QUEEN'S BENCH DIVISION
Strand, London, WC2A 2LL
B e f o r e :
| THE QUEEN on the application of
UK POWER NETWORKS (OPERATIONS) LIMITED
|- and –
|THE GAS AND ELECTRICITY MARKETS AUTHORITY
- and –
WILLMOTT DIXON CONSTRUCTION LIMITED
- and –
(1) SCOTTISH HYDRO ELECTRIC POWER DISTRIBUTION PLC
(2) SOUTHERN ELECTRIC POWER DISTRIBUTION PLC
Javan Herberg QC & Tom Coates (instructed by Ofgem) for the Defendant
Michael Fordham QC and Naina Patel (instructed by Addleshaw Goddard) for the Interveners
Hearing dates: 9 & 10 May 2017
Crown Copyright ©
Mr Justice Ouseley:
The statutory provisions
"(3) The duties under this section shall be performed subject to such terms as may be agreed under section 16A for so long as the connection is required.
(4) In this section and sections 16A to 23-
(a) any reference to making a connection includes a reference to maintaining the connection (and continuing to provide the necessary electric lines or electrical plant);
(b) any reference to requiring a connection includes a reference to requiring the connection to be maintained (and the continued provision of the necessary electric lines and electrical plant);
(5) The duties under this section are subject to the following provisions of this Part and any regulations made under those provisions."
"(5) As soon as practicable after receiving the notice under subsection (1) any information requested under subsection (3) and any amount payable by virtue of subsection (4A) to the distributor by the person requiring the connection, the distributor shall give to that person
a notice –
(a) stating the extent (if any) to which his proposals are acceptable to the distributor and specifying any counter proposals made by him;
(b) specifying any payment which that person will be required to make under section 19(1) or regulations under section 19(2);
(c) specifying any security which that person will be required to give under section 20; and
(d) stating any other terms which that person will be required to accept under section 21."
"Where any electric line or electrical plant is provided by an electricity distributor in pursuance of section 16(1) above, the distributor may require any expenses reasonably incurred in providing it to be defrayed by the person requiring the connection to such extent as is reasonable in all the circumstances."
"Any reference in this section to any expenses reasonably incurred in providing an electric line or electrical plant includes a reference to the capitalised value of any expenses likely to be so incurred in continuing to provide it."
"(1) Subject to the following provisions of this section, an electricity distributor may require any person who requires a connection in pursuance of section 16(1) to give him reasonable security for the payment to him under section 19 in respect of the provision of any electric line or electrical plant."
(1A) If a person fails to give any security required under subsection (1), or the security given has become invalid or insufficient, and he fails to provide alternative or additional security, the electricity distributor may if he thinks fit—
(a) if the connection has not been made, refuse to provide the line or plant for so long as the failure continues; or
(b) if the connection is being maintained, disconnect the premises or distribution system in question.
. . .
(3) Where any money is deposited with an electricity distributor by way of security in pursuance of this section, the distributor shall pay interest, at such rate as may from time to time be fixed by the distributor with the approval of the Authority, on every sum of 50p so deposited for every three months during which it remains in the hands of the distributor."
"An electricity distributor may require any person who requires a connection in pursuance of section 16(1) above to accept in respect of the making of the connection—
(a) any restrictions which must be imposed for the purpose of enabling the distributor to comply with regulations under section 29;
(b) any terms which it is reasonable in all the circumstances for that person to be required to accept;
"(b) payment of any amount due to be paid to the electricity distributor in accordance with the accepted quotation –
(i) in respect of paragraph (2), on acceptance of the quotation; or
(ii) in respect of paragraph (3), prior to completion of the works or a phase of the works (as applicable);
(c) any reasonable security required by the electricity distributor under section 20(1) of the Act."
"(4) A public electricity supplier shall not be entitled to require security in pursuance of subsection (1)(a) above if –
(a) the person requiring the supply is prepared to take the supply through a pre-payment meter; and
(b) it is reasonably practicable in all the circumstances for the supplier to provide such a meter."
Mr Gordon submitted that this illustrated that pre-payment was not a form of security, and was incompatible with GEMA's position on advance payment.
The Determination Letter, DL
"4. We have determined that section 20 of the Act governs the circumstances in which money may be required to be paid or deposited in advance and that the advance payment in this matter constitutes a payment by way of security. Therefore, the Customer is entitled to receive interest from the Company, accrued in respect of the advance payment. We provide the reasons for this decision in Sections 5 and 6 of this document. In Section 7 we indicate the minimum rate of interest that we would be prepared to approve under section 20(3) of the Act. We invite the Company to submit an interest rate to us for our approval under section 20(3) of the Act by 26 August 2016.
54. If security may be required to be provided by a money payment in advance, then in our view it provides confirmation that section 19 (by contrast) contemplates payment for the connection after the event. Otherwise it is difficult to see why the legislature should have gone on to provide for security to be required. Also, a distributor would be able to avoid the requirement to pay interest on security in section 20(3) by requiring security by way of a "deposit" under section 19. That cannot be right.
58. We therefore find that the Company's request for an advance payment was unlawful, unless it was as a request for security within section 20. An advance payment cannot be required under section 19, as this refers to payments being made after a connection has been provided."
"86. On the basis of the evidence and submissions we have received, we have decided that the minimum rate of interest that we would be prepared to approve under section 20(3), in relation to this connection, would be 0.75 per cent per annum. We consider that this takes into account the value of the borrowing costs that the Company has avoided, and the reduction in benefits once financing costs are considered.
87. We reach this rate as follows. Based on our knowledge of the Company and the financial environment, we consider that the Company should be able to earn a rate of return of approximately 1.5 per cent per annum, on sums that are deposited with it. We derived this value by considering the impact that depositing funds with the Company would have had on its overall costs of borrowing, and then deducted inflation from this to reflect that by charging for connections upfront, the Company is implicitly taking inflation risk.
88. However, we also consider it relevant to take into account the fact that the Customer in this case has received ongoing benefit over the period of the works in that the Company has undertaken the works and incurred costs in doing so in advance of payment becoming due. In this case, because the Company (wrongly) believed that it could require payment "up front" without payment of interest, it can be safely assumed that it will not have included in the cost quoted and charged to the Customer any sum representing the financing cost of the Company doing the work in advance of payment (because it did not understand that it was financing the works) (the Company may further have taken into account that it could use the monies that were deposited with it to defray other financing costs). This is an element of the Company's cost of doing the work which it would be entitled to recover from the Customer. Hence, in deciding what interest rate is the minimum appropriate in respect of the advance payment, it is appropriate to reduce the rate to avoid the Company being penalised – and the Customer receiving a windfall – by virtue of the sum charged not including the cost of financing.
89. Based on the indicative spend information provided by UKPN in its letter of 21 March 2016, it appears that the Company incurred costs on a roughly straight line basis from October 2011 to May 2012. In our view, therefore, the ongoing benefit to the Company of holding the advance payment was significantly reduced once one takes into account the cost of financing the works. In our view, the appropriate reduction would be to halve the interest rate of 1.5 per cent to 0.75 per cent."
GEMA's earlier practice
"We appreciate that it has been common practice for DNOs to request advance payment prior to making a connection to the distribution network. In making this determination we want to be clear that we do not wish to discourage these arrangements, which we believe are essential where they help to protect the interests of other consumers. We do not support any arrangement which would expose other customers to additional costs arising from connections-related expenditure that the DNO found it could not recover from the connecting customer."
"We normally require payment in full and in advance. However, if major works are to be carried out over an extended period of time, the Company may agree to payment being made in instalments; each instalment being paid before the next phase of the works has begun. Payment in advance is required for all of the following charge elements including Budget Estimate, Feasibility Study, Construction, Competition in Connection Charges, Other Charges and for Land Rights. Charges for Assessment & Design are to be paid on acceptance of any Connection Offer, or POC Offer as applicable."
[6.4] refers to the limited circumstances – single customer requesting numerous small value connections with minimal possibility of payment default – where it accepts payment in arrears.