Judgment of Mr. Justice William M. McKechnie delivered on the 23rd day of February, 2012
Introduction:
1. The appellants in this case are involved in the generation of electricity which they sell on a wholesale basis into the single electricity market of Ireland, covering both north and south. This sector is regulated, in this jurisdiction, by the respondent. To operate as such all generators must hold a licence, which the appellants do. A dispute has arisen in one particular respect arising out of this licence. Positions were crystallised in this regard following a direction which issued by the first respondent on the 8th October, 2010. As a result, the within judicial review proceedings were instituted in which several diverse reliefs were sought. This action was heard together with that of Endesa Ireland Limited, a fellow generator with similar interests to those of the appellants. In a judgment delivered on the 9th June, 2011, Clarke J. dismissed both applications. Endesa has not appealed that decision.
2. Despite the scope of the Notice of Appeal filed on behalf of Viridian and Huntstown, there is, as I will demonstrate, but a single issue for resolution in this appeal. It is whether what is referred to as the “Carbon Revenue Levy”, can be included in the bidding costs of a generator who seeks to sell electricity into the wholesale market in Ireland. The answer to this is to be determined exclusively by reference to the contractual relationship with exists between the parties. This in turn depends on the proper interpretation of the Electricity Generation Licence and a document entitled “The Bidding Code of Practice”. In fact the issue can even be more refined than what I have just described. By reference to such documents the end question is whether the levy can be said to be part of the operators “short run marginal costs”, which in turn is dependent on whether such levy can be said to have an “Opportunity Cost”.
3. The Attorney General was joined as a party to these proceedings following a suggestion by the first respondent that were the review to be successful, the court’s decision in that regard would amount to a frustration of the Oireachtas’s intention in enacting the legislation giving rise to the levy. The role of the Attorney General is a matter which I will further refer to later in this judgment.
4. A number of circumstances have converged to form the background to this case. A brief word needs to be said about each of them so as to contextualise this judgment.
Brief Background:
5. As and from the 1st November, 2007, there has existed a single market for wholesale electricity on the island of Ireland (SEM). The necessary legal structure, in this jurisdiction created by the Electricity Regulation (Amendment) (Single Electricity Market) Act 2007, has made provision for a cross border regulatory framework within which, the Commission for Energy Regulation (the “Commission”), previously established under the Electricity Regulation Act 1999 (the “Act of 1999”), and its equivalent in Northern Ireland, are the regulatory authorities. A Committee called the Single Electricity Market (SEM) Committee, has been established to compliment these authorities in the discharge of their various functions. In order to facilitate the operation of this market, a trading and settlement code has been created which specifies the rules and procedures by which wholesale electricity is traded within the market. Any entity interested in generating electricity in this jurisdiction must hold a licence from the Commission to do so. Both applicants are such persons and each currently is the holder of what is described as the “Electricity Generation Licence” (the “Generation Licence”). All such licences are in standard format and have what may be regarded as identical provisions.
6. In simple terms the market works like this: electricity generators will submit bids on a daily basis, offering to sell to the market operator (acting under licence from the regulatory authorities), a certain quantity of electricity at a given price. This operator, which will have previously assessed the amount of electricity required for any given trading day (in fact, for each half hour period of that day), then accepts the bids which on aggregate are sufficient to supply the required amount of electricity for that trading day. The sale prices as between operators will vary and thus are marked in merit order. Those operators whose bids are accepted are described as being “in merit”, whereas those whose bids are rejected are described as being “out of merit”. The highest bid price in the “in merit” category becomes the common price paid to all generators for that relevant trading period. This price is known as the “systems market price” (SMP).
7. The bidding procedure, which I have described, is not at the discretion of the generators: they are not free to do as they wish. In fact, there exists quite a sophisticated machinery for determining the basis on which cost items are allowed, measured and bid in. The provisions governing such a process are contained in the Generation Licence, above referred to and also in a document entitled “The Bidding Code of Practice” (BCOP), which by the express terms of the licence, is incorporated as part of the contractual relationship between the parties. It is not suggested that the rights and obligations of the parties are to be found otherwise than in these documents.
8. The second set of circumstances underpinning this case have as their foundation, Council Directive 2003/87/E.C. of the 13th October, 2003, “establishing a scheme for greenhouse gas emission allowance trading within the Community and amending Council Directive 96/61/EC”, O.J. L275/32 25.10.2003 which was transposed into Irish law by the European Communities (Greenhouse Gas Emissions Trading) Regulations 2004 (S.I. No. 437 of 2004). The essential purpose of the Directive and Regulations was to cap the amount of greenhouse gases which certain activities emit within the E.U. Electricity generators were within those whose activities were sought to be regulated in this way. Consequently, the regime required such operators, including the appellants, to surrender emission trading allowances, (also known as “carbon allowances”) to cover the greenhouse gases that are produced when a relevant electricity generation station is operated. Such allowances can be purchased on the open market but a large proportion were required to be issued free to affected operators. As originally adopted the Directive provided that for the years 2005-2007, all member states were to allocate 95% of allowances “free of charge” dropping to 90% for the years 2008 - 2012, ending on the 31st December, of that year. Council Directive 2009/29/E.C. of the 23rd April, 2009, amending directive 2003/87/E.C. as to improve and extend the greenhouse gas emission allowance trading scheme of the Community, O.J. L140/63 5.6.2009, provides that as and from the 1st January, 2013, allowances are to be allocated by auction. It is accepted that the appellants cannot generate electricity, at their plants, with the use of fossil fuels, without emitting greenhouse gases.
9. This background leads directly to the third event of relevance to this case.
10. The Electricity Regulation (Amendment) (Carbon Revenue Levy) Act 2010 (“the Act of 2010”), inserted a new Part VIB into the Electricity Regulation Act 1999 (“the Act of 1999”). By virtue of ss. 40B to 40M as so inserted, each electricity generator, including the appellants, must pay in respect of a levy period, a levy, described as a “carbon revenue levy”, “on such amount of the revenues received during that levy period by the electricity generator concerned, through participation in the Single Electricity Market, as is attributable to the emissions from each installation of which the electricity generator is the operator, which amount is calculated in accordance with the formula – E x P…”. Definitions are then given for the value of “E” and for the value of “P”. In effect, the levy is based on carbon emissions calculated by multiplying the amount of emissions (E) of each operator (in tonnes of carbon dioxide equivalent) by the average price (P) of the allowance for one tonne of carbon dioxide equivalent, further multiplied by a percentage (X) which currently stands at 65%. In essence, what it means is that for every tonne of carbon dioxide equivalent used by the appellants in generating electricity, they must surrender one carbon allowance under the emission trading regime (which may have been purchased or allocated for free) and also pay 65% of the market price of one such carbon allowance. It is said that the estimated cost of this levy to the appellants is in the order of €18M per annum. The issue on this appeal is whether such levy can form part of the “bid in” costs of the generators when offering electricity to the wholesale market. This, as stated, depends on the proper and correct interpretation of the contractual documents which create the legal relationship existing between these parties.
Decision of the 8th October, 2010:
11. Following the enactment of the Act of 2010, correspondence took place between the applicants and the Commission during which it was indicated by the generators that it was their intention to incorporate the levy as a cost item in the bid in costs. The Commission took the view that they could not do so and in furtherance of this opinion, caused a direction to be issued on the 8th October, 2010, under Condition 15(7) of the Generation Licence, in which they prohibited such inclusion. That decision was the immediate cause of the institution of these proceedings. While some debate was had as to the validity of the justifying reasons for such decision, and to what was described as the “shifting position” of the Commission in this regard, nothing turns on that point in the instant appeal. The reason is that, the Commission has not challenged the judge’s rejection of their submission that the review standard should be one of unreasonableness, in the O’Keeffe sense. That being the position but otherwise expressing no view on it, the approach which I propose to adopt, as agreed by the parties, is therefore one of “legal correctness”. As a result, the question is which of the conflicting interpretations as advanced is the correct one.
Contractual Documents:
12. The documents which therefore must be considered are the Generation Licence and the BCOP which is dated the 30th July, 2007. Unfortunately, the relevant sections of both Licence and Code are lengthy but given their central importance, their recital in this judgment is unavoidable. Condition 15 of the licence is the relevant condition and reads as follows:-
“Condition 15: Cost Reflective Bidding in the Single Electricity Market
1. The Licensee shall ensure that the price components of all Commercial Offer Data submitted to the Single Market Operation Business under the Single Electricity Market Trading and Settlement Code, whether by the Licensee itself or by any person acting on its behalf in relation to a generation unit for which the Licensee is the licensed generator, are cost-reflective.
2. For the purposes of this Condition, the price component of any Commercial Offer Data shall be treated as cost-reflective only if, in relation to each relevant generation unit, the Schedule Production Cost related to that generation unit in respect of the Trading Day to which the Commercial Offer Data submitted by or on behalf of the Licensee is equal to the Short Run marginal Cost related to that generation unit in respect of that Trading Day.
3. For the purposes of paragraph 2, the Short Run Marginal Cost related to a generation unit in respect of a Trading Day is to be calculated as:
the result of which calculation may be either a negative or a positive number.
4. For the purposes of paragraph 3, the costs attributable to the ownership, operation and maintenance of a generation unit shall be deemed, in respect of each relevant cost-item, to be the Opportunity Cost of that cost-item in relation to the relevant Trading Day.
5. The Commission may publish and, following consultation with the holders of Generation Licences and such other persons as the Commission considers appropriate, from time to time by direction amend, a document to be known as the Bidding Code of Practice, which shall have the purposes of:
6. The licensee shall, in carrying out the activity to which paragraph 1 refers, act so to ensure its compliance with the requirements of the Bidding Code of Practice.
7. The Commission may issue directions to the Licensee for the purposes of securing that the Licensee, in carrying out the activity to which paragraph 1 refers, complies with this licence and with the Bidding Code of Practice, and the Licensee shall comply with such directions.
8. The Licensee shall retain each set of Commercial Offer Data, and all of its supporting data relevant to the calculation of the price component of that Commercial Offer Data, for a period of at least four years commencing on the date on which the Commercial Offer Data is submitted to the Single Market Operation Business.
9. The Licensee shall, if requested to do so by the Commission, provide the Commission with:
10. In any case in which Commercial Offer Data are submitted to the Single Market Operation Business which are not consistent with the Licensee’s obligation under paragraph 1 of this Condition, the Licensee shall immediately inform the Commission and provide to the Commission a statement of its reasons for the Commercial Data submitted.
11. In this Condition:
‘Bidding Code of Practice’ means the document of that title published by the Commission in accordance with paragraph 5, as it may be amended from time to time;
‘Commercial Offer Data’ has the meaning given to it in the Single Electricity Market Trading and Settlement Code;
‘Opportunity Cost’ shall have the meaning set out in, and the value calculated in accordance with, the terms of the Bidding Code of Practice;
‘Schedule Production Cost’ has the meaning given to it in the Single Electricity Market Trading and Settlement Code:
‘Short Run Marginal Cost’ means certain costs attributable to the ownership, operation and maintenance of a generation unit, as calculated in accordance with paragraph 3 of this Condition;
‘Single Market Operation has the meaning given to it in the
Business’ licence granted pursuant to section 14(1)(j) of the Act; and
‘Trading Day’ has the meaning given to it in the Single Electricity Market Trading and Settlement Code.”
13. At para. 2 of Annex A, forming part of the BCOP, it is stated that “for the purposes of the licence conditions under which it is made…this code defines the concept of opportunity cost, makes provision for the calculation of cost items and sets out other principles of good behaviour in a single electricity market”. Under the following heading, paras. 6 – 8 read as follows:-
“DEFINITION OF OPPORTUNITY COST
General Principles
6. When calculating the Short Run Marginal Cost of a generation set or unit in respect of a Trading Day, constituent cost-items are to be valued at their Opportunity Cost, and so that a reasoned explanation of the calculation of that Opportunity Cost is capable of being given to the Authority of the Commission (as appropriate) on request.
7. The Opportunity Cost of any cost-item shall comprise the value of the benefit foregone by a generator in employing that cost-item for the purposes of electricity generation, by reference to the most valuable realisable alternative use of that cost-item for purposes other than electricity generation.
8. In calculating the value of the benefit foregone in employing a cost-item for the purposes of electricity generation, the following principles shall, unless it can be demonstrated to the satisfaction of the Authority or the Commission (as appropriate) that there is good cause not to, be applied:
The Submissions:
14. The principal submission on behalf of Viridian, which in all respects can be treated as also applying to Huntstown, is that the bid in costs must be cost reflective. Since the amount of the levy is calculated in direct proportion to the fuel used and thus the electricity generated, it must follow that it is a cost incurred. When the plant is producing electricity the liability ensues. When it is not so used, there is no liability. Consequently, it must be included. Unless it is, it cannot be recovered: it must therefore be borne by the generators. This could never have been intended as it runs directly contrary to the fundamental principle and requirement, that bidding should be cost reflective.
15. The High Court judge is criticised for only going part of the way with this argument. He held that the levy is a cost in the “ordinary sense of that word” and that it is undoubtedly a cost attributable to the operation of the plant. The appellants assert that this finding is equivalent to saying that the levy is part of the short run marginal cost. That being so it is argued that, the judge’s ultimate decision to disallow its inclusion, is in error in that:-
(a) the terms of the BCOP could not validly have the effect of precluding the bidding in of the levy, once it is part of short run marginal costs, and
(b) paragraphs 7 and 8 of the BCOP were misconstrued as allowing only the bidding in of costs which are “inputs” and/or are “employed” in the generation of electricity.
In essence, but for these errors the levy should, indeed, must be part of the bidding costs.
16. The Commission stands over the judgment of the trial judge in all respects, insofar as it relates to the issue under appeal. Its submissions, which touch on the broader issues as well as the specific one in question, largely outline why, in its view, the learned judge was correct in concluding as he did. The crucial phase for interpretation is “short run marginal costs”, which in turn involves a determination as to what the “opportunity costs”, of a cost item means. This requires a consideration, in particular of Condition 15(3) of the Generation Licence as well as paras. 7 and 8 of the BCOP.
17. By reference to these documents it is asserted that the levy is not part of short run marginal costs in that:-
(a) it is a liability which arises “further to” or as a “consequence of” electricity generation but not one incurred for the “purposes” of generation,
(b) it has no “realisable” alternative use, for purposes other than electricity generation, and
(c) as a result, no value can attach to any “benefit foregone”.
Consequently, it has no opportunity cost and therefore, cannot be part of short run marginal costs.
18. The Commission goes on to say that the applicants, in essence, are arguing that all costs associated with electricity generation, are costs which are not only capable of , but which must be, bid in and be contained in the commercial offer document. This could not be so, for example in the treatment within the bidding mechanism of carbon allowances. They go on to argue that the applicants attempt to assign to the judge’s remarks that the “levy was a cost in the ordinary sense of the term…”, a meaning which renders his conclusion in that regard incorrect, is misguided.
19. In the circumstances outlined at para. 3 of this judgment, the Attorney General was joined to these proceeding as a Notice Party, apparently to protect the public interest. At first glance it is difficult to understand why this was thought necessary, given the nature of the issues in dispute. Be that as it may, submissions were filed and were spoken to by counsel on her behalf.
20. At the outset the Attorney makes clear, quite properly in my view, that she remains detached from both parties in this commercial litigation. She concedes that the issue is one of construction, having regard to the Licence and to the BCOP. Furthermore she does not assert that the Act of 2010 sought to, or has in any way altered, the terms or the correct meaning of these contractual documents. What she does seek to do, is to make submissions as to the purpose and nature of the levy, suggesting in the process that a proper understanding of its character is essential in determining the construction issue.
21. The direct background to the Act of 2010, followed a decision of the SEM Committee, (SEM-08-32), which allowed the opportunity cost of carbon allowances to be bid in. As under the Directive and the Regulations above mentioned, such allowances for the most part, were obtained by the generators free of charge. This decision created a windfall which the Act of 2010, at least in part, sought to redress. The extent of the unearned income can be seen from the evidence in the case, which shows that about 80% of the allowances, which the appellants were required to surrender in respect of their emissions for 2008/2009, were obtained free of charge. This it is said, is the context in which the Act of 2010 was enacted.
22. The Attorney then complained that the appellants have consistently misdescribed the nature of the levy: it is not a charge on carbon, rather, as is evident from its long title and the inserted section into the Act of 1999, it is a charge on revenue which is attributable to emissions. Prior to the Act of 2010 generators were receiving revenue for their emissions allowances, even though a significant portion of these had been received free of charge. The levy was intended to capture these. It is therefore a levy on revenue, and not on allowances, emissions, electricity or any other form of operational costs.
Decision:
23. May I first deal with the position of the Attorney General and say that the direction of the submissions made, can have little if any significance, to the disputed issue. An understanding of the levy is of course important as it may be an understanding of legislative intent or purpose. However, such can only be reached by accepted canons of construction. To that end I would discount any attempt to shape an approach or seek to influence such matters, by any means other than those historically available and normally applied. The Act of 2010 is not truly central to this case: it is acknowledged by all, that it did not alter the rights or obligations of the parties, which have been established since 2007. What will determine this dispute is the Generation Licence and BCOP. If the effect of the court’s judgment is that the so called “windfall “revenue will be recouped, that is because the provisions of the Licence permit it, not because the Act says so. If the finding should be to the contrary then, whatever the intent of the Act might be will not alter the result. Therefore, whilst valuing the submissions made, I do not believe that the contribution of the Attorney was essential to this case.
How do you Interpret?:
24. Very little argument has been addressed to this issue. This is because there is very little dispute about it. No special or adapted principles are sought to be utilised. It is accepted that the front line rules of construction are applicable. In present context what does that mean? The starting point, although historically basic, remains very much apposite. Give the words a meaning which they obviously appear to have, but in the context in which they are used. Geoghegan J. in Analog Devices B.V. v. Zurich Insurance [2005] 1 IR 274, at p. 279-280 when speaking of contractual interpretation, referenced what Lord Hoffman had said in I.C.S. v. West Bromwich B.S. [1998] 1 WLR 896. In particular the learned judge highlighted the following:-
“13. In modern times, these principles have received further expansion from the House of Lords. Lord Hoffman in I.C.S. v. West Bromwich B.S. [1998] 1 WLR 896 considered that quite a radical change had come about, the result of which, "subject to one important exception", was to assimilate the way in which such documents are interpreted by judges to the common sense principles by which any serious utterance would be interpreted in ordinary life. He then set out the modern principles at p. 912 as he saw them and which I would accept:-
‘(1) Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.
(2) The background was famously referred to by Lord Wilberforce as the 'matrix of fact' but this phrase is, if anything, an understated description of what the background may include. Subject to the requirement that it should have been reasonably available to the parties and to the exception to be next mentioned, it includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man.
(3) The law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent. They are admissible only in an action for rectification. The law makes this distinction for reasons of practical policy and, in this respect only, legal interpretation differs from the way we would interpret utterances in ordinary life. The boundaries of this exception are in some respects unclear. But this is not the occasion on which to explore them.
(4) The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words is a matter of dictionaries and grammar; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean. The background may not merely enable the reasonable man to choose between the possible meaning of words which are ambiguous but even (as occasionally happens in ordinary life) to conclude that the parties must for whatever reason, have used the wrong words or syntax; see Mannai Ltd. v. Eagle Star Ass. Co. Ltd [1997] AC 749.
The ‘rule’ that words should be given their ‘natural and ordinary meaning’ reflects the commonsense proposition that we do not easily accept that people have made linguistic mistakes, particularly in formal documents. On the other hand, if one would nevertheless conclude from the background that something must have gone wrong with the language, the law does not require judges to attribute to the parties an intention which they plainly could not have had. Lord Diplock made this point more vigorously when he said in Antaios Compania S.A. v. Salen A.B. [1985] A.C. 191, 201:
‘If detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business commonsense, it must be made to yield to business commonsense.’”
I respectfully agree with this.
25. The purpose of such an interpretive exercise is to ascertain what contractual rights and obligations the parties have bound themselves to. The more formal the contractual context the more a court can be satisfied that, the concluded document, signed up to by the parties, reflect what their bargain is. Not simply in a factual sense but also as to the manner in which they seek to have the underlying events regulated by law. When a dispute arises, quite frequently, either one or all of the parties, disavow what might appear to be the obvious and manifest meaning of the document in issue. Positions are therefore stood on, impasse prevails and litigation follows.
26. In performing the function called upon, the court will firstly consider the document and any and all other documents, properly attached to or incorporated within it: each clause, part, chapter or section will be looked at individually, and if required, collectively. (The People (Attorney General) v. Kennedy (No.1) [1946] 1 I.R. 517 at 536). Its nature and purpose will form part of the background. Where the parties have defined or described a term, which is used in the document, that meaning will be ascribed to it and not any other, either ordinary or otherwise. This is to reflect the freedom of choice expressed by the parties. In addition, such interpretation is designed to ascertain what meaning the document has, for a reasonable person who has a knowledge of and an interest in the subject area covered by the document. Or, as Lord Hoffman said in I.C.S., “he who will have” of all the background, reasonably available. This input into construction is critical as otherwise it may be impossible to read the document in its proper context. In addition however, the actual words used, must never be lost sight of and must never be forced to yield to speculation or conjecture.
27. These principles are those which generally apply to commercial contracts negotiated freely in both the public and private sector. I have not considered any subsidiary aids to interpretation or examined any exceptions which may be available: it has not been necessary to do so. Although the relationship between the parties in the instant case did not crystallise in what may loosely be described as the free market place, nonetheless I see no reason why such rules should not equally apply here. Notwithstanding the fact that the licensor is a statutory body, that the terms are in statutory form and that the market place is regulated, all participating generators are fully aware of these matters at the time of their contract. Having chosen to enter the sector against such background, which is public knowledge, I see no reason to depart from the standard interpretative rules above mentioned. In fairness it should be said that the court has not in any substantive way been invited to do so.
28. Before reverting to Condition No. 15 of the Generation Licence, which as I will show incorporates the BCOP, which as a result must also be looked at, it is of the first importance to realise what is not in issue in this case. By this I mean events or circumstances which, noteworthy as they are in establishing background knowledge to the case, are nonetheless not of interpretive relevance to the documents in question. These include the following:-
1. that the market is regulated in all respects of its organisation: nothing is added by saying “highly” or “rigidly” regulated, or by the use of similar terms,
2. that participation in this market is mandatory for the applicants: thus they do not have the freedom of commercial choice which otherwise they may have,
3. that the licensor is the Commission, a statutory authority, with extensive functions of a regulatory and enforcement nature,
4. that the licence document is in a standardised form, reflecting the regulatory framework with no meaningful possibility of amendment at individual level, and
5. that the BCOP is similarly circumscribed.
In addition, it must also be noted that the validity of the Generation Licence is not in issue, neither is the validity of BCOP. It not suggested that either its definitional or measuring scope is outside the parameters permitted by the Licence. Furthermore, the provisions of the Act of 2010, as such, are not being challenged and neither is the legislative framework underpinning the levy. Finally, there is no cross border element or competition issue in this case.
29. By virtue of Condition No. 15(5) of the Generation Licence, the Commission is given a discretion to publish, be it noted that this is after full consultation with licence holders, a condition which undoubtedly has been satisfied, a document known as BCOP, which inter alia may define the term “opportunity cost” and may make provision for calculating the opportunity cost of specified cost items. Such a document, as we know, has been created: accordingly, under sub-condition (6), licence holders must comply with its terms. As a result it forms part of the contractual arrangements between the parties. It matters not that its existence has resulted from the exercise of a discretion: the generators were put on express notice of this reserved power. They bound themselves to the BCOP, if established. That has come to pass and they are therefore contractually committed to its terms.
30. That being so, the only way in which the terms of BCOP could be construed as being subsidiary or ancillary to the terms of the Licence is that, if there was a provision in either document to that effect. Unarguably so, this is not the case. Therefore, I cannot see any legal basis to support the suggestion that, where applicable and within their meaning, as determined by the normal rules of construction, the terms of BCOP should be viewed, somehow, as being secondary in importance to the terms of the lease. In my opinion, such terms are to be regarded for what they are, namely as being part of the overall terms governing the relationship between the parties. Given this unconditional manner of incorporation, it must be that such terms have parity of status with and an equivalence in importance to all of the other terms of the agreement. Consequently, the submission that BCOP cannot, as a matter of principle, as distinct from interpretation, affect Condition 15(1), (2), (3) and (4) of the Licence is in my view, incorrect.
31. Apart from the point last mentioned, it is I think correct common case that the principles governing the price at which generators may bid to sell electricity into SEM, are laid down in the Licence and BCOP. Both of these documents are based on the regulatory principles governing wholesale electricity prices in the SEM. It is also common case that the fundamental principle of bidding is that, the price components of each cost item, referred to in the commercial offer data, must be “cost reflective” as Condition 15(1) specifies. However, this concept is not free standing, in fact it is heavily circumscribed by and through the elaborate machinery set out in the Generation Licence and BCOP for determining the basis on which cost items are allowed in and valued. It has within that framework an autonomous meaning. This in my view inescapably follows from the sequential structure of Condition 15 itself.
32. As can be seen from para. 12 of this judgment, where Condition 15 is quoted in full:-
(a) subpara. (1) of the Condition, declares that the price components of, in effect, each relevant cost item, must be “cost reflective”,
(b) subpara. (2) ordains that such price components will be treated as being cost reflective only if the scheduled production costs of the specific unit on a specific trading day, is equivalent to the short run marginal cost of that unit for that trading day, and
(c) subpara. (3) provides that for the purposes of subpara. (2), short run marginal costs are to be calculated as the total costs attributable to the ownership etc. of the unit during a trading day if operating to generate electricity, minus the total costs attributable to the ownership etc. of that unit for that trading day when not operating to generate electricity.
33. The steps in the definitional process however do not end there. Subpara. (4), by its express terms, is created specifically “for the purposes of (sub)para. 3”, so of course, a meaning, in context, must be given to its words. There is a reason for this: it brings us to the next step in the tiered process, it gives a direction as to what the costs in subpara. (3) are or more accurately, what they are “deemed to be”, which is, in respect of each cost item, the opportunity cost of that item for that unit for that day’s trading. However, the task is not yet complete, for up to this point, one does not know what “opportunity costs” are or how such will be determined and measured. Hence, BCOP.
34. Whatever about ambiguity existing elsewhere, Clause 6 of BCOP, in clear terms, indicates that for the purposes of calculating short run marginal costs, each cost item must be valued at its opportunity cost. This leads directly back to the fundamental principle of costs being cost reflective, recalling that price components can only be regarded as such, if they are equivalent to short run marginal costs. There is therefore, a direct and immediate connection between cost reflective bidding and opportunity costs.
35. Clause 7 and 8 of BCOP then established how the opportunity cost of cost items are to be calculated. Clause 7 determines that such cost shall comprise the value of the benefit foregone, by reference to the most valuable realisable alternative use of that cost item, for purposes other than electricity generation. Clause 8 determines the manner in which the benefit foregone is to be calculated: where a market exists, the opportunity cost of a cost item shall be the prevailing price of that item; where no such market exists, it shall be its replacement cost. Those are terms which I will come back to again in a moment.
36. Therefore, as can be seen, the framework is multi-stepped and provides that:-
(i) cost reflective bidding takes place by reference to short run marginal costs,
(ii) short run marginal costs are determined by reference to opportunity costs,
(iii) opportunity costs are determined by reference to value of the benefit foregone, and
(iv) value of the benefit foregone is determined, where there is a market, by the prevailing price of the item in question, and where no such market exists, by its replacements cost.
Consequently, given the express terms of the Licence and BCOP, it is impossible to accept, what in essence is the core submission of the appellants, that notwithstanding the provisions above described, all costs incurred by or associated with generation, are or must be included in the commercial offer data. Such a conclusion in my view is not deducible from the provisions identified. Even if Condition 15 rested at the end of subpara. (3), I doubt if such a proposition could stand. However, certainty in my opinion, once the remainder of that condition, in conjunction with the terms of BCOP (as integrated in the manner indicated) is considered for the purposes of determining what cost reflective bidding truly is, the suggested conclusion is simply not possible.
37. During the course of submissions some discussion took place about the true nature of the imposition created by the Act of 2010 and the legitimacy of its purpose, if it be as submitted, namely to recoup what has been described as the “unearned windfall revenue”, resulting from the Directive and Regulations above mentioned. As no challenge has been advanced to the levy on this or on any ground, I will express no comment on these matters, save to say that, the use of the description “windfall”, is at least unfortunate. There cannot in my view be any question about the right of the appellants to receive, free of charge, the percentage of carbon allowances which they have. Such has resulted from community legislation which this Member State is bound by, as it is of course, by its own domestic obligations. Whatever was received by the generators, was received in accordance with law. Consequently the use of the phrase, as mentioned, is apt to mislead. However, I do not think that the issue on this appeal should in any way be influenced by the use of such terms, however marginal or inappropriate they might be.
38. The Act of 2010 is entitled “Electricity Regulation (Amendment) (Carbon Revenue Levy) Act 2010, the long title shows that its subject matter is the imposition of a levy, to be known as a “carbon revenue levy”, on so much of the revenues received by electricity generators who participate in the SEM, as is attributable to emissions from their generation units. The inserted s. 40(D) in the Act of 1999 is in much the same vein. Whilst it cannot be doubted but that the revenue identified, is directly related to the emissions resulting from the generation of electricity, nonetheless I cannot agree that it is a levy on carbon or on the generation of electricity as such. Whilst I note those who are exempt from the levy and the period of its application, I do not find it necessary to further analyse the provisions of the Act of 2010, as in my view, such is not required so as to determine whether or not the levy can be “bid in”, in the process under discussion.
39. Following on from the above analysis the key question is whether the levy has an opportunity cost, for in my view if it has not, it cannot form part of short run marginal costs. In this regard, I do not accept that the trial judge in the same breath included it as part of short run marginal costs and then excised it by reason of the BCOP. This in my view is to misunderstand paras. 7.13 and 7.15 of the judgment.
40. In 7.13 the learned judge said that the levy was a cost in the “ordinary sense of that word”, a proposition from which I would not demur. However, in judging what cost items are deemed part of short run marginal costs, one does not do so by reference to “the ordinary meaning” of costs. In addition, he said that the levy was a cost attributable to the operation of the plant, in that it was incurred once operational and not when idle. Again, that may be so but likewise it is subject to the same qualification. Quite correctly in my opinion, the learned judge immediately followed these observations by referring to Condition 15(4) of the Licence and thereafter by applying its provisions, arrived at the point where unless the levy had an opportunity cost it could not be bid in. This manner of approach is entirely consistent with his judgment and contrary to what has been inferred, if not expressed, at no time did he make a finding that the levy was part of short run marginal costs. Therefore, the question of exclusion never arose, quite simply the levy was never deemed to be part of such costs in the first place.
41. In the same context reference has also been made to a passage in the judgment where the learned judge referred to “working backwards through the various conditions”, when considering this issue. When viewed as a whole, I regard such an exercise as purely one of cross reference and not one of approach error. Therefore, I would reject the criticisms made of the judgment in such respects.
42. There can be no doubt but that when a “cost item” has an “opportunity cost”, the value of that item is deemed to be the “benefit foregone” by reference to the “most valuable realisable alternative use for purposes outside electricity generation”. Clause 8 of BCOP informs us that the value of the alternative use is the prevailing price of the cost item if there is a market and if there is not, its replacement cost. In my view the levy cannot fall within this contractual description of a cost item. In the first place, the levy must be understood for what it is: it is a statutory liability imposed on revenue earned in a particular way. To say that such a levy has a value or has an alternative value, is self contradictory. To suggest that it has a use and an alternative use is likewise not meaningful. Quite evidently one cannot speak of a market place or of replacement cost.
43. When contrasting the position of the levy with say, carbon allowances, it is immediately obvious that there is a market for the latter, in which such allowances can be sold and purchased. When looking at labour or fuel, including the taxes inextricably linked with such items, it is also the case that both may be put to profitable use in areas outside of electricity generation. On the other hand, the levy has no existence or life of its own, in this type of way. In addition, the levy is not money and cannot be regarded as such. It is not permissible to substitute the cost of discharging the statutory duty for the levy itself. It could never be that when paid the levy becomes an inclusive cost item but when remaining undischarged is not so. It is therefore in my view incorrect to suggest that, the value of any benefit foregone equals the cash value of the sum of the levy. To do so is to conflate two entirely different items. Consequently, I cannot see how in these circumstances the levy can be said to be part of short run marginal costs.
44. This conclusion will be sufficient to dispose of the appeal. However, there is one further aspect of Clauses 7 and 8 of BCOP which I wish to refer to. In both clauses, reference is made to the cost items being “employed…for the purposes of electricity generation”. It is said that this phraseology is unacceptably wide in that it goes further than simply determining the measure or value of the items in question. It is claimed that, it has the capacity for including or rejecting cost items per se. In this regard the learned judge is criticised for supporting his conclusion by indicating that the levy could not be said to be either “employed” in or constitute “an input” into, electricity generation.
45. In my view the subject phrase is but expressly stating what otherwise is implied within Condition 15. It seems to me that the essence of the contractual concentration is on the cost items which form an integral part of the generation of electricity. In that regard, I would also agree that the levy cannot be so regarded. It is in my view, as previously stated, a cost incidental to or consequential upon, but not a direct input cost into, the generation of electricity. Accordingly, for this reason I also would dismiss the appeal.
JUDGMENT of Mr. Justice Hardiman delivered on the 23rd day of February, 2012.
This is the applicant’s appeal from the judgment and order of the High Court dated 23rd June, 2011, whereby they were refused the relief they seek against the respondent, the Commission for Energy Regulation. The judgment of the High Court was that of Mr. Justice Clarke.
Background facts.
The issues in this case require some understanding of the nature and history of the way in which electricity is generated, transmitted
and supplied in Ireland. In the following very brief account I have drawn extensively and gratefully from the judgment of the learned High Court judge.
Before 1999 the generation transmission and supply of electricity in Ireland was a straightforward affair familiar in one degree or another to most people. The E.S.B. (Electricity Supply Board) a public monopoly, generated transmitted and supplied electricity to all customers in this jurisdiction. Northern Ireland had its own arrangements, not widely understood in this jurisdiction. More recent times have seen dramatic changes in this area. There has been a previously unimaginable liberalisation in the market for the generation and supply of electricity. This has happened in conjunction with the general liberalisation in many areas of economic activity which has taken place under the influence of the European Union. The Electricity Regulation Act, 1999, as will be seen below, provides a system of licensing of private electricity generators. The appellants in the present case are independent generators supplying electricity.
Subsequent to that development, a “single market” in electricity has been established. This parallels other single markets for electricity which exist in the European Union area. Such single markets are of varying sizes. The single market of which this jurisdiction is part consists of Ireland and Northern Ireland, a common all Ireland market.
The issues in this case cannot be understood without some appreciation of the nature of this market.
Since November, 2007, there has been a single market for wholesale electricity on the whole island of Ireland. A statute, the Electricity Regulation (Amendment) (Single Electricity Market) Act, 2007 made provision for a cross-border regulatory framework bringing together the Commission which is the respondent in these proceedings and its counterpart in Northern Ireland, the Northern Ireland Authority for Utility Regulation. It was held in the High Court and has not been disputed that the Single Electricity Market or “SEM” is in principle two separate committees of, respectively, the Commission and the Utility Regulator, but in practise consists of the same people and operates as a single body.
This cross-border aspect of the market into which electricity is now sold is a matter of considerable importance to the issue in these proceedings.
Both of the appellants have held generation licences from the Commission since before the inception of the single electricity market. The terms of such licences and other associated documents, govern the basis on which generators such as the appellants are permitted to “bid in” to the electricity market. In substance, the application of the bidding in mechanism determines the price which the generators are paid. That mechanism will be considered in some considerable detail below.
The present litigation is a dispute which has arisen between the appellants on the one hand and the Commission on the other as to one aspect of that mechanism. This aspect has its own background which it is not easy to state neutrally.
Emission trading allowances, often referred to as “carbon allowances” were issued under the provisions of the European Communities (Greenhouse Gas Emission Trading) Regulations, 2004. These regulations transpose Directive 2003/87/EC (“establishing a scheme for greenhouse gas emission allowances trading within the community”) into Irish law. This establishes a scheme of carbon allowances. Entities, such as the generators of electricity involved in this action, who use up the resource of carbon to produce electricity must have a carbon allowance to match their use of carbon resources. A market in those allowances has developed. By virtue of a decision of the European Authorities, in the early years of that regime many carbon allowances were distributed free, though others had to be purchased. All are now required to be purchased.
At one point, the availability to certain generators, to varying degrees, of “free” carbon allowances were regarded by the Regulator and others as being in the nature of a “windfall” to the generators. This way of thinking is particularly clear in the submissions of the Attorney General. It was not claimed that the generators had behaved in any way improperly. Nor was it claimed that they were wrong to “bid in” the free allowances: indeed they were obliged to do so. But there is an inescapable suggestion in the Attorney’s written submissions, and elsewhere, that it was legitimate to take steps to levy the revenues of the generators on this account. Mr. Maurice Collins, for the appellants, pointed out that the term “windfall” occurs fourteen times in the submissions of the Attorney General, and twenty-five times in the submissions to the High Court. But it was never claimed, and could not be claimed, that the Act of 2010 which imposed the levy either constituted it as a levy on “windfall profits” or prohibited the “bidding in” of the levy in the future on that basis.
To a very large degree, this point is now without relevance because of the unappealed finding of the learned High Court judge that the rights and liabilities of the party are crystallised in the licence and the BCOP that other, more general, considerations whether of policy, ideology, or matters that were “in the ether” around the time the 2010 Act was passed are now without relevance.
The applicants.
The first-named applicant, Viridian Power Limited (VPL) and the second-named applicant, Huntstown Power Company Limited (HPC) are sister companies which own electricity generation plants in the Dublin area. Another company Viridian Energy Supply Limited (VESL) is the trading arm of the Viridian group of companies. VPL and HPC are part of that group, which supplies services to them in connection with their participation in the Single Electricity Market (SEM).
VPL and HPC operated under licences issued by the respondent, the Commission. Specifically, HPC has held a licence in respect of a power station known as Huntstown 1 since 23rd August, 2000. The current version of that licence was annexed to a letter from the Commission dated the 31st July, 2007, which has been exhibited in these proceedings.
VPL has held a generation licence in respect of Hunststown 2 from the Commission since the 28 May, 2007. Both these licences were issued under s.14 of the Electricity Regulation Act, 1999. This licence has also been exhibited in the present proceedings, attached to a letter from the Commission to VPL dated 31 July, 2007.
Private generators of electricity in this jurisdiction and in Northern Ireland are obliged to sell their electricity into the Single Electricity Market (SEM). This market is highly regulated.
Central to these proceedings is the determination of the price of electricity supplied into that market. This is the price at which electricity generators sell electricity to licensed electricity suppliers. These, in turn, sell it on to end users who include domestic consumers. By virtue of the terms of the Single Electricity Market the market on the island of Ireland for the sale and purchase of electricity, and the mechanism for determining its price, is regulated jointly by the respondent Commission and the Utility Regulator under the Single Electricity Market. This came into operation on 1 November, 2007.
A key feature of the SEM is a Mandatory Gross Pool into which, with irrelevant exceptions, all electricity generated on the island of Ireland or imported into it, must be sold and from which wholesale electricity for consumption, or for export, must be purchased.
Of particular relevance to this case is one of the principles of the SEM design: that bidding for sale into the market by electricity generators would take place at the Electricity generators’ marginal cost, to ensure efficient price formation. It is also a principle of the SEM that competition between generators should, all other things being equal, lead to lowest cost production.
The underlying principles of the Single Electricity Market, including the principles that bidding by generators would take place at marginal cost to ensure a sufficient price formation, were set out by the regulatory authorities in a consultation paper entitled “The Single Electricity Market - Proposed High Level Design”, which was offered in evidence in these proceedings, as follows:
“The creation of a gross mandatory pool, where economic rationale suggests that bidding takes place at marginal cost, will also serve to deliver efficient price formation. Competition between generators for despatch, combined with a financial contracts market with suppliers, should, all other things being equal, lead to lowest cost production”.
The licence under which the applicants operate will be discussed in some detail below. For the purposes of this summary it is sufficient to note that the price elements of the offer, or “bid”, which each electricity generator must make for the sale of its product into the SEM are not at the generators’ discretion. Instead, the price is required to reflect the Short Run Marginal Cost of the generator. That is, in the language of the licence, the prices required to be “cost reflective”. Thus, the generator is prohibited from bidding at a price which either exceeds, or is lower than, its Short Run Marginal Cost. This is the effect of Condition 15 of the standard licence to generate electricity.
There is also another document said to be relevant to the price at which generators bid the price of the electricity. This is the Bidding Code of Practice (BCOP). This was published by the Commission and the Utility Regulator in July, 2007. This will also feature extensively in the discussion below.
The issue in the case.
On the 29th June, 2010, both Houses of the Oireachtas passed the Electricity Regulation (Amendment) (Carbon Revenue Levy) Bill 2010. It was signed into law by the President the following day. It came into effect immediately. The Act imposes a levy on the generation of electricity involving the use of fossil fuels, calculated in accordance with a formula which is set out in the Act. This Act applies, naturally, only in this jurisdiction. There is no such levy in Northern Ireland, the other participant in the S.E.M., whose territory is part of the all Ireland extent of that market.
This levy is extremely significant financially and the Court was told, without dispute, that the cost of the levy for these applicants is about €18 million per annum.
The issue in the case can be stated quite simply:
“Is the amount of a carbon levy a cost which the applicants are entitled to take into account in calculating the price at which they bid for the supply of electricity?”
Each applicant takes the view that it is such a cost and propose to construct its bid accordingly. This is described in industry language as “bidding in”. The Commission takes the view that it is not such a cost and therefore cannot be included in the calculation of the bidding price. Moreover, the Commission has purported to issue directions to each of the applicants requiring them not to include the cost of the levy as part of their bidding price. The applicants seek to quash these directions, and certain other relief.
The Licence.
As mentioned above, the licence is a common form licence issued under a statutory power which will itself be considered below. Accordingly, in quoting the licence for present purposes, and in the interest of clarity, I propose to quote only what appears to me to be the significant portions of the licence, indicating omissions in the usual way.
Condition 15, paragraphs 1 - 6, of the licence provide as follows:
“Condition 15: Cost Reflective Bidding in the Single Electricity Market.
(1) The licensee shall ensure that the price components of all commercial offer data … in relation to a generation unit for which the licensee is the licensed generator, are cost reflective.
(2) For the purposes of this condition, the price component of any commercial offer data shall be treated as cost reflective only if, in relation to each relevant generation unit, the Schedule Production Cost related to that unit in respect of the Trading Day to which the commercial offer data submitted by … the licensee apply is equal to the Short Run Marginal Cost related to that generation unit in respect of that Trading Day.
(3) For the purposes of paragraph 2, the Short Run Marginal Cost related to a generating unit in respect of a Trading Day is to be calculated as
(a) The total costs that would be attributable to the ownership, operation and maintenance of that generation unit during that Trading Day if the generation unit were operating to generate electricity during that day;
MINUS
(b) The total costs that would be attributable to the ownership, operation and maintenance of that generation unit during that Trading Day if the generation unit was not operating to generate electricity during that day.
the result of which calculation may either be a negative or a positive number.
(4) For the purposes of paragraph 3, the costs attributable to the ownership, operation and maintenance of a generation unit shall be deemed, in respect of each relevant cost item, to be the Opportunity Cost of that cost item in relation to the relevant Trading Day.
(5) The Commission may publish … a document to be known as the Bidding Code of Practice which shall have the purposes of:
(a) Defining the term Opportunity Cost
(b) Making provision, in respect of the calculation by the licensee and other generators of the opportunity cost of specified cost items for the treatment of
(i) The cost of fuel used by generators in the generation of electricity;
(ii) The value to be attributed to credits issued under the Emissions Trading Scheme established by the European Commission;
(iii) Variable operational and maintenance costs;
(iv) Start up a no load costs;
(v) Any other costs attributable to the generation of electricity.
(c) Setting out such other principles of good market behaviour as in the opinion of the Commission should be observed by the licensee and other generators in carrying out the activity to which paragraph 1 relates.
(6) The licensee shall in carrying out the activity to which paragraph 1 refers, act so as to ensure its compliance with the requirements of the Bidding Code of Practice and any directions issued under it. (Emphasis added)
The Bidding Code of Practice
The relevant portions of this document are paragraphs 6 - 8. These provide:
“(6) When calculating the Short Run Marginal Cost of a generation set or unit in respect of a Trading Day, constituent cost items are to be valued at their opportunity cost…
(7) The Opportunity Cost of any cost item shall comprise the value of the benefit foregone by a generator in employing that cost-item for the purposes of electricity generation, by reference to the most valuable realisable alternative use of that cost-item for purposes other than electricity generation.
(8) In calculating the value of the benefit foregone in employing a cost-item for the purposes of electricity generation, the following principles shall, unless it can be demonstrated to the satisfaction of the authority or the commission… that there is good cause not to, be applied:
(i) Where exists a recognised and generally accessible trading market in the relevant cost-item, the Opportunity Cost of that item should reflect the prevailing cost of the cost item, which may be for immediate or future delivery or use as appropriate to the circumstances of the relevant generator having regard to:
(a) Costs the relevant generator would incur in offering that cost-item for sale, or acquiring that cost-item on a recognised and generally accessible trading market;
(b) Reasonable provision for the variability of the prevailing price of a cost-item on a recognised and generally accessible trading market;
(ii) Where no recognised and generally accessible trading market exists in the relevant cost-item the opportunity cost of that item should reflect the costs which would be incurred by the relevant generator in replacing that cost-item; and
(iii) Reasonable provision for increased risk to plant and equipment as a result of the operation of a generation set maybe included.
Statutory background.
The construction of the licence, as we have seen, lies at the core of the present appeal. However it may be important to bear in mind the statutory background of the licence itself, which is to be found in the Electricity Regulation Act, 1999. Section 14 of that Statute insofar as relevant provides:
PART III
Licences and Authorisations
Licences to
generate and supply
electricity.
14.—(1) The Commission may grant or may refuse to grant to any person a licence—
(a) to generate electricity,
(b) to supply electricity to eligible customers,
(c) subject to section 28, to supply electricity to final customers which in aggregate does not exceed the amount of electricity which is available to the supplier and which is produced using renewable, sustainable or alternative forms of energy or electricity purchased, in place of such electricity, in accordance with the trading arrangements provided for in regulations to be made by the Commission under section 9(1)(d), or
(d) to supply to the single premises of the main heat customer electricity which is produced using combined heat and power at the generating station from which that main heat customer is supplied with heat, or electricity purchased, in place of such electricity, in accordance with the trading arrangements provided for in regulations to be
made by the Commission under section 9(1)(d),
on such terms and conditions as may be specified in the licence.
(2) The Commission may grant to the Board a licence to supply electricity to eligible customers, subject to terms and conditions as may be specified in the licence.
(3) Any licence granted under this section shall be deemed to contain a condition that it shall be subject to modification for the purposes of compliance with any enactment implementing, whether in whole or in part, Council Directive No. 96/92/EC of the European
Parliament and of the Council of 19 December, 1996 concerning common rules for the internal market in electricity.
(4) An application for a licence under this section shall be in writing and be in such form and contain such information as the Commission may request.
(5) An application for a licence under this section shall be
accompanied by such a fee, if any, as the Commission may determine to be appropriate, having regard to the application being made, and the Commission shall make information on such fees available on request.
(6) A licence granted by the Commission shall be subject to—
(a) modification in accordance with section 19, or
(b) revocation by the Commission in accordance with this Act.
(7) Where the Commission refuses to grant a licence to a person—
(a) the person shall be notified, in writing, by the Commission of the reasons for the refusal,
(b) within 28 days of the making of a refusal, the Commission shall notify, in writing, the Commission of the European Communities of the reasons for the refusal, and
(c) the person may appeal the refusal in accordance with section 29.
(8) The holder of a licence granted under paragraph (a) of subsection(1) may supply electricity to the holder of a licence granted under paragraph (b), (c) or (d) of that subsection or to the Board.
(9) A licence granted under paragraph (b), (c) or (d) of subsection(1) shall not authorise the supply of electricity to an eligible customer or final customer until after the 19th day of February, 2000.
(10) For the purposes of subsection (1), ‘‘main heat customer” means a person who has entered into a contract with a producer of combined heat and power to purchase, in a calendar year, an amount of heat produced by that producer, which amount of heat is greater than that contracted to be purchased in that year from that producer
by any other person (if any).
(11) The Commission shall monitor licensees to ensure that they continue to conform to all the conditions and requirements of their licences.
(12) The Board shall be obliged to supply electricity to the holder of a licence under subsection (1) in accordance with the trading arrangements provided for in regulations to be made by the Commission under section 9(1)(d).
It should be noted, though there is no need at present to set out the power, that a licence may be modified or amended under the terms of s.19 of the Act, but that this may be subject to the process of notification, representation or objection, consideration of such representation or objection set out in s.20 of the Statute.
The Levy.
The Electricity Regulation Amendment (Carbon Levy) Act, 2010, generally referred to as the Carbon Levy Act, inserts a new part VIIB into the Electricity Regulation Act, 1999. Section 40B of this Act, part of the insertion, defines the levy by requiring generators to pay to the Commission a levy based on carbon emissions calculated by multiplying the amount of emissions (“E”) of each operator, in tonnes of carbon dioxide equivalent by the average price (“P”) of the allowance for one tonne of carbon dioxide equivalent, then further multiplied by a percentage (“X”) which is currently 65% but may vary.
The long title of this Act may be relevant:
“An Act to provide for the imposition of a levy to be known as the Carbon Revenue Levy on such amount of the Revenues received by certain electricity generators, through participation in the single electricity market, as is attributable to the emissions from each installation of which an electricity generator is the operator; to confer functions on the Commission for Energy Regulation in respect of the collection and recovery of the levy; to provide for the manner on which the levy proceed shall be administered; for those purpose to amend and extend the Electricity Regulation Act, 1999 and to provide for related matters.” (Emphasis supplied)
It may be noted that, despite the reference to the single market no levy or charge of the sort prescribed by the 2010 Act has been imposed in Northern Ireland.
The actual obligation to pay the levy is contained in s.40D of the 2010 Act. This provides at subsection 1, insofar as relevant:
“Each electricity generator shall, subject to and in accordance with this Part and any Regulations made under this Part, pay to the Commission, in respect of the immediately preceding levy period, a levy (in this Part referred to as the ‘Carbon Revenue Levy’) on such amount of the revenues received during that levy period by the electricity generator through participation in the Single Electricity Market, as is attributed to the emissions from each installation of which the generator is the operator, which amount is calculated in accordance with a formula
E x P…”. (Emphasis supplied)
It will thus be observed that the levy was imposed just over a decade after the earliest of the licences in question here was issued and that the licence itself was not modified or amended to make reference to the levy. Nor was the point at issue in this case - whether or not the cost of the levy can be “bid in” as part of the generator’s short term marginal cost - addressed at all in the 2010 Act. Instead the authorities have relied on the proposition that the licence and where relevant the BCOP, properly construed, already prevent the bidding in of the levy. But the levy post-dates the Licence and the BCOP.
The High Court decision.
One of the authorities’ contention was successful in the High Court. The substantial reason for this was that the learned trial Judge held that the levy could be bid in only if it could be regarded as having an “opportunity cost” within the meaning of the BCOP. He went on to find that the levy did not have such an opportunity cost because it was not “employed” in the generation of electricity, again using that term in the meaning of the BCOP. These findings will be analysed in some detail below.
However, prior to reaching that stage, the learned trial Judge made several findings which favoured the applicants and which were strongly relied upon by them on the hearing of this appeal. These were not the subject of any cross appeal. Since they set out in short compass and with admirable clarity some central findings which appear to be agreed by both sides, I rehearse some of them here.
Firstly, the learned trial Judge held that the levy is a “cost” in the ordinary sense of that word. He said, at para. 7.13:
“That the levy is a cost in the ordinary sense of that word can hardly be doubted. It is not possible to generate electricity using fossil fuels… without incurring the levy which is directly proportionate to the amount of fuel used and, thus, to the amount of electricity generated. The levy is, undoubtedly, therefore, a cost attributable to the operation of the plant.”
The significance of this finding will be clear when the submissions of the Attorney General and the Commission are considered, below.
Secondly: other findings of the learned trial Judge relate to the correct legal approach to the resolution of this case. Many of these are no longer strictly relevant because of the absence of a cross appeal but are important in throwing light on the authorities case as it was argued in the Court below and reveals the mindset which informed the decision to issue the Directions. Thus, having stated the core issue in words considered below, the learned trial Judge held at para. 7.14:
“However, before addressing that core question I should note that much mention was made in the course of the hearing and in the affidavit evidence filed (including the expert evidence) of terms such as real resource costs, public, private and social costs. That those terms formed part of the thinking of the Commission in determining on the regime to be applied cannot be doubted from the evidence, and the documents which were published by the Commission in the run up to a final decision being taken on the structure of the regime concerned. However, the important point to note is that those terms did not find their way into the licence. The Commission decided on the terms of the licence. The Commission chose not to include terms such as real resource cost in the licence. The legal rights and obligations of all parties crystallized when the Commission issued licences in the form in which it did. To attempt to import terms and concepts which were undoubtedly ‘in the ether’ as the Commission formulated its proposals into a formal licence where the Commission chose not to include these terms would in my view be to place the cart before the horse. It would be to place context in front of the terms of the legally binding document. There is nothing, therefore, in my view in that evidence which could legitimately lead, in the circumstances of this case and in respect of the terms whose construction I have to determine, to moving away from the definitions of the terms in issue as set out in the licence and the BCOP.” (Emphasis added)
The significance of this finding may not be apparent from a consideration only of the arguments advanced on the hearing of this appeal. But at an earlier stage of the case, the reliance on terms, and on considerations, which were not stated in the licence, but were allegedly “in the ether” was a significant feature. Thus, in the letter of the 8th October, 2010, containing the direction to which the appellants in the present case take exception, the reasons for the decision to issue the direction are set out in the annex to the letter, a document which makes plentiful reference to policy considerations including the need to align physical generation decisions “with real resource costs”.
Equally, in the argument on this appeal Mr. Michael Collins S.C. for the Regulator found it necessary to distance his argument from his client’s own letter of the 10th October, 2009, which had stated that “on a simple reading” of the documentation, the appellant’s contention was correct. Mr. Collins said that his reasons for “withholding complete agreement” from that letter was that “in the licence there is a special definition of opportunity cost which was chosen to reflect certain policy objectives”.
The learned trial judge’s un-appealed findings in this respect - notably that the legal rights and obligations of all parties crystallised when then Commission issued licences in the form which it did - may have a particular continuing relevance in relation to the submissions of the Attorney General on this appeal. These will be further described below but they are conspicuous for their emphasis on the “context” in which the Carbon Revenue Levy Act, 2010, is said by the Attorney General to have been enacted. This “context” is not immediately apparent from a perusal of the Act itself. The submissions on behalf of the Attorney General also suggests that this “context” suggests a purpose for which the levy was imposed, by a process of inference from certain aspects of the Act, though not from any explicit statement therein. The Attorney General goes on to submit that “it is legitimate for regard to be had to the nature and purpose of a measure when determining - as a matter of documentary interpretation - how the measure ought to be construed”.
Thirdly, the learned trial Judge dealt with a contention on the part of the authorities that the licence conferred on the Commission a power of interpretation, which is in the nature of a discretion. The significance of this is that such a power, according to the Commission, would require to be reviewed on a criterion of reasonableness. That is to say the applicants would have to establish the unreasonableness, as that term is understood in law, of the direction. The alternative view is that the standard of review is one of correctness which is a lower hurdle for the applicants to surmount. The learned trial Judge held at para. 6.2:
“… there is nothing in the language of Condition 15.7 which suggests that the Commission is given any power of interpretation of the licence.”
Equally, at para. 6.5 the learned trial Judge held:
“… it seems to me that there is nothing in the licences from which it can be inferred that the Commission is to be given any power of interpretation over the terms of the licence which is material to this case. In those circumstances it seems to me that, subject to the point just mentioned, the proper standard of review is that of correctness.”
The ratio of the High Court’s decision.
The ratio of the High Court’s decision appears to me to be set out at para. 7.13 - 7.17 of the judgment. This passage starts with the passage, already quoted, to the effect that the levy is a cost of generation in the ordinary sense of that word and moreover is a cost attributable to the operation of the plant, and one directly proportionate to the fuel used and thus to the electricity generated. It seems to me to follow from this that it not merely a cost but a short-run marginal cost.
But the learned trial judge went on to hold, in the same paragraph that:
“The real question is as to whether the levy has an opportunity cost as defined in the BCOP for if it has not, then it is not the sort of cost which the definition in the licence and the BCOP allows to be included in the calculation.”
The learned trial Judge then proceeded at para. 7.17 to find:
“The principal definition provision of the BCOP concerning opportunity cost is to be found in paragraph 7. That paragraph speaks of ‘employing’ a cost item for the purpose of electricity generation. It seems to me that counsel for the Commission was correct when he suggested that the wording of that paragraph necessarily implies that the cost item is an input into electricity generation. It is only inputs that are employed in the generation of electricity. A levy which arises incidental to the generation of electricity is not, in itself, employed for the purpose of electricity generation, neither is it a tax or levy on other items which are themselves employed in electricity generation”.
This, then, in two short paragraphs, is the nub of the High Court’s findings. It represents the central issue to be determined on the hearing of this appeal. It is, however, first necessary to consider the contentions of the parties.
Submissions of the parties.
I propose to commence with the contentions of the Respondents, because there is no dispute but that the levy is a cost of generation as that word is ordinarily used. It was, therefore, for the respondents to establish the particular, artificial, meaning whether set out in the BCOP or otherwise which, they say, takes that cost out of the category of short term marginal cost for present purposes.
The Regulator’s Case.
Mr. Michael Collins S.C. for the Regulator, made submissions which fully acknowledged and indeed embraced the very narrow ground in which his client’s case was based. As noted above, he started by distancing himself from his client’s own letter of the 10th October, 2009, which conceded that “on a simple reading” of the documentation the appellants case was correct, i.e. the applicants cost was capable of being “bidded-in”.
He then emphasised to the Court, as a matter of considerable importance that neither the word “cost” nor the phrase “cost reflective” was defined in the documentation.
He then announced four propositions the first three of which appear to favour the appellants but the last of which, in Mr. Collins’s submission, supports the view that the cost is not “biddable in”. These propositions were as follows:
“(1) Firstly, the levy is a cost of generating electricity in the ordinary meaning of that word.
(This proposition appears to be a concession but is one which was absolutely necessary to make. It was also reflected in the findings of the learned trial judge from which the Regulator brought no cross-appeal).
(2) Secondly, the term “cost reflective”, is not a meaningful term without a definition of “cost”.
(3) Thirdly, the levy is a cost, which is reflective of the electricity produced.
(4) Fourthly, it [the levy] is not within the definition of short-term marginal cost”.
Mr. Collins conceded that Condition 15(1) in the licence obliges the licensee to bid in a “cost reflective way”. He further conceded that the cost in question was the cost of the generator who was making the bid. But, he said this does not mean that all costs must be included.
This proposition is one of great importance. Mr. Collins argument was that the combined effect of the licence and the BCOP was that although the generator was obliged to bid in a “cost reflective way”, and include his “total costs”, not all costs need be, or can be, included. This has the consequence that some costs can be excluded so that, to that extent the bid need not be cost reflective.
From the terms of the licence set out above, it will be recalled that “the price component of any commercial data shall be treated as cost reflective:
“… only if… the Schedule Production Cost related to that unit… is equal to the Short Run Marginal Cost related to that generating unit in respect of that trading day”. (Licence, Condition 15, para 2)
The short-run marginal cost is itself required to be calculated as “the total costs that would be attributable to the ownership operation and maintenance of that generation unit during that trading day if the generation unit were operating to generate electricity during that day”, minus certain fixed costs. Accordingly, the Regulator’s case involves the proposition that the phrase “total costs” need not include all costs or include every cost item.
Mr. Collins conceded that the word “total cost” meant all the costs of operating the electricity generation facility and further conceded that “if the construction exercise stopped at that point then ‘it means what it says’ and it includes the levy”.
However, Mr. Collins placed considerable emphasis, indeed crucial emphasis, on para. 15(4) of the licence which said that the costs attributable to the ownership etc. of a generation unit shall be “deemed, in respect of each relevant cost item, to be the opportunity cost of that cost item…”.
This deeming provision, he said, was the engine of the exclusion of some costs from the apparently all-inclusive category “total costs”.
He pointed out that by virtue of Condition 15(5) the Commission could publish a bidding Code of Practice which, inter alia, could define the term “opportunity cost” and refer in particular to the terms of paragraph 8 of the BCOP in this connection.
In another central submission, Mr. Collins stated that “opportunity cost” may be different from “actual cost”.
Asked whether the relevant paragraphs of the BCOP did not relate to a mode of establishing the value of an input rather than a definition of which items were biddable in, Mr. Collins submitted that the relevant provisions related to both of the meaning of the phrase and to the calculation of the value to be attributed to it.
Mr. Collins submitted that “opportunity costs” meant no more and no less than “value foregone”. He submitted that the licence, in particular Condition 15 thereof and the relevant provisions of BCOP meant that “only opportunity cost can be claimed” i.e. only opportunity cost can be bidded-in, even if the actual cost is greater. However it appears in the overall context of the case that Mr. Collins also meant that only something which had an opportunity cost could be claimed at all, and that the financial value of the claim could only be the value of its opportunity cost.
Mr. Collins submitted that this was so in the ordinary meaning of the words used.
Returning to the extremely subtle argument whereby the levy was admitted to be a cost, but denied to be a biddable cost, Mr. Collins used two other phrases. He said that the levy was a cost only in the “Clapham omnibus” meaning of the term and also in the “Profit and Loss Account” meaning, but not in the special meaning to be used in this case, arising from the terms of the licence and the BCOP. This seems at variance with the submission noted in the previous paragraph above.
Continuing this extremely subtle, almost ineffable characterisation of the nature of the “levy” Mr. Collins said that the levy was not an input into the generating process. Rather, it was a component of the input known as “fuel”.
Mr. Collins submitted that the terms of the licence itself excludes the levy. He said that the levy was not a “cost” but merely a “Clapham omnibus” or “profit and loss cost”. He said that the short-run marginal cost (SRMC) is calculable only on the basis of opportunity cost. In answer to a specific question, he said that he would go so far as to say that it was clear that the terms of the licence excluded the levy as a cost.
Turning to the BCOP, Mr. Collins submitted that the levy was not within para. 8(1) or para. 8(2) then “it’s not a cost”. Equally, he said if the levy was not capable of having an opportunity cost, it was not a short-run marginal cost. Varying this slightly, perhaps, Mr. Collins submitted that the levy might in theory be a cost item but if it has no opportunity cost “it doesn’t count”.
Equally, Mr. Collins contended that the generators “total cost” does not include the levy. He said there was nothing wrong in reading “total cost” as meaning merely “opportunity cost”.
When Mr. Eoin Carolan for the Attorney General had concluded his submissions, Mr. Collins made a further lengthy interjection. This was the subject of very strong objection by Mr. Maurice Collins S.C. for the appellants on the basis that the Commission’s submissions had been concluded. But it seems reasonable to take account of what Mr. Michael Collins said on that occasion since it was in fact heard.
He first said that the main cost which was properly “bidded-in” was fuel. Fuel was “bidded-in” at a cost which included Value Added Tax or Excise Duty, as appropriate. He said that other items which were “bidded-in” were maintenance costs and certain wages.
Mr. Michael Collins, in a central passage, then went on to submit that there was an important distinction to be drawn between two cognate things which he identified as “the levy itself” on the one hand and “the cash used to pay the levy” on the other.
It appears that this related to a significant part of Mr. Carolan’s submissions, set out below. Mr. Michael Collins illustrated the distinction he was making by submitting that the levy “has no existence until after generation has taken place”. It is therefore not a cost of generation.
The point of this submission, which it is fair to say Mr. Michael Collins advanced with considerable vehemence was that, as he put it:
“The cash used to pay the levy has an opportunity cost. But the levy itself does not have an opportunity cost.”
This, then, is the crux, the pons assinorum, of the Regulator’s case. There is a distinction between “the levy itself” and “the cash used to pay the levy”. The latter, Mr. Collins concedes, has an opportunity cost, but the former does not. On the correct construction, in Mr. Collins view, of the licence and the BCOP only cost items having an “opportunity cost” may be bidded-in.
It appears to me to be a significant concession to agree that the cash used to pay the levy has an opportunity cost. It may be that this concession was forced on Mr. Collins by the fact that it was admitted that the VAT and Excise Duty on fuel is correctly bidded-in and therefore, in the Regulator’s view, must have an opportunity cost. Once this is conceded, it is difficult to treat the levy differently.
In a supporting submission, Mr. Michael Collins relied on para. 7 of BCOP and the use of three particular phrases, “cost item”; “employed”; and “opportunity cost”. He repeated his submission that it was the opportunity cost, and not the actual cost of permitted items which is permitted to be bidded-in. The levy was not a permitted item and did not have an opportunity cost, considered as a thing in itself.
Submissions on behalf of the Attorney General.
A significant portion of the submissions on behalf of the Attorney General, which did not take sides in the issue between the parties, were lacking in relevance to the present appeal. Another portion of them, in relation to the Attorney General’s view of certain contextual factors, seem to have lost relevance by reason of the un-appealed findings of the learned trial judge which have been quoted above, and those submissions have been addressed in that context. But there are two other aspects of the submissions addressed to this Court on behalf of the Attorney General by Mr. Carolan which are highly relevant. The first is the terse but significant submission:
“My whole point is, the levy is a levy on revenue and not a levy on carbon”.
As noted above it appears to have been this submission which led to Mr. Michael Collins’s striking distinction between the levy itself, which he said had no opportunity cost, and the “cash used to pay the levy” which he conceded did have an opportunity cost.
The second significant submission of Mr. Carolan was previously addressed in his written submissions under the title:
“If this was the Oireachtas’s intention, why did it not choose a different course of action?”. (sic)
This is a coy way of raising the issue, why the Oireachtas did not provide by statute or by an amended BCOP, for the result it desired, if it desired it?
Having raised this question, Mr. Carolan first queried whether the appellants’ submission, which drew attention to the fact that the Oireachtas had failed to specify in the Act of 2010 whether the levy was or was not a reckonable cost and could or could not be “bidded-in” either by amending the Bidding Code of Practice or otherwise, “arguably fail[ed] to show adequate respect for the Oireachtas’s freedom to legislate in the manner it deems most appropriate”.
Having said this however Mr. Carolan went on to say that
“the Bidding Code of Practice (BCOP) applies to the Single Electricity Market (SEM). This is a multi-jurisdictional market which the Oireachtas cannot regulate by unilateral means. It is clear from the manner in which the Act is framed, that the Oireachtas was careful to avoid in any way impacting on the Bidding Code of Practice or the SEM pricing mechanism. By purposely not addressing the source of the windfall revenues… but instead providing for the recovery of a portion of those windfall revenues after they had been received through participation in SEM, the Oireachtas respected the special multi-jurisdictional nature of the SEM and the independent decision making of the SEM Committee in relation to SEM matters.”
As will be apparent, this is a submission of the greatest importance. First of all it provides an insight into the Authorities views of the importance of the levy being a levy on revenue, and not on carbon. Secondly, it states quite expressly that it is beyond the power of the Oireachtas to regulate the “multi-jurisdictional market” that is the SEM unilaterally. It has already been seen that no bilateral action has been taken on this matter since there is no Carbon Revenue levy in Northern Ireland.
These submissions will be further considered in the context of the submissions of the other parties, below.
Submissions of the Appellant.
On behalf of the appellants, the fundamental position of Mr. Maurice Collins S.C. was that the levy was admittedly a cost; it was admittedly, or at least necessarily, a short-run marginal cost. It was therefore part of the generators’ “total cost” and his “bid” was required to be “cost reflective” on the basis of his “total cost”. He pointed out that, by virtue of the terms of Condition 15, that bidding in price must be equal to the short-run marginal cost i.e. neither greater nor lesser than that sum. If, therefore, said Mr. Maurice Collins, the bidding in price is less than the actual short-run marginal cost, then it is not in compliance with the licence because the price is required to be equal to that cost.
He said that the BCOP does not require that only costs which have an opportunity cost may be recovered. On the contrary, it provides that the costs attributable to the ownership, operation etc. of a generation unit are deemed to be the opportunity cost of the relevant costs item. This, he submitted, is not a definition, but a mode of computation. The fact that the quantification is achieved by valuing the opportunity cost is a “subsidiary concept and cannot justify the removal of something which is an actual cost item from the short-run marginal cost”.
It is fair, I think, to say that Mr. Maurice Collins poured scorn on certain of the submissions of the Regulator. He characterised them as amounting to a submission that the levy “is a pure liability” and is “disconnected from the cash which discharges it”, and is therefore “not a cost of generation”. Mr. Maurice Collins took a stand on the fact that the learned trial judge had held, and the Regulator had accepted, that the levy was a cost. He asked, why did the learned trial judge find it was a cost and answered, by the citation from the judgment given above, that that finding was made because the levy was unavoidable if one wished to generate electricity by the use of fossil fuels.
Mr. Collins repeated, several times, that if you are a fossil fuel generator of electricity in Ireland, selling into the single electricity market, you cannot avoid the cost represented by the levy.
He said that the liability for that cost “is directly and in a linear way related to emissions”. It is therefore a marginal cost.
Mr. Maurice Collins submitted that the levy in no way resembled corporation tax, which had been mentioned by Mr. Michael Collins, as it made no provision for the set off of losses from taxable revenue and, unlike a tax, was linked to a specific input i.e. the emissions from a greenhouse gas as defined in Regulations of 2004.
Mr. Maurice Collins emphasised the statutory formula for quantifying the amount payable by way of levy and said that the element E for emissions is the only constant specific element of the formula. The element described as P for price is an average price and therefore unspecific.
On this basis, Mr. Collins denied that the levy was a levy on revenue. It is most obviously, or at least equally, a levy on carbon use.
Comment and Conclusions on Submission.
I must first record that I cannot attach the significance Mr. Michael Collins asked us to attach to the absence of definition of the term “cost”.
All laws are expressed in words and words sometimes are given special meanings, which themselves must be expressed in words. This familiar aspect of legal and judicial practise depends upon there being some words whose meaning is quite plain and I believe that “cost” is one of these. It falls to be construed by us in its ordinary and natural meaning and few, I believe, will quarrel with the ordinary and primary meaning of the word which I take from the Oxford English Dictionary as follows:
“That which must be given or surrendered in order to acquire, produce, accomplish or maintain something; the price paid for a thing”.
There are other words which are important either because they are used in the documents produced in this case or because they are relevant to other words which are so used. Prominent amongst these is the word “total” as in the phrase “total costs” which appears in Condition 15(3)(a) of the appellants’ licences.
From the same source quoted above one receives the unsurprising information that “total” used as an adjective (as it is in the licence) means:
“Of, pertaining, or relating to the whole of something; constituting or comprising a whole; whole, entire.”
Having regard to these unchallengeable definitions it will be seen that it is not easy to argue that the phrase “total costs” does not include “all costs” of the same kind.
I now turn to certain submissions about the “levy” itself. Two of these are particularly striking and memorable. They relate, of course, to the Carbon Revenue Levy. The two submissions are:
Firstly, that the levy is a levy on revenue and not on carbon.
The second is a submission that there is distinction to be drawn between the levy as a thing in itself, which has no opportunity cost, and the cash used to pay the levy which (it is conceded by the respondents) has such a cost.
The levy in question in this case is wholly a creature of statute, and that statute is the Electricity Regulation Amendment (Carbon Levy) Act, 2010.
The obligation to pay the levy is contained in s.40B which has already been quoted. It provides that:
“Each electricity generator shall, subject to and in accordance with this Part and any Regulations made under this Part, pay to the Commission, in respect of the immediately preceding levy period, a levy (in this Part referred to as the Carbon Revenue Levy) on such amount of the revenues received during that levy period by the electricity generator through participation in the Single Electricity Market, as is attributed to the emissions from each installation of which the generator is the operator, which amount is calculated in accordance with a formula E x P…”. (Emphasis supplied)
The long title of the Act, also quoted above, is quite consistent with this provision.
Firstly, it is not without significance that the levy is to be known as the Carbon Revenue Levy. It appears to me that neither of the first two words of this phrase can be ignored. Secondly, the levy is calculated by a formula which, consistent with the title of the levy itself, measures and treats both emissions (as identified in certain regulations) and price.
Where I find it impossible to accept Mr. Carolan’s submission is its insistence that the levy is in no way a levy on carbon. That is not the case. It is not the case either that the levy is exclusively a levy on carbon. It is a levy on carbon and on revenue, calculated in accordance with a specific formula. If there were no carbon there would be no liability to the levy. Put another way, the revenue which is levied is revenue attributed to emissions. One cannot ignore the fact that this is, by statute, a carbon revenue levy, and not simply a levy on the revenues of certain companies.
Nor, in my opinion, can it be said that there is a meaningful, or even a rational, distinction to be drawn between the levy as a thing in itself and the cash used to pay the levy. The levy simply does not exist apart from the cash expression of it. The levy is not a metaphysical entity which maintained some shadowy existence, pre-existing the Act of 2010: it is wholly and entirely a creation of that Act: there is no aspect of the levy which is not a creation of the Act. Moreover, the levy is composed as I have already outlined partly by reference to a price (naturally expressed in cash) and partly in relation to emissions. The formula whereby it is calculated yields a liability in cash and not otherwise. If one is liable to pay the levy, one is liable to pay it in cash, and not otherwise. If one is liable to pay the levy because of engaging in a particular activity, then the levy, expressed in cash, is an opportunity cost of engaging in this activity: it is a good (cash) whose alternative uses are foregone. This is avoidable only by avoiding the activity identified in the Act of 2010.
I regard as a matter of the greatest significance the statement on behalf of the Regulator that VAT or excise duty on the cost of fuel is permitted to be “bidded-in” although it is proposed that the levy should not be. I can see no basis on which this distinction can be drawn. Certainly, this information seems to fatal to the contention that the levy cannot be recovered because it is not an input into the process of generation. It appears to me that it is obviously an input, or not an input, to precisely the same extent that VAT or excise duty is.
Manifestly neither the levy nor the cash used to pay can itself be physically used to generate electricity. Nor can the VAT or excise duty, or the cash used to pay either of them be so used. But if the latter is a biddable in cost it can only be on the basis that it is an unavoidable consequence of using fuel for electricity generation. To precisely the same extent, neither more nor less, is the levy a biddable in cost. Moreover, it is clear from the terms of s.40D, quoted above, that it is a cost which is directly and in a linear way related to emissions. It is therefore a marginal cost. When applied to the period described as a “trading day” which is the period of time the licence envisages, it is a short-run marginal cost. Moreover, it is a legally unavoidable short-run marginal cost.
The terms of the licence.
Putting the above conclusions in terms of the licence, it follows from what has already been held that the levy is a cost of generation and, having regard to the manner in which it accumulates, proportionate to Emissions, over a “levy period” it is a short-run marginal cost of generation. It is therefore, inescapably, a part of the “total costs” referred to at Condition 15(3)(a) of the licence.
This arises as follows:
By virtue of the preceding paragraphs of Condition 15, the generator:
(1) “shall ensure that the price component of all commercial offer data… in relation to a generation unit… are cost reflective.”
The following subsection provides, insofar as relevant:
(2) “For the purposes of this Condition, the price component of any commercial offer data shall be treated as cost reflective only if, in relation to each relevant generation unit, the Schedule Production Cost related to that unit in respect of the trading day to which the commercial offer data is submitted… is equal to the short-run marginal cost related to that generation unit in respect of that trading day.”
The following paragraph, 15(3) requires the short-run marginal cost to be calculated as para. (3):
“The total costs attributable to the ownership operation and maintenance of that generation unit during that Trading Day…”.
We have already seen the unsurprising ordinary and natural meaning of the word “total”. I do not believe the respondents’ case is consistent with this meaning. Nor do I believe it is consistent with the view that VAT and excise duties are properly “biddable in” but the levy is not.
I agree with the submission of Mr. Maurice Collins that the concession that VAT and excise duties were properly biddable in, is fatal to the respondents’ case.
The BCOP
The first thing to be said about the BCOP is that it is constituted by the licence. At para. 15(5) we read that:
“The Commission may publish … a Commission to be known as the Bidding Code of Practice…”.
Accordingly, in relation to the terms of the licence and the BCOP one must first note the primacy of the licence. It contains the provision just quoted authorising the issue of the BCOP. It goes on to define what the BCOP may contain. The BCOP, therefore, is a document derivative from the licence and whose scope is defined by the licence.
The licence first establishes the obligation of cost reflectiveness and the obligation to quantify one short-run marginal cost in terms of “total costs”.
Having done this the licence then goes on to permit the creation of the BCOP for the following purposes:
(a) Defining the term Opportunity Cost,
(b) Making provision, in respect of the calculation by the licensee and other generators of the Opportunity Cost and specified cost items for the treatment of
(i) The cost of fuel used by generators in the generation of electricity.
(ii) The value to be attributed to credits under the Emissions Trading Scheme established by the European Commission;
(iii) Variable operational and maintenance costs;
(iv) Start up and no load costs;
(v) Any other costs attributable to the generation of electricity,
(c) Setting out such other principles of good market behaviour as in the opinion of the Commission should be observed by the licensee and other generators in carrying out the activity to which paragraph (1) relates.
It will be noted that BCOP is not permitted to derogate from the requirements of cost reflectiveness, or the requirement to calculate short-run marginal cost by reference to “total costs”.
Paragraph 6ff of the Bidding Code of Practice appears to me to be concerned with matters of calculation and not of the exclusion of any item from the category of “total costs”.
Paragraph 6 of BCOP commences by providing that “when calculating the short-run marginal cost of a generation set… constituent cost items are to be valued at their opportunity cost…”.
Paragraph 7 says that the opportunity cost shall comprise the value “of the benefit foregone” by a generator in employing that cost item for the purpose of electricity generation. This is to be done “by reference to the most valuable realisable alternative use of that cost item for purposes other than electricity generation”.
This paragraph, again, does not appear to me to exclude any item from the category of “total costs”. It further appears to me to be perfectly consistent with the valuation of a cash cost. Its “most valuable realisable alternative use” is manifestly its cash value in the hands of its owner.
Paragraph 8 of the BCOP provides method of calculating the value of a benefit foregone, and talks in terms of market price, where there is a market in the item in question, or the costs of replacing it where there is not.
This provision, which is entirely related to calculation, and which applies unless there is “good cause not” to employ it, appears to be redundant in the case of a cash levy, whose computation is provided in the Act of 2010.
It therefore appears that the appellants are not merely entitled but are obliged to make sure that the offer price which they make to the Regulator is equal to their short-run marginal costs of generation. They are required, more generally, to ensure that the price at which they “bid in” reflect their costs. That is, it is not lawful for an operator in this market to engage in below costs selling, or to exclude any actual costs from the category of “total costs”.
It is important to realise that this is not a decision of the electricity generators but a requirement of the Single Electricity Market. In this appeal it was common case that when, as the result of an E.U. decision, a percentage of emission allowances were allocated free to electricity generators, they were obliged to “bid in” a price for these free allowances being the price at which the allowances they had to pay for were actually available. This, again, was not a choice of the generators but a requirement to which they were subject. See, for example, para. 17 of the submissions on behalf of the Attorney General in this case.
It therefore appears, firstly, that even when carbon allowances, or some carbon allowances, were available free to generators as a result of an E.U. decision, operators of generation plants were required to “bid in” their cost at the then market price. Secondly, it will be recalled that taxes on physical inputs, such as VAT and excise duty were required to be treated as a cost and were bidded in. It therefore appears that the respondent itself has insisted upon ascribing a cost to an input which was in fact received free and that it required the inclusion as a cost, of VAT or excise duty on a physical input. This approach seems to me quite inconsistent with excluding the levy brought into being by the Act of 2010 from the category of a cost, and therefore a component part of “total costs”.
It will be recalled from the summary offered above of the argument of Mr. Michael Collins that he does not deny that the levy is in some sense a cost. But, for the purpose of this case, he dismissed the sense in which the levy could be said to be a cost as being merely the “Clapham omnibus” sense and the “Profit and Loss Account” sense.
In my view, where a word is not specifically defined by the legislator or by agreement, words are to be read in their ordinary and natural meaning, that is, the sense in which “the man on the Clapham omnibus”, or the person preparing a Profit and Loss Account, would read them. Where a word is not defined, such as “cost” as in the present example, it is to be read in this sense, and I have set out above the content of this reading.
I am somewhat puzzled as to why Mr. Collins denounced the alternative meaning to that for which he was contending as being merely “a Clapham omnibus” sense. The phrase “the man in the Clapham omnibus” was originally the creation of the distinguished 19th century jurist and aphorist, Lord Bowen. He is credited as the author of the phrase in a case called McQuire v. Western Morning News Company Ltd. [1903] 2KB 101, but I cannot find the original use. However, in Hall v. Brooklands Racing Clubs [1931] KB 205, Lord Justice Greer used the phrase in what I am sure is its correct sense. This was an action against the proprietors of a motor race track for personal injuries sustained when the cars that were racing left the track and struck the plaintiff. Lord Justice Greer referred to “what any reasonable member of the public must have intended should be the terms of the contract”.
He continued:
“The person concerned is sometimes described as ‘the man in the street’ or ‘the man in the Clapham omnibus’.”
The learned Lord Justice went on to say:
“Such a man, taking a ticket to see a cricket match at Lords would know quite well that he was not going to be encased in a steel frame which would protect him from the one in a million chance of a cricket ball dropping on his head… in the same way such a man taking a ticket to see motor races would know quite well that no barrier would be provided which would be sufficient to protect him in the possible but highly improbable event of a car charging the barrier and getting through to the spectators”.
In my view, it is precisely the man in the Clapham omnibus or (as Mr. Justice Walsh adapted the phrase) the man (or woman) in the Crumlin omnibus whose ordinary and natural use of language is in question, in the absence of a clear special meaning. I cannot see this usage is of assistance to the respondents’ case. I think that “total costs” includes all costs, each and every cost item. I think this is the sense in which the word would be read by the man on the Clapham omnibus, the man on the Crumlin omnibus, or any reasonable person. I do not think that the provisions of BCOP are authorised or intended to take from this generality. I think that they are directed at the calculation or quantification of biddable in cost items, but are not directed to assessing or defining items out of the “total costs” category. I believe that the levy has an opportunity cost, and that is the amount of its cash value. I note that Mr. Michael Collins conceded that the cash to pay the levy has an opportunity cost, and I do not accept, for the reasons given above, the metaphysical distinctions drawn between the levy itself and the cash used to pay the levy, that is the cash value of the levy. The felt need to draw this distinction is suggestive.
I consider that the levy is “employed” as an “input” in the generation of electricity to precisely the same extent, neither more nor less, than is the VAT or excise duty on fuel when so used.
No Statutory provision.
As we have seen above, the Attorney General’s written submissions raise the question:
“If this was the Oireachtas’s intention, why did it not choose a different course of action?”
The answer given by the Attorney General was:
“The Bidding Code of Practice applies to the Single Electricity Market. This is a multi-jurisdictional market which the Oireachtas cannot regulate by unilateral means”.
The whole of this submission is set out above.
This seems to me to be an extraordinarily important statement. It is stated, by the Attorney General, that the Oireachtas could not by legislation effect what is desired to effect here, the creation of a non-biddable in levy which therefore does not “pass through”, in industry language, to the market, because the market from which revenue is drawn is a multi-jurisdictional one, part of which is outside the jurisdiction of the Oireachtas.
Given that the Oireachtas could not, in the Attorney General’s view, achieve this purpose, it would be extraordinarily fortunate (to say the least of it) if the terms of a licence and a bidding code which predate the levy by a period of years could achieve precisely that purpose. Since the levy did not exist at the time the licence and the bidding code were created, it would seem to follow that if they do have the effect claimed, they have it by accident, co-incidence, happenstance or some process of that kind since it could not have been by intention.
I do not regard this aspect as critical, but it fortifies me in the construction of the licence and the Bidding Code of Practice at which I have arrived.
Revenue raising legislation falls to be interpreted in the light of the substantive nature and effect or impact of the measure and not simply by reference to its form or any statutory means devised for the purpose of its calculation or for the purpose of determining the point or the manner at which a tax or levy impacts on the revenue of the tax or levy payer.
Conclusion.
I would quash the directives of the Commission for Energy Regulation prohibiting the levy from being “bidded-in” and thereby allow the appeal.
Judgment delivered on the 23rd day of February, 2012 by Denham C.J.
1. This is an appeal by Viridian Power Limited and Huntstown Power Company Limited, the applicants/appellants, referred to as “the appellants”, from the judgment of the High Court (Clarke J.) delivered on the 9th June, 2011 and from the order of the High Court of the 23rd June, 2011 (perfected on the 29th June, 2011), whereby the High Court refused the reliefs sought by the appellants in the Notice of Motion of the 13th December, 2010.
2. The appellants had, by Notice of Motion, sought the following reliefs:-
“(a) An order of certiorari, by way of judicial review, quashing the purported decision of the respondent, dated 8 October 2010, directing the first named [appellant] to ensure that the price components of all Commercial Offer Data submitted by it in relation to any generation unit for which it is the licensed generator, do not include any amount in respect of the Levy paid or to be paid by it to the Commission pursuant to section 40D of the Electricity Regulation Act 1999 (as amended by the Electricity Regulation (Amendment) (Carbon Levy) Act 2010);
(b) An order of certiorari, by way of judicial review, quashing the purported decision of the respondent, dated 8 October 2010, directing the second named [appellant] to ensure that the price components of all Commercial Offer Data submitted by it in relation to any generation unit for which it is the licensed generator, do not include any amount in respect of the Levy paid or to be paid by it to the Commission pursuant to section 40D of the Electricity Regulation Act 1999 (as amended by the Electricity Regulation (Amendment) (Carbon Levy) Act 2010);
(c) If necessary, a Declaration, by way of judicial review, that the price components of the Commercial Offer Data submitted by the [appellants] or any of them in relation to a generation unit of which an [appellant] is the licensed generator may lawfully include the amounts in respect of the Levy paid or to be paid by the [appellants] to the Commission pursuant to section 40D of the Electricity Regulation Act 1999 (as amended by the Electricity Regulation (Amendment) (Carbon Levy) Act 2010.”
3. In a reserved judgment delivered on the 9th June, 2011, the learned High Court judge dismissed the application.
4. The appellants filed a Notice of Appeal on the 5th July, 2011, citing the following grounds of appeal:-
“(a) The learned High Court judge erred in concluding that the Levy payable by the [appellants] pursuant to the Electricity Regulation (Amendment) (Carbon Revenue Levy) Act, 2010 (“the Levy”) is not required or permitted to be included as a price component in the [appellants]’ Commercial Offer Data submitted to the Single Market Operation Business under the Single Electricity market Trading and Settlement Code (hereafter referred to the Levy being “bid in”), pursuant to the Electricity Generation Licences granted by the respondent to the [appellants] (“the Licences”).
(b) The learned High Court judge, having correctly concluded that the Levy was a cost attributable to the operation of the generating plants operated by the [appellants’] (para. 7.13 of the judgment), erred in not concluding that the Levy was thereby a cost liable to be bid in by the [appellants] in accordance with Condition 15 of the Licences.
(c) The learned High Court judge erred in concluding that the terms of the Bidding Code of Practice could validly have the effect of precluding the bidding in of a cost (the Levy) which (as the judge concluded) formed part of the Short Run Marginal Cost relating to the generation units operated by the [appellants] within the meaning of Condition 15.3 of the Licences and was thus a cost which the [appellants] were required to bid in accordance with the principle of cost-reflective bidding mandated by Condition 15.
(d) The learned High Court judge erred in his construction of Condition 15.4 and 15.5 of the Licences and, in particular (but without prejudice to the generality of the foregoing) erred in construing those provisions as permitting the respondent to adopt a Bidding Code of Practice the effect of which was to preclude the bidding in of costs properly coming within the scope of Condition 15 and, in particular, costs attributable to the generation of electricity as the judge found the Levy to be.
(e) Without prejudice to the foregoing, the learned High Court judge erred in his construction of the Bidding Code of Practice and, in particular, paragraphs 7 and 8 thereof.
(f) Without prejudice to the generality of the foregoing paragraph, the learned High Court judge erred in construing paragraphs 7 and 8 of the Bidding Code of Practice as permitting only the bidding in of costs items that are inputs into electricity generation and/or “employed” in the generation of electricity.
(g) Further, and in any event, the learned High Court judge erred in concluding that the Levy was not an input into electricity generation and/or employed in the generation of electricity insofar as such was properly a requirement of the Bidding Code of Practice (which the [appellants] do not accept). In this regard, the learned High Court judge erred in holding that the Levy was materially different to other costs-items permitted to be bid in, such as (but not limited to) excise duties on fuels, employer taxes and other levies.
(h) The learned High Court judge erred in concluding that the Levy did not have an Opportunity Cost for the purposes of Condition 15 and of the Bidding Code of Practice.
(i) Further, or in the alternative, the learned High Court judge erred in holding that it is implicit in the Bidding Code of Practice, and in particular paragraphs 7 and 8 thereof, that only costs which are “inputs” into electricity generation may be bid in by generators. In this regard, the learned High Court judge erred in implying a term in the Bidding Code of Practice which is not provided for, and is not consistent with, the plain meaning of the Bidding Code of Practice as adopted by the Commission, construed by reference to the Licence.”
5. The appellants, the Commission for Energy Regulation, “the Commission”, and the Attorney General filed written submissions on this appeal and counsel were heard by the Court from each party, including the notice party.
6. The central issue in these proceedings is the interpretation of the Electricity Generation Licences, “the Licences” issued to generators, including the appellants, and so far as relevant, the Bidding Code of Practice, “the BCOP”, as they apply to the Carbon Revenue Levy, “the Levy”, imposed on certain electricity generators, including the appellants, pursuant to Part VIB of the Electricity Regulation Act, 1999, inserted by s. 3 of the Electricity Regulation(Amendment) (Carbon Levy) Act, 2010, “the Act of 1999, as amended”,
7. In essence, this requires the interpretation of Condition 15 of the Licence and the BCOP.
8. The main issue is whether the Levy required to be paid by the appellants under the Act of 1999, as amended, may be included in their prices when bidding in to supply electricity demands.
9. The High Court held that the respondent had construed correctly the relevant terms of the Licence as not permitting the appellants to bid in the amount of the Levy.
10. The decision of the High Court required the appellants, when submitting bids for the sale of electricity generated by them into the Single Electricity market, the SEM, must not include in the price components of such bids any amount in respect of a Levy which the appellants were obliged to pay in the event that they generated revenue by using fossil fuels to generate electricity, pursuant to Part VIB of the Act of 1999, as amended.
Submissions
11. Extensive written and oral submissions were received and heard from the parties. On behalf of the appellants, in conclusion, it was submitted that the learned trial judge erred in holding that the appellants were not entitled to the reliefs sought. It was submitted that the decisions of the Commission purporting to direct the appellants not to bid in the cost of the Levy had no basis in law. It was submitted that their submission is the conclusion the Court should reach. It was submitted that the effect of the Commission’s decisions was that a significant cost of generating electricity could not be recovered by the appellants. Such a situation, it was submitted, is fundamentally at odds with the principles of cost reflective bidding. A convoluted rationale, it was argued, invoking esoteric distinctions between private and public costs, social costs and real resource costs, was offered by the Commission but was rejected; rightly, it was submitted, by the learned High Court judge. In the absence of that proffered rationale, the High Court failed to ask what justification there could be for a position where, as he stated, what was “undoubtedly … a cost attributable to the operation of the plant” should not be recoverable in the Single Electricity Market, “SEM”. On any view, it was submitted, such an outcome would be manifestly and seriously at odds with the terms and objectives of Condition 15 and constitute a serious attack on the property rights of the appellants. Consequently, the appellants sought the reliefs in their Notice of Appeal.
12. The Commission opposed the appeal of the appellants entirely. In essence, the Commission submitted that the High Court applied a test of ‘legal correctness’ and determined on an objective basis and in accordance with the ordinary principles applicable to the construction of documents having legal effect, that the Commission had correctly construed the relevant terms of the Licence as not permitting the appellants to bid in the amount of the Levy. The High Court had concluded that, “in issuing a direction which precluded [the appellants] from so doing, the Commission correctly interpreted the Licence and directed [the appellants] to take steps which were required to ensure compliance with the Licence and the BCOP”. The Commission requested the Court to agree with the High Court’s construction, and therefore, with its construction of the definition and calculation of “Opportunity Costs”, as defined by the BCOP, by which it determined that the Levy had no such opportunity costs, and being an expenditure arising incidental to the production of electricity, was not the type of cost which the definition in the Licence and the BCOP allows to be included in the calculation of the appellants’ Short Run Marginal Costs, and could not, therefore, be “bid in”.
13. It was submitted on behalf of the Attorney General that to the extent that the issues before the Court concern the construction of the Licence and/or BCOP, it was primarily a matter for the parties to make submissions. It was submitted that it may be relevant in considering how the Levy falls to be dealt with on an ordinary construction of the Licence and/or BCOP to take account of the nature and purpose of the Levy. It was submitted that, contrary to the appellants’ description of it, the Levy does not apply to the use of carbon. It is imposed on windfall revenues obtained by electricity generators, through their participation in the SEM, from the use of emissions allowances which were allocated to those generators free of charge. The terms of the Act of 1999, as amended, it was submitted, and the context in which it was amended, demonstrates that the Oireachtas’ intention in introducing the Levy was to apply it to these windfall revenues. The Levy, it was submitted, is a Levy or tax on revenues, and not on allowances, emissions, electricity or any other form of operational cost. It was argued that this is a matter to which the Court may have regard in considering what constitutes the correct treatment of the Levy under the provisions of the Licence and/or BCOP.
14. Thus this case raises an issue of construction of the Licence. In construing the Licence it is necessary also to consider certain paragraphs of the BCOP.
15. The issue on this appeal revolves around Condition 15 of the Licence. Condition 15 has a heading: “Cost-Reflective Bidding in the Single Electricity Market”, and provides:-
“1. The Licensee shall ensure that the price components of all Commercial Offer Data submitted to the Single Market Operation Business under the Single Electricity Market Trading and Settlement Code, whether by the Licensee itself or by any person acting on its behalf in relation to a generation unit for which the Licensee is the licensed generator, are cost-reflective.
2. For the purposes of this Condition, the price component of any Commercial Offer Data shall be treated as cost-reflective only if, in relation to each relevant generation unit, the Schedule Production Cost related to that generation unit in respect of the Trading Day to which the Commercial Offer Data submitted by or on behalf of the Licensee apply is equal to the Short Run Marginal Cost related to that generation unit in respect of that Trading Day.
3. For the purposes of paragraph 2, the Short Run Marginal Cost related to a generation unit in respect of a Trading Day is to be calculated as:
the result of which calculation may be either a negative or a positive number.
4. For the purposes of paragraph 3, the costs attributable to the ownership, operation and maintenance of a generation unit shall be deemed, in respect of each relevant cost-item, to be the Opportunity Cost of that cost-item in relation to the relevant Trading Day.
5. The Commission may publish and, following consultation with the holders of Generation Licences and such other persons as the Commission considers appropriate, from time to time by direction amend, a document to be known as the Bidding Code of Practice, which shall have the purposes of:
(c) setting out such other principles of good market behaviour as, in the opinion of the Commission, should be observed by the Licensee and other generators in carrying out the activity to which paragraph 1 refers.
6. The Licensee shall, in carrying out the activity to which paragraph 1 refers, act so to ensure its compliance with the requirements of the Bidding Code of Practice.
7. The Commission may issue directions to the Licensee for the purposes of securing that the Licensee, in carrying out the activity to which paragraph 1 refers, complies with this Licence and with the Bidding Code of Practice, and the Licensee shall comply with such directions.
8. The Licensee shall retain each set of Commercial Offer Data, and all of its supporting data relevant to the calculation of the price component of that Commercial Offer Data, for a period of at least four years commencing on the date on which the Commercial Offer Data is submitted to the Single Market Operation Business.
9. The Licensee shall, if requested to do so by the Commission, provide the Commission with:
10. In any case in which Commercial Offer Data are submitted to the Single Market Operation Business which are not consistent with the Licensee’s obligation under paragraph 1 of this Condition, the Licensee shall immediately inform the Commission and provide to the Commission a statement of its reasons for the Commercial Offer Data submitted.
11. In this Condition:
‘Bidding Code of Practice’ means the document of that title published by the Commission in accordance with paragraph 5, as it may be amended from time to time;
‘Commercial Offer Data’ has the meaning given to it in the Single Electricity Market Trading and Settlement Code;
‘Opportunity Cost’ shall have the meaning set out in, and the value calculated in accordance with, the terms of the Bidding Code of Practice;
‘Schedule Production Cost’ has the meaning given to it in the Single Electricity Market Trading and Settlement Code:
‘Short Run Marginal Cost’ means certain costs attributable to the ownership, operation and maintenance of a generation unit, as calculated in accordance with paragraph 3 of this Condition;
‘Single Market Operation has the meaning given to it in the
Business’ Licence granted pursuant to section 14(1)(j) of the Act; and
‘Trading Day’ has the meaning given to it in the Single Electricity Market Trading and Settlement Code.”
16. Thus, the Licence provides that the price components of all Commercial Offer Data submitted to the Single Market Operation Business under the Single Electricity Market Trading and Settlement Code be cost reflective. The Licence refers to terms which are terms of art within the licensing system, and which are identifiable in the Licence by the first letter of each word of the term being in upper-case, e.g. Commercial Offer Data. Under this Condition, for the specific purpose of this Condition 15, the price component of any Commercial Offer Data shall be treated as cost-reflective only if, in relation to each relevant generation unit, the Schedule Production Cost related to that generation unit in respect of the Trading Day, to which the Commercial Offer Data submitted by the Licensee apply, is equal to the Short Run Marginal Cost related to that generation unit in respect of that Trading Day. Thus, the Licence sets out, by reference to specific technical terms, how the price component of any Commercial Offer Data shall be treated.
17. Paragraph 3 of Condition 15 sets out the calculation to be conducted to determine the Short Run Marginal Cost in respect of a Trading Day. I shall return to this calculation later in the judgment.
18. Paragraph 4 of Condition 15 provides that for the purposes of paragraph 3, i.e. the calculation, the costs attributable to the ownership, operation and maintenance of a generation unit shall be deemed, in respect of each relevant cost-item, to be the Opportunity Cost of that cost-item in relation to the relevant Trading Day.
19. Paragraph 5 of Condition 15 states that the Commission may publish, and, after consultation, from time to time by direction amend the BCOP, which shall have a number of purposes. The first purpose is stated to be:
“defining the term Opportunity Cost”.
20. Thus, inherent in the Licence is the right of the Commission to publish a BCOP, one of the purposes of which is to define the term Opportunity Cost. Thus as part of the Licence it is stated that the technical term ‘Opportunity Cost’ shall be defined in the BCOP.
21. The Licensee is required, under paragraph 6 of Condition 15, when carrying out the activity in paragraph 1 of Condition 15, to ensure its compliance with the requirements of the BCOP.
22. Paragraph 11 of Condition 15 is clear and specific in defining a number of technical terms relevant to the Licence. Included is a definition:-
“’Opportunity Cost’ shall have the meaning set out in, and the value calculated in accordance with, the terms of the Bidding Code of Practice;”
Also included are definitions:
“’Short Run Marginal Cost’ means certain costs attributable to the ownership, operation and maintenance of a generation unit, as calculated in accordance with paragraph 3 of this Condition.”
[Emphasis added]
23. Thus, within the Licence are technical terms which are defined, or defined by reference to the BCOP, and a technical calculation to establish the Short Run Marginal Cost related to a generation unit in respect of a Trading Day.
24. The relevant part of the BCOP provides:-
“BIDDING CODE OF PRACTICE
INTRODUCTION
4. This Code aims to facilitate the efficient operation of the Single Electricity Market by ensuring that:
• in combination with the Capacity Payment Mechanism established under the Single Electricity Market Trading and Settlement Code, generators are appropriately compensated for making available their generation sets or units (as appropriate) and for generating electricity in the Single Electricity Market;
• generators cannot exercise market power in the generation of electricity on the island of Ireland or any part thereof; and
• the Power Procurement Business cannot exercise market power by virtue of generation sets or units contracted to it under long term power purchases agreements in Northern Ireland, in respect of which it has been appointed an intermediary.
5. Words and expressions used in this Code and not defined shall, unless the context otherwise requires, have the same meaning as when used in the Licences containing the relevant conditions or (where appropriate) in the Single Electricity Market Trading and Settlement Code.
DEFINITION OF OPPORTUNITY COST
General Principles
6. When calculating the Short Run Marginal Cost of a generation set or unit in respect of a Trading Day, constituent cost-items are to be valued at their Opportunity Cost, and so that a reasoned explanation of the calculation of that Opportunity Cost is capable of being given to the Authority or the Commission (as appropriate) on request.
7. The Opportunity Cost of any cost-item shall comprise the value of the benefit foregone by a generator in employing that cost-item for the purposes of electricity generation, by reference to the most valuable realisable alternative use of that cost-item for purposes other than electricity generation.
8. In calculating the value of the benefit foregone in employing a cost-item for the purposes of electricity generation, the following principles shall, unless it can be demonstrated to the satisfaction of the Authority or the Commission (as appropriate) that there is good cause not to, be applied:
9. Subject to paragraph 12, all Commercial Offer Data submitted in respect of a generation set or unit are to reflect the costs relating to that generation set or unit when considered on a stand-alone basis.”
25. Thus, the Licence stated that the BCOP shall define the term Opportunity Cost (paragraph 5 of Condition 15) and that in Condition 15 “Opportunity Cost” shall have the meaning set out in, and the value calculated in accordance with, the BCOP (paragraph 11 of Condition 15). The BCOP defines Opportunity Cost.
26. Thus, the technical term ‘Opportunity Cost’ in this specific Licence has the meaning as stated in the BCOP.
27. Under the general principles, when calculating the Short Run Marginal Cost of a generation set or unit on a Trading Day, only cost-items that satisfy the definition of Opportunity Cost may be bid in at their value calculated per the terms of the BCOP.
28. The Opportunity Cost of any cost-item shall comprise the benefit of the value foregone by a generator in employing that cost-item for the purposes of electricity generation, by reference to the most valuable realisable alternative use of that cost-item for purposes other than electricity generation. Principles are established for calculating the value of the benefit foregone.
29. It is necessary to construe and interpret Condition 15 so as to determine the meaning and calculation under the Licence of the Short Run Marginal Cost.
30. The calculation required is set out in paragraph 3 of Condition 15 which states:-
“(3) For the purposes of paragraph 2, the Short Run Marginal Cost related to a generation unit in respect of a Trading Day is to be calculated as:
the result of which calculation may be either a negative or a positive number.”
31. Paragraph 4 of Condition 15 has a deeming provision. It provides that for the purpose of the above calculation “the costs attributable to the ownership, operation and maintenance of a generation unit” shall be deemed, in respect of each relevant cost-item, to be the Opportunity Cost of that cost-item in relation to the relevant Trading Day. Thus, the term “Opportunity Cost” is to be read instead of the words “costs [that would be] attributable to the ownership, operation and maintenance of a generation unit” in paragraph 3 of Condition 15. Further, this is mandatory, pursuant to the words “shall be deemed … to be”.
32. Thus, placing the deemed term in paragraph 3 of Condition 15, it would read:-
33. It is clear from the Licence, and stated expressly in paragraph 11 of Condition 15, that “Opportunity Cost” shall have the meaning set out in, and the value calculated in, the BCOP.
34. The BCOP is also explicit. It states in paragraph 2 that for the purpose of the Licence conditions under which it is made, the code defines the concept of Opportunity Cost.
35. In paragraph 6 of the BCOP it is stated that when calculating the Short Run Marginal Cost of a generation set or unit in respect of a Trading Day, constituent cost-items are to be valued at their Opportunity Cost.
36. Paragraph 7 of the BCOP states that the Opportunity Cost of any cost-item shall comprise the value of the benefit foregone by a generator in employing that cost-item for the purposes of electricity generation, by reference to the most valuable realisable alternative use of that cost-item for purposes other than electricity generation. This paragraph refers to Opportunity Cost in the singular; however, paragraph 3 of Condition 15 of the Licence refers to the total: the total Opportunity Costs is the sum of each Opportunity Cost.
37. Thus, the calculation in paragraph 3 of Condition 15 of the Licence, with the mandating requirement of paragraph 4 of Condition 15, is as follows:-
For the purposes of paragraph 2, the Short Run Marginal Cost related to a generation unit in respect of a Trading Day is to be calculated as:
38. Consequently, it is clear that the costs in paragraph 3 of Condition 15 of the Licence are Opportunity Costs which are to be valued in the manner determined by the definition. This is required because of the deeming provision in paragraph 4 of Condition 15 of the Licence, and because the Licence requires in paragraphs 5 and 11 of Condition 15 that the BCOP shall define the ‘Opportunity Cost’. The BCOP defines Opportunity Cost in paragraph 7. In paragraph 7 of the BCOP the components of the term Opportunity Cost are set out with the words “shall comprise”.
39. Paragraph 3 of Condition 15 of the Licence was designed to work whether or not there was a definition of Opportunity Cost in a BCOP. Without the benefit of the BCOP, paragraph 3 of Condition 15 would require that the Short Run Marginal Cost is the result of the operating costs of a generation unit if producing electricity less the operating costs of a generation unit if not producing electricity, i.e. only the costs directly arising from the activity of producing electricity are part of the Short Run Marginal Cost. The definition of Opportunity Cost in the BCOP achieves the same aim in a more precise manner.
40. With the benefit of a definition of Opportunity Cost in paragraph 3 of Condition 15, it can be seen that sub-paragraph (a) asks what is the opportunity cost of a cost-item used for purposes of electricity generation and in the quantity so used and where that cost-item has a valuable realisable alternative use for purposes other than electricity generation, and sub-paragraph (b) will always equal zero. Sub-paragraph (b) will equal zero because the definition of Opportunity Cost requires that the cost-item be employed for the purposes of electricity generation, but the situation in sub-paragraph (b) is that the generation unit is not operating to generate electricity during that day.
41. The Levy cannot satisfy the definition of Opportunity Cost in either of its conditions. In the BCOP paragraph 7, Opportunity Cost is defined:
“… Any cost-item shall comprise the value of the benefit foregone by a generator in employing that cost-item for the purposes of electricity generation, by reference to the most valuable realisble alternative use of that cost-item for purposes other than electricity generation.”
[Emphasis added]
42. It does not make sense to speak of the Levy as being employed for the purposes of electricity generation for a number of reasons: (a) the Levy is a liability that arises from the product of the activities and cannot be said to be employed for the purposes of electricity generation; (b) the Levy is on the revenue, i.e. the income of the business, and although the Levy is calculated in a specific manner, it is not a Levy on an item, like fuel, employed for the purposes of electricity generation; (c) the main element in the calculation of the Levy is carbon, which is produced when fossil fuels are burnt; carbon is the product of generation: the product of generation cannot be said to be employed for the purposes of electricity generation.
43. In other words, the Levy is paid on revenue, and is calculated, according to the terms of the Licence and BCOP, by reference to carbon emissions. Both revenue and carbon emissions are the products of generation and it cannot be said that they were employed for the purposes of electricity generation.
44. Also, the Levy does not have a most valuable realisable alternative use for purposes other than electricity generation. The cost-item must have a valuable realisable alternative use for purposes other than electricity generation.
45. The Levy cannot have a valuable realisable alternative use for purposes other than for electricity generation because the Levy arises only because of generation and on the products of generation, and thus it cannot satisfy the definition of Opportunity Cost.
46. Confusion over the proper interpretation of the Licence may have arisen from paragraph 6 of the BCOP, which reads:-
“When calculating the Short Run Marginal Cost of a generation set or unit in respect of a Trading Day, constituent cost-items are to be valued at their Opportunity Cost, and so that a reasoned explanation of the calculation of that Opportunity Cost is capable of being given to the Authority or the Commission (as appropriate) on request.”
If this paragraph is to be read in addition to the requirement in paragraph 4 of Condition 15 of the Licence, where the costs in paragraph 3 of Condition 15 of the Licence are deemed to be the Opportunity Costs, i.e. are the Opportunity Costs, then there is no conflict because the costs in paragraph 3 of Condition 15 are both defined as Opportunity Costs and valued as Opportunity Costs. However, if paragraph 6 of the BCOP purports to interpret Condition 15 of the Licence as excluding the costs in Condition 15 being Opportunity Costs then paragraph 6 of the BCOP must be incorrect and ultra vires the Licence because the purpose of the BCOP is not to interpret the Licence but rather is to define the term Opportunity Cost, make provisions in respect of the calculation of the Opportunity Cost of specified cost-items, and set out other principles of good market behaviour as per paragraph 5 and 11 of Condition 15 of the Licence.
Conclusion
47. Paragraphs 4, 5 and 11 of Condition 15 require that the definition of Opportunity Cost is read instead of the words “costs [that would be] attributable to the ownership, operation and maintenance of a generation unit” in paragraph 3 of Condition 15. Opportunity Cost is described in paragraph 7 of the BCOP. The definition of Opportunity Cost requires that the cost-item be employed for the purposes of electricity generation and be capable of having a valuable realisable alternative use for purposes other than for electricity generation. While fuel, labour, etc., can satisfy these criteria, the Levy cannot and therefore the Levy is not an Opportunity Cost for the purposes of Condition 15 of the Licence.
48. This case turns on the construction of words in the Licence and the BCOP, as defined in the Licence and the BCOP. Thus, it is a decision on a construction of terms on a given set of documents only. For the reasons given, I would dismiss the appeal.
