange v Australian Broadcasting Corporation (1997) 189 CLR 520; (1997) 145 ALR 96; (1997) 71 ALJR 818; [1997] 10 Leg Rep 2; (1997) Aust Torts Reports 81-434; [1997] HCA 25
Deputy Commissioner of Taxation v State Bank of NSW (1992) 174 CLR 219; (1992) 105 ALR 161; (1992) 66 ALJR 250; (1992) 92 ATC 4079; (1992) 23 ATR 1; [1992] HCA 6
South Australia v Corporation of the City of Unley (1997) 68 SASR 511
Inglis v Commonwealth Trading Bank (1969) 119 CLR 334; [1970] ALR 241; (1969) 43 ALJR 330
Re Anti-Cancer Council of Victoria (1992) 175 CLR 442; (1992) 109 ALR 240; (1992) 66 ALJR 817; (1992) 44 IR 382
The Electricity Trust of South Australia v Linterns Limited [1950] SASR 133; [1950] ALR 551
Bradken Consolidated Ltd v Broken Hill Proprietary Co. Ltd (1979) 145 CLR 107; (1979) 24 ALR 9; (1979) 53 ALJR 452; (1979) ATPR 40-106
Townsville Hospitals Board v Townsville City Council (1982) 149 CLR 282; (1982) 47 LGRA 64; (1982) 42 ALR 319; (1982) 56 ALJR 789
The Federated Municipal and Shire Council Employees’ Union of Australia v The Lord Mayor, Aldermen, Councillors and Citizens of the City of Melbourne (1919) 26 CLR 508; (1919) 25 ALR 309
State Superannuation Board v Trade Practices Commission (1982) 150 CLR 282; (1982) 44 ALR 1; (1982) 57 ALJR 89; (1983) 1 ACLC 593; (1982) ATPR 40-326
Paul Dainty Corporation Ltd v National Tennis Centre Trust (1990) 22 FCR 495; (1990) 94 ALR 225; (1990) ATPR 41-029
Water Conservation and Irrigation Commission (NSW) v Browning (1947) 74 CLR 492; [1948] 1 ALR 89; (1947) 21 ALJR 105
Drake v Minister for Immigration and Ethnic Affairs (No 1) (1979) 2 ALD 60; (1979) 24 ALR 577; (1979) 46 FLR 409
REASONS FOR DECISION
28 September 2005 Senior Member B J McCabe
introduction
1. Queensland Power Trading Corporation (trading as Enertrade) is the applicant in these proceedings. Enertrade is a government-owned corporation (GOC) established under the Government Owned Corporations Act 1993 (Qld). It carries on business as a wholesale energy trader. The corporation necessarily deals in electricity derivatives to manage its risk. Electricity derivatives are financial products within the meaning of s 764A(1) of the Corporations Act 2001 (Cth) (the Act). A person who deals in financial products provides a financial service: s 766A. Section 911A of the Act says a person carrying on a financial services business must hold an Australian Financial Services Licence (AFSL) unless an exemption is given. Licence-holders are subject to a number of obligations referred to in Chapter 7 of the Act.
2. Enertrade does not hold an AFSL. It says Chapter 7 of the Act (which includes s 911A) does not apply because the corporation is an agency or instrumentality of the state of Queensland. In the alternative, it says the Australian Securities and Investments Commission (ASIC) should exercise its discretion to exempt the corporation and its subsidiaries from the requirement to hold an AFSL.
3. ASIC has declined to confirm Enertrade is entitled to be considered as the Crown or one of its instrumentalities. ASIC says it is not in the business of giving legal advice: if the applicant is confident it is not subject to the Act, it need not apply for a licence – although if ASIC subsequently forms the view Enertrade is wrong and is therefore acting in contravention of the Act, ASIC reserves its right to take action.
4. I will deal with the question of the applicant’s relationship with the Crown after briefly describing the applicant, its corporate relationships, the regulatory framework affecting GOCs and the industry within which it operates. I will also consider whether or not the discretion to grant exemption ought to be exercised in favour of the applicant or its subsidiaries.
5. ASIC has made two decisions: it has refused Enertrade’s application for an exemption, and it has made a decision with respect to interim relief. The applicant has asked the Tribunal to reconsider both questions.
evidence
6. The Tribunal was provided with the documents required under s 37 of the Administrative Appeals Tribunal Act 1975. The following documents were also tendered in evidence:
· Statement of Rachel Maree Pease dated 11 February 2005 (exhibit 2);
· Supplementary statement of Rachel Maree Pease dated 25 February 2005 (exhibit 3);
· Supplementary statement of Rachel Maree Pease dated 16 March 2005 (exhibit 4);
· Statement of Derek Andrew McKay dated 11 February 2005 (exhibit 5);
· Supplementary statement of Derek Andrew McKay dated 15 March 2005 (exhibit 6);
· Statement of Lucienne Priscilla Layton dated 25 February 2005 (exhibit 7); and
· Statement of Jane Fitzpatrick dated 21 March 2005 (exhibit 8).
7. Mr Hinson SC represented the applicant. Ms Brennan of counsel appeared for the respondent.
8. The matter was heard in two stages. The material was filed and the parties made submissions on 29-30 March 2005. I adjourned the matter to prepare my decision. After I drafted the reasons but before I handed down a decision, I decided it was appropriate to resume the hearing so I could discuss what orders should be made. Immediately prior to the resumed hearing, I provided the parties with draft reasons in order to facilitate the discussion. Mr Hinson and Ms Brennan made submissions in relation to the scope of the orders. Mr Hinson also sought leave to make further submissions on the question of whether or not Chapter 7 of the Corporations Act applied to Crown instrumentalities. He argued that my draft reasons did not squarely address that issue. He also asked to be heard in relation to a line of authorities I had referred to in my draft reasons.
9. I agreed to entertain further written submissions on the question of the applicant’s relationship with the Crown before handing down my decision. I thought it appropriate to do so out of fairness to the applicant, and because I had not had the benefit of comprehensive argument on the issue at the original hearing given ASIC’s view that it was inappropriate for an administrative decision-maker to determine the question. Both parties subsequently filed written submissions.
the power industry and enertrade’s role
10. Vertically integrated state-owned entities carried on most of the business of generating and distributing electricity in each state prior to the 1990s. The Hilmer Report noted in 1992 that there were substantial gains to be had from operating these industries more efficiently. In due course, the Commonwealth and the states and territories agreed to a reform program that was ultimately embodied in the National Competition Policy (NCP) agreements.
11. One object of the NCP was the creation of a competitive national electricity market. That process was facilitated by earlier agreements amongst a number of states to connect their electricity grids. But the Hilmer Report noted competition might be inhibited if vertically integrated power businesses could use their control over the transmission grid to exclude competing generators: see National Competition Policy: Report by the Independent Committee of Inquiry, Commonwealth of Australia, (1993) at 241. As a result, the NCP provided for a change in the way the electricity industry was run in each jurisdiction. The old statutory monopolies were broken up. Generation and distribution businesses were separated. In some states, electricity assets were sold off to the private sector. Other states (including Queensland) established new state-owned entities to carry on the separate businesses of generation and distribution.
12. Queensland’s state-owned power business was divided into three generating companies in 1997 (CS Energy, Stanwell Corporation and Tarong Energy), a transmission company (Powerlink, which operated the high voltage transmission system), and two distributors (Energex and Ergon Energy). The applicant was established as a transitional body at the same time to facilitate the restructure.
13. Enertrade did not have any generating assets of its own when it was established. It was conceived as a holding company that would take over responsibility for assets and obligations of other companies in the industry: see the Government Owned Corporations (AUSTA Wind-up) Regulation 2000 (Qld). A description of the obligations and liabilities is included in the affidavit of Jane Fitzpatrick (exhibit 8). For example, Enertrade took over management of contaminated land and liabilities associated with asbestos. It also took over a number of power purchase agreements under which it was obliged to buy power on unfavourable terms from privately owned generators under long term contracts. The other generating entities were relieved of the burden of the contracts, which permitted them to operate on a more profitable basis. The applicant traded the power it acquired under the power purchase agreements on the national electricity market. It has also sold power directly to clients. Profits from trading have been offset against the losses on the power purchase agreements.
14. Enertrade has acquired generating assets of its own in more recent times. It was chosen to develop and operate a new gas-fired power station in North Queensland in July 2002. The project involves the construction and operation of a natural gas pipeline. Profits from those activities are expected to reduce the losses Enertrade will sustain over the next few years. Some of these projects are carried on through subsidiary companies.
15. Enertrade is saved from insolvency by a set of financial arrangements with the Queensland Treasury.
16. Section 33(1) of the Government Owned Corporations Regulation 2004 sets out a formal list of Enertrade’s functions. I note regulation 33(1)(d)(ii) contemplates Enertrade “dealing in instruments that minimise the risks”.
enertrade’s legal structure
17. Enertrade is a GOC established under the Government Owned Corporations Act 1993 (Qld) (the GOC Act). Section 7 of the GOC Act provides for two different species of GOC: the statutory GOC established as a body corporate which is not registered under the Corporations Act (s 7(2)), and a company GOC established or registered under the Corporations Act (s 7(3)). Enertrade is a statutory GOC, whereas CS Energy, Stanwell Corporation, Tarong Energy, Powerlink, Energex and Ergon Energy are all company GOCs (exhibit 8).
18. Chapter 3 of the GOC Act describes the corporate structure of a GOC. Statutory GOCs must have a board of directors and share capital with issued shares: s 65. The statutory GOC has only two shareholders: s 71. The shares are held by the GOC Minister and the relevant portfolio minister: s 73. Section 82(1) says the state is the owner of the shares. The shares are held by the ministers on behalf of the state: s 82(2).
19. The role of the board of directors in a statutory GOC is set out in s 92. Section 92(b) charges the board with attempting to ensure the entity acts in accordance with the statement of corporate intent. The statement of corporate intent is prepared each financial year. It identifies the financial and non-financial performance targets for the entity’s activities (s 114), community service obligations (s 122) and the employment and industrial relations plan (s 171). The statement must be approved by the shareholding ministers before it becomes effective: s 118. The ministers may direct that the board consider particular matters when drafting the statement: s 117(1). The minister may ultimately direct that the board modify a statement of corporate intent: s 117(3).
20. The power of the state government over GOCs does not end there. The chief executive officer of a statutory GOC is appointed by the Governor-in-Council (s 1, Schedule 2), as are the board members: ss 1 and 11, Schedule 2. Directors may be terminated at any time by the Governor-in-Council “for any reason or none”: s 15, Schedule 1. The shareholding ministers also have reserve powers set out in Part 10 of the Act. These include the power to require the GOC to adopt a public sector policy (s 123) and the power to give directions to the board when it is in the public interest to do so (s 124). I note a statutory GOC is able to give binding directions to subsidiaries to enable the GOC to perform its role under the Act.
21. Statutory GOCs are also subject to the Financial Administration and Audit Act 1977 (Qld).
22. The board is obliged to keep the shareholding ministers informed about the operations and finances of the entity, and any difficulty in meeting its objectives: s 133. Directors are also under a duty to avoid insolvent trading: s 140.
23. One of the important differences between the two species of GOC is the extent to which they are subject to the Corporations Act. Section 7(7) of the GOC Act says company GOCs are subject to the provisions of the Corporations Act except where the GOC Act provides otherwise. (Section 69 says the same thing.) I note the GOC Act does not purport to exclude company GOCs from the operation of Chapter 7 of the Corporations Act in particular. Subject to reasons explained below, these entities are required to hold an AFSL if they engage in the business of providing a financial service.
24. The position of statutory GOCs is more complicated. Section 7(6) expressly provides the Corporations Act does not apply to statutory GOCs. (Section 67 says the same thing, in effect.) Section 5F of the Corporations Act provides a state or territory law may declare “a matter to be an excluded matter for the purposes of this section in relation to” the whole or part of the corporations legislation. ASIC appears to have accepted ss 7(6) and 67 of the GOC Act have the effect of excluding the operations of a GOC within Queensland from the operation of the Corporations Act, including Chapter 7: see respondent’s Statement of Facts and Contentions at paragraph 20. ASIC argues the GOC Act does not exempt the operations of a GOC from the Corporations Act where those operations take place outside Queensland. ASIC points out (at paragraph 26 of the Statement of Facts and Contentions) NSW government-owned enterprises that conduct wholesale electrical trading business are subject to the same approach.
25. I think ASIC is right. The GOC Act exempts the operation of a GOC from the Corporations Act when the GOC operates within Queensland. But s 5F(2) of the Corporations Act makes it clear a state or territory enactment excluding the operation of the Corporations Act is effective to exclude the operation of that Act in that state or territory. While s 11 of the GOC Act purports to extend the operation of the Act outside Queensland and s 149 enables the statutory corporation to exercise its powers outside the state, s 5F(2) of the Corporations Act means the GOC Act cannot exempt the GOC and its operations from the coverage of the Corporations Act in another state or territory. It follows a statutory GOC will be subject to Chapter 7 of the Corporations Act in relation to its activities outside the state of Queensland unless the entity is an instrumentality or agency of the Crown in right of the state of Queensland within the meaning of the Corporations Act.
26. The position of Enertrade’s subsidiaries is a little different. Those entities are not incorporated under the GOC Act. They are incorporated under the Corporations Act. I do not think the provisions of the GOC Act bring companies that are not GOCs within the scope of the exemption in s 5F of the Corporations Act. It follows that the business of each subsidiary will be subject to Chapter 7 of the Corporations Act unless the entity is properly described as the Crown within the meaning of that expression defined in s 5A of the Corporations Act.
the relationship between enrtrade and its subsidiaries and the Crown: the role of the respondent
27. We come to one of the important issues in dispute between the parties. Enertrade believes the corporation and its subsidiaries are exempted from the application of Chapter 7 of the Corporations Act because they are instrumentalities or agencies of the Crown in right of the state of Queensland within the meaning of s 5A. The applicant wants ASIC to acknowledge and confirm Enertrade and the subsidiaries are not required to obtain an AFSL as a result.
28. ASIC has declined to make a ruling or determination about Enertrade’s status. Its policy in this regard is set out in Practice Note 62 of the ASIC Digest at paragraph 49, which says:
“[ASIC] does not give rulings on whether a body is a public authority or an agency or instrumentality of the Crown…However, where:
(a) a body lodges a document with [ASIC] or applies to [ASIC] for relief; and
(b) there is a commercially significant doubt whether the body is entitled to claim direct or indirect Crown immunity,
[ASIC] will treat the document or the authority as if the Law applied…”
29. The respondent pointed out in its Statement of Facts and Contentions that it did not have express legislative power to make a determination as to the applicant’s relationship with the Crown. It argued neither ASIC nor the Tribunal were able to answer the question definitively because they are creatures of the executive that can - at most - express an opinion as to the operation of the law. The respondent says the applicant should seek a declaration from a court of competent jurisdiction if it wants a definitive answer to the question.
30. I agree ASIC and the Tribunal are unable to give a definitive ruling on whether or not Enertrade enjoys Crown immunity, or whether the applicant and its subsidiaries are instrumentalities or agencies of the Crown. A definitive ruling would require the exercise of judicial power – something the Tribunal cannot do: see, for example, Re Adams and the Tax Agents’ Board (1976) 12 ALR 239 at 245 per Brennan J. If the applicant wanted certainty in the short term, it could seek a declaration from the court. But it has not done so. It has chosen instead to persist in its application before ASIC. In those circumstances, it is incumbent on the administrative decision-maker to form an opinion as to whether or not it has jurisdiction to consider the application. The Federal Court said as much in Trajkovski v Telstra Corporation Ltd (1998) 153 ALR 248 (at 255-257 per Tamberlin J).
31. If the respondent forms the view that the applicant is subject to Chapter 7 of the Act, it should proceed to consider the substantive application for relief. If the application for relief were subsequently rejected and the applicant persisted with its activities, the respondent would presumably commence enforcement proceedings on the strength of its opinion that the applicant was carrying on prohibited activities that are not exempt from the operation of Chapter 7 of the Act. A court would definitively determine Enertrade’s status as part of those proceedings. If ASIC’s opinion were wrong, the proceedings would fail. If ASIC forms the view the applicant is definitely not subject to Chapter 7 of the Act, it should not entertain the application for relief. A decision on an application that was not properly before the respondent would be void for jurisdictional error (although if ASIC’s opinion were wrong and it erroneously refused to entertain the application for relief, that decision could be avoided upon judicial review). Of course, ASIC would be slow to reject an application on this basis given the consequences that can be visited upon a dealer in financial services who unlawfully operates without a licence.
32. The respondent referred to the decision of the High Court in The King v Hickman; ex parte Fox and Clinton (1945) 70 CLR 598. In Hickman, the legislation purported to deny the Local Reference Board’s decisions with respect to matters connected with “the coal mining industry” were subject to judicial review. The Board proceeded to take an expansive view of what constituted the coal mining industry. It argued its ruling on the question was immune to challenge. The High Court disagreed. The Court was not troubled by the Board reaching a view as to its jurisdiction. Its concern was that the Board should not be allowed to make a definitive ruling on the point that was immune to challenge. As Dixon J explained (at 618):
I do not mean to say that the Board may not, for the purpose of determining its own action, ‘decide’ in the sense of forming an opinion upon the meaning and application of the words ‘coal mining industry’. It must make up its mind whether this or that particular function on the borders of the coal mining industry does or does not fall within the conception. But it is not able to make a decision binding on the parties…
33. It seems to me the course I propose is consistent with the decision in Hickman. Forming a view on whether it has jurisdiction and proceeding to deal with the application on that basis does not amount to ASIC (or the Tribunal) exercising judicial power. Unlike the Board in Hickman, the decision-maker in this case does not pretend to have the final word on the question of jurisdiction. It does, however, have the first word.
Enertrade: the Crown, or an instrumentality of the Crown?
34. The executive governments of the Commonwealth, states and territories carry out their functions directly, through departments staffed by public servants, and indirectly, through a range of other bodies. Most of those other bodies are owned or controlled by the Crown. Some are not.
35. Difficulties sometimes arise when determining whether or not the Crown or related bodies are subject to particular legislation. As a general rule, the Crown is not bound by a statute “unless it appears by express words or by necessary implication that it was intended to do so”: Bradken Consolidated Ltd v Broken Hill Proprietary Company Ltd (1979) 145 CLR 107 at 116 per Gibbs ACJ.
36. The privileges and immunities of the Crown will extend to entities that are properly seen as the agents or representatives of the Crown in right of the state or the Commonwealth. That might occur when legislation describes an entity as the agent or representative of the state, or if the statute expressly confers on the entity the powers and immunities of the Crown. Thus in Bradken, the Commissioner of Railways was entitled to invoke Crown immunity because s 8 of the Railways Act 1914 (Qld) expressly provided the Commissioner represented the Crown and “shall have and may exercise all the powers, privileges, rights, and remedies of the Crown." The Queensland Investment Corporation (whose subsidiaries have been provided with exemptions by the respondent) is entitled to claim Crown immunity on the basis of a similar form of words in s 11 of the Queensland Investment Corporation Act 1999 (Qld).
37. The GOC Act does not expressly confer Crown immunity on GOCs established under the Act. There is no equivalent to s 11 of the Queensland Investment Corporation Act 1999.
38. An entity might attract Crown immunity in the absence of express words to that effect in a statute. If the legislation does not expressly provide for the entity to have the privileges and immunities of the Crown, it is necessary to consider whether Crown immunity can be implied. The High Court warned in Townsville Hospitals Board v Townsville City Council (1982) 149 CLR 282 that the immunity should not lightly be inferred in the case of statutory bodies. As Gibbs CJ explained (at 291):
All persons should prima facie be regarded as equal before the law, and no statutory body should be accorded special privileges and immunities unless it clearly appears that it was the intention of the legislature to confer them. It is not difficult for the legislature to provide in express terms that a corporation shall have the privileges and immunities of the Crown, and where it does not do so it should not readily be concluded that it had that intention.
39. There have been a number of cases where the courts have considered whether a statutory corporation or other entity is entitled to the privileges and immunities of the Crown. Early decisions like The Federated Municipal and Shire Council Employees’ Union of Australia v The Lord Mayor, Aldermen, Councillors and Citizens of the City of Melbourne (1919) 26 CLR 508 suggested that one should examine the activities of the entity and determine whether they formed a part of the inalienable functions of the Crown, like the provision of courts and defence: at 530-531 per Isaacs and Rich JJ. Higgins J agreed municipalities were not entitled to claim Crown immunity merely because they carry out functions desired by the public: at 538.
40. The courts have given less emphasis to the rationale for Crown exemption identified in the City of Melbourne case in more recent decisions. In State Superannuation Board v Trade Practices Commission (1982) 150 CLR 282, Mason, Murphy and Deane JJ preferred to look to the operations of the entity which was established to provide superannuation benefits to public servants. Their Honours noted the entity’s relative autonomy and the fact its funds and property were not treated as if they were the property of the state (for example, funds were never paid from the fund into consolidated revenue): at 308. In those circumstances, the court accepted the entity was not entitled to Crown immunity.
41. The rationale behind looking to the relationship between the Crown and the entity was explained in Superannuation Fund Investment Trust v Commissioner of Stamps (SA) (1979) 145 CLR 330. Stephen J said (at 348):
If a corporation is no more than the passive instrument of the Crown, subject in a high degree to control by the executive, it is appropriate enough that its acts be viewed as those of its master and that it be itself treated as the alter ego of the Crown, enjoying accordingly those immunities and privileges with which the Crown is clothed. If, on the contrary, a statutory corporation is essentially autonomous, its acts being in no sense the outcome of directions by the executive but truly its own, there will be little reason to clothe it with any of those immunities or privileges. In saying this I do not intend to suggest the need for any examination of the actual extent to which particular actions are or are not the result of the exercise of control by the executive: it is the existence of the statutory ability to control, or its absence, that is to be looked at.
42. The High Court undertook a detailed examination of the operations of the entity in question in the Townsville Hospitals Board case to determine whether or not it enjoyed Crown immunity. In that case, Gibbs CJ noted (at 289) the board of the authority and its manager were appointed by the Governor-in-Council. Senior officials working for the board could not be dismissed without the permission of the director-general of the Department of Health. The board had the power to enter into contracts within certain limits, and its budget had to be approved by the Governor-in-Council. The budget apparently contemplated that operating funds would be allocated by the treasury and any surplus at the end of the financial year was paid into a central fund managed by the state government. His Honour noted (at 290-291) in particular that the authority – not the state Crown - was liable in respect of its own borrowings and other financial arrangements, even though the approval of the treasurer and the relevant minister was required before borrowing.
43. His Honour concluded (at 292) the authority was not entitled to the privileges and immunities of the Crown even though the state executive was able to exercise a number of controls over the operations of the entity. Murphy, Wilson and Brennan JJ agreed.
44. The Full Federal Court considered Townsville Hospitals Board in Paul Dainty Corporation Ltd v National Tennis Centre Trust (1990) 94 ALR 225. Woodward, Northrop and Sheppard JJ examined the governance of a number of public bodies claiming Crown immunity in a dispute. The court also considered the relationship between the entities and the minister. Their Honours noted (at 250) the Victorian Arts Centre Trust (one of the entities concerned) had the power to enter into contracts for the provision of services with the consent of the minister, and that the entity’s board and senior management were appointed by the Governor-in-Council. Their Honours also note s 4(2) of the Victorian Arts Centre Act 1979 (Vic) charged the trust with the management of the centre “subject to the general direction and control of the Minister”.
45. After reviewing the governance arrangements and relationships and the decision in Townsville Hospitals Board, the Full Court concluded the entities in question were not entitled to claim Crown immunity – at least in relation to the commercial conduct under consideration. Their Honours conceded the question was a difficult one but they were influenced by the observation of Gibbs CJ in Townsville Hospitals Board to the effect that parliament could have readily provided for Crown immunity if that result had been intended. Their Honours explained (at 251):
None of these enabling or reserve powers of the Governor in Council or the Minister compensate, in our view, for the absence of any expression of legislative intent that a body in the position of OPM, under the relevant legislation, should be subject to the control of the executive in carrying out those of its functions which are relevant for present purposes.
46. The Court left open the question of whether or not Crown immunity might have been available in relation to conduct that could not be characterised as the provision of a commercial service (eg, if the conduct was in truth giving effect to the directions of the minister in relation to a community service obligation). I note Gibbs CJ left the same question open in Townsville Hospitals Board. His Honour’s decision in that case focused on whether engaging in building operations (as opposed to other functions that a hospital might perform) attracted Crown immunity. The High Court subsequently confirmed in Deputy Commissioner of Taxation v State Bank of New South Wales (1992) 174 CLR 219 (at 230) that some of the functions of an entity might attract Crown immunity while others did not. The High Court added in that case (at 230) there was no reason why a statute could not extend the privileges and immunities of the Crown to a private corporation in respect of some or all of its functions.
47. Is Enertrade entitled to Crown immunity? I have already noted the GOC Act does not expressly confer the privileges and immunities of the Crown on GOCs. But is the applicant entitled to Crown immunity by implication?
48. I have described the governance arrangements of the applicant and its relationships with the executive. I note in particular that the applicant’s finances, while subject to external audit, are nonetheless very much the concern of the board – to the extent that individual board members may be liable if the entity engages in insolvent trading. Enertrade’s liabilities are not treated as state liabilities, and its revenue is not derived from the state or paid directly into the state’s coffers other than by way of dividend. Evidence was given that the state has entered into arms’ length relationships with respect to the corporation’s finances. That factor suggests a distance between the Crown and the entity. The Crown’s financial commitment relates to obligations incurred under the power purchase agreements but does not extend to the entity’s debts incurred in the course of other activities. The entity’s control over its own finances was regarded as an important indicator that it did not act as part of the Crown in Townsville Hospitals Board and State Superannuation Board. Enertrade appears to enjoy even more independence in this respect than the authority in Townsville Hospitals Board in particular.
49. Statutory corporations created under the GOC Act enjoy less independence from the executive than company GOCs, but they still enjoy wide autonomy – at least as wide as the authority in Townsville Hospitals Board or the entities in Paul Dainty. It is true the GOC Act provides for reserve powers that enable the minister to give binding directions and impose community service obligations. I do not think that is enough to tip the balance in favour of a claim of Crown immunity. In any event, there is no evidence any of the commercial trading activities which attract the operation of Chapter 7 of the Corporations Act have taken place pursuant to a ministerial direction or community service obligation. Even if a statutory GOC giving effect to a ministerial direction or a community service obligation could be said to attract Crown immunity in respect of those activities, I am not satisfied the entity is entitled to make that claim with respect to the commercial activities under consideration in this case.
50. The GOC Act could have made express provision if the parliament intended that Crown immunity be available. I note the parliament has done so in respect of other state-owned enterprises, like the Queensland Investment Corporation.
51. In all the circumstances I am satisfied Enertrade is not the Crown in right of the state of Queensland, or an agent of the Crown. Enertrade’s wholly-owned subsidiaries - which are in incorporated under the Corporations Act, not the GOC Act - are not entitled to claim the privileges or immunities of the Crown either.
52. That is not the end of the issue. The applicant emphasised in its supplementary submissions that it was not claiming to be the Crown in right of the state of Queensland. It added it was not purporting to be an agent or to otherwise enjoy the privileges and immunities of the Crown. The applicant argued instead that it was an instrumentality of the Crown in right of the state of Queensland and that it was exempt from Chapter 7 of the Corporations Act by reason of the operation of s 5A(4).
53. Section 5A says, relevantly:
(1) To avoid doubt, a reference in this section to the Crown in a particular right includes a reference to an instrumentality or agency (whether a body corporate or not) of the Crown in that right.
…
(4) A provision of Chapter 6CA or 7 only binds the Crown in a particular capacity in circumstances (if any) specified in the regulations.
54. The applicant argues s 5A(1) extends the concept of the Crown to include a variety of bodies that might otherwise fall outside that definition for the limited purpose of determining whether portions of the Corporations Act are applicable. Mr Hinson cited a number of authorities including NT Power Generation v Power and Water Authority [2004] HCA 48 at paragraphs 163-164 and Lange v Australian Broadcasting Corporation (1997) 189 CLR 520 at 561 in which the High Court has indicated that references to “the Crown” or “the state” should be read as references to the executive government (as opposed to the legislature or the judiciary) in appropriate cases. Mr Hinson says this is one of those cases.
55. While s 5A(4) purports to exempt the Crown from the operation of Chapter 7 of the Corporations Act, Enertrade argues it is wrong to approach the issue at hand by asking whether or not Enertrade is the Crown or enjoys Crown immunity. To do that risks answering questions over the applicant’s status under the Corporations Act “by reference to a doctrine which has evolved with the object of answering questions of a different kind”: Deputy Commissioner of Taxation v State Bank of New South Wales (1992) 174 CLR 219 at 230 per Mason CJ, Brennan, Deane, Dawson, Toohey and Gaudron JJ. Enertrade suggests the section has the effect of conferring a limited form of instrumentality immunity.
56. The leading authority in relation to instrumentality immunity is South Australia v Corporation of the City of Unley (1997) 68 SASR 511. That case considered a provision in the Development Act 1993 (SA) exempting state agencies from certain planning procedures. The expression “state agencies” was defined in s 49 to include “an agency or instrumentality of the Crown”. The question arose as to whether a health service provider incorporated pursuant to the South Australian Health Commission Act 1976 (SA) was a state agency that did not require planning permission under the Development Act. The Full Court of the Supreme Court of South Australia concluded the entity was a state agency because it was an instrumentality.
57. Matheson J wrote the leading judgment. After reviewing the South Australian Health Commission Act 1976, the constitution of the entity in question and the authorities, his Honour said (at 525):
…the critical question on the authorities is not really whether the Centre's function is traditionally a Government function, but whether the Centre is empowered to, and does, carry out a Government purpose or activity. It does not have to be a servant or agent of the Crown to do that.
58. Mr Hinson also referred to the decision of the High Court in Inglis v Commonwealth Trading Bank (1969) 119 CLR 334. In that case, Kitto J distinguished (at 338, 341) between an entity which was a vehicle for the Commonwealth to operate in a particular field of activity and an entity that carried on its functions independently of the Commonwealth.
59. It follows one does not ask whether Enertrade and its subsidiaries were brought into existence to carry on a function that is traditionally or appropriately reserved to government: Inglis, at 337-338 per Kitto J. Reasonable minds may well differ on that question. One asks instead whether the state of Queensland wishes to involve itself in the business of wholesaling electricity and uses Enertrade and its subsidiaries as means to that end.
60. One does not establish the state’s intention to involve itself in an industry by simply pointing to the fact the state has established an entity that trades in that industry. Not every entity that is owned or controlled by the executive government is necessarily an instrumentality of the Crown. One must identify an intention on the part of the state to participate through the medium of the corporation: see Inglis at 338 per Kitto J. That intention will be found - if it is to be found - in the relevant legislation.
61. In Inglis, Kitto J noted the legislation establishing the various entities of the Commonwealth Banking Corporation instructed the board to pursue policies “directed to the greatest advantage of the people of Australia” and said it should “have due regard to the stability and balanced development of the Australian economy.” His Honour concluded (at 340):
“…the policies of those banks and the Banking Corporation which staffs them shall be directed wholly and solely to ends which are of the essence of the central (ie the federal) government of the country.”
62. His Honour went on to explain that the entities created by the legislation formed part of an integrated system of government banking. The executive government clearly intended to involve itself in that business, and chose to do so through the media of the various entities that together comprised the Commonwealth Banking Corporation.
63. In South Australia v Corporation of the City of Unley, Matheson J discussed the provisions of the South Australian Health Commission Act 1976. His Honour noted s 16 charged the Commission with responsibility for promoting “the health and well-being of the people of this state…” and included a power to establish entities that would provide health services. The constitution of the entity in question made it clear the entiy was intended to carry out the public functions entrusted to it by the Commission. In those circumstances, there was little doubt the entity was an instrument of the executive: see also Re Anti-Cancer Council of Victoria (1992) 175 CLR 442 at 448 per Mason CJ, Brennan and Gaudron JJ.
64. Matheson J also referred to The Electricity Trust of South Australia v Linterns Limited [1950] SASR 133. That case concerned the status of the entity established by the state government to take over the assets of an electricity company and to manage coal assets. Ligertwood J considered the provisions of the Electricity Trust of South Australia Act 1946 (SA) and referred in particular to s 15 which said the entity “shall hold its assets for and on account of the Crown” and instructed it to “administer this Act in such manner as in its discretion it deems to be best in the interests of the general public.” His Honour concluded (at 139-140):
“By virtue of s 15 of the Electricity Trust of South Australia Act, the Crown is the owner of the undertaking for the supply of electricity and the mining of coal in South Australia. The Trust serves the purposes of the Crown in managing the undertaking and in making electricity and coal available for the public. It exercises its functions on behalf of the Crown and is the means or agency for managing the Crown asset….it serves the purpose of the Crown in managing Crown assets in the interests of the public.”
65. What does the legislation tell us about the intentions of the state of Queensland with respect to the applicant and its subsidiaries? Section 5 of the GOC Act refers to GOCs as “government entities”. Sections 15-21 outline the objectives of the Act. Those provisions refer in particular to the efficient and effective management of government assets. Taken as a whole, one could infer the GOC Act – informed as it is by the National Competition Policy - suggests an intention to better manage Crown assets in the interests of the public through corporatised entities.
66. The Government Owned Corporations (AUSTA Wind-Up) Regulation 2000 does not really shed any light on the government’s intention. It is merely a transitional device that effects the rearrangement of the electricity industry in accordance with the reform agenda of the government of the day. Division 9 of the Government Owned Corporations Regulations 2004 refers to Enertrade’s functions but not its objectives. Taken together, the regulations form part of a reform package under which the applicant was established to take over the obligations – many of them onerous – that were previously borne by other entities within the power industry.
67. I was not referred to the provisions of the Electricity Act 1994 (Qld), but for the sake of completeness I note s 3 says the objects of the Act are to:
(a) set a framework for all electricity industry participants that promotes efficient, economical and environmentally sound electricity supply and use; and
(b) regulate the electricity industry and electricity use; and
(c) establish a competitive electricity market in line with the national electricity industry reform process; and
(d) ensure that the interests of customers are protected; and
(e) take into account national competition policy requirements.
68. That Act evinces an intention to regulate the electricity industry, but it says little about the activities of the government as a participant either in its own right or clothed in the legal form of another entity.
69. When one considers the GOC Act in context and has regard to the ongoing financial commitment of the government, it seems likely the applicant is an instrumentality of the Crown in right of the state of Queensland. If that is so, I would also regard the subsidiary companies as instrumentalities on the basis that they are carrying out parts of Enertrade’s functions on behalf of the Crown.
70. If the applicant is in fact exempt from the operation of Chapter 7 of the Corporations Act on the basis of s 5A, the respondent’s decision to reject the application for an exemption ought to be affirmed. If Chapter 7 does not apply, there is no obligation to hold a licence and the respondent has no jurisdiction to issue a licence or grant relief from the obligation to hold one.
71. While I have formed a view about the applicant’s status, I am conscious that it is merely an administrative decision-maker’s view. The question can only be definitively resolved by a court. I have already indicated I think administrative decision-makers are obliged to form a view as to whether they have jurisdiction – but I also suggested they should hesitate before excluding an application to participate in a licensing regime where there is doubt. In the absence of a declaration from the court, I will proceed to consider the application for an exemption.
the power to grant exemptions
72. Section 911A(1) imposes an obligation to hold an AFSL. Section 911A(2) sets out the circumstances in which a person is exempted from complying with sub-section (1). Those circumstances include a decision by ASIC to specify that a service is exempt from the requirement to hold an AFSL: s 911A(2)(l). If ASIC makes a determination to that effect, the exemption must be in writing and published in the Gazette.
73. ASIC’s decision was communicated in its letter to the applicant dated 6 December 2004 (document T11 at p 76). The letter and the statement prepared pursuant to s 37 of the Administrative Appeals Tribunal Act 1975 (document T2 at p 9) both refer to an exercise of the power to exempt under s 911A(2)(l) of the Corporations Act. The applicant also referred to s 926A which gives ASIC the power to grant exemptions from many provisions in Part 7.6 - including s 911A. Section 926A(2) provides:
(2) ASIC may:
(a) exempt a person or class of persons from all or specified provisions to which this section applies; or
(b) exempt a financial product or class of financial products from all or specified provisions to which this section applies; or
(c) declare that provisions to which this section applies apply in relation to a person or financial product, or a class of persons or financial products, as if specified provisions were omitted, modified or varied as specified in the declaration.
74. If ss 911A and 926A are read in isolation from each other, they appear to confer separate powers to exempt an entity from (amongst other obligations) the obligation to hold an AFSL. ASIC has not addressed this issue squarely. It has confined itself to arguing about a decision under s 911A(2)(l). The applicant argued in paragraph 7 of its Reply to the Respondent’s Statement of Facts and Contentions that s 926A is the source of ASIC’s power to exempt the applicant from the requirement imposed in s 911A (although I note the applicant was equivocal on this point in the written submissions lodged with the Tribunal). This approach suggests the two sections should not be read in isolation. Rather, the decision to grant an exemption is made under s 926A while s 911A recognises the obligation to hold an AFSL does not apply where ASIC has given an exemption.
75. I agree s 926A is the source of ASIC’s power to grant exemptions from the obligation imposed in s 911A(1) to hold an AFSL. As a formal matter, the decision to grant the exemption referred to in s 911A(2)(l) is made in exercise of a power conferred under s 926A. To hold otherwise would be to suggest there are two overlapping powers to exempt: one in s 911A(2) and one in s 926A. That would be a surprising result.
76. It makes little difference in practice whether the decision to exempt is made pursuant to s 911A(2) or s 926A. There is no reason to assume a decision-maker would approach the question differently if he or she considered relief in the context of s 926A instead of s 911A as neither section refers to criteria governing the exercise of the discretion. ASIC has devised its own policies to guide the exercise of its discretion to grant relief. PS 51 Applications for relief is reproduced at T12 p 79 and PS 167 Licensing: Discretionary powers and transition is reproduced at T14 p 114. ASIC has dealt with the matter as if the exemption were granted under s 911A; for the sake of convenience, and notwithstanding my conclusions about the relationship between ss911A and 926A, I will do the same.
what the parties say about the desirability of granting an exemption
77. The applicant’s submissions to ASIC on the exemption issue are contained in a letter from its solicitors dated 1 October 2003 (document T3 at p 20). The applicant elaborates on the reasons in a further letter dated 5 March 2004 (document T7 at p 57). Both letters deal with the arguments about Crown immunity and exemption from the Corporations Act by reason of s 5F that I have already discussed. They both go on to refer to commercial grounds and policy grounds justifying the grant of an exemption.
78. The discussion of the commercial grounds commences with a concession in relation to Enertrade’s financial position. The company is expected to continue making substantial losses on the various power supply agreements it took over from other entities. It has an arrangement with Queensland Treasury Corporation to provide working capital until 2029 and it has received an additional $410 million from its shareholding ministers in the two years ending 30 June 2004 (see affidavit of Jane FitzPatrick annexure JF2 at 32). Enertrade would be insolvent but for the ongoing support of the Queensland government.
79. The commercial grounds in favour of granting an exemption can be summarised as follows:
·Enertrade’s financial position is such that it may have difficulty meeting the obligation set out in s 912A(1)(d) that it have adequate financial resources to provide the financial services covered by the licence.
·An exemption would obviate the need to explain to sceptical counterparties that Enertrade is not covered by the Act (although that argument assumes Enertrade is not in fact covered by the Act – a proposition I do not accept for reasons I have already explained, at least in relation to its interstate activities).
·If the Act applies and Enertrade does not receive an exemption, the applicant will effectively be required to maintain two separate compliance regimes – one relating to interstate activities and the other relating to the protected intrastate activities - or else accept that the whole of its operations must be “FSR compliant” (ie, complying with the Chapter 7 regime). Enertrade would have to incur significant costs associated with achieving compliance in any event.
·The letters also foreshadow the possibility that Enertrade might cease to deal in derivatives, thereby increasing the risk to Queensland taxpayers.
80. The policy grounds for granting an exemption are summarised as follows:
·Statutory GOCs are required to operate within an established regulatory regime established by the Queensland government. There is no benefit in requiring Enertrade to conform to a different regime under the Corporations Act.
·There is no danger to consumers if Enertrade continues within its current framework. The entity only deals with wholesale customers whose interests are protected by the Queensland government’s commitment to meet obligations under the power purchase agreements.
·Enertrade would be able to rely on the exemption to reassure its counterparties. It would not need to change its operations or operational procedures and could continue business as before.
81. ASIC summarised its reasons for declining to give the exemption in its letter to the applicant of 6 December 2004:
·Granting Enertrade permanent relief from holding an AFSL would be inconsistent with Parliament’s intent;
·The statutory framework for Enertrade does not demonstrate that its activities are subject to adequate alternative regulation;
·Permanent relief does not adequately manage the regulatory risks arising from the activities of Enertrade, including the regulatory risk arising from the transactions with other participants and counterparties in the electricity market; and
·Permanent relief will provide Enertrade with an unfair advantage in relation to other participants in the electricity market who are required to hold an AFSL.
82. ASIC elaborated on these reasons in its s 37 statement. It referred to PS 167 and noted (at T2 p 11) it would consider granting relief to address atypical, unforseen circumstances or unintended consequences of the licensing provisions of the Act. It added it would exercise its powers having regard to:
… the regulatory goals of:
·Promoting consumer confidence in using financial services;
·Promoting the provision of efficient, honest and fair financial services by all licensees and their representatives; and
·Supporting confident use of the financial markets by consumers and market participants.
83. These goals are referred to at paragraph 167.3B of PS 167: Licensing: Discretionary powers and transition.
84. The applicant’s outline of argument tendered at the hearing focuses on the respondent’s reasons for denying the exemption. That is useful, but the Tribunal does not simply review the adequacy of the primary decision-maker’s reasons. The Tribunal must make its decision de novo. It is therefore necessary to consider afresh the reasons for and against exercising the discretion to grant an exemption.
should an exemption be granted?
85. I have already noted the Corporations Act does not set out criteria governing the granting of exemptions. That does not mean the power can be exercised “for any reason whatever or for no reason at all”: Water Conservation and Irrigation Commission (NSW) v Browning (1947) 74 CLR 492 at 496 per Latham CJ. The decision-maker may only exercise a power or discretion under the Act for the purpose for which it was given: see Drake v Minister for Immigration and Ethnic Affairs(No 1) (1979) 2 ALD 60 at 70 per Bowen CJ and Deane J.
86.Section 760A sets out the objectives of Chapter 7. Section 760A provides:
The main object of this Chapter is to promote:
(a) confident and informed decision making by consumers of financial products and services while facilitating efficiency, flexibility and innovation in the provision of those products and services; and
(b) fairness, honesty and professionalism by those who provide financial services; and
(c) fair, orderly and transparent markets for financial products; and
(d) the reduction of systemic risk and the provision of fair and effective services by clearing and settlement facilities.
87. Any discretion exercised under Chapter 7 must have regard to these objectives. But the list in s 760A is not exhaustive. A decision-maker contemplating the exercise of the discretion to exempt someone from the obligation to hold an AFSL must not lose sight of the fact the power is given in order to provide relief from the strict operation of the rules. It is therefore appropriate to have regard to the individual circumstances of the person seeking the exemption. If the operation of the rules would lead to unusually burdensome results for the applicant, a decision-maker should consider granting relief provided the objectives of the regulation are not compromised.
88. While the decision-maker would be sympathetic to requests for relief in cases where an exemption would clearly advance the objectives of the Act, it should be circumspect in other cases. Parliament has created a regulatory regime that was intended to apply to all but exceptional cases. The regime would be undermined if exemptions were given without good reason. That cautious approach is particularly appropriate in this case, where the applicant deals in electricity derivatives. The parliament expressly excluded entities dealing in electricity derivatives from the general exemption for bodies dealing in derivatives in certain circumstances provided for in Paragraph 7.6.01 of the Corporations Regulations 2001 (see subparagraph (1)(m)). It follows each application for an exemption should be carefully scrutinised on its merits.
89. My approach to these questions is consistent with ASIC’s policy set out in PS 51: Applications for Relief (document T12) and PS 167: Licensing: Discretionary Powers and transition (document T14).
(a) the burden of compliance
90. The applicant says there are substantial implementation costs associated with making Enertrade and its subsidiaries “FSR compliant” (ie, able to comply with the regime established by Chapter 7). The respondent noted the applicant’s estimate in the s 37 statement at document T2 at p 14 that it would require an investment of at least $1 million to make the entity comply. That estimate was not contradicted. It is a large amount of money, but any big company that requires an AFSL may be required to make a substantial investment in compliance.
91. The applicant says it is in a different position to other participants in the market because of its financial position. Its main business loses a large amount of money each year, and will continue to do so for many years to come. That is not an accident: it was established with that end in mind. The entity depends on the ongoing support of the Queensland government. The government has committed itself to covering some of Enertrade’s losses, and the entity’s other activities are assisting it to mitigate its losses. But Enertrade has required additional injections of capital in recent years, and may yet require more money from the shareholding ministers in future years. The government is not legally obliged to provide that capital. The costs associated with establishing a compliance regime and meeting the various obligations imposed under the Act therefore loom large for the board of Enertrade.
92. The applicant’s financial position on its own does not justify an exemption. I think most participants in the market who were required to obtain an AFSL would be surprised if they realised one could obtain an exemption on the basis of a poor financial position. That is clear when one recalls that the holder of an AFSL is obliged pursuant to s 912A(1)(d) to:
…have available adequate resources (including financial, technological and human resources) to provide the financial services covered by the licence and to carry out supervisory arrangements…
93. The applicant’s financial position might be relevant if one considers the difficulty and expense of complying with two different regulatory regimes: the state-based regime that governs its activities within the state of Queensland that are exempt from the Corporations Act, and the provisions of Chapter 7 applying to the interstate dealings that comprise less than a third of its overall dealings. ASIC says this is not unusual: it notes in its statement of facts and contentions (at paragraph 26) that government-owned Electricity Service Corporations (ESCs) in New South Wales are in a similar position in that their intrastate activities are exempt from the Corporations Act. ASIC has given them a temporary exemption from the requirement to obtain an AFSL on the strength of an undertaking from the state government that the regulatory regime would be changed so that ESCs no longer provided financial services (which means an AFSL would not be required). In the absence of such a change, ASIC says the ESCs will require an AFSL – just like Enertrade.
94. I have some sympathy for Enertrade’s position. It is caught between the two regulatory regimes. If it is not exempted from the requirement to obtain an AFSL, it must co-exist between two different regulatory regimes – and bear all the expenses of doing so - or else limit its activities. The cost and inconvenience associated with this regulatory discontinuity weigh in favour of an exemption, although I note ASIC has treated ESCs in New South Wales in the same way.
(b) an adequate alternative regime?
95. Enertrade says the regime provided for in the GOC Act and other state legislation provides a satisfactory alternative regulatory regime. The applicant notes paragraph 167.3C of PS 167: Licensing: Discretionary Powers and transition cites the existence of an adequate alternative regulatory regime as one basis for considering an exemption.
96. ASIC says the alternative regime in this case is inadequate. It points out the regulatory regime applicable to GOCs in Queensland was designed with different objectives to those set out in s 760A of the Corporations Act. The respondent argued in paragraph 49 of its statement of facts and contentions:
…whilst the GOC Act, Financial Administration and Audit Act 1977 (Qld), the Crime and Misconduct Act 2001 (Qld), the Ombudsman Act 2001 (Qld) and other relevant legislation address issues such as fraud and risk, the focus of the Applicant’s current legislative regime is on accountability to the Queensland Government and Parliament as a GOC.
97. ASIC was particularly concerned that the state regulatory regime did not expressly incorporate a requirement that the entity satisfy the obligations set out in s 912A of the Corporations Act: see s 37 statement at document T2 at p 13.
98. Neither party sought to undertake a detailed comparison of the two regimes, although the applicant went to some lengths to explain the operation of the GOC Act and related legislation. The respondent argued in its submissions that a detailed comparison was inappropriate in any event. ASIC said (at paragraphs 41-42 of the submissions) the real issue was whether the state regime would meet and monitor compliance with the objectives of the financial services laws. That approach is consistent with the policy articulated in paragraph 11C of PS 167 Licensing: Discretionary Powers and transition. The policy says one must evaluate an alternative regime by considering whether it addresses:
(a) efficient, honest and fair service provision;
(b) service provider resources and competence;
(c) compliance and risk management practices by service providers;
(d) initial and ongoing disclosure to retail clients about the provision of a service;
(e) protection of client assets;
(f) financial and transaction record-keeping;
(g) access by retail clients to internal and external dispute resolution services; and(h) the provision of any advice to retail clients on a reasonable basis.
99. I agree ASIC has adopted the correct approach. The starting point of the analysis must be the GOC Act. The Act facilitates the corporatisation of various entities. The key objectives of a GOC involved in the corporatisation process are identified in s 20:
(1) Under corporatisation the key objectives of a GOC are to be commercially successful in the conduct of its activities and efficient in the delivery of its community service obligations.
(2) The commercial success and efficiency of a GOC are to be measured against its financial and non-financial performance targets.
100. The references to commercial success and efficiency reflect the fact the GOC Act is largely a product of competition policy. But even if one accepts that is so, it is possible to identify compromises between objectives. The structure and governance arrangements of the GOCs reflect a trade-off between a desire to set the entities free to compete more effectively (and be exposed to the discipline of competitive forces) with a need to retain a measure of ministerial control over the entities to facilitate the achievement of community service obligations and political objectives. The shareholding ministers who are able to exercise that residual control are ultimately accountable to the Queensland parliament. Apart from the fact of parliamentary scrutiny, there is no guarantee the shareholding ministers will protect the interests of consumers of financial services or even the interests of the GOC itself.
101. Competition policy has undoubtedly informed the objectives of Chapter 7 of the Corporations Act, but that portion of the legislation is ultimately focused on promoting the development of fair and efficient markets for financial services. To that end, s 912A provides reasonably detailed prescriptions of how the holder of an AFSL should behave. The applicant’s argument depends on GOCs and ministerial shareholders acting in accordance with the spirit of s 912A when there is no express obligation upon them to do so.
102. The Financial Administration and Audit Act 1977 does not include an objectives clause, but the thrust of the legislation is clear enough. The Act is designed to monitor and promote the accountability of government departments and entities. To put it differently, the Act is designed to regulate what government organisations may do with the Crown’s property and money. That has little to do with the objectives in s 760A of the Corporations Act.
103. The same criticism can be made of the Crime and Misconduct Act 2001 (Qld). As the name suggests, the Act is concerned with crime and misconduct in the public sector. Section 4(1) provides:
The main purposes of this Act are--
(a) to combat and reduce the incidence of major crime; and
(b) to continuously improve the integrity of, and to reduce the incidence of misconduct in, the public sector.
104. The focus of the legislation is therefore quite different to that of Chapter 7 of the Corporations Act.
105. The applicant also referred to the role of the Ombudsman in the regulatory regime. Section 5 of the Ombudsman Act 2001 (Qld) says:
The objects of this Act are--
(a) to give people a timely, effective, independent and just way of having administrative actions of agencies investigated; and
(b) to improve the quality of decision-making and administrative practice in agencies.
106. The focus of the legislation is different to that of Chapter 7 of the Corporations Act. While the scrutiny of the Ombudsman might enhance the quality of decision-making processes within Enertrade, it is unclear how that helps Enetrade to meet the objective of developing fairer and more efficient markets for financial services.
107. It follows I am not satisfied the regulatory regime embodied in the state legislation is an adequate substitute for the regime in Chapter 7 of the Corporations Act which includes the requirement to hold an ASFL.
108. The applicant suggests the absence of express commitments to the objectives of the Corporations Act and the obligations in s 912A should not be given great weight given Enertrade operates in the national electricity market (the NEM). The NEM is regulated under the National Electricity Law (see the Electricity – National Scheme (Queensland) Act 1997 (Qld) and equivalent legislation in other states participating in the NEM). The National Electricity Law provides for the enactment of rules regulating the conduct of market participants. Enertrade is registered to participate in that market and meets its obligations under the rules. It says its participation does not depend on holding an AFSL.
109. That may be true but I think ASIC is right to say it makes no difference to the question at hand. If the market rules passed under the National Electricity Law provided adequate alternative regulation there would be no call for any of the participants in that market to hold an AFSL. The market design principles set out in clause 3.1.4 of the rules makes it clear why this is not so: the principles upon which the regulation of the NEM proceeds have a different focus (ie, to regulate the NEM in an efficient and transparent manner) to the objectives set out in s 760A of the Corporations Act, which apply to the regulation of markets for financial services. The regulatory regime in the Corporations Act and the market rules in the NEM compliment – rather than duplicate – each other.
110. The applicant notes it is entitled to deal in electricity derivatives within Queensland without holding an AFSL. It adds it has done so over a period of time without incident or complaint, which suggests the state-based regulatory regime is in fact adequate. Enertrade says it is futile to insist that it embrace a regulatory model that can only apply to a minority of its transactions. I do not think that matters. The applicant will be required to satisfy the requirements of Chapter 7 if it persists in dealing in electricity derivatives outside of Queensland. The fact it engages in activities that do not formally require an AFSL does not change the reality that Enertrade will have an AFSL, comply with its obligations under the Act, and subject itself to the oversight of ASIC. That would have incidental benefits for the counterparties to all of its dealings in electricity derivatives.
111. I am not satisfied there is an adequate alternative to the Chapter 7 regulatory regime. The absence of an appropriate alternative regime weighs heavily against granting an exemption.
(c) the role of asic
112. In a related point, ASIC says permanent relief is inappropriate because it will prevent the regulator from monitoring the operations of the applicant and imposing sanctions in the event of non-compliance. Those sanctions most obviously include the imposition of conditions on a licence, or revoking the licence under s 915C. That is potentially an important issue if the alternative regulatory regime provides limited opportunities for monitoring and intervention in relation to the applicant’s conduct of the financial services’ component of its business.
113. The applicant criticises this as a “boot-straps” argument: see paragraph 38 of the applicant’s submissions. It says ASIC wants the applicant to hold a licence so ASIC can use the regulatory tools available under the Act even though most of the applicant’s activities are beyond ASIC’s jurisdiction.
114. It does not matter that ASIC will be unable to police some – even most – of the applicant’s trading activities. Requiring that the applicant meet obligations imposed on an AFSL holder provides a standard against which the intrastate operations can be assessed by the state government bodies responsible for regulation.
115. ASIC effectively forfeits the power to play its regulatory role in respect of any aspect of the applicant’s operations if it exempts the applicant from the obligation to hold an AFSL. The fact that part of the applicant’s operations are excised from ASIC’s jurisdiction because of the operation of the GOC Act and s 5F of the Corporations Act does not mean the rest of the operations should be exempted as well.
(d) enertrade is a wholesaler and its counterparties do not need the protections conferred by an afsl in all the cirucmstances
116. The applicant says in its submissions it deals with 11 other authorised counterparties, most of whom are registered electricity retailers under the Electricity Act 1994 (Qld). All of the counterparties are aware Enertrade does not hold an AFSL. The applicant says (at paragraph 36 of its submissions) all of the counterparties are sophisticated and informed businesses that do not require the prescription of statutory obligations like those set out in s 912A. Enertrade is a wholesaler and the people with whom it deals are not consumers who might be thought to require a greater level of protection.
117. ASIC concedes that the wholesale nature of the market is relevant to the question of whether or not the applicant should receive an exemption. Even so, the regulator insists an exemption is not appropriate in this case.
118. It is generally true that sophisticated traders in a specialised market do not benefit as much as consumers from measures designed to improve consumer protection. While the regime established by Chapter 7 might be thought to be of particular benefit to consumers, that is only one of its objectives. The law is also concerned with promoting market integrity and efficiency. I note just one of the obligations referred to in s 912A(1) – the obligation to provide a dispute resolution system conforming to a certain standard – is expressed to be applicable only where the trader deals with consumers.
119. ASIC points out that most (if not all) of the other participants in the market for electricity derivatives are required to hold an AFSL. It is unclear why the applicant should receive an exemption when the other participants in the market have not. ASIC says in any case it does not matter what individual traders within the market may think: see paragraph 58 of ASIC’s statement of facts and contentions.
120. I accept that markets generally benefit from a regime designed to foster the objectives in s 760A. Even so, one must have regard to the circumstances of this market and this trader. I am satisfied the wholesale nature of the market tends to favour the granting of an exemption.
(e) Competitive neutrality
121. ASIC has argued against granting an exemption on the basis that allowing a government-owned entity to trade without an AFSL offends the principles of competitive neutrality. The expression competitive neutrality refers to a policy objective embodied in the Competition Principles Agreement between the Commonwealth and the states and territories which forms the basis of the National Competition Policy. Clause 3(1) of that Agreement says the expression means “government-owned businesses should not enjoy any net competitive advantage simply as a result of their public sector ownership.” ASIC says the applicant should not be held to different, less exacting standards than private sector traders dealing in the same market who are required to hold an AFSL.
122. The applicant says ASIC is not responsible for giving effect to National Competition Policy, and competitive neutrality is not a policy goal of Chapter 7. PS 167: Licensing Discretionary Powers and transition does not refer to competition policy as a relevant factor to be considered: see paragraph 3C.
123. The applicant is right. I do not accept that ASIC should be relying on competition policy in support of its decisions. There is a separate regulatory regime created to administer obligations imposed pursuant to the National Competition Policy.
124. The regulatory scheme is concerned with fairness, of course: see s 760A. Participants are expected to behave fairly, but the regulator must also be fair in its distribution of regulatory burdens and benefits under ss 911A and 926A. It would be unfair to give Enertrade an exemption from the requirement to hold an AFSL simply because it is a government-owned entity. The fact of government ownership will only be relevant to the question of exemption if there is some aspect or features of that ownership which disadvantage Enertrade relative to other participants in the market, or which makes the regulatory regime in the Corporations Act redundant. Enertrade’s arguments in relation to those issues have already been discussed (above).
conclusion
125. I have already explained my view that the applicant and its subsidiaries are probably exempt from the operation of chapter 7 of the Corporations Act because they are instrumentalities of the Crown. If that is so, the application for an exemption ought to be rejected, and the respondent’s decision to that effect should be affirmed. But I decided it was appropriate to deal with the application for an exemption in any event given the consequences of wrongfully denying a party access to the licensing regime in the Act.
126. After reviewing the material and considering the arguments of both parties, I am not satisfied Enertrade should be exempted from the obligation to hold an AFSL in respect of its interstate activities. I acknowledge some of the arguments I have referred to favour the granting of an exemption, but I think they are outweighed by concerns about the adequacy of the alternative regulatory arrangements if Chapter 7 does not apply to Enertrade’s interstate activities.
127. Given my conclusions with respect to Enertrade’s entitlement to an exemption, I am satisfied its subsidiaries incorporated under the Corporations Act should not be exempted from the obligation to hold an AFSL either.
128. That leaves only the question of what interim relief should be available if the applicant and its subsidiaries persist in their application for an AFSL in respect of trading activities outside the state of Queensland. Mr Hinson prepared draft orders setting out a timetable providing for an application for an AFSL to be made on or before 31 August 2006 with a temporary exemption continuing until 28 February 2007 or the date on which ASIC decides the application – whichever comes to pass first.
129. The applicant notes that ASIC has extended interim relief on a generous basis to NSW electricity traders. ASIC, for its part, points out the relief was provided on the basis of regulatory uncertainty rather than to provide an opportunity to either apply for a licence or wind down activities.
130. I do not think it is necessary or appropriate to limit the discretion of the respondent to deal with any request for further interim relief. It has already indicated it would provide appropriate relief to allow the applicant and its subsidiaries time to transition to the new arrangements (assuming the applicant persists with its plans to make an application). Ms Brennan communicated an undertaking from ASIC that it would reasonably consider a request for further extensions. This simple arrangement allows the parties to talk about what is required and tailor an appropriate extension to fit the needs of the situation.
131. The respondent’s decision of 6 December 2004 ought to be varied with respect to the issue of interim relief beyond 31 October 2005. The question of interim relief beyond 31 October 2005 for the purpose of the applicant transitioning to the Financial Services regime and obtaining an Australian Financial Services Licence is remitted to the respondent for determination in the ordinary course.
I certify that the 131 preceding paragraphs are a true copy of the reasons for the decision herein of Senior Member B J McCabe.
Signed: .....................................................................................
Associate: Sam J AppletonDates of Hearing 29 – 30 March 2005
Date of Decision 28 September 2005The applicant was represented by Mr Hinson SC.
The respondent was represented by Ms Brennan of counsel.
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