QUEENS BENCH DIVISION
London, WC2A 2LL
B e f o r e :
| THE QUEEN
|On the application of
|LONDON AND CONTINENTAL STATIONS AND PROPERTY LIMITED
|- and -
|THE RAIL REGULATOR
|MIDLAND MAIN LINE LIMITED
Smith Bernal Wordwave Limited, 190 Fleet Street
London EC4A 2AG
Tel No: 020 7421 4040, Fax No: 020 7831 8838
Official Shorthand Writers to the Court)
Mr John Cavanagh QC and Mr Paul Nicholls (instructed by Norton Rose) for the Defendant
Mr Andrew Hunter (instructed by Edwards Geldard) for the Interested Party
Crown Copyright ©
Mr Justice Moses:
(1) The Regulator shall have a duty to exercise the functions assigned or transferred to him under or by virtue of this Part in the manner which he considers best calculated-
(za) to facilitate the furtherance by the Authority of any strategies which it has formulated with respect to its purposes;
(a) to protect the interests of users of railway services;
(b) to promote the use of the railway network in Great Britain for the carriage of passengers and goods, and the development of that railway network, to the greatest extent that he considers economically practicable;
(ba) to contribute to the development of an integrated system of transport of passengers and goods;
(bb) to contribute to the achievement of sustainable development;
(c) to promote efficiency and economy on the part of persons providing railway services;
(d) to promote competition in the provision of railway services (for the benefit of users of railway services);
(e) to promote measures designed to facilitate the making by passengers of journeys which involve use of the services of more than one passenger service operator;
(f) to impose on the operators of railway services the minimum restrictions which are consistent with the performance of his functions under this Part;
(g) to enable persons providing railway services to plan the future of their businesses with a reasonable degree of assurance.
1996 Access Agreement
(1) Facilities compensation to reflect loss of facilities or increases in walking distances to and from facilities for staff and passengers (see Schedule 4 paragraphs 2 to 8);
(2) Compensation for project liaison to cover the cost to MML of liasing with CTRL project (Part 1 paragraph 11.1) and
(3) General Damage Compensation to cover the general effects of the construction works on MML's business (Part 1 paragraph 11.2)
"The station facility owner expressly agrees and acknowledges that the compensation payable pursuant to this Schedule 4 represents the parties genuine pre estimates of the loss which the beneficiary may suffer as a result of the events which gave rise to the payment of compensation under this Schedule 4."
It is also important to observe that all the compensation figures were to be increased annually in accordance with the retail price index (see clause 12.1). Sums specified were based on MML's estimated revenues in 1996 calculated by reference to the 1994 timetable. They were not to be increased pro-rata according to any increase in revenue in future years which MML might achieve.
The 2003 Station Access Agreement: Key Changes and Challenge
Relevant principles in relation to the court's intervention
"Where the Act has conferred the decision making and function on the Director, it is for him, and him alone, to consider the economic arguments, weigh the compelling considerations and arrive at a judgment. The applicants have no right of appeal; in these judicial review proceedings so long as he directs himself correctly in law, his decision may only be challenged on Wedensbury grounds. The court must be astute to avoid the danger of substituting its views for the decision maker and of contradicting (as in this case) a conscientious decision maker acting in good faith and with knowledge of all the facts."
"If (as I have stated) the court should be very slow to impugn decisions of fact made by an expert and experienced decision maker, it must surely be even slower to impugn his educated prophesises and predictions for the future."
"Of course in judicial review proceedings as in any other proceedings everything depends on the facts. But judicial review should not be allowed to run riot. The practice of delving through documents and conversations to extract a few sentences which enables a skilled advocate to produce doubt and confusion when none exists should not be repeated." (195).
"Greater or lesser deference will be due according to whether the subject matter lies more readily with actual or potential expertise of the democratic powers or the courts."
The width of the Regulator's discretionary area of judgment is easily recognised in relation to a decision as to directions which are concerned with economic policy.
Does the Regulator's approach to compensation lead to the imposition of an excessive and unjustifiable burden on LCSP?
"The Regulator has concluded, in accordance with his duties, and in particular his duties under Section (4)(1)(a) and 4(1)(g) of the Act that it is appropriate to include in his directions compensation provisions to protect the interests of users of railway services, and to enable both MML and L&C to plan the future of their businesses with a reasonable degree of assurance, on the premise that the regime he is directing will hold MML financially neutral from the effects of the disruption caused by the CTRL works."
This premise, contends LCSP, requires justification in the public interest. The reasons advanced by the Regulator for adopting MVA's methodology are set out at paragraph 5.36. It is said that the methodology will best protect the interests of users of railway services because it will incentivise the parties to make decisions which will minimise the impact of CTRL work (5.36(a)) and promote efficiency and economy by creating an incentive for the efficient implementation of work at St Pancras Station (5.36(b)). Further, it imposes minimum restrictions on the operators of railway services (5.36(c)) and enables the service providers to plan the future of their businesses (5.36(d)).
None of these reasons, focussing as they do upon incentives, provide an explanation as to why it is in the public interest to impose so great a burden upon LCSP stemming, to a significant extent, from the direction to calculate compensation upon the estimate of the 2003 revenue figures.
LCSP contends that the aim of financial neutrality which the Regulator sought to achieve, by adopting the new regime recommended by MVA, was only legitimate if it imposed no disproportionate burden upon LCSP. LCSP had argued before the Regulator that it had no obligation to make good any shortfall on 2003 revenues as a result of the CTRL works. Its primary argument at the hearing of 24th January 2003 was that the works had not triggered and were unlikely to trigger any loss in revenue. Miss Kelly, on behalf of LCSP, said that LCSP was prepared to compensate Midland Mainline but objected to the amounts payable. It sought substantial reduction in the rates (C/482). She pointed out that under the 1996 regime, once facilities had been moved to the interim station, LCSP's payments would exceed access charges by three quarters of a million pounds a year. At the very least, it contended, compensation should be capped to the access charge.
Article 1 of the First Protocol
"Every natural or legal person is entitled to the peaceful enjoyment of his possessions. No one shall be deprived of his possessions except in the public interest and subject to the conditions provided for by law and by the general principles of international law.
The preceding provisions shall not, however, in any way, impair the right of a State to enforce such laws as it deems necessary to control the use of property in accordance with the general interest or to secure the payment of taxes or other contributions or penalties."
There was, at least by the time of the exchange of skeleton arguments, a dispute between the parties as to whether the Regulator's decision involved any interference by him with LCSP's right to use its land. Such interference, it was contended, stemmed from the Station Access Agreement and not from the imposition of a new compensation regime. The interference with LCSP's right to use its land at St Pancras Station had been agreed between LCSP and MML. It was not in contention.
"The requisite balance will not be found if the person concerned has had to bear "an individual and excessive burden".
Was the burden excessive?: Conclusions
The Regulator's failure to take into account the regime under the 1996 Agreement as the parties had operated it.
"Payable per day or part day for each additional minutes walk time."
Thus the Regulator required the expressed compensation figure, the multiplicand, to be multiplied by each additional minute walk time. This process of multiplication will cause, submit LCSP, an unjustified increase to the amount of compensation it is likely to have to pay over that which it would have had to pay under the 1996 regime. The decision to allow for multiplication stemmed, so it is contended, from the Regulator's failure to take into account the pre existing compensation regime as operated by LCSP and MML. Previously there had been no multiplication. Two arguments flow: firstly it is contended that all that MML was seeking as a means of providing sufficient compensation was compensation for additional walking time without multiplication. Secondly, in failing to take into account the practice of the parties under the 1996 regime the Regulator failed to take into account a material consideration.
The 1996 regime as drafted.
"Shall for each day of that period be a sum equal to the amount shown for that facility in the applicable compensation facility table (by reference to the excess of the time over the existing time for that facility as set out in whichever of the columns under the general heading "Compensation Payable per day or part day for each additional minutes walking time" of that compensation facility table is applicable to such excess) multiplied by the amount of that excess. "
The compensation facility table was headed:-
"Compensation payable per day or part day for each additional minutes walking time."
In respect of each facility outwith the permissible range three different and increased figures were set out for the multiplicand. For example, in relation to short term car parking if the facility was outwith the permissible range by up to two minutes a figure of £188 was fixed. If it was outwith the permissible range by more than two but less than eight minutes the figure was £376 and if the facility was outwith the permissible range by at least eight minutes the figure was £940. Thus within each particular band the figure was the same whether the facility was dispersed by three minutes or seven minutes. Those figures were index linked (see paragraph 12.1).
"Which were envisaged by all the parties to provide adequate and fair protection for MML… during the ongoing construction work." (4.3)
MML contended that it was entirely appropriate for the terms and conditions of the existing agreement to be carried forward into the new agreement (4.5). It said at 6.6:-
"MML do not consider that there is any rationale to dispense with the compensation levels previously agreed at a time when the CTRL and St Pancras works were about to intensify. MML are firmly of the view that the current values contained within the facility tables and the general business damages need to be carried forward to the new agreement. "
LCSP stressed that they were based upon 1996 revenues.
"Constituted an appropriate level of compensation and therefore the terms of the existing agreement should be contained in the new agreement."
A schedule of proposed amendments sought by LCSP to the existing agreement referred at Item 32 to the fact that MML had agreed to deletion of the words "for each additional minutes walking time multiplied by the amount of that excess". It agreed with LCSP's contention that the title of the column was misleading and that the table should be self-standing with no further multiplication.
"Broadly speaking, the compensation regime contained in the directions is expected to provide overall levels of compensation in the region of those sought by MML, rather than those offered to MML by L&C (LCSP's parent)."
LCSP contend that MML did not seek a regime with multiplication but rather sought continuation of the existing compensation without any multiplication. The regime directed by the Regulator would provide MML with compensation of £14.2 million over 44 months whereas MML's proposal of a continuation of existing compensation without any multiplication would be likely to result in only £10.2 million. The Regulator's error as to how the parties put into operation the existing agreement and as to what MML was seeking led to an increase on his own figures of approximately £4 million (just under 40%). LCSP estimate an even greater increase. Accordingly the Regulator has substantially underestimated the increases his directed regime will cause compared with the provisions for compensation for increased walking time under the old 1996 regime as operated by the parties and which both parties agreed should be followed under the new contract.
Conclusions: MML's approach
"The real damage (if any is proved) to MML's position".
MML was thus faced with a proposal to reduce the level of compensation payable under the 1996 Agreement. Its response was to seek, at least, retention of the existing level of compensation payable. In its proposal at A.5.1(c) it pointed out that the existing agreement in 1996 was a genuine pre-estimate of its losses. It continued:-
"MML consider that to the extent that any changes in the level of general damages compensation and facility compensation is appropriate, such changes should reflect an upward adjustment on the basis of MML having successfully built up its business since the current levels were set. This is particularly the case in view of LCSP's failure to show any reason for change. MML's approach, however, is to maintain the levels of general damages compensation and facility compensation at the existing levels on the basis of certainty". (B319).
This approach was repeated in its comments on sub-paragraph 2 of 2.4(d) (B326) and in its response to LCSP's conclusion (335). Thus MML's agreement to the removal of multiplication was made in the context of seeking to maintain an approach which would achieve a genuine pre-estimate of its losses and no reduction in levels of compensation.
"Walking distance compensation within each band or step in range is applicable to the whole of the range… The principle of this approach has been agreed by MML for facilities that are sited outwith the permissible range."
The email then referred to a previous email from MML dated 23rd October 2002. This slight and passing reference to the previous practice could hardly be described as coming at the forefront of LCSP's representations. Nevertheless the Regulator was aware of the previous agreement and took it into account in his reasoning. He said:-
"1.22 Late in the course of the Section 17 process, it emerged that the parties sought to agree an interpretation of the walking time compensation provisions in the existing Access Agreement which provide the instructions on how to calculate this element of compensation. The Regulator does not agree with the interpretation of the agreement which the parties appear, from the evidence they have provided to have adopted. In his directions the Regulator has included provisions which implement a revised compensation regime, and has clarified how this should be interpreted. In future therefore there should no longer be any doubt about how walking time compensation should calculated.
1.23. However, comparisons between the likely financial impact of the new regime contained in the Regulator's directions, and the current compensation arrangements, are complicated by the difference of view over how the current provisions should be interpreted. Where possible, the Regulator has provided comparisons with both what he regards as the proper reading of the current agreement and the interpretation adopted by the parties."
"Interpreting the existing regime is relevant only to a comparison of the compensation payments likely to become payable under the existing regime to those which are likely to be payable under MVA's recommended regime."
For the reasons he gave he preferred the methodology adopted by MVA:-
"Which itself is based on standard and accepted rail industry techniques."
Accordingly I reject the contention that the Regulator erred in stating that the compensation regime contained in the new directed regime was expected to provide overall levels of compensation "in the region of those sought by MML" (5.27). The Regulator's reasoning demonstrates to my satisfaction that he was aware of MML's approach to walking time compensation. Far more important, to my mind, is the question whether the Regulator was entitled, whatever the parties' interpretation of the existing 1996 regime, to adopt a new approach. It is clear from his reasoning at 5.67 that the Regulator did not regard comparison of compensation levels under the 1996 regime, as interpreted by the parties, with compensation levels under the new regime as of particular significance. The essential question raised by LCSP's contentions is whether he was entitled to adopt that approach. It is accepted on behalf of the Regulator that the levels of compensation will be considerably higher under the new regime than under the existing regime as interpreted by the parties (see in particular Mr Gooding's table annexed to his third statement at E222 and MVA's calculations at E270). Under the new directed regime, the figures are £20,797 million as opposed to £18,904 million for the 1996 regime as drafted as opposed to 9168 on the parties' interpretation of the 1996 regime. The difference in levels is slight when comparison is made between the directed regime and the 1996 regime on its proper construction. The levels are only dramatically apart in relation to the 1996 regime as adopted in 2002.
"MVA's proposals are not dependent on obtaining a definitive interpretation of the existing regime. They encompass a new approach independent of the existing regime based on the methodology adopted by MVA which itself is based on standard and accepted rail industry techniques."
The hotly disputed comparative figures played little part in the reasoning of the Regulator. The real question is, as it seems to me, whether the new methodology did provide a genuine pre-estimate of loss. That that was the Regulator's approach is demonstrated in paragraph 1.26 in which he says that the MVA's recommendations:-
"Reflect more accurately MML's revenue loss and strengthens the economic incentives on L&C to minimise the effects of the CTRL construction works on MML, its passengers and staff."
It was that approach which led to the Regulator's decision to calculate compensation on the basis of MML's current revenue data using an estimate of the 2003 revenue figure (the starting year of the new agreement) but thereafter providing for indexation in line with RPI (see paragraph 5.79). It is to the challenge to re-basing that I now turn.
Re-basing using an estimate of the 2003 revenue figure
"We are not attempting to penalise MML for their success; that has never been our intent. We merely sought to quantify actual loss and to link compensation payable to such loss. A number of factors may contribute to a slower growth than was hoped for by MML. St Pancras Station is only one of those factors". (See C/549).
"We are content that the granting of the additional track access rights will not have any adverse financial consequences for LCR". (Kelly: second statement para 84).
Re-basing: MML's approach
"An upward adjustment on the basis of MML having successfully built up its business since the current levels were set".
Moreover MML had originally proposed, in response to LCSP's suggestion that compensation would be reduced from the 1996 levels that it should be increased to reflect the current value of MML's business (see Mr Marshall's, first statement 5.5). Finally, although MML's preferred position was to maintain the status quo, for reasons, it says, of certainty (see A5.1(4)(c) of its application for Section 17 directions), nevertheless finally, MML did argue that levels should be increased on the basis of the increased passenger numbers.
Re-basing: The extension of MML's franchise on 2nd August 2000
"MML confirmed at the hearing that its franchise bid and franchise extension bid were made by MML on the assumption that compensation from its access agreement would remain at current levels."
In its report, MVA commented at 4.3.3 when discussing the appropriate base level of revenue:-
"MML's franchise has recently been extended, and in establishing the new subsidy required, an (implicit) assumption would have been made about the level of compensation to be received. We cannot be certain of this assumption, but it is likely to have reflected the existing agreement, one part of which is that compensation levels only increase in line with RPI".
It is contended that this comment demonstrates firstly that MML has already benefited through obtaining an extension to the franchise on the basis of lower levels of compensation. Secondly, it demonstrates that the Regulator failed to acquaint himself with relevant information in order properly to reach a view as to whether to make provision for compensation on the basis of 1994 figures or 2003 figures. To that extent, he failed in his obligation to inform himself of relevant considerations (see Prest & Ors. v Secretary of State for Wales 81 L.G.R. 193 at 200-201).
These points were made by LCSP in its comments dated 26th March 2003 but, it contends, have never had any adequate answer. The evidence as to what happened remains confused and uncertain. If MML had bid for a franchise extension expecting more than the 1996 levels of compensation, index linked, it would certainly have revealed that to the Regulator and not the accepted deletion of the multiplier.
"LCSP's position appears to be that the terms of the franchise were substantially dependent on the compensation scheme. This is wrong. The franchise extensions were concerned with investment in the route, stations, and infrastructure generally."
At paragraph 17 he says:-
"As far as I am aware, the negotiations with the SRA assumed that the overall levels of compensation would be no lower than those set out in the 1996 agreement."
It is that comment which forms the basis of LCSP's argument.
Planning the future of LCSP's business
The Regulator's errors of calculation: underestimating walking time
Erroneous method for estimating the effect on passenger demand of increased walking time
Benefits of the interim and final station
"MVA has advised that, in view of the subjective nature of this assessment, general damages should be limited during an assessment of the impact of noise, dust and visual intrusion alone."
does not do proper justice to MVA's report. He was guilty of some elision in summarising MVA's advice which was made available to LCSP (although I should record its protests that there was only a short opportunity for comment). MVA clearly drew a distinction between noise, dust and visual intrusion, described by MVA as "building site effects" at 3.8.6 and passenger perception of the environment of the interim station at 3.8.7. It was open to the Regulator to adopt this distinction.
"Best protect the interests of users of railway services (Section 4(1)(a)), because the regime will incentivise the parties to make decisions which, overall, will minimise the impact of CTRL work on passengers and MML operations" (See 5.36(a) of his reasons).
(1) the Regulator was entitled to direct that the compensation regime should hold MML "financially neutral" from the effects of the disruption caused by the CTRL work. This approach did not infringe Article 1 of the First Protocol of the European Convention on Human Rights; [Paragraphs 44-49]
(2) the Regulator was entitled to reject the existing 1996 Agreement, as interpreted by the parties, in respect of additional walking time to dispersed facilities as a basis for the new directed regime; [Paragraphs 58-66]
(3) the Regulator was entitled to direct a method of compensation based upon an estimate of MML's 2003 revenues; [Paragraphs 75-78 and 83-92]
(4) the Regulator's directions did not infringe his obligations under Section 4(1)(g) in relation of the ability to LCSP to plan the future of its business; [Paragraphs 93-96]
(5) the Regulator was entitled not to rely upon any accurate estimate of increased walking distances; [Paragraph 100]
(6) the Regulator did not err in law in adopting MVA's advice as to the calculation of elasticities in respect of increased walking time; [Paragraph 105]
(7) the Regulator was entitled to leave out of account any environmental benefit derived from the interim and final stations; [Paragraphs 111-112 and 114]
(8) the Regulator was entitled to reach the conclusion that his regime provided an incentive to minimise the impact of CTRL work [Paragraphs 115-116]
Section 17 of the 1993 Act provides that:
"(1) The Regulator may, on the application of any person, give directions to a facility owner requiring him to enter into an access contract with the applicant for the purpose specified in subsection (2) below;....
(2) The purpose for which directions may be given is that of enabling the beneficiary to obtain (whether for himself alone or for himself and, so far as may be applicable, associates of his) -
(b) from a facility owner whose railway facility is a station, permission to use that station for or in connection with the operation of trains by the beneficiary;
but this subsection is subject to the limitations imposed by subsection (3) below.
(3) In subsection (2) above -
(b) paragraph (b) does not extend to obtaining permission to use a station for the purpose of operating the station;..
(6) In this Part -
"access contract" means -
(a) a contract under which -
(i) a person (whether or not the applicant), and
(ii) so far as may be appropriate, any associate of that person
obtains permission from a facility owner to use the facility owner's railway facility; or
"facility owner" means any person -
(a) who has an estate or interest in, or right over, a railway facility and
(b) whose permission to use that facility is needed by another before that other may use it;.....
(7) In this section -
"the applicant" means the person making the application for directions;
"the beneficiary" means the person mentioned in paragraph (a)(i)...of the definition of "access contract" in subsection (6) above...
(10) Schedule 4 to this Act shall have effect with respect to applications for directions."
Section 18 Access agreements: contracts requiring the approval of the Regulator
(1) A facility owner shall not enter into an access contract to which this section applies unless—
(a) he does so pursuant to directions under section 17 above;...
b) the Regulator has approved the terms of the access contract and the facility owner enters into the contract pursuant to directions under this section; [or
(c) the access contract is of a class or description specified in a general approval given by the Regulator;]
and any access contract to which this section applies [shall be void unless of the conditions in paragraphs (a) to (c) above is satisfied].
MR JUSTICE MOSES: For the reasons I have given in the judgment that has been handed down these applications are dismissed. The order made by Ouseley J will, however, continue until the hearing that will be arranged of any consequential matters, and there should be liberty to apply. But, as I say, for the reasons I have given, this application is dismissed.