QUEEN'S BENCH DIVISION
Strand, London, WC2A 2LL
B e f o r e :
| HEATHROW AIRPORT LIMITED
- and –
|OFFICE OF RAIL AND ROAD
- and -
|(1) TRANSPORT FOR LONDON
(2) SECRETARY OF STATE FOR TRANSPORT
- and -
|CIVIL AVIATION AUTHORITY
Mr Rhodri Thompson QC, Mr Nicholas Gibson and Ms Anita Davies (instructed by the Office of Rail and Road) for the Defendant
Mr Marc Rowlands QC and Mr Simon Taylor (instructed by Transport for London) for the 1st Interested Party
Mr Tom Hickman (instructed by the Government Legal Department) for the 2nd Interested Party
Ms Anneli Howard (instructed by the Civil Aviation Authority) for the Intervener
Hearing date: 21-23 February 2017
Crown Copyright ©
Mr Justice Ouseley:
The context for the ORR decision
"2. For specific investment projects, in the future, or that have been completed not more than 15 years before the entry into force of this Directive, the infrastructure manager may set or continue to set higher charges on the basis of the long-term costs of such projects if they increase efficiency and/or cost-effectiveness and could not otherwise be or have been undertaken. Such a charging arrangement may also incorporate agreements on the sharing of the risk associated with new investments." (My italics.)
"3. (1) Subject to sub-paragraph (2), for specific investment projects completed –
(a) since 15th March 1988; or
(b) following the coming into force of these Regulations,
the infrastructure manager may set or continue to set higher charges on the basis of the long-term costs of the project.
(2) For sub-paragraph (1) to apply –
(a) the project must increase efficiency or cost-effectiveness; and
(b) the project could not otherwise have been undertaken without the prospect of such higher charges."
The Decision Letter of 27 May 2016
" the infrastructure manager must be able to demonstrate that the project could not have gone ahead without the prospect of levying charges on rail users that made at least some contribution to the "long-term costs of the project". However, we do not consider that the Regulations require an infrastructure manager to demonstrate that the project could not have gone ahead unless the higher charges imposed were sufficient to recover all the long-term costs of the project from rail users, if it is to be permitted to levy any higher charges under this exception."
"The operative requirement is, however, that the undertaking of the project was contingent on the prospect of higher charges being levied."
"…an important factor in determining whether charges can be levied under the …exception is the basis on which the investment was made (i.e. expected returns/traffic forecasts rather than the actual amount recovered)."
" We think a realistic commercial standard should be applied to an issue of this kind. As a result, we considered the relevant question was whether HAL had showed that, when the decision was taken to approve the project, there was no realistic commercial possibility of the project going ahead without the prospect of levying charges on rail users that contributed to the Historical Long-Term Costs."
" We do not consider the available evidence to be sufficient to demonstrate that HAL has satisfied the Paragraph 3 Test in respect of the Historical Long-Term Costs and as such, HAL cannot be considered to have discharged its burden of proof."
"50. We have seen no evidence that Newco, as a standalone special purpose vehicle, would have had any realistic commercial source of income to contribute to Historical Long-Term Costs other than revenue from rail users. Accordingly, we are persuaded that, had the Newco structure proceeded, the third criterion of the Paragraph 3 Test would very likely have been satisfied."
"55. Our initial understanding, as set out in our proposed decision, was that the Heathrow Spur was included in the airport RAB as an alternative to pursuing the Newco option, although, as we noted, we had not seen any explicit evidence setting out the basis on which that RAB addition occurred. We said in our proposed decision that we did not consider that inclusion of the Heathrow Spur on the RAB necessarily precluded the application of the third criterion of the Paragraph 3 Test. However, in most regulated sectors, a rate of return on the RAB is included in the calculation of the charges a regulated entity is permitted to make to its customers and, as such, we considered that this could provide an alternative source of funding for a project enabling it to go ahead even without a contribution to capital costs from users of the project infrastructure. In the case of the Heathrow Spur, the addition of the project to the airport RAB could, at least in principle, be viewed as having created a realistic commercial possibility of funding the project through airline charges (or other single till income) even if there were no prospect of higher charges to rail users contributing to Historical Long-Term Costs. We therefore considered the addition of the project to the airport RAB to be important when considering the basis on which the investment was made."
"58 Our understanding is that the two mechanisms offered the same recourse to alternative funding through airport charges and that the regulatory till did not operate in a materially different way to the present day RAB.
60. In light of the above, we consider that the RAB (although not known by that name) existed before the project was approved, and operated in a way that created a realistic commercial possibility of funding the project through airline charges (or other single till income) even if there were no prospect of higher charges to rail users contributing to Historical Long-Term Costs."
"61. In our proposed decision, we went on to consider all the available evidence to establish whether the addition of the Heathrow Spur to the airport RAB (or its predecessor) was or was not consistent with the Paragraph 3 Test being satisfied. HAL told us that the CAA was unlikely to have agreed to the Heathrow Spur project (and funding through the RAB) if there was not a prospect of the charges being recovered over time through revenues from use of the new infrastructure. We looked to see whether there was any evidence from which we could infer that the investment in this case was treated in a way which distinguished it from other assets. Such treatment could, for example, include allocation of specific income to fund specific costs or some form of ring-fencing of that investment. However, we did not see, nor have we seen in response to our consultation, any evidence of distinct treatment of the project on the airport RAB or the regulatory till."
"were consistent with a view that the Heathrow Spur project, once added to the RAB or regulatory till, would be treated in the same way as any other addition. That is, airline charges would fund a rate of return on that project without any specific correlation to any contribution from rail users to Historical Long-Term Costs."
"53. Heathrow Express represents something of a special case and the rationale for this is detailed in Appendix 1; BAA was obliged to undertake significant investment in the project in order to improve surface access to Heathrow and respond to pressure from CAA. Airport rail projects are very unlikely to make a commercial rate of return and further investment will not be possible without inclusion in the aeronautical till. This in turn is likely to compromise airport capacity and throughput.
54. Two exceptions to this principle may apply:-
– where rail investment is a free-standing commercial venture not required for airport capacity, it should probably be excluded;
– where BAA invests in infrastructure and operates the service (as in the case of HEx) the operating business may be excluded, if it pays a fair arm's length price (and no more) for use of the infrastructure."
"It is essential to the operation and growth of aeronautical operations
- It would not have been developed, and will not be further developed, if required to achieve normal commercial returns. This would prejudice the airport's growth.
- The implementation of the project was pressed on BAA by the CAA for air transport reasons
- It is essential for the airport to retain operational control of the rail infrastructure and service to specify levels of service and fares which would not be provided on pure commercial grounds, in order to meet aeronautical demand. If the rail service were provided by a third party, any subsidy provided by the airport should be regarded as a cost within the aeronautical till.
It supports the request by British Airways for BAA to provide "good surface access (road/rail links)" (22/11/00)."
"64. In its consultation response, CAA said it would "encourage a degree of caution about adopting an assumption that just because a rail project is within the airport RAB, this axiomatically indicates that the project would have gone ahead without recovering historic costs through rail charges. This is because under our single till approach the airport operator will factor in that income from the project will be netted off from airport charges and that we would expect an operator to maximise the recovery of the costs from this income." We accept that HAL has sought to maximise recovery of income from the Heathrow Spur project (and consider the reasons for this later); however, we have not seen any evidence that challenges our view that once the Heathrow Spur project was added to the RAB (or regulatory till), airline charges would fund a rate of return on that project without any specific correlation to any contribution from rail users to Historical Long-Term Costs."
"as far as practicable against revenues from those directly using the new surface access infrastructure/services. As a result, airport charges would only fund the residual costs not covered by rail fares or road tolls or charges." Our proposed decision noted that the policy did not however go so far as to preclude investment where this was not the case. As a result, we did not feel the evidence provided to us on this issue was sufficient to demonstrate that the addition of the project to the airport RAB was only permitted on the basis that the Historical Long-Term Costs would be recovered, over time, through rail charges."
"no reason to doubt that a similar 'user pays' type approach would have been taken into account during earlier price control reviews". It also confirmed that airport charges would only make up a shortfall for the costs that are not otherwise recovered by charging users of the surface access infrastructure. In light of this confirmation that airport charges are available to make up any shortfall in revenue from users of surface access infrastructure, our view remains that HAL has not provided sufficient evidence to support a conclusion that the addition of the project to the airport RAB, or its predecessor, was only permitted on the basis that the Historical Long-Term Costs would be recovered through rail charges."
" "This exemption will enable us to charge a track fee to other users of the line crossing Heathrow Airport, a fee that will compensate the Heathrow Express project for any loss of income generated by the introduction of other services on the line, including CrossRail". It is clear that BAA's concern was to protect against "loss of income".
"HAL's explanation of why the exemption was essential for the financial viability of the project is that not obtaining such an exemption could preclude HAL from fully recovering its capital expenditure. HAL told us that the exemption would enable BAA to charge other operators using the Heathrow Spur for access so as to compensate for the loss of income to the Heathrow Express and would allow HAL to maintain its projected incomes from the Heathrow Spur in the event of use by other operators. HAL's view is that "the BAA plc Board would not have proceeded with full investment in the Heathrow Spur – and, therefore, the Spur would not have been constructed – unless it was confident that it could (pursuant to the said exemption) levy charges on access operators enabling BAA plc (later HAL) to recover its capital investment in construction, plus a commercial rate of return"."
"74. From the board papers it appears that the reduction or increase in fare revenues was forecast to have the biggest effect on IRR and, therefore, the profitability of the project. The track fee that BAA contemplated charging other users of the Heathrow Spur including CrossRail appears to have been to compensate the project for any loss of this income from HEX fare revenues.
75. HAL has essentially sought to link the focus on recovering income in the form of fares through the operating company to a need for HAL to receive income through track access charges which would recover the Historical Long-Term Costs."
But the ORR was not persuaded that the documents demonstrated "a link between fares revenue and income through track access charges to recover the Historical Long-term Costs."
"76. We consider that there are three potential reasons why an exemption from the access and licensing regime may have been so important to the project's viability:
i. it allowed BAA to protect its monopoly profits generated through fare revenue (albeit that this ability would be limited by competition law and the price control mechanism);
ii. it allowed BAA to maximise fare revenue to ensure that the contribution to the single till was maximised and helped lower airport charges; and
iii. it allowed BAA to ensure that the users of the project infrastructure contributed to repaying the Historical Long-Term Costs of the project.
77. We consider that all three reasons are plausible explanations for the significance of the exemption from the Railways Act. However, even keeping in mind the fact that the Paragraph 3 Test did not exist at the time when the documents were drafted, we believe the language of those documents appears to be more consistent with the first two reasons than the third. If the third reason were the most likely explanation, we consider there would be some mention of the importance of recovering the Historical Long-Term Costs (or at least some language implying it) in the board papers. Therefore, we are not convinced that the importance of the exemption was that it allowed BAA to ensure that the fare revenue contributed to repaying the Historical Long-Term Costs, rather than simply enabling it to protect its monopoly profits and/or maximise contributions to the single till, thereby reducing airport charges. As such, although we accept gaining an exemption from the Railways Act access and licensing system was critical, we consider that the decisive factor in proceeding with the project was the wider benefits that the project would bring to the development of the airport as a whole."
"79. We set out our understanding, in our proposed decision, that any shortfall in Historical Long-Term Costs recovery from rail users had been recovered through airline charges calculated on the basis of the RAB. While we considered the recovery of costs from rail users to be rational commercial behaviour, given that the Heathrow Spur was financed through the airport RAB and had been (at least partially) funded through airport charges since its inception, we did not consider the expectation of recovery (even when coupled with actual recovery), to be determinative of whether HAL had met the requirements of the Paragraph 3 Test. As such, whilst we recognised HAL took steps to recover revenues from users of the Heathrow Spur, we did not consider it to be sufficient to establish that the project could not have gone ahead without the prospect of such cost recovery. We remain of this view."
"81. In light of the above, we are not satisfied that HAL has provided sufficient evidence to demonstrate that the Heathrow Spur project could not have gone ahead without the prospect of higher charges to rail users. We have taken into account that the Paragraph 3 Test did not exist at the time the decision to construct the Heathrow Spur was taken. However, in considering all the evidence in the round, we are not satisfied that HAL has met the test.
82. In reaching this conclusion, we consider that the addition of the Heathrow Spur project to the RAB, or the regulatory till, was a significant factor, as this provided a realistic alternative source of funding for the project which could have allowed it to go ahead even if there were no prospect of higher charges to rail users contributing to the Historical Long-Term Costs. Evidence showing the significance of the project to the development of the airport as a whole supports this conclusion. Equally, we accept that there was an expectation of cost recovery from rail users from the outset of the project (and protection of fare revenue sought in the form of an exemption from the access and licensing system), and that HAL has demonstrated it has recovered revenue from rail users. We consider taking steps to recover revenue from users of the Heathrow Spur to be rational commercial behaviour by HAL to protect and maximise) monopoly profits and/or the contribution to the airport single till, and, as such, is not determinative of the Paragraph 3 Test."
The contemporaneous documents
"20. As a stand alone project the marginal returns and the extent of the downside make this an unattractive investment. In the context of Heathrow's development prior to the opening of T5, however, Heathrow Express is considered an essential part of the plan to accommodate growth in traffic. The returns which are forecast for this overall development programme are attractive, and on this basis Group Finance recommend approval."
The CAA's position
The rationality challenge
TfL's submission on transposition
The application of the Regulations
"(6) Where the High Court considers that there has been undue delay in making an application for judicial review, the court may refuse to grant –
(a) leave for the making of the application; or
(b) any relief sought on the application,
if it considers that the granting of the relief sought would be likely to cause substantial hardship to, or substantially prejudice the rights of, any person or would be detrimental to good administration."
"Please will you accept this letter as an invitation to deal with the matter referred to in Appendix 3 of the said Deed of Undertaking and confirm that the 2005 Regulations apply in respect of the Heathrow Spur.
On receipt of the confirmation that the 2005 Regulations apply, we will look to further engage ORR for comments on the proposed Heathrow Spur network statement and confirmation of the relevant charging framework and specific charging rules."
"ORR has considered the applicability of the exemptions to Heathrow Airport Limited and Heathrow Express Operating Company Limited and it is our view that the Regulations do apply in each case."