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Cite as: [1999] 1 WLR 2093, [1999] UKHL 49, [1999] WLR 2093, [2000] 1 All ER 97

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Coventry and Solihull Waste Disposal Company Ltd v. Russell [1999] UKHL 49; [2000] 1 All ER 97; [1999] 1 WLR 2093 (25th November, 1999)

HOUSE OF LORDS

Lord Steyn Lord Cooke of Thorndon Lord Hope of Craighead Lord Clyde Lord Millett

OPINIONS OF THE LORDS OF APPEAL FOR JUDGMENT

IN THE CAUSE

COVENTRY AND SOLIHULL WASTE DISPOSAL COMPANY LIMITED

(APPELLANTS)

v.

RUSSELL (VALUATION OFFICER)

(RESPONDENTS)

ON 25 NOVEMBER 1999

LORD STEYN

My Lords,

I have had the advantage of reading in draft the speech of my noble and learned friend Lord Hope of Craighead. For the reasons he has given I would dismiss the appeal.

LORD COOKE OF THORNDON

My Lords,

I have had the advantage of reading in draft the speeches prepared by my noble and learned friends Lord Hope of Craighead and Lord Clyde. For the reasons given by them I, too, would dismiss this appeal.

LORD HOPE OF CRAIGHEAD

My Lords,

This appeal is concerned with an entry in the non-domestic rating list relating to a hereditament at Bar Road, Coventry which is known as the Coventry Waste Reduction Unit. The appellant, Coventry and Solihull Waste Disposal Company Limited, is the owner and operator of the hereditament. The respondent, Anthony Russell, is the Valuation Officer for the Coventry City Council area.

On 1 April 1990 the respondent made two entries in the rating list relating to the appellant's premises. The first, which was listed as Assessment No. 13007, was in respect of subjects described as "Refuse Destructor and Premises", the rateable value of which was £610,000. The second, which was listed as Assessment No. 15215, was in respect of subjects described as "Pipeline and Appurtenances", the rateable value of which was £38,500. On 29 November 1993 the respondent issued a notice that Assessment No. 13007 had been altered with effect from 26 February 1993 so as to reflect structural alterations to the hereditament by increasing the rateable value to £1,150,000. The appellant appealed to the Coventry and Solihull Valuation Tribunal on the grounds that the two assessments should be merged into one, and that the combined rateable value of the hereditament should be reduced by applying to it the formula for the determination of rateable value which had been prescribed by the Electricity Generators (Rateable Values) Order 1989 (S.I. 1989 No. 2474) as amended.

The Valuation Tribunal held that the two assessments should not be merged and that the rateable value of the pipeline should not be altered. A small reduction was made to the rateable value for Assessment No.13007 by adjusting the respondent's valuation of the hereditament, which had been based upon the contractor's method of valuation. The appellant appealed from that decision to the Lands Tribunal. The appeal was held by the President, H.H. Judge Bernard Marder Q.C. He allowed the appeal and ordered that the two entries in the rating list should be deleted and that there should be substituted a single entry which described the hereditament as comprising the refuse destructor, the power generation plant and the pipeline with appurtenant premises. He ascribed a rateable value of £143,034 with effect from 26 February 1993 to the hereditament which he determined on the basis of the formula.

The respondent then appealed to the Court of Appeal by way of case stated under section 3(4) of the Lands Tribunal Act 1949. Two issues were before the Court in that appeal. The first was whether the two assessments should be merged into a single assessment. The second was whether the hereditament, whether it comprised the plant and the pipeline or just the plant, should be valued in accordance with the 1989 Regulations on the basis of the formula. The respondent's appeal on the first issue was dismissed. All three members of the Court of Appeal (Robert Walker L.J., Waller L.J. and Hobhouse L.J. (now Lord Hobhouse of Woodborough)) held that the pipeline formed part of a single hereditament comprising the incinerator plant, the generator plant and the pipeline and that the two assessments should be merged into a single assessment. But by a majority (Robert Walker L.J. dissenting) the Court of Appeal allowed the respondent's appeal on the second issue on the ground that the 1989 Regulations did not apply to the hereditament. The parties were agreed that on this basis the rateable value of the hereditament was £928,500. The respondent has not appealed against the decision of the Court of Appeal on the first issue. The appellant has appealed against its decision on the second issue, as to whether or not the hereditament fell to be valued under the 1989 Regulations in accordance with the formula. It is the second issue only which is before your Lordships in this appeal.

The hereditament

The Coventry Waste Reduction Unit was built for Coventry City Council in the early 1970s. It came into operation in 1975. It was designed to receive waste from householders and commercial and industrial undertakings collected by the local authority's refuse collection services. It was also designed to take in waste which people brought in their own vehicles to a civic amenity centre on the premises. The waste was to be incinerated, leaving a residue of ash and ferrous material which could be more readily disposed of. An integral part of the original design was a heat transfer station and pipeline. They were completed in 1976. The purpose of this facility was to transfer heat in the form of hot water produced by steam from the boilers from the energy raised by the incineration process to nearby works now occupied by the car manufacturer Peugeot. Subsequent refinements were incorporated into the premises to enable various material such as glass and metals to be received separately for re-cycling. On the coming into force of the Environmental Protection Act 1990 local authorities were required to discontinue from operating their own waste disposal facilities, and waste disposal contracts had to be awarded on the basis of competitive tendering. The appellant company was formed in 1992 for the purpose of operating the waste disposal facilities previously operated by Coventry City Council and Solihull Metropolitan Borough Council. On 1 April 1994 in accordance with a transfer scheme made under Schedule 2 to the Act of 1990 the plant and the pipeline were transferred to and vested in the company.

The subject matter of this appeal arises out of substantial alterations to the premises which were carried out in 1992 and 1993 before they were vested in the company. Approximately £8.5m was invested in the construction of an electricity generating plant and associated equipment. In consequence of these alterations, which became operational on 26 February 1993, electricity is generated by using steam from the boilers of the incinerator plant to drive a turbine. Some of the electricity is used on the premises, but most of it is sold though the Non Fossil Purchasing Agency and supplied to the distribution network of East Midlands Electricity Plc. The plant generates 12.9 Mw of electricity, of which 11.4 Mw is exported through the distribution network. For the purposes of the 1989 Order, 11.4 Kw is the plant's declared net capacity. The plant continues to use the steam from the boilers to supply heat to the works occupied by Peugeot. The Lands Tribunal held that the plant was originally constructed to dispose of Coventry's waste by incineration and that, although the operations of the plant had been expanded so as to enable electricity to be generated, the disposal of Coventry's refuse together with that of Solihull remains the principal reason for its existence. This finding has not been disputed by either party to the appeal.

The 1989 Order

The Local Government Finance Act 1988, under which the 1989 Order was made, brought about major changes in the system of finance for local government in England and Wales. It has three main elements: a system of taxation of individuals to be known as the Community Charge, rates on non-domestic property and a revenue support grant. Part III of the Act deals with non-domestic rating. Section 41(1) provides that the valuation officer for a charging authority shall compile, and then maintain, lists for the authority, to be called its non-domestic rating lists, in accordance with that Part of the Act. Section 56(1) gives effect to Schedule 6 to the Act, which provides for the determination of the rateable value of non-domestic hereditaments.

The primary rule is that which is set out in paragraph 2(1) of the Schedule. It provides that the rateable value of a non-domestic hereditament shall be taken to be an amount equal to the rent at which it is estimated the hereditament might reasonably be expected to let from year to year if the tenant undertook to pay all usual tenant's rates and taxes and to bear the cost of the repairs and insurance and the other expenses (if any) necessary to maintain the hereditament in a state to command that rent. The traditional methods of valuation - the comparative method, the revenue method and the contractor's method - remain available to the valuer in order that he may determine the annual value of the hereditament. Provision is made in paragraph 2(4) for maintaining a uniform level of valuation for subsequent entries with that when the list was compiled by requiring, as a general rule, that the day by reference to which the determination is to be made is the day on which the list came into force. The respondent's assessment of the rateable value of the premises with effect from 26 February 1993, when the alterations to the plant became operational, was made by applying these rules. He used the contractor's method in order to determine the rateable value of the hereditament under paragraph 2(1).

The starting point for the appellant's argument is to be found in paragraph 3(1) of Schedule 6. This paragraph provides that the Secretary of State may by order provide that in the case of a non-domestic of such description as may be prescribed paragraph 2 of the Schedule shall not apply and its rateable value shall be such as is determined in accordance with prescribed rules. This method of valuation is known as valuation by formula. On 22 December 1989 the Secretary of State for the Environment as respects England and the Secretary of State for Wales as respects Wales made the Electricity Generators (Rateable Values) Order 1989. The provisions of the 1989 Order, which came into force on 23 December 1989, were amended by the Gas and Electricity Industries (Rateable Values) (Amendment) Order 1990 (S.I. 1990 No. 804), in force from 1 April 1990, and the Electricity Industry (Rateable Values) (Amendment) Order 1991 (S.I. 1991 No. 959), in force from 1 April 1991. The appellant's argument is that its premises fall within the description of the hereditaments to which the Order applies which is set out in the 1989 Order as amended, with the result that they are to be valued in accordance with the formula which article 4 prescribes for the rateable values of such hereditaments.

The basic structure of the 1989 Order is quite simple. Article 3 of the Order defines the conditions which must be fulfilled by the hereditament if the formula is to be applied to it. Article 4 sets out the valuation formula. The formula requires a fixed amount to be applied to the declared net capacity of the plant in or on the hereditament which is used or available for use for the purposes of generating electricity. The declared net capacity is defined in article 2 as meaning the highest generation of electricity at the main alternator terminals which can be maintained indefinitely without causing damage to the plant, less so much of that capacity as is consumed by the plant.

Where the primary source of energy used by the plant is wind or tidal power, which varies according to the weather conditions in its capacity to produce energy, the rateable value is the sum of £6,405 applied to the declared net capacity. In any other case the rateable value is the sum of £12,810 applied to the declared net capacity. These figures are derived from the rate used to adjust the rateable values of the major power stations, now largely owned by PowerGen and National Power, which are rated centrally under section 52 of the Act of 1988 for the purposes of central non-domestic rating lists and not locally. Under the Order which applies to these power stations (S.I. 1989 No. 2475) total rateable values are prescribed, and a recalculation factor is used to enable the prescribed rateable value to be adjusted from year to year in accordance with changes in the capacity of the generator. The rate used for that adjustment is £12,810 per Mw, which is derived from the total of the prescribed rateable values.

The difficulty which has given rise to the dispute as to the rateable value of the hereditament lies in the wording of article 3 of the Order. In its amended form it is in these terms:

(1)

section 53

Local Government Finance Act 1988

(2)

(a)

(i)

(ii)

(iii)

(b)

(i)

(ii)

(iii)

It is clear that three conditions must be satisfied for a hereditament to fall under article 3. First, it must be used or be available for use for the purposes of generating electricity. Second, it must fall within one of the three paragraphs of article 3(2)(a). Paragraphs (i) and (ii) refer to the function of the hereditament. Paragraph (iii) applies where the burning of refuse is the primary source of energy. Third, it must fall within one of the three paragraphs of article 3(2)(b), which are concerned with the capacity of the generating plant. Paragraph (?) provides that generating plant will satisfy the condition if it uses wind, tidal or water power as its primary source of energy. Paragraphs (ii) and (iii) provide that, in order to satisfy the condition in article 3(2)(b), the generating plant must have a minimum declared net capacity. If the primary source of energy is the burning of refuse special conditions apply. The general rule in paragraph (?) of article 3(2)(b) is that the generating plant must have a declared net capacity of 25 Mw or more, whereas for all other sources of energy other than wind, tidal or water power the minimum is set by paragraph (iii) at 500 Kw. But an exception is made for those generating plants whose primary source of energy is the burning of refuse which satisfy the conditions set out in either paragraph (?) or paragraph (ii) of article 3(2)(a).

The Lands Tribunal held that the primary function of the appellant's hereditament is the destruction by incineration of refuse. That being so, it is unable to fulfil the condition set out in paragraph (?) of article 3(a), which requires that use for the purposes of generating electricity is its sole or primary function. It is plain both from the agreed facts and from the Tribunal's findings that its primary source of energy is the burning of refuse. As that is the primary source of its energy the hereditament undoubtedly fulfils the condition set out in paragraph (iii) of article 3(2)(a). But that is not enough if the hereditament is also to satisfy the conditions set out in article 3(2)(b), as the declared net capacity of its generating plant is only 11.4 Kw. It must also fulfil the condition set out in paragraph (ii) of article 3(2)(a). The parties are agreed that the alterations to the plant which became operational on 26 February 1993 comprised a scheme for the production for sale of both electrical power and heat (a "CHP scheme"). So the concluding words of paragraph (ii) are satisfied. The argument relates to the question what paragraph (ii) requires in regard to the primary function of the hereditament.

To complete the background mention should be made of the legislative history of the 1989 Order, and in particular of paragraph (ii) of article 3(2)(a). In its original form article 3(2) of the Order set out only two conditions which had to be satisfied for the formula to be applied to the hereditament. The first was that it was used or available for use wholly or mainly for the purposes of generating electricity. The second was that the generating plant had a declared net capacity of 500Kw or more, or used wind or water power as its primary source of energy. The 1990 Amendment Order did two things. It made provision for the application of the formula to hereditaments which used tidal power as their principal source of energy. And it substituted a new article 3(2), which set out in each of sub-paragraphs (a) and (b) three alternative conditions which had to be satisfied. Except for those described in paragraph (ii) in each of these two sub-paragraphs, these have remained unchanged following the amendments made by the 1991 Amending Order.

In paragraph (ii) of article 3(2)(a) of the original Order the words used were "it is so used or available in connection with a scheme for the production for sale of both electrical power and heat." In paragraph (ii) of article 3(2)(b) of the original Order the words were "if its primary source of energy is the burning of refuse, has a declared net capacity of 25 megawatts or more." Article 2 of the 1991 Amendment Order made two changes to the wording of these paragraphs. The first was the substitution, in paragraph (ii) of article 3(2)(a), of the words from the beginning to "available," of the words "its primary function is." The second was the insertion in paragraph (ii) of article 3(2)(b), after the word "refuse," of the words "and neither paragraph (?) nor paragraph (ii) of sub-paragraph (a) applies." In the Explanatory Note to the 1991 Amendment Order it was stated:

(a)

(b)

The issue between the parties

The issue between the parties is one as to the proper construction of the words of paragraph (ii) in the amended article 3(2)(a). Reduced to simple terms, it is whether the primary function of the appellant's hereditament "is in connection with" the CHP scheme which came into operation there on 26 February 1993. The appellant's argument was that the words "in connection with" are ordinary words which should be given their ordinary meaning. All that was required for the ordinary meaning of those words to be satisfied was a "connection" between the function of destroying waste by incineration and the CHP scheme. The fact that there was a connection between them was amply demonstrated by the fact that it was the act of destroying the waste by incineration which enabled the CHP scheme to operate. There was therefore a close and substantial connection between the primary function of the hereditament, which was the destruction of waste by incineration, and the scheme. If it were to be suggested that a functional connection was needed to satisfy the condition, the connection here was plainly a functional one.

Miss Williamson Q.C. submitted that this reading of the paragraph was consistent with what she took to be the legislative purpose of the Order. She said that this was to provide financial incentives to ratepayers to encourage operations which were beneficial to the environment. The appellant's premises were beneficial to the environment in two respects. They were used to incinerate waste. And they harnessed the energy produced by that process to create for sale both power and heat. This reduced the need for the recipients to rely on power and heat produced by alternative sources of energy.

The respondent's argument as to the wording of paragraph (ii) of article 3(2)(a) was directed primarily to the words "function" and "is" which precede the words "in connection with." Mr. Holgate Q.C. submitted that the effect of the paragraph was that the condition was only satisfied if the primary function of a hereditament which was used or available for use for the purposes of generating electricity was its use in connection with a CHP scheme. The word "function" directed attention to the purpose or the object for which the hereditament was used. The words "is in connection with" were intended to link the primary function linguistically with the scheme. He recognised that the wording of the paragraph was unsatisfactory, and that it was capable of bearing either of the two meanings contended for. But he submitted that there were compelling reasons, when the phrase was taken in context and the balance of advantages and disadvantages on either construction were taken into account, for preferring the respondent's construction and holding that in this case the condition was not satisfied.

Discussion

The wording of the amended paragraph (ii) of article 3(2)(a) is far from satisfactory. But I think that the words used, when taken in their context and in the light of the legislative history, are more consistent with the interpretation which the respondent has contended for than that urged upon us by the appellant. Any lingering doubt as to where the balance lies is removed when the implications of the competing version are considered, having regard to the part which the Order plays in the context of the system which Schedule 6 to the Act of 1988 lays down for the valuation of hereditaments which are to be entered in the local non-domestic rating lists.

The amendment which was made to the paragraph by the 1991 Amending Order inserted the words "its primary function is" in place of the words "it is so used or available." It is reasonably clear from the juxtaposition of these words that the purpose of the amendment was to restrict the condition by directing attention to the primary function for which a hereditament used for the purposes of generating electricity is used or available. Under the original wording the condition was satisfied in the case of such a hereditament irrespective of its primary function. All that was needed was evidence to show that its use or availability for use for generating electricity was in connection with a CHP scheme. The primary function of the hereditament could be an entirely different one, so long as there was such a connection. It was enough that its use in connection with a CHP scheme was ancillary to the primary function of the hereditament. By substituting a reference to the primary function the amendment was seeking to introduce a different test. The appellant's argument, which directs attention to the words "in connection with," fails to give sufficient content to the amendment. It concentrates on the words "in connection with," which were left untouched by the amendment. In the result, the effect on this argument of the amended paragraph, when taken as a whole, is virtually indistinguishable from that of the unamended paragraph. It seems unlikely that this was the intention of the amendment.

The structure of article 3(2)(a), in its original form, was to direct attention in paragraphs (?) and (ii) to the use of the hereditament and in paragraph (iii) to its primary source of energy. The wording of the amendment suggests that the amended paragraph (ii) was intended to retain the same direction. The natural meaning of the phrase "its primary function is" requires an examination of the use of the hereditament. Its use is inherent in the concept of what is to be seen as its function. The words "its use" is absent from the amended paragraph, but I think that they are implied by the context. In seeking to provide what Mr. Holgate described as a linguistic bridge between the primary function and the CHP scheme the draftsman used the word "is." It is that word, rather than the phrase "in connection with," which defines the bridge. To give it its full sense the word should be read as if the bridge which it provides had included after the word "is" the words "its use." If those words had been included in the amendment they would have removed all doubt as to its effect. Just as paragraph (?) requires that use for the purposes of generating electricity must be the sole or primary function if it is to be satisfied, it seems to me that paragraph (ii) requires that use in connection with a CHP scheme must be the primary function if it is to be satisfied. This provides a measure of symmetry to the first two paragraphs which, if either of them can be satisfied, will enable a hereditament whose primary source of energy is the burning of refuse to benefit from the lower threshold of declared net capacity in paragraph (iii) of article 3(2)(b).

Looking at the matter more broadly, in order to assess the advantages and disadvantages of the competing arguments, there are two important points which tell heavily against the appellant's construction and favour that of the respondent.

The first is that, if the appellant is right, a very substantial amount of the value of their hereditament will be left out of account in the rateable value which is ascribed to it in the list. In the case of the typical power station a sound test of its annual value, within the meaning of paragraph 2(1) of Schedule 6 to the Act of 1988, is its capacity to generate electricity. Where the sole or primary function of the hereditament is to generate electricity, the value of the entire premises, including all the buildings, plant and machinery, will be reflected in the amount which the hypothetical tenant would pay for the subjects if measured by a figure related to its declared net capacity. The figures which have been selected for use in the formula set out in article 4 of the 1989 Order are linked to the values ascribed to major power stations which are rated centrally. This is a sufficient indication, if this were needed, that the intention was to ensure that local power stations were entered at the same level of value in the local lists. In its amended form paragraph (ii) of article 3(2)(a), on the respondent's interpretation, extends that level of value to a hereditament of which it cannot be said that its sole or primary function is its use for generating electricity because its primary function is to supply for sale both electricity and heat. On the appellant's argument the same level of value would be extended still further to a hereditament whose primary function was an entirely different one, the value of which in that respect was unrelated to the declared net capacity of its generating plant.

In the present case, for example, the appellant's witness told the Lands Tribunal that the major part of the floor area on site was taken up by the waste reduction unit. Two thirds of the respondent's valuation on the contractor's method was represented by the refuse destruction plant. The effect of applying the formula would be that a substantial part of the value of the hereditament which was attributable to its primary function of waste reduction would be left out of account in the local non-domestic rating list. It is difficult to believe that this was the intention of the amendment. The purpose of the valuation system in the context of non-domestic rating is to ensure, so far as possible, that the same level of value is maintained throughout the list in order to achieve fairness as between all non-domestic ratepayers. Where the Secretary of State prescribes the use of a formula for determining the rateable value of a non-domestic hereditament it is to be assumed that his intention is to provide a simple and convenient method of arriving at a fair valuation, in that context, of the entire hereditament.

The second point which tells heavily against the appellant's construction is that it would allow those hereditaments whose primary function is other than their use in connection with a CHP scheme to benefit from the formula while depriving those hereditaments whose primary function was their use in connection with such a scheme of that benefit. The respondent's interpretation provides the more logical result. Those hereditaments whose primary function was their use in connection with such a scheme would be valued by means of the formula, while those whose primary function was their use for some other purpose would continue to be valued by the contractor's method. Miss Williamson was unable to provide a convincing explanation for the result which would follow from her argument. She said that the requirement that there must be a scheme for the production for sale of both electrical power and heat was sufficient to ensure that the connection between the primary function and the scheme would have to be a very substantial one. But any system which is designed to enable both electrical power and heat to be produced for sale, however small and however insignificant in relation to the primary function of the hereditament, will be capable of being described as a scheme within the ordinary meaning of that word. She drew our attention to the provisions of the Order which extended the benefit of the formula to hereditaments whose generating plant used wind, tidal or water power as its primary source of energy irrespective of the declared net capacity of the generator. It is clear that one of the purposes of the Order was to encourage the generation of electricity by the use of renewable sources of energy. But that feature of the Order does not explain why a hereditament whose primary function is its use in connection with a CHP scheme and whose primary source of energy is the burning of refuse should have to satisfy the much larger threshold of declared net capacity in paragraph (ii) of article 3(2)(b), while one whose primary use is something quite different but to which a CHP scheme was an ancillary is to be accorded the benefit of the much lower threshold set by paragraph (iii).

Conclusion

The majority in the Court of Appeal held that it was a sufficient answer to the appellant's argument to construe the words "in connection with" as meaning "having to do with". This explanation of the meaning of the phrase was given by McFarlane J in Re Nanaimo Community Hotel Limited [1944] 4 D.L.R. 638. It was adopted by Somervell L.J. in Johnson v. Johnson [1952] P. 47, 50-51. It may be that in some contexts the substitution of the words "having to do with" will solve the entire problem which is created by the use of the words "in connection with." But I am not, with respect, satisfied that it does so in this case, and Mr. Holgate did not rely on this solution to the difficulty. As he said, the phrase is a protean one which tends to draw its meaning from the words which surround it. In this case it is the surrounding words, when taken together with the words used in the 1991 Amending Order and its wider context, which provide the best guide to a sensible solution of the problem which has been created by the ambiguity.

In the Court of Appeal both Robert Walker L.J. and Hobhouse L.J. declined to attach any importance to the Explanatory Note which was attached to the 1991 Amending Order. But Waller L.J. said that it supported the view which he took which was favourable to the respondent's argument. In my opinion an explanatory note may be referred to as an aid to construction where the statutory instrument to which it is attached is ambiguous. In Pickstone v. Freemans Plc [1989] AC 66, 127A Lord Oliver of Aylmerton said that the explanatory note attached to a statutory instrument, although it was not of course part of the instrument, could be used to identify the mischief which it was attempting to remedy. The problem in this case is that the Explanatory Note is itself ambiguous, because of similar inconsistencies in its use of language to those which appear in the Order which it seeks to explain. But the explanation which it gives for the amendment to paragraph (ii) of article 3(2)(a) is a simple one, and it seems to me to be perfectly intelligible. This is that its purpose is to secure that the rateable values of hereditaments are to be determined in accordance with the Order, in the case of a hereditament comprising an electricity generator used in connection with a CHP scheme, "only if such use is the primary function of the hereditament." I agree with Waller L.J. that this explanation supports the respondent's interpretation of the effect of the amendment. It lends no support at all to the appellant's interpretation. But in any event, for the other reasons which I have given, I consider that the balance of the argument strongly favours the respondent's interpretation as being the correct one.

I would dismiss the appeal.

LORD CLYDE

My Lords,

This appeal concerns the valuation of a hereditament occupied by the appellant ratepayer. In 1990 there were two separate entries in the non-domestic rating list compiled by the respondent, the local Valuation Officer. One (Assessment No. 13007) was for what was described as "Refuse Destructor and Premises." The other, (Assessment No. 15215) was for "Pipeline and Appurtenances." Until 1993 the former subjects comprised plant which not only incinerated waste materials brought to the site by local authorities and others but also a heat transfer station whereby water could be heated and then transferred by pipes to provide heat for a nearby factory, now occupied by Peugeot. Between 1992 and 1993 certain structural changes were made to the premises. An electricity generating plant and associated equipment was installed. The electricity was generated by a turbine driven by steam piped from the boilers of the incinerator plant. The electricity was then sold to the local distribution network. The final shape of the plant thus consisted of an incinerator which disposed of rubbish material and at the same time provided both steam power to drive the turbine and hot water which was passed to and returned from the Peugeot factory, providing warmth for those premises.

In November 1993 the respondent made a proposal to alter Assessment No. 13007 to reflect the changes which had been effected. Apart from the matter of value which is at the heart of the present appeal, the description for that assessment was proposed to be "Refuse Destructor, Power Generation Plant and Premises." The appellant then made two proposals one of which was that the two assessments should be merged into one. That proposal was rejected by the local tribunal but approved by the Lands Tribunal. The Court of Appeal adhered to the decision of the Lands Tribunal on that issue and the matter has not been opened up before this House. I only mention it because it appears to have been treated as a second issue after the first question which raised the issue of the method of valuation, and that seems to me to have been incorrect. The first issue to be resolved in any matter of valuation for rating is the identification of the hereditament. Before one can resolve any question about the valuation one must first know what it is one is to value. It is now clear that the plant and the pipelines all formed a unum quid and should be treated as one hereditament; but that question should logically and practically precede the question how they are to be valued. In terms of the order of the Lands Tribunal the description of the hereditament is now "Refuse Destructor, Power Generation Plant and pipeline with appurtenant premises."

The problem in the present appeal is whether the hereditament is to be subject to a formula valuation, in which event the rateable value would be £146,034, or a valuation on the contractor's principle, in which case the rateable value would be £928,500. The formula valuation is contained in the Electricity Generators (Rateable Values) Order 1989 (S.I. 1989 No. 2474) and the question in the appeal is whether that Order applies to the hereditament, as the Lands Tribunal held it did, or does not apply, as was held by the majority of the Court of Appeal.

Article 3 of the Order provides as follows:

"3 Application

The scope of the present dispute is narrowed to a question of the construction of one element in these conditions, namely article 3(2)(a)(ii). As regards article 3(2)(a) it is agreed that the hereditament is used or available for use for the purposes of generating electricity. It is also accepted that it does not qualify under head (a)(i). It would qualify under head (a)(iii) but a difficulty then arises regarding paragraph (2)(b). Head (i) of that paragraph does not apply and accordingly the declared net capacity of the hereditament becomes relevant. In the present case that is agreed to be 11.4 megawatts. While that would satisfy head (b)(iii) the appellants cannot invoke that head unless they can exclude themselves from head (b)(ii). In that connection they cannot show that paragraph (a)(i) applies and so in order to succeed they have to show that they fall within paragraph (a)(ii). It is in this way that the construction of article 3(2)(a)(ii) becomes critical. As regards the ingredients of paragraph (a)(ii) the Lands Tribunal have found as matter of fact that the "primary function" of the hereditament is the destruction of refuse by incineration. It is agreed that the arrangements made for producing and selling heat and power amount to a "scheme for the production for sale of both electrical power and heat", otherwise known as a CHP scheme. What remains is the construction of the words "is in connection with." The appellant submits that on a proper construction of the paragraph the primary function, the incineration of waste, is in connection with the CHP scheme. The substance of the respondent's submission is that the paragraph only applies where in effect the primary function is the implementation of a CHP scheme.

The appellant's approach identifies two elements in the paragraph, the function and the scheme, the one being connected with the other. The respondent's approach identifies the scheme as the primary function. On the one view the paragraph can be construed as comprising a synthetic, or descriptive, proposition. The paragraph is saying that whatever the primary function may be it is required to be of the stated description in order to qualify. That is the view proposed by the appellant. On the alternative construction the paragraph is to be seen as of an analytic, or definitive, character. On that approach the paragraph is defining what the primary function has to be in order for it to qualify. That is the construction put forward by the respondent.

I have come to the conclusion that the respondent's construction is to be preferred. I have not taken particular account of the Explanatory Note to the latest amending order and I have reached my conclusion essentially for the following five reasons.

I turn in the first place to the language used in the paragraph. To substitute for the words "is in connection with" the words "having to do with," a course which commended itself to the Court of Appeal, does not seem to me to advance the matter. The close similarity of meaning between the two expressions does not seem to me to support a departure from the conclusion at which the Lands Tribunal arrived, that the primary function had a connection with the CHP scheme. I find it more helpful to see if the paragraph can support the two elements which on the appellant's approach it is said to contain. Certainly it could be said that the function of the incinerator was to serve the CHP scheme. But the paragraph requires that consideration be given to the function, not of the incinerator, but of the hereditament as a whole. On the approach favoured by the appellant that function has to be in connection with something else, and one might expect that that something else would be something other than the hereditament. But the connection has to be with the scheme and the scheme is being carried on in at least part of the hereditament itself. I find it difficult to regard the scheme as a second element with which the function of the whole hereditament is connected. Content must certainly be found for the words "in connection with". They cannot be altogether ignored. But I consider that they can reasonably be taken to express a relationship between the function and scheme without requiring that they be two distinct elements. The phrase "in connection with" may reasonably be used to express a relationship of support, or service. In the context of agricultural derating in W. & J.B. Eastwood Ltd. v. Herrod (Valuation Officer) [1971] A.C. 160 the phrase was construed as matter of ordinary usage as reflecting a relationship where one thing is subsidiary to or ancillary to another, and a like understanding of the phrase should be appropriate in the context of another piece of rating legislation such as the present Order. The language of the paragraph is far from elegant, but in my view this construction gives a reasonably coherent meaning to it. What the paragraph requires is that the primary function of the hereditament must be to serve a CHP scheme. The paragraph is defining, not describing, the primary function.

In the second place, the paragraph clearly intends that hereditaments used for the purposes of certain CHP schemes should have the benefit of the formula valuation. If the primary function of the hereditament was the operation of a CHP scheme it would fail to meet paragraph (i), and on the appellant's approach it would also fail to meet paragraph (ii). On their requirement for the identification of two elements it would have to be said that the operation of the scheme was in connection with the operation of a scheme, which makes no sense. The hereditament could fall under head (iii). But the effect of this would be that such a hereditament would only qualify if its primary source of energy was the burning of refuse and if it possessed the large declared net capacity of 25 megawatts. It is unlikely that the intention of the Order was to exclude CHP schemes where the primary source of energy was fossil fuels and where the capacity fell below 25 megawatts. It would be also curious if a hereditament used for a CHP scheme could qualify if the scheme was an adjunct of the primary function of the hereditament, but not if it was the principle function.

Thirdly, the history of the legislation seems to me to support the respondent's construction. Throughout its successive amendments the Order has applied a formula valuation to certain hereditaments not shown in the central rating list which are used or available for use for the purposes of generating electricity. The original version of the Order applied only where the generating plant had a declared net capacity of 500 kilowatts or more or used wind or water power as its primary source of energy. The formula involved the application of a stated sum per megawatt of the declared net capacity, with the rate being halved where the primary source of energy was wind power. The Order was then amended in 1990 by The Gas and Electricity Industries (Rateable Values) (Amendment) Order 1990. (S.I. 1990 No. 804) This amendment re-designed the layout of article 3(2), introducing the two paragraphs (a) and (b) which the article currently possesses. Two of the purposes of this amending Order are relevant to the present case. One of these was to include CHP schemes. It did that by requiring that the hereditament, used or available for use for the purposes of generating electricity, was "so used or available in connection with a scheme for the production for sale of both electrical power and heat." That formulation was defining was the use of the hereditament. This was later amended by The Electricity Industry (Rateable Values)(Amendment) Order 1991 (S.I. 1991 No.959) by substituting "its primary function" for the words "it is so used or available." That imposed a restriction upon the scope of the provision. Any degree of use for a CHP scheme would not now suffice. But there is no reason to suppose that the paragraph was not still intended to be looking at the use to which the hereditament was put and to the definition of that use. The other of the two particular purposes of the amending Order was to introduce provision for cases where the primary source of energy was the burning of refuse. It did that by introducing what was, and still is, paragraph (a)(iii) and by providing, as paragraph (b)(ii), that the generating plant, "if its primary source of energy is the burning of refuse, has a declared net capacity of 25 megawatts or more." The effect of that was to exclude generating stations of a lower capacity fuelled by the burning of refuse. The 1991 Order amended paragraph (b)(ii) by excluding from it cases where paragraph (a)(i) or (ii) applied. There is nothing to suggest that the intention was to do more than benefit hereditaments solely or primarily used for the generation of electricity or the conduct of CHP schemes.

Consideration of the history of the legislation leads on to the fourth matter, which is a consideration of the purpose and intention of the legislation. I have not found clear guidance here in the empowering provisions and it is only from the Order itself that some assistance can be gleaned. Here it seems that the focus is fixed upon the generation of electricity, with account also being taken of CHP schemes. The Order seeks to provide a simple and direct method of the valuation of electricity generating stations which do not fall into the central rating list. I find nothing to support the contention of the appellant that the purpose of the Order was to encourage the harnessing of the process of waste disposal into the economic production of electricity and heat. While notice is taken of the incineration of refuse as a source of power, such a form of waste disposal appears only as a means to the end of electricity generation or the running of a CHP scheme and not as an intended beneficiary of the Order in its own right. I find nothing in the Order which reflects an intention to discourage the use of fossil fuels or to promote the use of waste incineration as a means of generating electricity or operating CHP schemes. The requirement of the high level of capacity expressly required in paragraph (b)(ii) where refuse burning is the primary source of energy tends to point away from such a intention.

The respondent founded in this connection on the fact that the formula proceeds upon a consideration of the declared net capacity of the generating plant. This may be seen as an indication that the hereditaments which are intended to benefit from the Order are hereditaments whose primary function is the production of electricity, either by itself or in the course of a CHP scheme. The method of valuation used reflects the value of the hereditament in so far as it is productive of electricity and does not reflect the element of waste disposal which the present plant also achieves. It is, of course, a feature of any valuation based solely upon output or reached solely by reference to revenue or profits that it ignores any detailed consideration of the physical composition of the hereditament. But such a method may well produce a more realistic estimate of rental value than can be achieved through the artificialities of the contractor's test. The figure to be applied to the net capacity in the formula adopted in the present Order is evidently applied also in the valuation of larger power stations. A uniformity of levels of value may thereby be obtained even although the valuation may not necessarily reflect the result of a profits based valuation. Indeed I understood that the figure used in the formula may have been derived from valuations made on the contractor's test. But however, that may be, the point made by the respondent has some force in pointing to the intention of the legislation. While, as the appellant pointed out, the formula takes no account of the production of heat, that may only add emphasis to the fact that it is with the production of electricity that the Order is principally concerned. At the least the exclusion of the output of heat from the formula does not lead to the conclusion that promotion of the incineration of refuse as a means of fuelling CHP schemes played any important part in the legislative intention.

Finally, the construction adopted by the appellant seems to me to involve if not an unwelcome degree of uncertainty in the construction of the provision, at least an undue width in its application. Not only does it require a decision to be made upon the primary function of the hereditament and the existence of a CHP scheme, but it calls for what could be a nice question about the sufficiency of the connection between them in the particular circumstances of each case. It then opens the way to the admission of any hereditament, used for any purpose, which has some connection with a CHP scheme. That takes the possible application of the Order far beyond what appears to be the intended scope of its application, namely the valuation of electricity generating stations.

For the foregoing reasons I would dismiss the appeal.

LORD MILLETT

My Lords,

I have had the advantage of reading in draft the speeches prepared by my noble and learned friends Lord Hope of Craighead and Lord Clyde. For the reasons they give I too would dismiss this appeal.