England and Wales High Court (Commercial Court) Decisions

IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT

		Royal Courts of Justice Strand, London, WC2A 2LL
		1st December 2006

Mrs. Justice Gloster, DBE:

Introduction

1. In this action the Claimants, Centrica PLC ("Centrica") and its wholly-owned subsidiary, British Gas Trading Limited ("BGTL"), make certain claims against the Defendant, Premier Power Limited ("PPL") under or in relation to a long term gas supply agreement dated 1 April 1992 ("the GSA"). As a result of a transfer scheme in 1996, made pursuant to the provisions of the Gas Act 1995, and a demerger and assignment in February 1997, the GSA is now a contract between Centrica as seller and PPL as buyer. The GSA provides for the supply of gas by Centrica to the Ballylumford Power Station, which is situated on the Antrim Coast of Northern Ireland, near Larne and which is owned and operated by PPL. BGTL has at all material times performed the GSA on behalf of Centrica.
2. The GSA is what is known in the industry as a long term interruptible gas supply agreement (or "LTI" for short.). The terms of the GSA provide that it will last for a period of 12 years from the defined Start Date (1 April 1997) until 31 March 2009. By the terms of a side letter dated 30 March 1992, PPL was given the option to extend certain of Centrica's transportation obligations for a further three years until 2012.
3. The gas to be delivered to PPL under the GSA has to be transported from the junction of the UK National Transmission System ("NTS") system at Moffat, Dumfriesshire, Scotland, via Twynholm in Scotland, through a pipeline, part of which runs under the Irish Sea, to the Ballylumford Power Station in Northern Ireland ("the Pipeline"). The section of pipeline between Moffat and Twynholm is, and was at all material times, owned and operated by Bord Gas Eireann ("BGE"), and is part of a pipeline which is used to deliver gas to the Republic of Ireland, near Dublin. At the date of the GSA, the remainder of the Pipeline (i.e. that portion from Twynholm, to the Scottish coast, under the Irish Sea and then to Ballylumford) had not yet been built. British Gas plc ("British Gas"), the original seller under the GSA, established a subsidiary, Premier Transco Limited (which was later renamed Premier Transmission Limited) ("PTL") to build, own and operate the Pipeline. It was anticipated that deliveries of gas under the GSA would not begin until 1996. That in fact occurred: first deliveries of gas began in late 1996.
4. From the time when deliveries under the GSA began, transportation of gas through the Pipeline was undertaken by PTL (as carrier) pursuant to a contractual arrangement with BGTL (as shipper). The terms of this arrangement were originally contained in a Transportation Agreement dated 6 September 1996; since October 2001 they have been contained in a Transportation Code ("the Code"), which sets the terms applicable to all shippers using the Pipeline.
5. The present dispute concerns the extent of Centrica's ability to recover the costs of transporting gas under the GSA from PPL. The Claimants seek to charge PPL under the GSA for two sets of charges. I explain these charges in more detail below, but, for the purposes of this introduction, they can be summarised as follows:

i) "Balancing and Scheduling Charges": these are charges which are imposed by the operator of the Pipeline, PTL, as a result of the terms of the Code, upon BGTL/Centrica for the use of the Pipeline from October 2001; the amount claimed in the Amended Particulars of Claim up until March 2006 in respect of this item was £3,196,449.35 together with future sums alleged to be accruing due for the remaining duration of the GSA; and

ii) "Monthly Postalised Payments" ("MPP"): the MPP are the basis upon which PTL has charged BGTL/Centrica for the use of the Pipeline following the introduction in Northern Ireland in October 2004 of a new system for charging in respect of gas transportation, known as "Postalisation" or "the Postalised System"; the aim of this system (the name of which was no doubt inspired by the philosophy of the postage stamp) was to ensure that all shippers of gas into Northern Ireland paid a common tariff for the shipment of gas, irrespective of the location of their ultimate customers and such customers' proximity to the point of arrival of the gas into Northern Ireland; the amount claimed in the Amended Particulars of Claim up until March 2006 in respect of this item was £25,823,154.29, together with future sums alleged to be accruing due for the remaining duration of the GSA.

Issues

6. There are three principal issues which I have to determine:

i) Are BGTL/Centrica entitled, as a matter of construction of the GSA, to pass on to PPL the Balancing and Scheduling Charges and the MPP under the charging provisions of the GSA?

ii) If BGTL/Centrica are not entitled, as a matter of construction, to charge PPL for these items, are BGTL/Centrica entitled to exercise a provision in the GSA that allows for limited unilateral variations to be made to the terms of the GSA by BGTL/Centrica in certain defined circumstances?

iii) If BGTL/Centrica, are not entitled, as a matter of construction, to charge PPL for these items (whether under the existing charging provisions of the GSA, or as varied), has an estoppel by convention arisen as to the meaning of the charging provisions in the GSA, such that BGTL/Centrica are entitled to proceed to charge PPL on the basis of a common assumption, both in respect of the past and in respect of the future, that such charges are recoverable?

Factual background and relevant contractual provisions

7. It is necessary to rehearse the factual background to the dispute and the terms of the relevant agreements in some detail for the purposes of both the construction arguments and the estoppel arguments.

(a) British Gas bid for the acquisition of Ballylumford Power Station

8. The GSA came about as a result of the implementation of plans by the UK Government to privatise the electricity supply industry in Northern Ireland. Prior to privatisation, the generation and supply of electricity in Northern Ireland was owned by Northern Ireland Electricity Service. Northern Ireland Electricity Service was privatised in June 1993 when it became Northern Ireland Electricity plc ("NIE"). (Hereafter I refer to both Northern Ireland Electricity Service and Northern Ireland Electricity plc as NIE.)
9. NIE was the owner of a number of generating companies including Ballylumford Power Limited, the former name of PPL, which in turn owned the Ballylumford power station. In 1992, there was no supply of natural gas to Northern Ireland and Ballylumford power station was oil fired. In October 1991 British Gas submitted a bid to the UK Government (Department of Economic Development for Northern Ireland) for the acquisition of the shares in Ballylumford Power Limited, through which British Gas would acquire indirect ownership of Ballylumford power station. In its bid document, British Gas made a number of proposals: first, to convert the power station so that it could use natural gas as well as heavy fuel oil; secondly, to supply gas to the power station; thirdly, to construct the Pipeline from Scotland to Northern Ireland in order to bring gas to Northern Ireland. The intention was to connect to the NTS at Moffat, but since there was the existing pipeline between Moffat and Twynholm, owned by BGE, it was only necessary for the new Pipeline to be constructed from Twynholm.
10. Following a six month period of negotiation, British Gas' bid was successful. The PPL sale and purchase agreement was entered into on 6 March 1992 and completion took place by 1 April 1992. Ballylumford Power Limited was renamed Premier Power Limited after it was acquired by British Gas.

(b) The GSA

11. As I have already stated, the GSA was entered into on 1 April 1992, the parties to the agreement then being British Gas as seller and PPL as buyer. The form which the GSA took was that of a long term interruptible supply agreement, namely a LTI. For gas supplies within Great Britain, British Gas was obliged to offer standard terms of supply, which it did by offering standard LTI pricing schedules (representing the commodity price and the price of gas transport within Great Britain). At the time when the GSA was entered into, there was very high demand for gas supply in Great Britain. As demand increased, British Gas revised the pricing of the LTIs so as to continue to be in a position to meet the demand on gas. This resulted in successive revisions to the LTI schedules. The schedule current at the time of the GSA was LTI3. British Gas was not statutorily obliged to offer LTI3 terms outside Great Britain but decided to bid for the GSA on a basis that incorporated standard LTI3 terms. However, it was common ground that the capital cost of constructing the Pipeline and the costs of operating it were expressly anticipated by the GSA, and that, although the GSA was based on the standard British Gas LTI3 take or pay contract, it included a specially negotiated annex (Annex 5) relating to Transmission Charges. The Annex 5 Transmission Charges were defined by reference to the capital and operational costs of the Pipeline.
12. Annex 5 defined capital costs by reference to forecast capital costs, but adjusted, subject to a cap, to reflect actual costs. The Annex also fixed predictable operating costs by reference to the actual capital cost of the installed Pipeline. Although unpredictable operating costs were also recoverable, these were defined by reference to actual costs incurred in operating, repairing or maintaining the Pipeline and were subject to the scrutiny of an audit. The GSA was also subject to the overall condition precedent that capital expenditure on the Pipeline would not exceed £127 million (Special Condition 1.1).
13. I shall have to address the relevant charging provisions of the GSA in greater detail below. Basically, however, by clause 2.1 the GSA provided that the price that PPL was to pay British Gas was as follows:

"The Customer shall pay to British Gas:

(a) a commodity charge for gas supplied under this Agreement (referred to as the Modified Reference Price) and

(b) a charge for the costs of connection to the national transmission system of British Gas and gas transportation along the Pipeline (referred to as the Transmission Charges)."

14. There is no dispute between the parties about the commodity charge; the dispute arises in relation to the Transmission Charges. It is common ground that these were carefully drafted to enable certain costs to be recovered; it is also common ground that these costs were, in summary, the costs incurred in constructing, and then in operating, repairing and maintaining the Pipeline; the dispute between the parties is as to whether the Balancing and Scheduling Charges and the MPP come within the scope of Transmission Charges as defined.
15. Clause 2.6 provided:

"The Transmission Charges shall be calculated and paid in accordance with Annex 5 and General Condition 4"

16. The entirety of Annex 5 relates to the Transmission Charges. The Transmission Charges are made up of two elements: (i) the Actual Monthly Charge ("AMC"); and (ii) a proportionate share of certain costs referred to as "the BG Unpredictable Operating Costs" ("BGUOC"). The Annex is divided into 6 Parts. Part 1 contains preliminary provisions. Part 2 concerns calculation. Parts 3 and 4 contain definitions. Part 5 concerns assumptions. Finally, Part 6 concerns the annual reconciliation of the AMC. Annex 5, Pt 2 provides that the AMC is to be calculated by reference to a set formula set out in Annex 5, the most important element of which is the Base Monthly Charge ("BMC"). The BMC was effectively a payment in respect of certain specifically defined capital costs; certain operating costs, referred to as "BG Predictable Operating Costs", defined, in paragraph 10 of Part 3 of Annex 5, to include various costs associated with inspection and testing; and the "BGE Charge for Operational Costs" which were effectively British Gas' proportion of the operating costs referable to the pipeline running between Moffat and Twynholm operated by BGE, and which were calculated "in accordance with applicable monthly invoices submitted from time to time by BGE".
17. So far as the BGUOC were concerned, Annex 5, Part 1, paragraph 3 provides that:

"3. BG Unpredictable Operating Costs shall be calculated without variation in accordance with relevant expenditure incurred from time to time by British Gas."

Paragraph 11 of Part 3 of Annex 5 defines BGUOC as follows:

"BG Unpredictable Operating Costs" means all costs and expenses reasonably and properly incurred by British Gas or any Affiliate thereof (as defined in General Condition 14(4) in Annex 3 to this Agreement) in operating, repairing or maintaining the Pipeline and any land or sub strata on, in, under or over which it is laid other than the BG Predictable Operating Costs and excluding any such costs or expenses relating to the BGE Pipeline."

18. The term "Affiliate", as used in Annex 5, Pt 3, paragraph 11, is defined in General Condition 14(4) to mean:

"… any holding company or subsidiary company of a party or any company which is a subsidiary of such a holding company and the expressions "holding company" and "subsidiary company" shall have the meanings specified in Section 736 of the Companies Act 1985".

19. The "BGUOC Payable by the Customer" are defined in Annex 5, Pt 3, paragraph 12 as the proportion of the BGUOC payable by PPL; this proportion is equivalent to PPL's annual consumption of gas under the GSA over the total aggregate quantity of gas consumed in the year by all persons supplied with gas through the Pipeline.
20. The variation provisions are also considered in more detail below, but Annex 5, Part 1, paragraph 6 conferred a power on British Gas to vary the Transmission Charges in the following terms:

"(a) Notwithstanding anything else contained or referred to in this Agreement or elsewhere and notwithstanding any prior agreement or understandings between the parties hereto and notwithstanding any representations made by or to either of them or by or to any third party with the intention or expectation that either party hereto would act thereon, all Transmission Charges have been calculated on the basis of those assumptions set out in Part 5 of this Annex.

(b) If any of the assumptions in paragraph (A) of Part 5 shall at any time during the currency of this Agreement prove incorrect for whatever reason, British Gas shall be entitled from time to time to vary the Transmission Charges by such amount or amounts and generally in such manner as it may consider reasonably appropriate to reflect the circumstances at the date of variation. Any such variation may have retrospective effect."

21. For present purposes the relevant assumption, or assumptions, is or are set out at paragraph (A)5 of Part 5 of Annex 5, headed "Assumptions" in the following terms:

"That no Regulatory Action will occur and there will be no changes in and no introduction of any legislation, statutory instrument, order or code of practice (whether or not having statutory effect) regulating or in any way affecting the planning, design, construction, laying, burying, testing, commissioning, certification, approval or operation of the Pipeline or any part thereof which would or might affect the total cost of construction (including the Capital Costs) or any of the costs of operating the Pipeline or any part thereof or any component of any of the costs referred to in this paragraph; provided that (for the avoidance of doubt) this paragraph shall not of itself entitle British Gas to vary the Transmission Charges by reason only of anything relating to the supply of gas through the Pipeline to any person in Northern Ireland other than the Customer."

22. So far as is material for present purposes, "Regulatory Action" is defined in Annex 3 to the GSA in the following terms:

"Regulatory Action" means any order of a court of competent jurisdiction or any order, decision or conclusive view made, given or expressed (save as a direct and necessary consequence of Wilful Default) … by a competent governmental or regulatory authority or agency or an enactment of a legislative body:

(a) which materially prohibits or restricts any or all of the transactions contemplated hereby or requires the Substantial Completion Date or the Start Date to be delayed beyond the dates referred to in Special Condition 6; or

(b) which prohibits or restricts or materially affects the design or construction or laying or commissioning of the Pipeline; or

(c) which would materially prohibit or restrict the operation of the power station at the Premises; or

(d) in consequence of which, either of the Parties would incur fines or a liability in damages were this Agreement to be performed in accordance with its terms."

(c) The agreements between PPL and NIE

23. On 1 April 1992 (the same date as the GSA) PPL entered into a number of agreements with NIE for the supply of electricity generated at the Ballylumford Power Station to NIE. These agreements included Generating Unit agreements ("GUAs"), a Power Station Agreement and a Gas Conversion Agreement. Under the GUAs, PPL agreed to provide capacity and deliver electricity to NIE, and NIE agreed to pay the Transmission Charges payable by PPL under the GSA. The Power Station Agreement contained a number of provisions designed to protect NIE's position. In particular, PPL was required to comply with its own obligations under the GSA, to enforce compliance by British Gas with its obligations under the GSA and to permit NIE to require disputes to be raised by PPL in relation to any invoice.

(d) The construction of the Pipeline

24. The GSA expressly envisaged that the first gas supply thereunder would not take place until October 1996 at the earliest; clause 6.1 of the GSA defines "the Earliest Start Date" as being not earlier than 1 October 1996. This was because it was correctly anticipated that the gas conversion process and the construction of the Pipeline would take a substantial amount of time to complete.
25. As I have already said, British Gas established another subsidiary, PTL, to build, own and operate the Pipeline. Thus, at the date of the GSA, the seller (British Gas), the buyer (PPL) and the company responsible for the pipeline, (PTL), were all companies in the same group.
26. The construction of the Pipeline was completed by about mid 1996. This was followed by a period during which gas deliveries were made to Ballylumford Power Station for the purposes of commissioning.

(e) The Transfer Scheme

27. On 2 February 1996 all rights and liabilities of British Gas in the GSA were transferred to BGTL, a subsidiary of Centrica, by a transfer scheme made pursuant to the Gas Act 1995 ("the Transfer Scheme"). At that time, Centrica was itself a subsidiary of British Gas. Clause 17 of the Transfer Scheme had the effect of substituting "BGTL" for each reference to "British Gas" in the GSA.

(f) The Transportation Agreement

28. In anticipation of the start of gas supply under the GSA, BGTL entered into a Transportation Agreement with PTL dated 6 September 1996 relating to the transportation of gas through the Pipeline. PPL was not a party to this agreement and I find as a fact that it was not shown a copy of it at the time. The Transportation Agreement required BGTL to pay to PTL charges for the transportation of gas that mirrored those payable by PPL under the GSA. The charges included an "Actual Monthly Charge" ("AMC") as well as "Carrier Unpredictable Operating Costs" ("CUOC"), which were defined in the same way as BGUOC under the GSA. The provisions of the Transportation Agreement were also reflected in PTL's Licence.

(g) The De-Merger

29. At the time of the GSA, British Gas carried on business in supply, shipping and transportation of gas (in particular, transport of gas along the NTS, which it then owned and operated). Under the Gas Act 1995, British Gas was required to place its gas supply, shipping and its gas transportation business into separate legal entities. On 2 February 1996, pursuant to paragraph 2 of Schedule 5 to the Gas Act 1995 the rights and liabilities under all of the gas sales agreements, including the GSA and all the other LTI agreements of British Gas were transferred to BGTL, under a Transfer Scheme. The Transfer Scheme was implemented on 1 March 1996.
30. On 17 February 1997 British Gas de-merged into two publicly listed companies: BG plc (which was the new name for the corporate entity that had been called British Gas, prior to the de-merger) and Centrica. The former ceased to own Centrica. The de-merger resulted in two separate groups, one with Centrica as its parent (gas sales, services and retail businesses, which included BGTL as a subsidiary), and the other with BG plc as its parent (gas transmission and distribution in Great Britain, and Exploration, Production and International Downstream businesses, including PPL and PTL as subsidiaries).
31. On the same day as the de-merger, a Deed of Assignment ("the Deed of Assignment") was entered into by BGTL, Centrica and PPL pursuant to which BGTL, with the consent of PPL transferred its rights and obligations under the GSA from BGTL to Centrica. The Deed of Assignment effected a novation of the GSA; in other words a new contract came into being on the terms of the GSA between Centrica as seller and PPL as buyer.
32. As between BGTL and Centrica, agreements were put in place by which BGTL agreed that it would perform Centrica's obligations under the GSA on behalf of Centrica and became entitled to the economic benefit and burden of the agreement. PPL was not a party to these arrangements.
33. Thus, the consequence of the de-merger was that, from the date of the de-merger and as at the date of the Deed of Assignment (17 February 1997), when Centrica entered into contractual relations with PPL on the terms of the GSA, as all concerned knew:

i) the seller and the buyer under the GSA were not part of the same group of companies;

ii) neither Centrica, nor any company in its group, owned or operated the Pipeline; and

iii) PTL, the operator of the Pipeline, was no longer an Affiliate, as defined, of either Centrica or BGTL (for the purposes of the GSA) but rather a company in the same group as PPL.

34. For much of the period after February 1997 PTL remained a company in the same group as PPL. In 1997 and 1998, 50% of the shares in PTL were disposed of to a third party, Keyspan, in two tranches. Since March 2005 PTL has ceased to be in the same group as PPL. In March 2005 all of the shares in PTL were sold to Northern Ireland Energy Holdings Limited, a not for profit company, as part of a process of mutualisation.

(h) Disputes about invoices raised by BGTL/Centrica

35. Following the completion of commissioning, gas deliveries under the GSA began in April 1997. Under PPL's GUAs with NIE, PPL was entitled to charge to NIE properly incurred charges for fuel, including charges for transportation. NIE was concerned from the outset to ensure that the amount that it was charged only included items that were properly recoverable by BGTL/Centrica under Annex 5 of the GSA. Even before the Pipeline had been constructed, NIE had written to PPL requesting that an audit be carried out in relation to PTL's capital costs and how they were to be allocated. Various disputes arose both between PPL and NIE on the one hand and PPL and BGTL/Centrica on the other, in relation to various invoices and charges which were in large measure resolved, but I shall have to return to the history of these disputes in greater detail when I come to consider the estoppel claim.

(i) Introduction of the Transportation Code

36. By PTL's Conveyance Licence dated 6 September 1996 it was obliged to introduce a network code for the transportation of gas through the Pipeline (clause 2.3.2). Such a code was to enable shippers using the Pipeline to arrange for the transport of gas along the Pipeline on standard terms, instead of entering into bilateral agreements with PTL for the transportation of gas. The Code came into effect on 1 October 2001 through the amendment of PTL's Conveyance Licence to require it to charge shippers on the basis of the standard terms set out in the amended licence. The Transportation Agreement terminated on the introduction of the Code. The Code provided for shippers to pay to PTL Licence Charges (including an Actual Monthly Charge and Licensee Unpredictable Operating Costs) and Code Charges (including Balancing Charges and Scheduling Charges). I describe the nature and operation of these charges in greater detail below.

(j) The Energy Order and the Postalised system

37. By 2004 the gas transmission network in Northern Ireland had considerably expanded. There were three pipeline operators transporting gas to and across Northern Ireland: PTL, Phoenix Natural Gas and BGE. Prior to Postalisation, shippers transporting gas across Northern Ireland had to deal with different pipeline operators charging different transmission charges for the transportation of the gas. This could lead to multiple charges and different transportation costs. For example, customers in the west of the Province would pay more than customers in the east of the Province who were using only part of the network. The idea of Postalisation was to pool the revenue requirements of the pipeline operators so as to produce a single tariff so that the cost of transmission to more remote locations could be reduced at the expense of the cost of transmission to more accessible locations, which would increase.
38. On 27 February 2003, the Energy (Northern Ireland) Order 2003 (the "Energy Order") was made by Order in Council. Article 59 of that Order gave to the Department of Enterprise, Trade and Investment the power, after consultation with the Northern Ireland Authority for Energy Regulation, to designate any pipeline as a pipeline to which Article 60 applied. Pursuant to Article 60, the Department of Enterprise, Trade and Investment, after similar consultation, was given power to modify certain licences, including a conveyance licence "where it considers it necessary or expedient to do so for the purpose of implementing, or facilitating the operation of arrangements designed to secure that the prices charged in connection with the conveyance of gas through designated pipelines are in accordance with a common tariff which does not distinguish (whether direct or indirectly) between different parts of Northern Ireland or the extent of use of any such pipeline." This was referred to as the "postalised system".
39. On 22 September 2004 The Gas (Designation of Pipelines) Order (Northern Ireland) 2004 was enacted pursuant to Article 59 of the Energy Order (the "Designation of Pipelines Order"). This designated the pipelines that were to be subject to a common tariff. The designated pipelines were: part of the Pipeline from Castle Robin Bay in Northern Ireland to Ballylumford Power Station; the Phoenix pipeline from Ballylumford to the Greater Belfast Distribution Network; and the BGE North-West pipeline which connects to the Phoenix Pipeline at Carrickfergus and runs to Coolkeeragh Power Station.
40. On 28 September 2004 PTL's Conveyance Licence was modified pursuant to Article 8(1) of the Gas (Northern Ireland) Order 1996 and Article 60 of the Energy Order so as to authorise PTL to charge shippers using the Pipeline Monthly Postalised Capacity and Commodity Payments (as defined). Prior to Postalisation, corresponding modifications were also made to BGTL's Supply Licence. The modifications so made to the Conveyance Licence and the Supply Licence were reflected in the introduction of a revised version of the Transportation Code, namely version 1.04.
41. By condition 2A.2.2.1 of the Modified Licence, PTL was required to charge BGTL in respect of the "Exit" of gas from and holding of capacity on the "Designated Network". Such payments were required to be made as "Monthly Postalised Payments" (i.e. MPP as defined above) in accordance with the terms of the Modified Licence and the applicable provisions of the Code. These modifications came into effect from 1 October 2004. These MPP, payable by a shipper such as BGTL/Centrica to PTL, involve a capacity payment and a commodity payment. In the case of the capacity payment, the MPP were determined by units of firm capacity booked by the shipper; in the case of the commodity payment, the MPP were determined by the units of gas offtaken by the shipper each month.

(k) Consultation prior to the introduction of Postalisation

42. The new Postalised System was introduced with effect from 1 October 2004 following a detailed process of consultation and discussion. The consultation began with the publication in December 2002 of the Office for Regulation of Electricity and Gas' ("Ofreg's") Consultation Paper relating to Postalisation. Each of BGTL/Centrica, PPL and NIE responded to this paper. Many of the communications that followed the Consultation Paper were between PPL and Ofreg or between BGTL/Centrica and Ofreg rather than directly between PPL and BGTL/Centrica. Both parties respectively relied upon what was said during the consultation process in support of their submissions on the various issues and I shall have to refer to certain of the communications in due course.

(k) Disputes over post-Postalisation invoices

43. The first invoice issued by PTL to BGTL/Centrica under the new system was dated 9 November 2004. The first invoice issued by BGTL/Centrica to PPL following Postalisation was dated 22 November 2004. It no longer contained an AMC or BGUOC calculation. Instead it sought to pass on to PPL the MPPs. In a separate invoice BGTL/Centrica continued to seek payment of the Balancing and Scheduling Charges. PPL did not pay these invoices and has not paid these invoices pending the resolution of this dispute. By letter dated 19 May 2006 Denton Wilde Sapte, solicitors acting on behalf of PPL, wrote to Ashursts, solicitors acting on behalf of BGTL/Centrica, indicating that PPL was willing to pay the AMC and the relevant proportion of the BGUOC (not including the Balancing and Scheduling Charges) for all outstanding periods from 1 October 2004 up to 31 March 2006 (together with interest) calculated as set out in the letter and based on information received from PTL. Dentons also indicated that PPL was willing to pay the AMC and its proportion of the BGUOC on the same basis going forward. The letter made it clear that the payments being offered were not part payments of the MPP and that they would be paid upon receipt of a proper invoice.

Sub-issues

44. The three principal issues which I defined in paragraph 6 above, can be more closely formulated as the following six sub-issues:

Postalisation charges:

i) On a true construction of Annex 5 of the GSA, in particular the definitions of AMC and BGUOC, are BGTL/Centrica entitled to recover any part of the MPP from PPL?

ii) If not, are BGTL/Centrica nonetheless entitled unilaterally to vary the provisions of Annex 5 of the GSA so as to render the MPP or a proportion of them payable by PPL?

iii) If not, is the effect of the alleged estoppel by convention that BGTL/Centrica can recover these payments?

Balancing and Scheduling Charges:

iv) On a true construction of Annex 5 of the GSA, are BGTL/Centrica entitled to recover any part of the Balancing and Scheduling Charges from PPL?

v) If not, are BGTL/Centrica nonetheless entitled unilaterally to vary the provisions of Annex 5 of the GSA so as to render the Balancing and Scheduling Charges payable by PPL?

vi) If not, is the effect of the alleged estoppel by convention that BGTL/Centrica can recover these charges?

Postalisation charges:

Sub-issue (i): On a true construction of Annex 5 of the GSA, in particular the definitions of AMC and BGUOC, are BGTL/Centrica entitled to recover any part of the MPP from PPL?

45. The first point that arises in relation to the determination of this sub-issue is the meaning of BGUOC, the definition of which is contained in paragraph 11 of Part 3 of Annex 5 which I have set out above. The relevant words are "all costs and expenses reasonably and properly incurred by British Gas or any Affiliate thereof … in operating, repairing or maintaining the Pipeline …" (emphasis added). It was common ground, and both sides' submissions were presented to me on the basis that, following the novation in February 1997, the reference to British Gas must be read as a reference to Centrica.
46. The issue is what is meant by the words "in operating". The rival constructions are as follows: PPL, by Mr. Jeffrey Onions QC and Mr. Daniel Toledano of counsel, contends that the definition of BGUOC refers only to costs and expenses which are incurred by the company which actually operates the Pipeline, namely PTL. They submit that, since neither Centrica, nor any Affiliate of Centrica (as defined), operates the Pipeline (since PTL, which actually operates the Pipeline, has never been an Affiliate of Centrica – and, indeed, ceased to be an Affiliate of British Gas/ BG Group plc in March 2005), there are no costs which are incurred by Centrica or any of its Affiliates which can fall within this definition.
47. The Claimants, on the other hand, by Mr. John McCaughran QC and Mr. Sa'ad Hossain of counsel, contend that the meaning of BGUOC clearly covers costs incurred by Centrica, or its Affiliate (BGTL), in respect of the operation of the Pipeline – presently incurred in the form of BGTL's liability to pay PTL. It is accepted by the Claimants that this liability must be reasonably and properly incurred, and must not be in respect of Predictable Operating Costs, or costs and expenses relating to the BGE Pipeline - both of which are covered by the AMC. But, they submit, in a situation such as the present, which has pertained since February 1997, when Centrica became a party to the GSA, where the Pipeline is operated by a company which is not an Affiliate of the seller, the seller's costs incurred in operating the Pipeline are what the seller has to pay to the actual Pipeline's operator (i.e. PTL) in respect of the Pipeline's operation.
48. In summary, they submit:

i) The seller was obliged under the GSA to deliver gas to PPL's premises at Ballylumford. It is axiomatic that, in order to do so, the seller, originally British Gas (now Centrica), must ensure that the Pipeline is operated, so that gas can flow through it. However, there is no obligation, express or implied, in the GSA which requires the seller itself to operate the Pipeline; nor is there any obligation, express or implied, which requires the seller to ensure that the Pipeline is operated by an Affiliate of the seller. Thus, under the GSA, the seller may perform its obligation to deliver either by operating the Pipeline itself, or by arranging for an Affiliate to operate the Pipeline, and to provide capacity within it for delivery of gas under the GSA, or by making an equivalent arrangement with a third party, which is not an Affiliate.

ii) At the date of the GSA it was not anticipated that the seller, namely, British Gas, would operate the Pipeline itself; rather, that the Pipeline would be owned and operated by PTL, which was then British Gas' Affiliate. However, it was also anticipated that, during the currency of the GSA, the company which operated the Pipeline might not be an Affiliate of the seller, either because British Gas might dispose of an interest in the Pipeline, for example by selling its shares in PTL, or because the seller might transfer its rights and obligations under the GSA to a third party. Although this could not be done unless the buyer consented, under Clause 14(2) of Annex 3, the buyer could not unreasonably withhold its consent, if the proposed transferee had the appropriate financial and technical status. Thus, the prospect of PTL not being an Affiliate of the seller under the GSA was contemplated at the date of the contract - either through a sale of the shares in PTL, or through a novation - and, indeed, both have in fact happened. How, submitted Mr. McCaughran, does one give sense to the agreement, in the event that PTL is no longer connected with the seller, unless one construes the words in the manner for which he contends, since the alternative construction has the result that the provisions relating to the BGUOC simply fall away.

iii) The interpretation which the Claimants put upon the words used by the parties is one which those words are perfectly capable of bearing. Indeed, in the situation in which the Pipeline is owned and operated by a company unconnected with the seller, "all costs and expenses reasonably and properly incurred by [the seller] or any Affiliate thereof … in operating … the Pipeline …" would naturally be taken to mean the liability reasonably and properly incurred by the seller (or any Affiliate) to that company, in respect of that company's operation of the Pipeline.

iv) The alternative construction, put forward by PPL, has the result that, in the situation in question, the relevant words have no meaning at all. Accordingly, the choice between - (i) whether the words used can be taken to refer to the seller's liability to the Pipeline-operating company; or (ii) whether the words used should be treated as meaningless in the circumstances - is not a difficult one; the logical and commercial answer is that for which the Claimants contend. Any other result would have represented a significant reallocation of the financial burden of the GSA which cannot have been the intention of the parties, viewed objectively. Had it been intended, the GSA would have been amended at the time of the novation to delete the provisions in Annex 5 relating to BG Unpredictable Operating Costs, particularly given that the Deed of Assignment was not a contentious transaction between opposing parties, but rather one where one firm of solicitors acted for all parties concerned.

v) A further curiosity in relation to PPL's position relates to the AMC. The AMC formula, set out in Part 2 of Annex 5, is designed to allow the seller to recover a number of different heads of cost, some of which are capital costs, and some of which are operational. The operational costs included in the AMC formula are:

a) Predictable Operating Costs – defined in Annex 5, Part 3, paragraph 10 as meaning various costs and expenses associated with inspection, testing and the like; and

b) Charges payable in respect of the operation of the BGE Pipeline, referred to as the BGE Charge for Operational Costs.

Both of these elements of operational costs are included in the AMC formula as part of the Base Monthly Charge. PPL now accepts that the AMC remained payable after Centrica became a party to the GSA in February 1997 and therefore accepts that the elements of operational costs included in the AMC formula may be recovered by Centrica from PPL, notwithstanding that neither Centrica, nor any Affiliate, operates the Pipeline. Originally, however, PPL in a letter from Denton Wilde Sapte dated 15 October 2004, argued that the AMC should not include any operational costs incurred by PTL – or indeed any Capital Costs incurred by PTL, because PTL was not an Affiliate of Centrica or BGTL. The effect of this argument was that from 1997 Centrica was not entitled to recover any Transmission Charges at all – whether the AMC or BGUOC, under the GSA. Although PPL has subsequently resiled from this extreme position, the logical conclusion to which its arguments lead highlights their absurdity. Even so far as PPL's revised position is concerned, it is not logical that Centrica should be entitled to recover some of the charges which it has to pay to PTL in respect of the operation of the Pipeline, but not others.

49. In support of his submissions on construction, that a Court will prefer a construction that does not render an agreement ineffectual, or frustrate the parties' intentions, albeit that such construction might be less appropriate than the alternative, Mr. McCaughran referred to well-known cases such as Arbuthnot v Fagan [1996] 1 Lloyd's Reinsurance law Reports 135, and, in particular, per Steyn LJ at page 140. He submitted that the Court should adopt a purposive approach and reject PPL's black-letter, semantic approach.
50. In my judgment the interpretation of the GSA has to be approached on the basis of what the agreement would have conveyed to a reasonable man when it was entered into in 1992. As Mr. Onions submitted, its meaning cannot change over time. One cannot construe the GSA differently in February 1997, when Centrica became a party to it, compared with the position when the GSA was first concluded in April 1992. There is no basis, legal or evidential, for the adoption of a different or wider construction as at 1997 and I reject Mr. McCaughran's submission that the factual matters known to both parties at that date may be taken into account in construing the contract. The GSA was simply assigned to Centrica without any modifications or negotiations as to its terms. Nor can the GSA be construed by reference to subsequent events that happened long after it was concluded, such as BGTL/Centrica's entry into the Transportation Agreement and their accession to the Code.
51. Mr. McCaughran on a number of occasions submitted that "the purpose" of the provisions relating to the Transmission Charges was to allow the seller to recover "costs of and associated with the transportation of gas to Ballylumford". I accept that Clause 2.1(b) of the GSA envisaged that the buyer would pay "a charge for the costs of … gas transportation along the Pipeline" (my emphasis), which suggests that such charge will cover all the costs of transportation. I also accept that the legitimate factual matrix evidence of the commercial background to the GSA shows that the commercial object, or aim, of the transaction at that time was that the buyer should pay all the costs of and associated with the transportation of the gas along the Pipeline to Ballylumford, and that, in effect, the seller, then British Gas, would be able to pass through all its costs, or its Affiliate's costs, of operating the Pipeline to the buyer. I also accept that, on the commercial state of play at the time of the conclusion of the GSA, the provisions of Annex 5 were designed to ensure that the buyer would pay for all of the costs of and associated with the transportation of the gas, and that they were not designed to ensure that the transportation costs were to be shared between the buyer and the seller.
52. The factual matrix evidence that shows this was the following. The GSA was, as I have already said, based upon the standard form of LTI contract in use in 1992, namely LTI3. Under this form of contract, all purchasers of gas from British Gas paid the same commodity prices. The provisions of Annex 5 were specifically negotiated to cover the additional costs of transporting the gas from Great Britain to Ballylumford. The Transmission Charges were not designed to provide a subsidy to PPL in relation to the commodity prices. As Mr. Richard Souchard, one of PPL's witnesses, who had been UK Downstream Asset Manager within BG Group Plc with responsibility for PPL, said: "The transmission charging formula was there specifically to ensure that the costs of capital and the costs of operation of the pipeline were recovered". The AMC formula contained in Annex 5 provides for the recovery of a variety of different heads of cost, both capital and operational. They go together to form the Base Monthly Charge or "BMC". In addition, Annex 5 provided for the payment of BGUOC. The "basket" of recoverable costs provided for in Annex 5 represented all of the costs of and associated with the transportation of the gas from Great Britain to Ballylumford. It is correct, as Mr. Onions submitted, that the recoverable capital costs were subject to a cap in the region of £127.5 million (index linked). However, in reality, on the basis of the evidence before me, at the time of the inception of the GSA, there was no significant risk that British Gas or PTL would fail to recover the capital costs of the project.
53. However, the reality was that the GSA, as Mr. Onions pointed out, closely defines what may be recovered as "Transmission Charges" and reflects an understandable commercial deal entered into in 1992, when the Pipeline was to be constructed, to enable recovery of the costs of constructing, operating, repairing or maintaining the Pipeline as specific Transmission Charges to be paid by the buyer, PPL, to the seller, in respect of the seller's operation, or its Affiliate's operation, of the Pipeline. This was in fact reflected in the extension letter, under which PPL had to continue to pay the Transmission Charges for a further period after the end of the gas supply period to enable the recovery of the costs of construction and operation for the 15 year period. This was also accepted by Mrs. Griffith. In my judgment there is no evidence, that can be properly characterised as factual matrix evidence, that provides any support for the contention that it was irrelevant for the purposes of BGUOC whether the seller, or its Affiliate, was the operator of the Pipeline, or supports the proposition that the seller could recover costs which he had to pay by way of third party payments to the actual operator of the Pipeline, in circumstances where neither the seller, nor its Affiliate, was the operator of the Pipeline. Some of the Claimants' factual witnesses gave evidence to the effect that they had such a subjective belief. But subjective belief is not within the ambit of legitimately available factual matrix material: see per Jonathan Parker J in Philip Collins Ltd v Davis (supra) at 823. The clear inference that in my judgment can be drawn from the words used in the GSA and the surrounding circumstances in 1992 was that the purpose of the Transmission Charges was to enable the seller to recover the capital costs of the construction of the Pipeline and the seller's costs of operating it. Indeed, even the Claimants' witness, Mrs. Valerie Griffith, Commercial Manager within BGTL responsible for managing the GSA, accepted that the charges were designed for this purpose. She said: "That is all that was contemplated at the time, the initial PTL pipeline."
54. Looking at the commercial background to the arrangements, I do not find the possibility of PPL's construction being the correct one, a commercially absurd or astonishing result as Mr. McCaughran suggests. The fact is that Annex 5 makes it clear that only certain costs may be recovered and those (so far as the BGUOC are concerned) are the costs that are or were incurred by the constructor and operator of the Pipeline in constructing, operating, maintaining and repairing of the Pipeline. That makes commercial sense, because the Pipeline needed to be constructed, operated, maintained and repaired in order to enable the supply of gas to be made to Ballylumford. Nor, in my judgment, do the following facts:

i) that there was no obligation, express or implied, in the GSA which requires the seller itself to operate the Pipeline or to ensure that the Pipeline is operated by an Affiliate of the seller;

ii) that it was also anticipated that, during the currency of the GSA, the company which operated the Pipeline might not be an Affiliate of the seller, because it was anticipated that British Gas might dispose of an interest in the Pipeline, for example by selling its shares in PTL;

iii) that it was also anticipated that, during the currency of the GSA, the seller might transfer its rights and obligations under the GSA to a third party, subject to consent of the buyer, not to be unreasonably withheld, if the proposed transferee had the appropriate financial and technical status;

require the definition of BGUOC as being "all costs and expenses reasonably and properly incurred by British Gas or any Affiliate thereof (as defined in General Condition 4(4) in Annex 3 to this Agreement) in operating, repairing or maintaining the Pipeline" to be disregarded and effectively replaced by a new provision permitting the seller to recover from the buyer the charges that it pays to an unconnected third party in respect of the latter's operation of the Pipeline, in circumstances where there might well be no ability to verify that such third party's operation was efficient or that the charges that it was imposing reflected "reasonably and properly incurred" operating costs and expenses. On the contrary, the limitation to the seller's, or its Affiliate's operation, and the right of the buyer to inspect the seller's records, suggests that it was important that the buyer should be in a position to verify or monitor that such costs were indeed reasonably and properly incurred. In summary, the commercial position or matrix, as I see it, was that it was indeed intended that all the operating costs should be passed through to the buyer, but only in circumstances where the seller or its Affiliate (as defined) was the operator of the Pipeline.

55. Moreover, any inability on BGTL/Centrica's part to pass through the MPP (and, indeed, the Balancing and Scheduling Charges) arises not as a result of a "commercially absurd" construction of the GSA but rather from the fact that they entered into the Deed of Assignment in 1997 without making any amendments to the GSA to provide for the possibility that they would not be operating the Pipeline; and that they entered into the Transportation Agreement in 1996, and acceded to the Code in October 2001 in circumstances where neither the Transportation Agreement nor the Code were contractually back to back with the GSA. The effect of this was that there were rights and obligations between PTL and BGTL/Centrica on the one hand, that were not mirrored by rights and obligations between BGTL/Centrica and PPL, on the other. For example, the Transportation Agreement contained specific charging provisions which were not reflected in the GSA; see 6.16 and 6.19 of the Transportation Agreement. The Code, both pre and post Postalisation, also contained charges that were not mirrored in the GSA. It contained Code Charges defined so as to include Balancing Charges and Scheduling Charges. The Code Charges were expressly defined as a different category from Licensee (that is, PTL) Unpredictable Operating Costs. Following Postalisation, the Code also provided for PTL to recover the MPP from shippers. Various of the Claimants' witnesses fairly recognised that the Code and the GSA were not back to back in a number of operational respects and, indeed, BGTL/Centrica recognised the mismatch, at least so far as operational issues were concerned, by requesting a side letter from PPL in 2000. However, the side letter was not agreed and BGTL/Centrica acceded to the Code regardless. Mrs. Griffith recognised that this meant that BGTL/Centrica took the risk in respect of differences between the GSA and the Code.
56. For similar reasons I do not accept Mr. McCaughran's submission that PPL's construction would necessarily frustrate the parties' intentions. Such a submission begs the very question as to what was the scope of the BGUOC, and what were the parties' common intentions as the circumstances in which they were payable.
57. In my judgment, the wording of paragraph 11, Part 3, Annex 5, of the GSA and the definition of BGUOC, with its specific identification of the costs which can be recovered as Transmission Charges, simply do not permit the recovery of costs which are not the costs and expenses of the seller, or any Affiliate, of operating the Pipeline itself. BGTL/Centrica's asserted construction that it extends to include their liability to pay a proportion of the costs incurred by a non-connected third party in respect of the latter's operation of the Pipeline, or to cover all "the costs of and associated with the transportation of gas to Ballylumford" disregards the actual language used by the provision. Thus it takes no account of the restriction that the nature of costs that can be recovered are limited to the costs and expenses incurred by the person operating the Pipeline in itself operating, maintaining or repairing the Pipeline. That is clear from the fact that the subject of the participle phrase "in operating" is British Gas, or any affiliate. Secondly, it pays no regard to the restriction on the persons by whom the costs are to be incurred. Originally they had to be incurred by British Gas or an Affiliate as defined and, after the Transfer Scheme, they had to be incurred by BGTL/Centrica, or an Affiliate as defined. BGTL/Centrica's construction arguments require the precisely formulated charging provisions of Annex 5 to be entirely re-written to suit BGTL/Centrica's circumstances following the introduction of the Code or Postalisation. In my judgment it is not legitimate to use the factual matrix evidence to reach this conclusion.
58. Mr. Onions' alternative submission under this head was that, in any event, even if (contrary to his first argument) BGTL/Centrica could pass on their liability to pay a proportion of a non-connected third party's costs of operating, maintaining or repairing the Pipeline, on proper analysis, the MPP could not be characterised as costs of operating, maintaining or repairing the Pipeline. He submitted that the MPP are the charges made by PTL to BGTL for the latter's use of the postalised network for transporting gas to PPL. They are, he submitted, in reality, the cost of carriage to BGTL/Centrica, not the costs of operating the Pipeline; the MPP do not relate to the costs of the Pipeline alone: the MPP relate to, and are calculated by reference to, the costs of the postalised network as a whole. The MPP are indeed calculated taking into account PTL's revenue requirements (i.e. the revenues it needs to meet the costs of operating the Pipeline), but the MPP are not calculated only by reference to PTL's revenue requirements. They also take into account the revenue requirements (and indirectly the operational costs) of all the Pipeline Operators. As Mr. Souchard said in his witness statement, the charge to BGTL/Centrica is its proportion of the capacity booked and volume shipped through the system relative to the total capacity bookings and total throughput volume, in respect of the total revenue requirements of the postalised system. Mr. Keith Sanderson, one of the Claimants' witnesses, and the Commercial Manager within Centrica responsible for day to day management of the Transportation Code, accepted that the MPP was based upon the allowable revenues of three TSOs and that it therefore included the costs of operating pipelines other than the Pipeline. Mr. Onions submitted, accordingly, that the MPP cannot be characterised as "costs… incurred in operating, repairing or maintaining the Pipeline" for the purposes of the BGUOC, because they do not represent and are not calculated solely by reference to, the costs incurred in operating, repairing or maintaining the Pipeline.
59. In my judgment, given the structure of the definition of BGUOC (viz. "all costs and expenses reasonably and properly incurred by British Gas or any Affiliate thereof … in operating, repairing or maintaining the Pipeline …"), it is necessary to approach the characterisation from the perspective of BGTL/Centrica. It is therefore necessary to ask oneself whether, so far as they are concerned, the MPP can be characterised as being within the definition. From that perspective, (and however one might characterise the MPP from the perspective of PTL), I regard the correct characterisation of the MPP, as paid by BGTL, as being costs that are paid for the latter's use of the postalised network for transporting gas to PPL, rather than BGTL/Centrica's indirect costs of operating the Pipeline. Accordingly, to that limited extent I accept Mr. Onions' alternative argument.
60. Finally, the fact that PPL originally asserted in correspondence that the AMC should not include any operational costs incurred by PTL – or indeed any Capital Costs incurred by PTL, because PTL was not an Affiliate of Centrica or BGTL, takes Mr. McCaughran's arguments no further. As I said, PPL subsequently resiled from this position and accepted that the AMC remained payable. There was a clear justification for this difference in approach. The definition of BG Predictable Operating Costs is much wider than the definition of the BGUOC and includes "costs and expenses incurred.. in or associated with the following matters relating to the operation of the pipeline". Those matters are then dealt with as a fixed percentage of capital costs, rather than as incurred.
61. BGTL/Centrica have not contended that there is any part of the AMC formula, as contained in Part 2 of Annex 5, that could be said to relate to or include the MPP. BGTL/Centrica's own witnesses did not support the suggestion that any of the components of the MPP could be related to the AMC. Mr. Sanderson accepted that the MPP was not included in the AMC formula under the GSA.
62. It follows that I decide this issue contrary to the contentions of BGTL/Centrica.

Sub-issue ii): If not, are BGTL/Centrica nonetheless entitled unilaterally to vary the provisions of Annex 5 of the GSA so as to render the MPP or a proportion of them payable by PPL?

63. I turn now to deal with BGTL/Centrica's argument that BGTL has a unilateral right in the circumstances to vary the Annex 5 charging provisions so as to make the MPP recoverable from PPL (assuming, as I have held, that such charges are not recoverable as a matter of construction of the GSA) on the grounds that the relevant assumptions contained in paragraph (A)5 of Part 5 of Annex 5 to the GSA are no longer correct.
64. I have already quoted the relevant assumptions contained in paragraph (A)5 above. I accept BGTL/Centrica's submission that there are two assumptions contained in paragraph (A)5. The first is that no Regulatory Action will occur; the second is that there will be no changes in, and no introduction of any legislation, statutory instrument, order or code of practice regulating or in any way affecting the planning etc or operation of the Pipeline, which would or might affect the total cost of its construction or any of the costs of operating the Pipeline. In my judgment, each assumption is self-contained in the sense that, if either of the two assumptions no longer remains correct, the right to vary is triggered. I also accept Mr. McCaughran's submission that

i) the participle phrase "regulating or in any way affecting the … operation of the Pipeline or any part thereof"; and

ii) the subordinate clause "which would or might affect the total cost of its construction.. or any of the costs of operating the Pipeline or any part thereof or any component of any of the costs referred to in this paragraph"

only qualify the second limb or main clause of the paragraph; in other words, a Regulatory Action, which comes within the definition in Annex 3, does not also have to satisfy the descriptive conditions set out in the participle phrase or the subordinate clause set out above. I reach this conclusion: (a) because a Regulatory Action is a specifically defined term and it would be surprising in this context to see it further restrictively defined; and (b) it would be unnatural and grammatically clumsy to read either the participle phrase or the subordinate clause as referring back to the first main clause that no Regulatory Action will occur. Moreover, the second main clause of paragraph (A)5 is clearly referring to the Pipeline; the words "the total cost of its construction", in the subordinate clause, are also doing so and are not linguistically apt to relate back to "Regulatory Action".

65. On the other hand, I also accept Mr. Onions' submission that, when one is construing a provision of this sort, which confers a unilateral power on one party to vary the terms of a contract, that is expressed in subjective terms based upon what one party considers reasonable, the right to vary should be construed cautiously and should not be regarded as exercisable otherwise than in circumstances that fall clearly within the wording of the relevant provision. That is because it is well-established that the circumstances in which the exercise of such rights can be challenged are limited; see Ludgate v Citibank [1998] 2 Ll R 221 at paragraph 35 and Paragon v Nash [2002] 1 WLR 685.

The second assumption - no changes in, and no introduction of any legislation, statutory instrument, order or code of practice

66. I deal with the second assumption first, because that was the order in which the points were argued and because the arguments in relation to the second assumption overlap to some extent with the arguments that were presented in relation to BGUOC. The material words of the assumption to be considered are:

"... there will be no changes in and no introduction of any legislation, statutory instrument, order or code of practice … regulating or in any way affecting the … operation of the Pipeline or any part thereof which would or might affect the total cost of its construction. or any of the costs of operating the Pipeline or any part thereof or any component of any of the costs referred to in this paragraph: provided that (for the avoidance of doubt) this paragraph shall not of itself entitle British Gas to vary the Transmission Charges by reason only of anything relating to the supply of gas through the Pipeline to any person in Northern Ireland other than the Customer.

…"

67. Four conditions have to be satisfied in order to show that the assumption no longer remains correct and that Centrica is entitled to exercise its power to vary. They are as follows:

i) that there has been a change in, or introduction of, a piece of legislation, statutory instrument, order or code of practice;

ii) that such change or introduction was one which regulated or in any way affected the operation of the Pipeline or any part thereof ; and

iii) that such change or introduction was one which would or might affect any of the costs of operating the Pipeline or any part thereof or any component of any of the costs referred to in paragraph 5;

iv) that the variation power is not going to be exercised by reason only of anything relating to the supply of gas through the Pipeline to any person in Northern Ireland other than PPL.

68. In order to consider the respective arguments of the parties in relation to this issue, it is helpful to have a clear understanding as to how, in practice, Postalisation works in relation to the charging of the tariff to users of the postalised system and the way in which the charges are calculated. A good description is contained in paragraphs 37-42 of Mr. Souchard's first witness statement (as amended in evidence by him), which I quote in full:

"37. Before postalisation, because the transmission charges of each of the Pipeline Operators were (or would have been) charged separately, shippers transporting gas through all three pipelines forming the postalised network would pay multiple charges for transmission, resulting in higher transportation costs in the west of the province than in the east. These shippers were at a disadvantage to shippers to locations (for example Ballylumford) that only used the first part of the network from Twynholm in Scotland to Ballylumford in the east of the province. Postalisation pools the [annual required revenues of] the Pipeline Operators so that only one tariff applies regardless of the distance that gas is transported. Therefore, the shippers to the more remote locations pay less than they would have paid without postalisation and shippers to more accessible locations pay more.

38. Under postalisation each of the Pipeline Operators within the postalised system is allowed to recover on an annual basis an allowed revenue. A Pipeline Operator's allowed revenue is calculated in accordance with its licence and a charging formula contained in that licence. At the beginning of each year, so that PTL's allowed revenue can be calculated, it submits details to the Postalisation [System Administrator] of its capital and operating costs. These costs were historically used to calculate the invoice submitted to PPL for the Actual Monthly Charge (representing the capital and fixed operational costs) and BG Unpredictable Operating Costs. PTL's annual allowed revenue for postalisation takes into account the capital and forecast operating costs of the Pipeline as well as Unpredictable Operating Costs (but not balancing charges, scheduling charges and balancing gas charges arising under the Code). As the tariff is constant, PTL has to forecast these Unpredictable Operating Costs at the start of each year.

39. PTL's revenue requirements are pooled with other Pipeline Operators' revenue requirements to determine the total annual revenue ('TARR') for the whole postalised network. A uniform capacity and commodity tariff is then calculated taking into account the TARR and the sum of capacity booked at all the exit points on the postalised network and the total forecast volumes to be shipped through the postalised network. The postalised tariff therefore includes the costs of operating all the pipelines within the postalised system and not just the PTL Pipeline. The postalised charge to the shipper is its proportion of the capacity booked and volume shipped through the system relative to total capacity bookings and total throughput volume, In respect of the total revenue requirements of the postalised system. So if for example the shipper has booked 30% of the capacity of the system it will pay 30% of the capacity element of the tariff.

40. The postalised tariff is paid by the shippers into a trustee account and a monthly payment is made from the account to each of the Pipeline Operators based upon their allowed revenue entitlement. At the end of the year payments will be reconciled depending on actual volumes transported and, in the case of PTL, actual operational expenditure. If PTL spends less than its forecast for Unpredictable Operating Costs, then it is required to pay the difference to the trustee account and if it spends more it can charge this to the trustee account (to be recovered in subsequent years).

41. Since the introduction of postalisation, all postalised network operators have charged shippers a common postalised tariff comprising a uniform postalised capacity and commodity rate

(a) the capacity payment is calculated by reference to the units of firm capacity booked by the shipper. PTL's current published capacity charge is 20.73 per kWh booked;

(b) the commodity payment is calculated by reference to units of gas off-taken by the shipper each month, at the point where the gas exits the postalised network (for Centrica/BGT, this is the Ballylumford Exit Point). PTL's current published commodity charge is 0.08p per kWh supplied.

42. The Pipeline Operators are obliged by their Licences to charge the postalised tariff to shippers. The shippers have a two-fold obligation to pay: under their supply licences and the Code. The postalised tariff is paid by BGTL to PTL for used of the postalised network to transport gas to PPL and therefore represents the cost of carriage to BGTL."

69. BGTL/Centrica submits that all the four conditions, referred to above, are satisfied, because the Orders (viz. the Energy Order and the Designation of Pipelines Order), and the consequential modification of the Licences imposed a new charging regime on PTL and BGTL/Centrica in respect of the transportation of gas.
70. There can be no doubt, in my judgment, that the first condition has been satisfied given the Energy Order and the Designation of Pipelines Order, with the consequential modifications to PPL's Conveyance Licence and BGTL's Supply Licence, and the introduction of a revised version of the Transportation Code, which reflected those modifications.
71. However PPL submits that the second and third conditions have not been satisfied. Mr. Onions contended that neither the Orders nor the modified Licences (i.e. the introduction of postalisation)

i) has regulated or in any way affected the operation of the Pipeline or any part thereof or

ii) regulated or in any way affected the operation of the Pipeline or any part thereof in a way which would or might affect any of the costs of operating the Pipeline or any part thereof.

72. He submitted that the true position is that the Orders and modified Licences merely introduced common tariffs for natural gas transmission in Northern Ireland which is not a situation covered by the language of Assumption (A)5; and that it is impossible to identify any effect on the operation of the Pipeline or on the costs of operating the Pipeline. The fact that, as submitted by BGTL/Centrica, their "liabilities in respect of the operation" of the Pipeline have increased since postalisation, he submits is a gloss on the words actually used in the GSA for which there is no justification. Moreover, he contends, that, in any event, BGTL/Centrica's liabilities in respect of operating the Pipeline have not increased following Postalisation, rather it is the case that BGTL/Centrica's costs as a shipper of using the postalised network to transport gas to PPL have increased. He submits that this does not even begin to demonstrate an effect on operation of the Pipeline or an effect on the costs of operating the Pipeline, because the costs of carriage and the costs of operation are two different concepts. In relation to BGTL/Centrica's alternative argument, namely that the second and third conditions are satisfied because PTL's costs of operating the Pipeline have been affected on the basis that the manner in which PTL is permitted to recover its costs from users of the Pipeline has changed, he likewise submits that the actual operation of the Pipeline or the costs of operating it have not been affected by the manner in which those costs are now recovered by PTL.
73. In my judgment the second condition is satisfied because the Orders and the modified Licences have indeed regulated and affected the operation of the Pipeline. I reject PPL's submission that the words "in any way affecting the … operation of the Pipeline …" refer solely to the physical operation of the Pipeline, to the exclusion of its commercial operation. Nor do I not accept Mr. Onions' submission that "operational issues" are limited to physical "issues" such as the pressure, temperature, volume of gas and so on.
74. The words "in any way affecting", which appear in paragraph 5, make it clear that the phrase is to be construed widely. In my judgment, the fact that, after the introduction of Postalisation, the operators of the postalised network, such as PTL, were required to alter the manner in which they charged shippers of gas through the Pipeline, meant that the commercial operation of the Pipeline was indeed being regulated and affected. To suggest that "the operation of the Pipeline" does not include the commercial management of it, in the sense of the operator's need to put in place pricing structures and to organise and collect revenues in order to recover its costs and profit, seems to me to fly in the face of commercial reality. The description in Mr. Souchard's first witness statement of what changes have occurred since Postalisation in relation to the manner in which the pipeline operators charge and collect payments from shippers demonstrates in my view that there has indeed been an effect on the manner in which the Pipeline is operated.
75. In my judgment, however, the evidence before me did not establish that the third condition was also satisfied; that is to say, there was no evidence that the introduction of Postalisation was indeed something which would or might affect any of the costs of operating the Pipeline – even if one construes "operation" in the wider sense of including commercial operation. Certainly, if one looks at the position from the perspective that it is PTL's costs of operation, as the operator of the Pipeline, that have to be, or might be affected, there was no evidence to suggest that PTL's costs were in any way affected by the Orders or the modifications to the Licences. So far as PTL was concerned, the costs of operation of the Pipeline remained the same; there was no evidence that they had been, or might be affected by the fact that, as a result of Postalisation, the procedures for the means of recovery of those costs, (namely by way of charges to shippers by way of a postalised tariff) had changed.
76. Nor do I accept Mr. McCaughran's submission that, in this context, the reference to the costs of operating the Pipeline is a reference to the costs incurred by the seller BGTL/Centrica "in relation to the operation of the Pipeline", viz. the liability which they incurred to pay PTL transportation costs which reflected PTL's costs of operation. As with the BGUOC, he submitted that to construe paragraph 5 in any other way, would be to deprive it of its commercial purpose; that the words in question appear in the context of a provision giving to the seller under the GSA a right to vary the Transmission Charges, and whilst it is obvious that the seller may wish to do so if the costs incurred by the seller, or by an Affiliate on its behalf, are affected, the seller has no interest in seeking to vary the Transmission Charges if the costs of a third party are affected; that therefore one has to concentrate on the seller's costs in order to give sense to this provision. He further contended that, at the date of the GSA in 1992, the words "costs of operating the Pipeline" would, therefore, have been read as referring to the costs of British Gas or any Affiliate; upon the novation to Centrica in February 1997 they should be read as referring to the costs of Centrica or any Affiliate. He submitted that the wording in the variation provisions call, if anything, for a wider construction of the costs "of operating the Pipeline", than in the BGUOC, having regard to the broad purpose of such variation, namely to allow the seller to vary the provisions of the GSA relating to Transmission Charges, in the event of the seller being disadvantaged by some legislative or regulatory change; and that, if the seller cannot vary pursuant to the relevant provision, where its costs are affected, then it is difficult to see what sensible purpose the provision is designed to achieve.
77. There is no doubt that Centrica's costs in relation to the transportation of gas along the Pipeline - in the form of BGTL's liability to PTL - have undoubtedly been affected by the introduction of Postalisation. The liability which existed prior to Postalisation has been abolished, and replaced by a liability of a different nature, and of a greater magnitude. However, even though I accept that it may be legitimate in this context (as opposed to in the context of the definition of the BGUOC) to construe the words more widely, as including any person's costs of operating the Pipeline (because the words are not restricted by any reference to the Seller or any Affiliate of the Seller - as they are in paragraph 11 of Part 3 of Annex 5), I do not see how one can legitimately, even taking into account the factual matrix considerations urged upon me by Mr. McCaughran, characterise BGTL/Centrica's liabilities to PTL, in respect of the postalised tariff which BGTL/Centrica pays for using the postalised network to transport gas, as "the costs of operating the Pipeline". As Mr. Onions submitted, the costs of transportation and the costs of operation are two different concepts.
78. So far as the fourth condition is concerned, namely the proviso to paragraph (A)5 that states that the paragraph shall not of itself entitle BGTL/Centrica to vary the Transmission Charges "by reason only of anything relating to the supply of gas through the Pipeline to any person in Northern Ireland other than [PPL]" (my emphasis), I would have held (had I not been against BGTL/Centrica in relation to the third condition), that this fourth condition was indeed satisfied and the proviso did not apply. This is because, although the introduction of Postalisation entailed the adoption of common tariffs for natural gas transmission in Northern Ireland, and that tariff related to users of the Pipeline and consumers of gas other than PPL, Postalisation also related to, and affected PPL, as much as it affected every other user.

The first assumption - Regulatory Action

79. The issue in relation to the first assumption, "Regulatory Action" as defined in Annex 3 was whether the introduction of Postalisation, by means of the Orders and modification of the Licences, "materially prohibit[ed] or restrict[ed] any or all of the transactions contemplated [by the GSA]." There was no dispute that there had indeed been an "order, decision or conclusive view made … by a competent governmental or regulatory authority or agency or an enactment of a legislative body."
80. The first way in which Mr. McCaughran, for BGTL/Centrica, put his argument under this head was as follows: he submitted that, because the GSA contemplated that the costs of and associated with the transportation of gas to Ballylumford should be borne by the buyer, PPL, (and, again, he referred to clause 2.1(b) of the GSA and the factual matrix points referred to above), the introduction of Postalisation meant that the postalised charges could not be passed through to PPL, with the result that the seller will end up shouldering a large proportion of the transportation costs; that would be a wholly different bargain from the one which the parties entered into in 1992 (and 1997); accordingly, he submitted, there is thereby a material restriction on the transaction contemplated by the GSA, namely a restriction on the seller's ability (and right) to charge the buyer for "the costs of gas transportation along the Pipeline", as provided in clause 2.1 of the GSA; thus, he submitted, Regulatory Action occurred and Centrica's right to vary the Transmission Charges was thereby triggered.
81. On the other hand, Mr. Onions submits that nothing in the legislation or the implementation of the legislation restricts the transactions contemplated by the GSA. He contends as follows:

i) The GSA has not been materially restricted because it can operate after Postalisation in the same way as it did before Postalisation. The Claimants' argument that there has been a material restriction is based upon the false premise that what is described as "the contractual scheme" was that "the costs of or associated with the transportation of gas to Ballylumford" would be borne by PPL. That argument is wrong.

ii) So far as the costs to be charged to PPL, the contractual scheme was Annex 5 of the GSA. It was not that all costs of and associated with transportation of gas would be borne by PPL.

iii) The transactions contemplated by the GSA, namely the sale and transportation of gas through the Pipeline, continue and have not been restricted at all.

iv) The GSA provides for the recovery of Transmission Charges. Insofar as BGTL/Centrica assert that the recovery of Transmission Charges itself is a "transaction" within the meaning of the Regulatory Action definition, it is not; the transaction is the sale and transportation of gas.

v) Even if the recovery of the Transmission Charges is itself a "transaction", the recovery of Transmission Charges by BGTL/Centrica from PPL in the manner contemplated by the GSA has not been restricted by the Regulatory Action, nor has the method of charging for it been restricted.

vi) In any event, BGTL/Centrica remain entitled to recover the Transmission Charges in accordance with the terms of the GSA in respect of the same items as they were prior to the implementation of the Postalised System.

vii) The GSA itself is not a transaction within the definition of Regulatory Action but, even if it is, it has not been materially restricted nor has it been materially restricted by any Regulatory Action.

viii) In fact, the GSA can carry on in precisely the same way as it did prior to Postalisation. BGTL/Centrica may charge the AMC and the BGUOC in accordance with Annex 5.

82. In my judgment, and despite Mr. Onions' skilful and superficially persuasive arguments, the simple reality is that, as result of Postalisation, the seller cannot charge the buyer in respect of the costs of gas transportation along the Pipeline; the seller is required, as a result of the modifications to the operator and supply licence and the Transportation Code, to pay a postalised tariff to the operator (PTL). Thus prior to postalisation, BGTL was liable to pay to PTL, pursuant to the Transportation Code, Licence Charges, which included the AMC (which itself included two elements of operational cost) and Licensee Unpredictable Operating Costs). As part of the measures taken upon the introduction of postalisation, BGTL's Supply Licence has been modified, so that it is no longer required to pay the AMC, together with Licence Charges but is, instead, required to pay the postalisation charges. The Transportation Code has been similarly amended so as to require shippers, including BGTL, to pay the postalisation charges. Absent variation, the result would be that the seller would end up shouldering a large proportion of the transportation costs, which commercially would be a wholly different bargain from the one which the parties entered into in 1992, or indeed, 1997. The result in my judgment is that, in reality, because of Regulatory Action BGTL/Centrica can no longer exercise their right to be paid "a charge for the costs of … gas transportation along the Pipeline" as provided in clause 2.1(b) of the GSA, as calculated in accordance with the provisions of Annex 5, because the nature of the costs which they have in fact incurred are materially different. It follows that I accept Mr. McCaughran's submission that the recovery of Transmission Charges by the seller, and the payment of such charges, are a "transaction" "contemplated" by the GSA, within the meaning of the Regulatory Action definition, and that the transactions thereby contemplated are not limited to the sale and transportation of gas.
83. Had it been necessary to do so, I would have found against BGTL/Centrica's in relation to their second point under this head. The thrust of this submission was that BGTL receives invoices from PTL on a different basis from before, and that it had not in the past been given information by PTL, nor was entitled to information from PTL, showing the calculation of the AMC or what proportion of the MPP represents BG Unpredictable Operating Costs, or a breakdown thereof (save in respect of balancing and scheduling charges). Mr. McCaughran further submitted that the fact that PPL, as the evidence has shown, has recently contacted PTL and obtained the agreement of the latter to provide information to allow the AMC and BGUOC to be calculated from October 2004 to March 2006, and on an ongoing basis, does not undermine this submission; he contended that Centrica's right to vary the Transmission Charges is triggered if any of the relevant assumptions "shall at any time during the currency of this Agreement prove incorrect for whatever reason …"; see Annex 5, Part 1, paragraph 6(b). The fact that PPL had managed to secure an agreement from PTL that this information will be provided did not prevent the right to vary from arising in the past. Moreover, Mr. McCaughran contended that it was clear from the evidence that there remain uncertainties about the utility of the draft agreement that has been negotiated; it contains no warranty of quality, accuracy or completeness of the information provided and no right of audit. It was contended that this lack of information has had the effect of materially restricting BGTL/Centrica's ability to charge both in respect of the AMC and in respect of the BGUOC following Postalisation; see the Claimants' Voluntary Further Information dated 10 May 2006, paragraph 3(d).
84. However I accept Mr. Onions' submissions that this alleged lack of information per se does not give rise to any separate ground for the exercise of Centrica's variation rights. As he submitted:

i) The mere fact that BGTL/Centrica may lack certain information does not mean that any transaction contemplated by the GSA has been materially restricted by the Regulatory Action.

ii) BGTL/Centrica did not lack any information as a result of the Orders or the Modified Licence. It lacked the information because it had not, at any time since the introduction of Postalisation, requested the information from PTL.

iii) PPL has now obtained the necessary information from PTL and has carried out the necessary calculations. PTL has agreed to provide the information on an ongoing basis, and a draft agreement to this effect has been negotiated. Although there may theoretically be difficulties about the verification of that information going forward, the reality in practice is that it is capable of verification and the figures are capable of agreement.

iv) The AMC and the BGUOC are capable of calculation and they have been calculated for all outstanding periods to March 2006.

v) BGTL/Centrica have suggested that, if they had to enter into an agreement with PTL in order to ensure that the information needed to calculate the AMC and BGUOC going forward was provided, this would be an "obvious restriction on its ability to recover the Transmission Charges", but it is difficult to characterise such difficulty as a material restriction as a result of Regulatory Action. The position simply is that, in order to obtain the information to calculate the Transmission Charges, BGTL/Centrica have to reach an agreement with PTL.

85. Mr. Onions also submitted that, even if the Order and the Modified Licence were "Regulatory Action" as defined, it is not all "Regulatory Action" that entitles BGTL/Centrica to impose a unilateral variation of the GSA on PPL: it is only Regulatory Action that has the effect of "regulating or in any way affecting the planning, design, construction, laying, burying, testing, commissioning, certification, approval or operation of the Pipeline or any part thereof which would or might affect the total cost of construction (including the Capital Costs) or any of the costs of operating the Pipeline or any part thereof or any component of any of the costs …" and that BGTL/Centrica cannot satisfy these further conditions. However, as stated above, I have previously held against BGTL/Centrica in relation to this point of construction. He likewise sought to rely on the proviso contained in paragraph 5, of Part 5 of Annex 5, but for the reasons stated above, in my judgment it does not apply.

Reasonableness of the proposed variation

86. I accept Mr. McCaughran's submissions in relation to the reasonableness of the proposed variation. Once the right to vary has been triggered, Centrica has a discretion pursuant to paragraph 6(b) of Part 1 of Annex 5 to vary in such manner as Centrica may consider reasonably appropriate to reflect the circumstances of the date of variation. Thus the test of what might be reasonable for the purposes of the relevant provision in the GSA is not an objective one - it is a matter of what Centrica may consider to be reasonably appropriate. Both sides relied upon the case of Paragon Finance plc v. Nash [2002] 1 WLR 685. This case concerned a mortgage which contained a provision giving to the lender the right to vary the rate of interest under the mortgage. There was no express fetter on the lender's right to vary, and the issue for the Court of Appeal was whether a term could be implied fettering the lender's discretion and, if so, what the scope of that implied term should be. It was held that such a term was to be implied to the effect that the lender would not act dishonestly, for an improper purpose, capriciously or arbitrarily. It was further held that the lender should not act unreasonably in the limited sense that the lender should not act in a manner so extreme that no reasonable company in its position would act, i.e. analogous to Wednesbury unreasonableness.
87. I accept that, in all the circumstances of the case including the commercial factual matrix as I have found it to be, that the variation which Centrica seeks, namely to pass through to PPL (for onward pass-through to NIE and their customers), the postalised charges which BGTL has to pay, is reasonable and not capricious. The rationale for the introduction of the postalised scheme was that geographically advantaged customers should be required to subsidise geographically disadvantaged customers. As Mr. Souchard stated in a document prepared in a response to the Ofreg consultation document:

"Postalisation is a widely accepted concept where geographically advantaged customers subsidise geographically disadvantaged customers."

88. Mr. Patrick Larkin, Chief Executive Officer of PPL since August 2004, and a Business Manager within PPL since 1999 also accepted, on several occasions in cross-examination, that the basic intention behind the scheme was that the extra costs involved should flow through to consumers. Whatever views may have been expressed at different times, by different representatives of Ofreg and DETI, as to whether any additional costs involved would or should be borne by Centrica/BGTL (or indeed PPL), there is no basis on the evidence which I heard for any conclusion that it was the intention of the scheme that a shipper such as Centrica/BGTL should have to bear the economic brunt of a proportion of the costs of postalisation. Moreover the reality is that, since October 2004 NIE's allowed revenue is calculated on the basis that its customers should pay the postalised charges, and, as the Court was told by Mr. Onions during the trial, the position at the moment is that consumers in Northern Ireland are in fact paying the postalised charges, even though the charges have not so far been passed on to NIE by PPL. In such circumstances, I do not consider that Centrica's proposal to vary the transmission charges in order to pass the MPP through to is proposing to do could be described as unreasonable, whether in the Wednesbury sense, or any other sense.
89. Accordingly, I hold in favour of BGTL/Centrica in relation to the variation issue.

Sub-issue iii): If the variation provisions are not exercisable, is the effect of the alleged estoppel by convention that BGTL/Centrica can recover the MPP payments?

90. I shall address this sub-issue together with the estoppel issue that arises in connection with the Balancing and Scheduling Charges, since there are in reality the same issue.

Balancing and Scheduling Charges

Sub-issue iv): On a true construction of Annex 5 of the GSA, are BGTL/Centrica entitled to recover any part of the Balancing and Scheduling Charges from PPL?

91. As I have already stated, Balancing and Scheduling Charges are charges which were imposed by the operator of the Pipeline, PTL, as a result of the terms of the Code, upon BGTL/Centrica for the use of the Pipeline from October 2001; the amount claimed in the Amended Particulars of Claim up until March 2006 in respect of this item was £3,196,449.35 together with future sums alleged to be accruing due for the remaining duration of the GSA.
92. An agreed statement of the nature of such charges, and the way in which they operate, was set out in the Updated Case Memorandum as follows.

"Balancing Charges

51. Section 4 of the Transportation Code provides for charges payable by or to Shippers (including BGT) in respect of balancing and scheduling. Section 4.3 sets out the method for calculating the amount of the Balancing Charge payable by a Shipper on any given day. In simplified terms, Balancing Charges are charges or credits which arise when there is a mismatch between the gas allocated to a Shipper at the entry point and the gas allocated to the Shipper at the relevant exit point (which in the case of gas shipped to PPL is the Ballylumford exit point).

52. Where the Shipper has been allocated at the exit point more gas than it was allocated at the entry point on any given day, there is a 'Negative Balance'. The Shipper will then have to pay a Balancing Charge, which is calculated - to the extent that the Negative Balance is within a specified tolerance (the 'Exit Point Tolerance') - by multiplying the amount of the Negative Balance by the gas price prescribed for that day (the 'Daily Gas Price'), and by multiplying the amount of the Negative Balance that exceeds the Exit Point Tolerance by a gas price less favourable to the Shipper than the Daily Gas Price.

53. Where the Shipper has been allocated less gas at the exit point than the amount which it was allocated at the entry point into the Pipeline, there is a 'Positive Balance'. The Shipper will then receive a credit by way of Balancing Charge, which is again calculated by multiplying the amount of the Positive Balance by the Daily Gas Price and/or by a gas price less favourable to the Shipper than the Daily Gas Price (on the basis of the principles set out in paragraph 52 above).

54. If the Negative or Positive Balance exceeds the Exit Point Tolerance then the price used to calculate the charge or credit represented by the Balancing Charge is less advantageous to the Shipper. The Balancing Charge therefore acts as an incentive on Shippers to input and offtake gas in accordance with their nominations, and the Claimants' case is that this therefore reduces the likelihood that balancing action will have to be taken by PTL in operating the Pipeline. [PPL does not agree with the inclusion of the highlighted portion of this paragraph. This portion goes beyond BGT's pleaded case and is argument or submission.]

55. BGTL does not pass on the Balancing Charge (whether credit or debit) to PPL.

56. PTL maintains an overall neutral position with regard to the Balancing Charges. Under the Code the charges and credits in respect of Balancing Charges are to be paid into the same Balancing Account into which sums in respect of the purchase or disposal of Balancing Gas are paid. The aggregate credit or debit in respect of Balancing Charges is distributed or charged (as appropriate) to all Shippers on a monthly basis in proportion to the volume of gas allocated to each Shipper during that month.

57. PTL charges or credits BGTL each month with a 'distribute Balancing Charge' representing the distribution of the aggregated Balancing Charges paid by or to all Shippers in each month. PTL identifies on its invoices the amount of such 'distribute Balancing Charge' relating to the volume of gas shipped by BGTL to its customers. BGTL seeks to pass on to PPL a proportion of the distribute Balancing Charge invoiced to it by PTL as a BGUOC Payable by the Customer. PPL disputes that these charges and credits are BGUOC Payable by the Customer and asserts that (a) they are not costs and expenses incurred by BGTL in operating, maintaining or repairing the Pipeline – BGTL does not operate, maintain or repair the Pipeline, PTL does and PTL is not an Affiliate of Centrica or BGT; and (b) they are not costs and expenses incurred in operating, repairing or maintaining the Pipeline – they are charges and credits made to Shippers in respect of imbalances between inputs and offtakes and inaccurate nominations by Shippers transporting gas through the Pipeline.

58. The Claimants contend that the purpose and effect of the distribute Balancing Charge is similar in principle to the distribution of sums in respect of 'cash out' under the predecessor Transportation Agreement.

Scheduling Charges

59. By Section 4.4 Scheduling Charges are payable if on any day the amount of gas allocated to a Shipper at its exit point is more or less than it said it would off-take from that exit point (its nomination) by an amount exceeding the Exit Point Tolerance. In that case a charge is payable amounting to 5% of the Daily Gas Price as applied to the difference between the relevant allocation and nomination, after taking account of the Exit Point Tolerance.

60. The purpose of the Scheduling Charge is also to encourage Shippers to offtake gas at the exit point in accordance with their nominations – as if they do not, they effectively pay a penalty. The Scheduling Charge is payable if the exit point allocations differ from the nominations by more than an Exit Point Tolerance, in either direction. The Scheduling Charge is therefore always a charge to the Shipper by PTL.

61. PTL makes a monthly distribution to Shippers of their share of the Scheduling Charge (according to the amount of their Aggregate Allocated Quantities during such Month), which is always a credit to the Shipper. This distribution is known as the Distribute Scheduling Charge.

62. [PPL agrees with the first sentence of paragraph 62 but does not agree with the inclusion of the remainder of this paragraph. The remainder of the paragraph goes beyond the pleaded case of either party and makes assertions that are not agreed and need to be proved by evidence.] By means of the Distribute Scheduling Charge, PTL maintains an overall neutral position with respect to the Scheduling Charge. Shippers whose nominations (on their customer's behalf) are inaccurate (in the sense that the customer offtakes more or less than is nominated) are likely to pay more by way of the Scheduling Charge than they subsequently receive back by way of the Distribute Scheduling Charge. Conversely, Shippers whose nominations are accurate will be likely to pay less by way of the Scheduling Charge than they receive as their share of the Distribute Scheduling Charges. Thus, the combined effect of the Scheduling Charge and the Distribute Scheduling Charge is to reward Shippers whose nominations (on behalf of their customers) are accurate and to penalise those whose nominations are not.

63. In accordance with the scheme described above, PTL charges BGTL a Scheduling Charge and credits BGTL with a distribute Scheduling Charge. PTL's invoices identify the proportion of such charge or credit by reference to the volume of gas shipped by BGTL to PPL. BGTL passes on such charges or credits to PPL on the basis that they are BGUOC Payable by the Customer. PPL disputes that these charges and credits are BGUOC Payable by the Customer for the reasons set out in paragraph 57 above.

64. It is common ground that the Scheduling Charge and the distribute Scheduling Charge were new charges introduced by the Transportation Code.

65. Section 12.1 of the Transportation Code defines certain of the charges payable by Shippers to PTL. System Charges were defined to mean Licence Charges and Code Charges. Licence Charges were defined as certain charges in accordance with the Licence and included Licensee Unpredictable Operating Costs (amongst other costs) which are defined as 'costs and expenses which have been reasonably and properly incurred by the Licensee or any affiliate thereof in operating, repairing and maintaining the Economic Network…'. Code Charges were defined to mean Balancing Charges, Scheduling Charges and Unauthorised Interruptible Flow Charges. In addition to the reasons set out in paragraph 57 above PPL relies on Section 12.1 of the Transportation Code in alleging that the disputed charges (in respect of balancing and scheduling) are not capable of being BGUOC Payable by the Customer. The Claimants deny that Section 12.1 supports PPL's case and deny that the provisions of the Transportation Code are relevant to the construction of the provisions of the GSA, in particular the meaning of BGUOC Payable by the Customer."

93. BGTL/Centrica contend that PPL is obliged to pay the invoices submitted in respect of what they contend is PPL's share of the Balancing and Scheduling Charges paid by BGTL/Centrica to PTL on the basis that they are BGUOC because:

i) they are PPL's "proportion of costs and expenses incurred by [PTL] in operating the Pipeline and incurred by BGTL as a liability to [PTL] in respect of the operation of the Pipeline",

ii) they are reasonably and properly incurred, and

iii) they are not BG Predictable Operating Costs.

94. BGTL/Centrica seek to support this contention by asserting that, on a true construction of the GSA, BGUOC "include PPL's proportion of those costs other than BG Predictable Operating Costs that are reasonably and properly incurred by BGTL in the form of a liability to pay [PTL] in respect of the operation of the Pipeline"; see paragraph 18(a) of the Points of Claim and the Further Information dated 5 October 2005 at Requests 1(b) and 12.
95. PPL, on the other hand, contends that this construction of the GSA is wrong and is not what the GSA says. Mr. Onions submits that, as with the construction advanced by BGTL/Centrica in respect of the MPP, the construction BGTL/Centrica advances in the context of the Balancing and Scheduling Charges does not pay any regard to the actual words used by the GSA; that the effect of BGTL/Centrica's construction would be to enable BGTL/Centrica to recover all costs incurred in connection with the transportation of the gas, contrary to what the GSA says; and that, in the absence of any claim for rectification, BGTL/Centrica's contention is hopeless. He also points to what he suggests is a fundamental inconsistency at the heart of BGTL/Centrica's case. BGTL/Centrica assert that they are entitled to pass through costs incurred in the form of a liability to PTL in respect of the operation of the Pipeline; BGTL/Centrica accept that the cash out (pre-Code) and Balancing Charges (post Code) fall within that definition. However, BGTL/Centrica appear to accept that they are not entitled to pass on to PPL cash-out charges (pre Code) and Balancing Charges (post Code) even though those charges are paid by BGTL/Centrica to PTL, allegedly because they are the cost of gas already paid for by PPL. But that "exception" to the charges that it is said can be passed on by reference to the liability of BGTL/Centrica to PTL appears nowhere in the GSA. He contends that this is another example of their need to rewrite the GSA to make it say what BGTL/Centrica wish it to mean.
96. Thus PPL submits that the true construction of the definition of BGUOC is that it covers only costs or expenses that are incurred by BGTL/Centrica or an Affiliate in operating, repairing or maintaining the Pipeline; and that Balancing and Scheduling Charges do not fall within the BGUOC definition because they are not costs or expenses incurred by BGTL/Centrica or an Affiliate in operating, repairing or maintaining the Pipeline. In this context PPL makes two submissions; first, even on the assumption that such costs are indeed costs or expenses incurred in operating the Pipeline, they are costs that are incurred by PTL in operating the Pipeline: they are not costs incurred by BGTL/Centrica or an Affiliate in operating the Pipeline, because they do not operate the Pipeline; second, that even if, contrary to this submission, the BGUOC includes liabilities incurred by BGTL/Centrica to PTL in respect of the latter's operation of the Pipeline, the charges in question are not, in fact, costs incurred by PTL in operating the Pipeline.
97. In my judgment, for the same reasons as set out above in relation to the MPP, none of the Balancing and Scheduling Charges are recoverable as part of the BGUOC. I have already held that, on its true construction, the definition of BGUOC covers only costs or expenses that are incurred by BGTL/Centrica or an Affiliate in operating, repairing or maintaining the Pipeline. Balancing and Scheduling Charges do not fall within the BGUOC definition because they are not costs or expenses incurred by BGTL/Centrica or an Affiliate in operating, repairing or maintaining the Pipeline, as they do not operate the Pipeline. Rather, such charges represent a liability which is owed to PTL. Even on the assumption in the Claimants' favour that the Balancing and Scheduling Charges are costs or expenses incurred in operating the Pipeline, they are costs that are incurred by PTL in operating the Pipeline: they are not incurred by BGTL/Centrica or an Affiliate in operating the Pipeline.
98. It is only if I were wrong in this conclusion, and the BGUOC includes liabilities incurred by BGTL/Centrica to PTL in respect of its operation of the Pipeline, that it becomes necessary to analyse the nature and detail of the respective charges, in order to ascertain whether the charges are indeed incurred in respect of PTL's operation. I do so on that basis, in case this matter goes further.
99. The disputed balancing and scheduling charges are: (a) "distribute Balancing Gas Purchases/Sales"; (b) "distribute Fixed Monthly Balancing Charge"; (c) "distribute Balancing Charges"; (d) "Scheduling Charges"; (e) "distribute Scheduling Charges". Although many of the arguments overlap, it is easier to deal with the individual charges separately.

Distribute Balancing Gas Purchases/Sales

100. A summary of this charge is as follows. Shippers introduce gas into the Pipeline at the Entry Point, and PPL off-takes gas from the Pipeline at its Exit Point ("the Ballylumford Exit Point"). The gas in the Pipeline is a co-mingled stream, so there is no way of distinguishing the gas introduced into the Pipeline by the various shippers. The gas which is contained in the Pipeline is known as the "line pack". The Pipeline is designed to operate within a range of gas pressures. The pressure of gas in the Pipeline is dependent on the amount of gas which is introduced into the Pipeline, and the amount of gas which is off-taken from the Pipeline. It will also depend on whether gas is lost from the Pipeline, through what is known as "shrinkage". If the pressure in the Pipeline falls, then it may be necessary, so as to ensure its safe and efficient operation, for gas to be purchased so as to restore the pressure in the line pack to its correct value. Conversely, if the pressure in the Pipeline rises, then it may be necessary for gas pressure in the line pack to be reduced to its correct value. The purchase or sale of Balancing Gas is known as balancing action. Where gas is purchased this gives rise to a cost, and where it is sold a revenue is received by PTL. In each case the cost or credit is passed on to shippers using the Pipeline. It is passed on in proportion to their usage of the Pipeline. The charges or credits are aggregated monthly and passed on as distribute Balancing Gas Purchases/Sales.
101. PPL accepts that, insofar as Balancing Gas is bought by PTL from, or sold to, third parties, to that extent it represents a cost or receivable for PTL and that, in theory, the cost to PTL of purchasing Balancing Gas is incurred in operating the Pipeline. PPL's witness, Mr. Burley, General Manager within PTL between March 2002 and November 2004, accepted that in cross-examination. However, PPL does not accept that BGTL/Centrica can demonstrate that, in practice, the system of Balancing Gas purchases and sales worked as the theory would suggest. Mr. Onions submitted that the evidence showed that the charges that have been made for Balancing Gas are not in fact costs incurred in operating the Pipeline, but rather gas that has been, and continues to be, introduced into the Pipeline not so as to fill PTL's linepack, but rather as gas that is supplied by shippers to customers and paid for by those customers through their commodity charges. He therefore submitted that the distribute Balancing Gas Purchases/Sales could not be passed through because "it would effectively lead to BGTL being paid twice for the same gas ...". That argument was not pleaded. Mr. McCaughran complained about that, but he was nonetheless able adequately to develop his submissions in relation to the point.
102. I reject PPL's analysis. On the basis of the evidence before me, and Mr. McCaughran's submissions in relation to the charges, (in particular at paragraphs 228-238 of his written closing submissions), I accept that it was for PTL to decide whether to buy or sell Balancing Gas, given its responsibility under its Conveyance Licence to ensure that the physical balance of gas in the Pipeline is maintained; that PTL did so as principal, not as agent for the shippers; and that, accordingly, the cost of buying Balancing Gas represents a cost to PTL in relation to the operation of the Pipeline.

Distribute Fixed Monthly Balancing Gas Charge

103. The evidence established that, in fulfilling its responsibility to buy and sell Balancing Gas, PTL has a contract with a third party, pursuant to which PTL may buy or sell Balancing Gas. There is a fixed charge associated with the contract, so that even if no balancing action is taken in a given month, a charge will still be incurred for having the contract in place. Mr. Burley describes the cost of the contract for buying (or selling) Balancing Gas as having a variable element, which is distributed to the shippers via the distribute Balancing Gas Purchases/Sales, and a fixed element, which is represented by the distribute Fixed Monthly Balancing Charge. The charge is invoiced as a separate line item on PTL's invoices. However, there is no distinction between the way in which this charge and the distribute Balancing Gas Purchases/Sales charge should be treated as a matter of the Transportation Code. The distribute Fixed Monthly Balancing Charge is simply the cost of action taken by PTL to purchase or dispose of gas as it reasonably considers is necessary with a view to achieving a physical balance of gas in respect of the Pipeline (pursuant to Section 5.2.1 of the Transportation Code) and is required to be aggregated and distributed to shippers pursuant to Section 5.3 of the Transportation Code in precisely the same way as the distribute Balancing Gas Purchases and Sales. Mr. Burley accepted that this cost related to the operation of the Pipeline – though he clarified that the arrangements for the purchase of balancing gas also extended to other pipelines.
104. This led Mr. Onions to submit that since, in effect, this was a fixed charge for all PTL's balancing gas needs, because PTL has always purchased balancing gas for pipelines in addition to the Pipeline, it followed that this charge could not be said to be a cost or expense "incurred…in operating…the Pipeline" since it is incurred in respect of more than just the Pipeline. However, there was no suggestion by PPL that PTL has charged BGTL more than the due proportion of the cost of such arrangements referable to balancing action in respect of the Pipeline itself.
105. Mr. Onions also submitted that if the Distribute Balancing Gas Purchases/Sales charge is not recoverable, then neither is the Distribute Fixed Monthly Balancing Gas charge for the same reasons. I have already held against PPL on this point.
106. Accordingly in my judgment the evidence shows that the Distribute Fixed Monthly Balancing Gas charge represents a cost to PTL in relation to the operation of the Pipeline.

Distribute Balancing Charges

107. The evidence showed that Distribute Balancing Charges are a monthly distribution of the aggregated charges and credits arising from Balancing Charges. Balancing Charges are charges or credits as between PTL and individual shippers. Balancing Charges arise when the amount allocated to a shipper at the entry point to the Pipeline differs from the amount allocated at the relevant exit point. In PPL's case this is the Ballylumford Exit Point. PPL exercises control over the Ballylumford Exit Point. If PPL off-takes more gas than was allocated to it at the entry point, then BGTL will have to pay a Balancing charge to PTL in respect of the difference. Conversely, if PPL off-takes less gas than was allocated at the entry point, then the Balancing Charge will in fact be a credit. The Balancing Charge is calculated by taking the physical volume of gas attributable to that imbalance and multiplying it by a price – the Daily Gas Price up to the amount of the Exit Tolerance, and a less favourable price to the shipper above that tolerance. The allocation to a shipper at the entry point is supposed to match the nomination which that shipper has given to PTL. Accordingly, imbalances may arise where PPL off-takes different amounts of gas to that which it has nominated to BGTL.
108. As Mr. Burley explained, imbalances may arise for other reasons. There is only one meter at the entry point to the system. There is a system for allocating gas between shippers at the entry point, which generates an individual allocation for each shipper, but shipper allocations are not metered separately. As a result, there may be differences between nomination and entry allocation. Consequently, there may be an imbalance between the Entry Point and Exit Point allocations even if PPL off-takes in accordance with its nomination. Additionally, there may be metering inaccuracies.
109. Balancing Charges paid by all shippers are aggregated monthly and distributed amongst all shippers in accordance with their usage of the Pipeline in the form of a distribute Balancing Charge. If there has been a net payment of Balancing Charges over the month to PTL, then the distribute Balancing Charge will be a credit. If PTL has a net liability to pay Balancing Charges, then the distribute Balancing Charge will be a charge.
110. Based on the evidence of Mr. Burley and Mr. Sanderson, I find the following facts:

i) The Balancing Charge constitutes an individual liability between the shipper and PTL. The liability is not merely notional. Where entry point and exit point allocations did not match, there was a physical volume of gas associated with that imbalance, and the Balancing Charge represents the purchase by PTL of gas that has been left in the Pipeline or the sale by PTL of gas which the shipper has taken from PTL's line pack.

ii) The Balancing Charges (and hence the distribute Balancing Charge) relate to the operation of the Pipeline. The system of Balancing Charges and Distribute Balancing Charges acts as an incentive to shippers to ensure that their offtakes are in accordance with their input allocations. The structure is set up in a way so that PTL is neutral; the system is not a system designed to recover actual costs incurred by PTL.

iii) Although in one sense, Balancing Charges were a cost incurred by PTL in operating the Pipeline, the reality was, as Mr. Burley's evidence made clear, that PTL does not regard the Balancing Charges as a cost to PTL at all because they are immediately offset, on the same invoice, by the Distribute Balancing Charge and there is never any cash consequence to the arrangement. Thus the charges were not something that would appear in the accounts as a cost to the business, because, as Mr. Burley said "…from a practical perspective of the business, it is never a cost to the business…".

iv) It is clear that BGTL/Centrica did not pass on Balancing Charges or Credits, nor the earlier cash out charges. What was not clear on the evidence is why BGTL/Centrica reached the decision not to pass on Balancing Charges or Credits.

111. On the basis of this evidence, I accept Mr. Onions' submission that one has to consider Balancing Charges and the Distribute Balancing Charges together to determine whether they are "costs or expenses … incurred in operating, repairing or maintaining the Pipeline". As Mr. Burley said, in practical terms they do not represent a cost to PTL at all because the net effect of one is immediately cancelled out by the other. It is highly artificial to consider whether one may be a cost to PTL in isolation. Moreover, cash-out charges or credits incurred by BGTL/Centrica under the Transportation Agreement were not passed on to PPL. During that period, there was a separate cash-out invoice from PTL to BGTL/Centrica, the amounts of which were not passed on. Following the introduction of the Code, the PTL invoices were modified so as to strip out the Balancing Charges and Credits.
112. Mr. Sanderson suggested that BGTL/Centrica may not have wished to pass on Balancing Charges and Credits because they represented a cost of gas to individual shippers and would therefore duplicate the commodity charge: However, what was clear was that, whether or not they represented a cost of gas, BGTL/Centrica also regarded them as a liability incurred to PTL in respect of the operation of the Pipeline: In fact neither Mr. Sanderson nor Mrs. Griffith could really assist in explaining the basis of, or reasons for, the decisions of BGTL/Centrica as to the Balancing Charges.
113. In my judgment, BGTL/Centrica's approach in treating the two types of Balancing Charges separately from each other and only one of them, the Distribute Balancing Charge, passed on to PPL is logistically inconsistent. This was not the approach taken with Scheduling Charges and Distribute Scheduling Charges, where BGTL/Centrica's position is that one must go with the other. The mechanics of both Scheduling and Balancing Charges are the same, yet they are treated differently by BGTL/Centrica. I share Mr. Onions' view that the real reason for not passing on Balancing Charges may well be that they were a net credit to BGTL/Centrica. The invoices disclosed by BGTL/Centrica show that, during the period October 2001 to September 2005, BGTL/Centrica appears to have kept credits of approximately £1.4 million in respect of Balancing Charges and passed on charges as Distribute Balancing Charges of £1.2 million.
114. In my judgment, the correct analysis is that, viewed together, as they should be, the Balancing Charges and the Distribute Balancing Charges are not "costs or expenses … incurred in operating, repairing or maintaining the Pipeline". As Mr. Burley said, in practical terms they do not represent a cost to PTL at all because the net effect of one is immediately cancelled out by the other. But if I am wrong in that view, and it is correct to treat the two related charges separately, then I accept Mr. Onions' submission that the cost to PTL is not the Distribute Balancing Charge (that is passed on) but the Balancing Credits (which are not passed on). The Balancing Credits, considered in isolation, might be viewed as a liability owed by PTL to the shippers. As the court pointed out and as Mr. Burley accepted, if three shippers that were entitled to Balancing Credits (because their exit allocations were less than their entry allocations) became insolvent, PTL would in the first instance have to bear those costs. But the Distribute Balancing Charge, as Mr. Sanderson readily accepted, is "a redistribution of the costs relating to the arrangements between the shipper and PTL". Mr. Burley's evidence was to the same effect: "From a practical perspective, we would treat it [the Distribute Balancing Charge] as the same [as the Balancing Charge], it is redistributing. It is reflecting the neutral position that PTL is in". Thus I accept Mr. Onions' submission that, if the Distribute Balancing Charge is a redistribution of costs, it cannot itself be a "cost or expense … incurred in operating, repairing or maintaining the Pipeline".
115. Accordingly, I conclude that, for the purpose of the GSA, the Distribute Balancing Charges and the Balancing Charges do not represent a cost to PTL in relation to the operation of the Pipeline.

Scheduling Charges and Distribute Scheduling Charges

116. The evidence shows that Scheduling Charges arise when a shipper off-takes more or less than it has nominated. The charge is calculated by applying a price to the discrepancy (whether positive or negative), after allowing a specified tolerance. The Scheduling Charges are always a charge. As in the case of the Balancing Charge, PTL retains an overall neutral position with regard to such charges. Accordingly, the monthly aggregated Scheduling Charges are distributed amongst the shippers as a Distribute Scheduling Charge – which is always a credit. It was common ground that Scheduling Charges and Distribute Scheduling Charges were new types of charge introduced by the Transportation Code, which did not exist under the previous Transportation Agreement. It was also common ground that, as with the Balancing Charges, the Scheduling Charges were to incentivise shippers to ensure that their nominations matched up with their allocations. Mr. Burley also agreed that the Scheduling Charges related to the operation of the Pipeline. I agree with this last point; it is irrelevant that there is no physical operation of the Pipeline to which the charges relate.
117. Mr. McCaughran conceded that the Scheduling Charges and Distribute Scheduling Charges do not represent a cost to PTL, but he contended that they are a liability on BGTL (to pay PTL, or to receive a credit from PTL). However, given my conclusion on the construction of the BGUOC (namely that it is not legitimate to have regard to BGTL/Centrica's liability to pay PTL), that is irrelevant, and I necessarily conclude, in the light of the concession, that, for the purpose of the GSA, the Scheduling Charges and Distribute Scheduling Charges do not represent a cost to PTL in relation to the operation of the Pipeline. I should say that to date the amount involved under this head is minimal.

Sub-issue v) If the Balancing and Scheduling Charges are not recoverable on the construction of the GSA, are BGTL/Centrica nonetheless entitled unilaterally to vary the provisions of Annex 5 of the GSA so as to render the Balancing and Scheduling Charges payable by PPL?

118. In the alternative to their claim to recover the disputed Balancing and Scheduling charges under the GSA as presently worded, the Claimants submit that they are entitled to vary the GSA to enable such sums to be recovered (historically and for the future).
119. Mr. McCaughran submitted as follows:

i) All of the disputed Balancing and Scheduling charges arise under the Transportation Code, which came into effect on 1 October 2001. PTL was obliged by the terms of its Conveyance Licence to introduce a Network Code, to facilitate the objective of the efficient and economic operation of the Network, which it complied with through the introduction of the Transportation Code.

ii) The effect of the Transportation Code was to impose on BGTL liabilities to PTL in respect of the disputed Balancing and Scheduling charges.

iii) As such, the introduction of the Transportation Code was a Regulatory Action, within paragraph (A)5 of Part 5 of Annex 5 and within the definition in paragraph 1 of Annex 3, in that it was an order, decision, conclusive view of a competent governmental or regulatory authority or agency or enactment of a legislative body. It materially restricted any or all of the transactions contemplated by the GSA in that, (on the assumption for these purposes that the disputed balancing and scheduling charges may not be recovered under the GSA in its present form), the economic balance of the GSA is disrupted and the liabilities of BGTL in respect of the operation of the Pipeline affected.

iv) For substantially the same reasons, the second assumption in paragraph 5 of Part 5 of Annex 5, is also fulfilled in that the Transportation Code amounted to the introduction of an order or code of practice. It regulated and affected the operation of the Pipeline in a manner affecting the costs (or any part of the costs) of operating the Pipeline in that BGTL became liable to pay costs in respect of the operation of the Pipeline, which were differently structured and different in amount.

v) Moreover, even if (contrary to the Claimants' primary case) one looks at costs from PTL's (rather than BGTL's) point of view, PTL itself incurred costs in the operation of the Pipeline in carrying out balancing action, e.g. in purchasing and selling balancing gas to maintain a physical balance in the Pipeline.

120. In my judgment these arguments are wrong and BGTL/Centrica are not entitled to invoke the unilateral variation provisions in order to vary Annex 5 of the GSA in respect of the Balancing and Scheduling Charges. There is, in my view, a world of difference between the position in relation to these charges and the position in relation to the introduction of the MPP following the introduction of Postalisation, in relation to which I have held that the power is exercisable. As I have held, that completely changed the basis of charging for the costs of gas transportation,
121. First of all, I do not accept, as a matter of fact, that the Code and the modified Licences materially restricted any transaction. In paragraph 85 of BGTL/Centrica's opening skeleton argument, counsel on their behalf state:

"The introduction of the Transportation Code did not result in any significant change: the AMC continued to be invoiced by PTL to BGTL, and by BGTL to PPL; similarly, Unpredictable Operating Costs continued to be invoiced by PTL to BGTL and by BGTL to PPL. Charges in respect of balancing actions came to be more precisely identified; and a new category of charge, namely Scheduling Charges, was introduced."

122. Although I have accepted that the recovery of Transmission Charges under the GSA can be a transaction "contemplated" by the GSA, in my judgment it cannot realistically be said that the recovery of charges under the GSA was materially restricted by the introduction of the Code and the modified Licences. As Mr. Onions pointed out, the Balancing and Scheduling Charges were not recoverable under the old Transportation Agreement regime either. The only difference between the two regimes for present purposes was that the Code introduced Scheduling Charges which had not been a feature of the old regime. These new charges are not recoverable not because of the Code but because they do not fall within the definition of BGUOC under Annex 5 of the GSA. As I have held, they are not costs or expenses incurred by BGTL/Centrica or an Affiliate in operating, repairing or maintaining the Pipeline.
123. Whereas, in my judgment, the introduction of Postalisation operated materially to restrict transactions contemplated by the GSA, because of the serious impact on BGTL/Centrica's rights to recover "a charge for the costs of .. gas transportation along the Pipeline" pursuant to clause 2.1(b), one cannot characterise the effect of the introduction of the Code in the same way. It follows that I do not accept Mr. McCaughran's submission that the transactions contemplated by the GSA were restricted because "the economic balance of the GSA is disrupted and the liabilities of BGTL in respect of the operation of the Pipeline affected".
124. I also reject BGTL/Centrica's second argument in relation to the second assumption in paragraph 5 of Part 5 of Annex 5, namely that the change brought about by the Code or the introduction of the Code regulated or in any way affected the operation of the Pipeline in a way which would or might affect any of the costs of operating the Pipeline. I accept that it could be said that the Code affected the operation of the Pipeline, as it laid down a regime as to the manner in which PTL was commercially to operate it. But I do not accept that it had any impact on the costs of its operation. Mr. McCaughran did not suggest to Mr. Burley in cross-examination that there had been any such impact on the costs of operation and no other witness gave evidence to that effect. Mr. McCaughran submitted that the fact that, after the introduction of the Code, BGTL became liable to pay costs in respect of the operation of the Pipeline, "which were differently structured and different in amount", satisfied the condition that the operation of the Pipeline was affected "in a way which would or might affect any of the costs of operating the Pipeline". But for reasons which I have already stated, that is not right, because (apart from being inconsistent with BGTL/Centrica's own assertion that the Code did not produce a significant change), the costs of BGTL/Centrica are not to be equated with the costs of operating the Pipeline. Mr. McCaughran also submitted that, if one looks at the costs from PTL's point of view, PTL incurred costs in the operation of the Pipeline in carrying out balancing action. However, even if PTL did incur any costs in carrying out balancing action this was not as a result of any changes brought about by the Code. On BGTL/Centrica's own case, and as the evidence showed, PTL was carrying out balancing action prior to the introduction of the Code.
125. Accordingly, in my judgment, BGTL/Centrica have no right unilaterally to vary Annex 5 of the GSA in respect of the Balancing and Scheduling Charges.

Estoppel

Issue iii) and vi): Has an estoppel by convention arisen as to the meaning of the charging provisions in the GSA, such that BGTL/Centrica are entitled to proceed to charge PPL on the basis of a common assumption, both in respect of the past and in respect of the future, that such charges are recoverable?

126. I turn now to deal with the issue of estoppel. I received detailed submissions from both parties in relation to the evidence and the law in relation to this issue. However, at the end of the hearing, and having heard the evidence from the relevant witnesses, I was left wholly unconvinced that the evidence demonstrated the alleged or any common assumption sufficient to support the estoppel for which the Claimants contended. Moreover it was also clear to me that from April 2002 the alleged, or any, common assumption must have been revealed as erroneous at that point because PPL was asserting in terms a right not to pay part of the amounts being invoiced by BGTL/Centrica to PPL. As Mr. Onions pointed out, this means, at best, that, even if made out, the alleged estoppel only impacts on the claims in relation to Balancing and Scheduling Charges between October 2001 and February 2002 and has no impact at all on the claims in relation to the MPP. (I mention, for completeness, that there was no counterclaim by PPL seeking recovery of the Balancing and Scheduling Charges which it had paid in respect of that period, or indeed any monies that it had paid to date, which, on its case as to the construction of the GSA, it had erroneously paid.)
127. The Claimants' case was summarised by Mr. McCaughran as follows:

i) Both PPL and Centrica/BGTL assumed, throughout the period between February 1997 and September 2004, that BGTL's liabilities in respect of the operation of the Pipeline (insofar as they were not BG Predictable Operating Costs or costs relating to the BGE Pipeline) could be passed through to PPL under the GSA.

ii) Both PPL and Centrica/BGTL performed the GSA on that basis.

iii) On the basis that such assumption was incorrect, if their mistake had been pointed out (either immediately before the novation of the GSA or in the period when disputes could have been resolved under the Dispute Resolution Agreement), then either the GSA would have been novated on amended terms in the Claimants' favour or the dispute under the GSA would have been resolved in the Claimants' favour.

iv) If the dispute had been dealt with otherwise then, in all likelihood, it would also have been resolved in Centrica/BGTL's favour – since the point has only become important to PPL since Postalisation emerged on the horizon.

v) Therefore, if PPL were permitted now to resile from the common assumption that has existed for almost all of the period during which gas has been supplied under the GSA, it would obtain a result far more favourable than it would ever have been able to achieve if no such mistake had been made.

vi) In those circumstances it would be unjust and unconscionable for PPL now to be permitted to resile from its assumption.

128. It was common ground that a common assumption must be based on conduct "crossing the line"; The August Leonhardt [1985] 2 Ll Rep 28 at 34; The Indian Endurance (No 2) [1998] AC 878 at 913, HL (Lord Steyn); Philip Collins Ltd v Davis (supra) at 823 (Jonathan Parker J). The only matter relied on by BGTL/Centrica in its Particulars of Claim (see paragraph 18(b) in support of the alleged common assumption is the fact of payment by PPL without protest in respect of (a) In the pre-Code period: "the whole of PPL's proportion of the Carrier Unpredictable Operating Costs charged by Premier Transmission to BGT", and (b) in the period between October 2001 and March 2002: "its proportion of the charges in respect of balancing and scheduling pursuant to the Transportation Code". So the Claimants contention, in effect, is that, because PPL continued to pay invoices rendered in connection with what were described as BGUOC, even after PTL ceased to be an Affiliate of BGTL/Centrica, that thereby suggested that the parties assumed that such costs could be claimed from PPL under the GSA. However, as Mr. Onions correctly submitted, the fact of payment by itself does not communicate acceptance of, or acquiescence in, any assumption as to the amounts that may properly be charged by BGTL/Centrica. A payment is only a payment. It is not a representation that the payment is due; see Philip Collins Ltd v Davis (supra) at 823, 824. No other conduct supporting the alleged common assumption was alleged. On this ground alone the estoppel claim would in my view fail.
129. However, there are, in my judgment, other insuperable objections to an estoppel claim based upon the alleged common assumption. On the evidence I am not satisfied that the parties operated the GSA on the basis of the alleged common assumption; in other words I am not satisfied that it was the alleged common assumption which caused PPL to make the payments or that BGTL/Centrica shared the alleged common assumption. BGTL/Centrica's alleged common assumption is that "from at least February 1997", the parties operated the GSA on the common assumption that "PPL was obliged to pay BGTL BGUOC Payable by the Customer where such costs were in the form of its proportion of BGTL's liability to pay Premier Transmission in respect of the operation of the Pipeline (other than BG Predictable Operating Costs)": see Particulars of Claim, paragraph 18(b). On the basis of the evidence which I heard, there was no such common assumption. There was no evidence of any common understanding between the parties to that effect. Indeed the evidence contradicted it.
130. So far as PPL's witnesses were concerned, Mr. Philip Flynn, PPL's commercial engineer, was able to give direct evidence in relation to the initial period in which the common assumption is alleged to have been adopted. His evidence was supported by the evidence of Mr. Sam Cunningham, Former Commercial Manager at PPL, (put in under a Civil Evidence Act Notice) as to the approach that PPL took to the charges under the GSA and whether they were proper charges. Mr. Flynn categorically rejected the suggestion that PPL was concerned with BGTL/Centrica's liabilities rather than with PTL's costs of operating the Pipeline. His evidence was that PPL was not privy to BGTL/Centrica's contractual arrangements with PTL and could not therefore have been concerned with BGTL/Centrica's liabilities under those arrangements. PPL was only interested in the GSA and, in particular, in the definition of BGUOC being costs incurred in operating, repairing or maintaining the Pipeline. Mr. Flynn said: "…my clear objective at that time was to understand what BGTL could pass to us under the terms of the GSA. Now, that was specifically what I was looking at. As to liabilities outside of that, that is quite different". Mr. Larkin also categorically rejected the alleged common assumption. He said:

"We really looked at PTL – we knew that BGTL had entered into a transportation agreement and code with PTL and we knew that that could deviate from the GSA because the link was broken whenever they acceded to the code. So we were really not concerned about BGTL's liabilities because we knew these could change. We were concerned what PTL's operating costs were and the costs of operating the pipeline."

131. Likewise, BGTL/Centrica's witnesses, did not support the alleged common assumption. Mrs. Valerie Griffith, Commercial Manager within BGTL responsible for managing the GSA, accepted that, during the Transportation Agreement period, the pass through only related to PTL's costs of operating the Pipeline because "those were the only costs that we incurred at the time". She also accepted in cross-examination that there were two relevant questions in relation to charging. The first question was: was the cost one that had been incurred by PTL in operating the Pipeline. The second question was: whether the cost had been reasonably and properly incurred by PTL. Her correspondence during the relevant period supported this approach. The reality was that, as BGTL/Centrica well knew, PPL was concerned to ensure that the amounts it was charged fell within Annex 5 of the GSA. That was because it needed, in turn, to be able in turn to pass charges on to NIE, which took a hard line in relation to the operation of the chain of invoices and expected a high level of transparency and accountability. As regards BGUOC, this meant that PPL had to ensure that invoiced amounts were a proportion of the costs and expenses reasonably and properly incurred in operating, repairing or maintaining the Pipeline.
132. I accept Mr. Onions' submission that these answers were completely at odds with BGTL/Centrica's alleged common assumption. BGTL/Centrica's alleged common assumption is concerned with BGTL/Centrica's liabilities and whether those liabilities have been reasonably and properly incurred by BGTL/Centrica. Mrs. Griffith's approach, on the other hand, was to consider whether the costs of operating the Pipeline had been reasonably and properly incurred by PTL. Moreover, Mr. Keith Sanderson, Commercial Manager within Centrica, responsible for day to day management of the Transportation Code, also accepted that, in what he described as at least "one specific circumstance", BGTL/Centrica could not have assumed in its dealings with PPL and PTL that every charge arising from BGTL/Centrica's liability in respect of the operation of the Pipeline could be passed on. The "one specific circumstance" was that BGTL/Centrica did not pass on to PPL the cash-out charges (pre-Code) or the Balancing Charges (post Code) even though they were a liability of BGTL/Centrica to PTL. The fact that there was one specific circumstance is irrelevant. The point made by Mr. Onions is that as a result, as a matter of fact, even BGTL/Centrica were not acting in accordance with, or on the basis of what they now say, was the common assumption.
133. Critically, and fatally so far as the estoppel claim is concerned, BGTL/Centrica also knew, from at least April 2002, that PPL was disputing its liability under the GSA for the Balancing and Scheduling Charges. What happened was that on 14 January 2002 PPL queried the nature and breakdown of the BGUOC. Following an instruction from NIE, PPL wrote again on 23 April 2002 informing BGTL/Centrica that the Balancing and Scheduling Charges should not be classified as BGUOC and should not be charged to PPL. Thus from April 2002 onwards the parties were in dispute about the nature and scope of BGUOC. In his evidence, Mr. Sanderson fairly accepted that BGTL/Centrica could not have assumed at that stage that PPL was operating on the basis that it was liable to pay a proportion of all BGTL/Centrica's liabilities to PTL. The evidence also shows that not only was BGTL/Centrica aware that PPL was not acting in the dispute about Balancing and Scheduling Charges on the basis of BGTL/Centrica's alleged common assumption, but that BGTL/Centrica itself, when dealing with the dispute, was not acting on the basis its alleged common assumption. Mrs. Griffith accepted that when she wrote to PPL in 2002 she was seeking to demonstrate to PPL that the disputed Balancing and Scheduling Charges were PTL's unpredictable operating costs. The point is that Mrs. Griffith did not say to PPL that BGTL/Centrica could pass on anything that it was liable to pay to PTL and did not suggest that this had been the parties' assumption all along. Moreover, at some point between March and August 2003, BGTL/Centrica also clearly understood that there was real doubt as to whether it could pass the MPP through to PPL. In my judgment, on the basis of all the evidence which I heard, BGTL/Centrica simply could not have assumed when Postalisation was being introduced, that they would able to pass the MPP through to PPL. Mr. Simon Goldring, Head of Transportation within Centrica, accepted that, by September 2003, BGTL/Centrica were aware that it was likely that "some parties" may raise an issue with the pass through of the MPP.
134. Accordingly, I hold that there was no common assumption in the terms alleged. Mr. Onions suggested, as a possible alternative, and as pleaded in paragraph 24(1)(d) of the Amended Defence, that there was a common assumption that the de-merger made no difference to the costs that could be recovered, in the sense that PTL would be treated as if it was an Affiliate for the purposes of Annex 5 of the GSA. But even if this was the case, this assumption was shown to be wrong by September 2004 at the very latest, when PPL expressly took the Affiliate point. Moreover, in my view, since it was clear from April 2002 that there was a dispute between the parties, I do not consider that it would be just for the Claimants to rely on this alternate assumption prospectively from that date – even if it had been pleaded.
135. Both parties agreed as to basic requirements necessary to found an estoppel by convention and both referred me, in particular, to The Indian Endurance (No. 2) [1998] AC 878 at 913E-G, where Lord Steyn states that the effect of an estoppel is "to preclude a party from denying the assumed facts or law if it would be unjust to allow him to go back on the assumption." Mr. McCaughran argued that cases such as The Vistafjord [1988] 2 Lloyd's Rep. 343, and Hiscox v Outhwaite [1992] 1 AC 562, showed that an estoppel by convention could operate to have prospective effect even after the assumption has been revealed to be incorrect.
136. Mr. Onions, on the other hand, in my view correctly, pointed out that there was a difference between the situation where a common assumption is made prior to a contract, and the parties enter into it on that basis, and the situation (as here), where the relevant common assumption was made during the currency of the contract, where an estoppel cannot usually operate prospectively, once the error has been revealed. He pointed out that The Vistafjord was a case where the common assumption was made prior to the relevant contract being made and the contract was entered into on that basis. Therefore it was just in that case for the estoppel to continue to operate throughout the period of the contract, even though the error had been discovered in the meantime. He relied in particular on Philip Collins Ltd v Davis (supra) (at page 823) (a case where the assumption arose during the currency of the contract) where Jonathan Parker J stated:

"In my judgment the defendant's contention that estoppel by convention (assuming it applies in the present case) can have prospective effect by, in effect, changing the meaning of the agreement for the future, is wrong in law. As Lord Donaldson MR. said in Hiscox v Outhwaite (No 1) [1991] 3 All ER 641 at 134-135, [1992] AC 562 at 575, referring to the judgment of Bingham LJ in Norwegian American Cruises A/S v Paul Munday Ltd, "The Vistafjord" [1988] 2 Lloyd's Rep 343 (a passage cited with approval by the Court of Appeal in "The Indian Endurance" (No 2), Republic of India v India Steamship Co Ltd [1996] 3 All ER 641 at 652, [1998] AC 878 at 891: "once a common assumption is revealed to be erroneous, the estoppel will not apply to future dealings."

He also referred me the passage in Lord Donaldson's judgment in Hiscox v Outhwaite (No 1) (supra) at page 575, where he stated that once the underlying assumption on which an estoppel by convention is based is shown to be incorrect, the estoppel will not apply to future dealings. Hiscox was a case where the estoppel continued to operate in relation to past arbitration awards, but not in relation to future awards.

137. In my judgment, the fundamental principle is that an estoppel will be effective where it would be unjust or unconscionable to allow one party to resile from an assumption. In the present case, where the assumption (if any) was made during the currency of the GSA, it would be contrary to principle for the estoppel to operate prospectively, throughout the period of the GSA, after the assumption was revealed to be mistaken. It is also relevant that there was no allegation made here that BGTL/Centrica entered into either the demerger or the Assignment on the basis of a common assumption held prior to 17 February 1997. Moreover, in the circumstances, any injustice caused to the Claimants as a result of reliance on the alternate assumption would be prevented by giving the estoppel a limited effect, and a limited duration, in the sense of operating so as to prevent PPL from claiming the return of payments which it had made prior to the assumption being revealed to be incorrect. In circumstances where there is no counterclaim by PPL to seek the return of any payments which it has made in the past, it is not necessary to investigate the position in relation to the consequences of Mr. Onions' alternate, and more limited, assumption any further.
138. Finally, in relation to this issue, I accept PPL's contention that BGTL/Centrica's case in respect of reliance is not sustainable. The evidence did not establish that BGTL/Centrica entered into any transaction or took or refrained from taking any action based on the alleged common assumption, or, indeed, the alternate assumption. BGTL/Centrica sought to rely on their alleged loss of a greater chance to resolve the dispute on favourable terms, as constituting reliance. But the evidence on this point was unconvincing. As Mr. Onions submitted, BGTL/Centrica had as much chance of resolving their disputes with PPL after April 2002 as they would have had if the issues had been dealt with in February 1997. Mrs. Griffith accepted that, even if there had been an earlier mediation of the dispute, BGTL/Centrica might have had to re-negotiate the gas price under the GSA (which at that time and for much of the period of the GSA was significantly higher than the market price) in conjunction with other terms of the contract as part of an overall settlement. Mrs. Griffith suggested that this would not have been the case if the issues had been resolved under the Dispute Resolution procedure but it is difficult to see why the position would have been any different under this procedure than under a later mediation. Nor was I impressed with the contention that, if what has been described as the Affiliate point had been raised earlier, it might have been possible to affect the drafting of the Code in such as way as to circumvent the issue. BGTL/Centrica entered into the Code in the knowledge that there were mismatches between the Code and the GSA. The evidence did not support the proposition that there would have been any scope for the Code to have been drafted differently or that, even if it had been, it would have made any difference to the position as between BGTL/Centrica and PPL.
139. For the reasons set out above, I reject the claim based on estoppel, both in relation to the MPP and the Balancing and Scheduling Charges

Conclusion

140. Accordingly, in summary, I conclude that the Claimants are not entitled to pass through either the Postalisation charges or Balancing and Scheduling Charges to PPL on the construction of the existing terms of the GSA. However they are, in my judgment contractually entitled to vary those terms so as to pass through the Postalisation charges, but not the Balancing and Scheduling Charges. In relation to both types of charge, the estoppel claim fails.
141. Finally, I should express my gratitude to all counsel and the solicitors involved on both sides for the detailed and extensive written and oral arguments and the helpful presentation of the documentary materials. The fact that, necessarily, not every point that was taken in counsel's lengthy submissions has been expressly addressed in this judgment does not mean that it has not received consideration for the purposes of my determination.
142. I will hear from counsel on the wording of the order and in relation to any consequential matters arising from this judgment.