Judgments - Regina v. Central Valuation Officer and another (Respondent) ex parte Edison First Power Limited (Appellants)

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    32. I shall call this problem, which in the nineteenth century was solved by using the "profits method" (later called the "receipts and expenditure method") of valuation, the "global valuation problem". But then, having arrived at a global valuation, the next problem was to allocate that value fairly between the parishes in which the ratepaying company occupied hereditaments. I shall call this "the distribution problem". In the nineteenth century it was solved by an elaborate formula devised by experts and approved by the courts, which divided hereditaments into "indirectly productive assets" like reservoirs and "directly productive assets" like pipes carrying the water to properties in the parish, and giving each parish a proportion of the total valuation by reference to the cost of construction of the first class of assets and the revenue arising from the second class.

    33. These methods of rating public utility companies continued until after the Second World War but for various reasons were not found altogether satisfactory. For one thing, a number of public utilities ran at a loss in the inter-war years. Assessment of rates by reference to the excess of receipts over expenditure was not very realistic. The rules were also very complicated because, once one had calculated the total value of the undertaking, it was necessary not only to apportion the total value among the rating areas in which the utility occupied hereditaments but also to make adjustments for cases in which it was not the occupier for the whole rating year.

    34. After the nationalisation of most public utilities after the war, resort was had to even more violent departures from traditional rating. So violent, indeed, that for ten years the sums payable by the nationalised electricity corporations were described not as rates but as payments in lieu of rates. One difficulty about continuing with the old method of global valuation was that the concept of profit seemed inapplicable to nationalised industries. I shall briefly outline how the payments in lieu were calculated, because they are relevant to the methods of rating adopted later when the industry was brought back into the rating system.

    35. Payments in lieu of rates were introduced by section 85(1) of the Local Government Act 1948. It provided that hereditaments occupied by, among others, the statutory corporations in which the assets of the industry had been vested by the Electricity Act 1947 should not be liable to be rated or to be included in any valuation list. Instead, the nationalised corporations were to pay, for the year 1948-49 and all subsequent years, "payments for the benefit of local authorities" in lieu of the rates which would otherwise have been payable. The amount payable for 1948-49 was to be "the standard amount": section 96(2)(a). This was defined in section 96(3) as meaning, in relation to the payment for the benefit local authorities in England and Wales, £11,250,000. In succeeding years the amount was to be adjusted for changes in the average rates levied in England and Wales and changes in the amount of electricity supplied.

    36. The new system therefore dealt with the global valuation problem in the same way as before; by making the industry's liability referable to the whole of its undertaking. But the method of calculation was greatly simplified; instead of valuing the undertaking, attributing proportions of that value to the various rating areas in which it occupied hereditaments and then applying the various local rates to those values, it used a single annual figure prescribed by Parliament, subject to adjustment in following years in accordance with a formula. It did not matter whether a corporation ceased to occupy hereditaments or occupied new ones. If a corporation sold a hereditament to a rateable occupier, it would pass out of the immunity to rates conferred by section 85(1) but the sum for which the corporation was liable to make payments in lieu would be unaffected.

    37. The distribution problem was dealt with equally simply: the payment was distributed to rating authorities in proportion to the rateable values of their respective areas in the year in question: section 100(2)(a). This method paid no regard to where any hereditament happened to be.

    38. This egalitarianism was no doubt in accordance with the spirit of the age but resulted in complaints from local authorities which had to sustain greater burdens on account of the industry's activities than others; in particular, those in which generating stations were situated. Equity between rating authorities was thought to require recognition of these differences. So the system was recast by the Local Government Act 1958. This abolished "payments for the benefit of local authorities in lieu of rates": section 12(1). Instead, it brought the nationalised corporations (then consisting of the Central Electricity Generating Board and twelve Area Boards) back into the rating system.

    39. Section 12(1) of the 1958 Act provided that after 31 March 1959 the thirteen electricity boards were to be treated, for the purposes of any rate period, as occupying in each rating area "a hereditament of a rateable value" calculated in accordance with provisions contained in the Second Schedule.

    40. The method of calculation, an example of what was known as "formula rating", was briefly as follows. The Minister of Housing and Local Government certified "the basic electricity rateable value" (paragraph 4(3), which was his estimate (subject to certain adjustments) of the annual payment in lieu of rates falling due for 1958-59, the last year of the old system. Half of this amount was to be attributed to the Generating Board and the other half to Area Boards in specified percentages. These sums were to be adjusted in subsequent years by reference to changes in the outputs of the Boards. In calculating the rateable value of the hereditament which a Board was deemed to occupy in each rating area during any given year, a distinction was made between the values of distribution activities and generating activities. There was a formula for deciding what proportion of the total value allocated to a Board should be treated as attributable to each kind of activity: in the case of the Generating Board it was half and half; in the case of the Area Boards it was more complicated. Value attributable to distribution activities was apportioned among rating authorities within the areas of each Board in proportion to the aggregate net annual value of their rating areas. Value attributable to generating activities was apportioned only to the rating authorities in whose areas the Board had generating stations in commission. Apportionment was made according to the proportion of the generating capacity in the rating area to the Board's total generating capacity.

    41. The important point to notice about this system is that the hereditament which a Board was treated as occupying in the year in question was entirely notional. It did not matter whether the Board actually occupied hereditaments in that rating area for all or any of the year in question. The immunity from rating conferred by section 85(1) of the 1948 Act in respect of hereditaments actually occupied by the Boards was preserved and there was substituted its liability in respect of the notional hereditaments created by the 1958 Act. So once again, the actual hereditaments occupied by the Boards during the rating year were irrelevant to its overall liability. Occupation of hereditaments on which it had a generating station in commission would affect the distribution of the rates which it paid but only by way of revision from year to year. The disposal of a hereditament to a rateable occupier in the course of a year would leave the Board's liability to rates unaffected.

    42. Similar codes of formula rating were applied to other public utilities and they were all consolidated in the General Rate Act 1967, where the provisions relating to Electricity Boards will be found in section 34 and Schedule 7.

    43. This system of formula rating lasted until the 1988 Act came into force on 1 April 1990. The revolutionary change made by the 1988 Act was to convert non-domestic rates from a local into a central tax. The rate is now set by the Secretary of State, paid over to him and then redistributed to local authorities according to the population living in their areas. This change solved at a stroke the distribution problem which had given so much trouble over the previous 150 years. It is no longer necessary for each local authority to be able to collect the rates on the hereditaments or notional hereditaments which the ratepayer occupies or is deemed to occupy in its rating area. They all go into the same pot for redistribution.

    44. Nevertheless, in the case of the great majority of hereditaments subject to the non-domestic rate, local valuation, assessment and collection were continued. It was obviously more convenient that valuation of individual hereditaments should be in the hands of local valuation officers. Local authorities maintain lists called "local non-domestic rating lists" of non-domestic hereditaments within the authority's area, showing for each day in the year the rateable value of each hereditament as determined by the local valuation officer. The occupier of the hereditament is liable to the rate for each day on which it is shown in the list and he is in occupation. The local authority collects the rate and passes it on to the Secretary of State.

    45. For some cases, however, the 1988 Act provided for central assessment. Section 52 established a central non-domestic rating list. Section 53(1) provides that "with a view to securing the central rating en bloc of certain hereditaments" the Secretary of State may by regulations designate a person to be included in the central list and prescribe the hereditaments in respect of which he is to be centrally rated. Regulation 6(1) of the Central Rating Lists Regulations 1994 SI 1994/3121 ("the Central Rating Regulations"), echoing section 53(2) of the 1988 Act, provides that the central list must show, for each day for which the list is in force, the name of the designated person and, against each name, each hereditament in England which on the day concerned is occupied or (if unoccupied) owned by that person and falls within the description of hereditaments for which the Secretary of State has prescribed that he is to be centrally rated. This might suggest that each hereditament must be separately identified on the list, but section 67(9) and (9A) provide that the requirement may be satisfied by specifying a class of hereditaments by reference to occupation by the designated person and the prescribed description. Thus PowerGen is designated by the Central Rating Regulations in respect of all its hereditaments "wholly or mainly used for the purposes of the generation of electrical power" without specifying them individually. This means that if the designated person ceases to occupy a hereditament, it ceases to be a member of the class and it is no longer rated in respect of that hereditament.

    46. Section 54 deals with the liability of centrally rated persons. Such a person is liable in respect of a chargeable financial year "if for any day in the year" his name appears on the list. The amount for which he is liable is the aggregate of the chargeable amounts for each chargeable day. A chargeable day means a day for which the ratepayer's name is shown on the list and the chargeable amount for each such day is determined by multiplying the rateable value shown on the list for that day by the "non-domestic rating multiplier" - the equivalent of the old poundage fixed by the local authority - and dividing it by the number of days in the financial year.

    47. Thus the statutory framework for central rating contemplates that although the designated ratepayers' centrally rated hereditaments will be valued en bloc, the method of valuation will, in the absence of contrary provision, be the traditional method of estimating the rent at which those hereditaments could reasonably be expected to let from year to year.

    48. An example of designation for central rating without the use of a formula is British Telecom, which was designated only respect of its "posts, wires, underground cables and ducts, telephone kiosks, towers, masts, switching equipment, or other equipment, or easements or wayleaves", which were to be treated as one hereditament: see regulation 5 of and Part 5.II of the Schedule to the Central Rating Regulations and Regulation 4(1) of the Non-Domestic Rating (Railways, Telecommunications and Canals) Regulations 1994 (SI 1994 No 3123). Thus all other hereditaments occupied by British Telecom are rated on local lists in the ordinary way and even in respect of those centrally rated en bloc, valuation is according to the conventional method specified in paragraphs 2 to 2B of Schedule 6 to the 1988 Act: an estimate of the rent at which the hereditament might reasonably be expected to let from year to year.

    49. The 1988 Act therefore contains what may be regarded as a prima facie assumption that valuation, even of centrally rated hereditaments rated en bloc, will be according to the conventional method. For present purposes, the important feature of the conventional method is that each hereditament (or class of hereditaments deemed to be a single hereditament) is separately valued, so that disposal of an hereditament results in a cessation of liability in respect of the value of that hereditament.

    50. But paragraph 3 of Schedule 6 gives the Secretary of State power to disapply the conventional method, in respect of both hereditaments on local lists (sub-paragraph (1)) and hereditaments on the central list (sub-paragraph (2)):

    "The Secretary of State may by order provide that in the case of non-domestic hereditaments to be shown in a central non-domestic rating list by virtue of regulations under section 53(2) above-

    (a)  paragraphs 2 to 2B above shall not apply; and

    (b)  their rateable value shall be such as is specified in the order or determined in accordance with prescribed rules."

    51. It is the purpose and scope of this provision which is in issue in this appeal. The 1988 Act was a long time in gestation and the purpose of paragraph 3 can be clearly understood only by reference to the rating law as it was before the Act and the admissible evidence of what were perceived to be the matters needing to be reformed. The proposal to introduce a central non-domestic rate was made in the 1986 Green Paper Paying for Local Government (Cmnd 9714) which set out the results of more than a year of studies undertaken by ministers and officials in the Department of the Environment and "special advisers" (of whom I was briefly one). Chapter 2 argued the case for central non-domestic rating; paragraph 2.40 noted that the last revaluation had been in 1973 and that values had become "badly out of line with up-to-date rental values." It proposed the preparation of a new list in time for introduction on 1 April 1990 and said (in paragraph 2.42) that the government would issue a separate consultation paper on revaluation. This was issued in July 1987, entitled Paying for Local Government: Non-domestic Rates. Paragraph 7 dealt with formula rating:

    "7.1  The large majority of statutory undertakers, and some other activities, are now rated by statutory formula. The Government will be reviewing the various formulae, in consultation with representatives of the industries concerned, with the intention of bringing them all up to date at the same time as the general non-domestic revaluation in 1990.

    7.2  At present, the provisions enabling formula rating to be applied, and the formulae themselves, are set out at great length in Schedules 4-7 to the General Rate Act and in various other Acts…

    7.3  The existing provisions would in any case require extensive recasting, not only because of the current review of the individual formulae, but also because, with the introduction of the national non-domestic rate, in the case of those industries where the formula is calculated at national level and then apportioned by a further formula to local authority areas, such apportionment will no longer be necessary. The review of the formulae could not in any case be completed in time to be included in the forthcoming main legislation.

    7.4  The Government therefore has it in mind to replace all of the existing statutory provisions relating to formula rating with a simple enabling power. This would empower the Secretary of State to provide by order that hereditaments used for a specified activity, or occupied by a specified activity, or occupied by a specified occupier or class of occupier, should be formula-rated; to provide for the determination of the rateable value to be attributed to them in 1990 and at subsequent revaluations either as a specified sum or to be calculated in a specified manner; and to provide for the value to be adjusted for changes in the occupation of property by the industry.

    7.5  The object would remain to replicate, in very broad terms, the rate burden a hereditament or industry might have borne had it been capable of being conventionally rated. The Secretary of State would consult representatives of the industry before varying the formula, or applying formula rating for the first time or ceasing to apply it. There is in practice no intention of substantially extending the scope of formula rating, though there may be some activities, for example private electricity generators, where it is appropriate; in other cases it may be possible to revert to conventional valuation."

    52. As foreshadowed, the government made the Electricity Supply Industry (Rateable Values) Order 1989 (SI 1989 No. 2475) which continued formula rating for the industry for the 1990-1995 quinquennium. By the time the Act had been passed, it appeared that the government had a further reason for not including the formulae in the Act itself. It regarded the whole idea of formula rating as a relic of outdated political theory. Public utilities should function in a market economy and there was no reason why their assets should not be valued in the same way as those of any other enterprise. And a point forcibly made by the public utility industries during consultation was that conventional valuation by the Valuation Officer allowed them a right of appeal, whereas a statutory formula, even if devised after a process of consultation, was immovable.

    53. In a further consultation paper published after the Act had been passed, the government therefore made it clear that it would like to return the industry to conventional rating as soon as possible:

    "While the Government believes that its proposals for prescribed rateable values are fair and reasonable, and are in line with what the 1990 revaluation is expected to show for other industries, it acknowledges that this is not an ideal method of rating assessment, particularly since the ratepayers' right of appeal is severely limited. The 1988 Act opens the way to returning these undertakings to conventional assessment; it removes the need to apportion rateable values to individual authorities, and it contains the power to set aside the restrictive case law associated with the profits method of valuing public utilities. Consequently, the Government intends, so far as it is practical, to return all hereditaments whose values are currently prescribed to conventional assessment for the next revaluation."

    54. In the event it appears that it was not found practical to return the industry to conventional assessment in time for the start of the next quinquennium, so the government, after further consultation, made the ESI Order in 1994. But the industry's power station hereditaments were eventually transferred to local lists in 2000.

    55. The question, as I have said, is whether the system of formula rating prescribed by the Secretary of State by the ESI Order, which carried the inevitable consequence that the en bloc rateable value of hereditaments occupied by PowerGen would not be affected by changes during the rating year, was so unreasonable that Parliament could not have intended to authorise it by the general words of paragraph 3(2) of Schedule 6 to the 1988 Act. My Lords, I find it impossible to say this of a system which, in its essential principles, Parliament had thought appropriate for the electricity generating industry for the previous 30 years. In my opinion the purpose of paragraph 3(2) was to allow that system to be retained, with whatever formulae the Government thought appropriate and as long as it thought it expedient to do so.

    56. PowerGen acknowledges all this in the written submissions which they made to your Lordships by way of intervention in the appeal. Edison's claim of double taxation would not have any plausibility if it were not for the fact that it agreed to pay an apportioned part of the rates payable by PowerGen which were treated as attributable to the DNC of the two power stations. But this payment, however calculated, is in my opinion nothing more than part of the price which Edison were willing to pay PowerGen for the power stations. It is not, from Edison's point of view, a payment of rates.

    57. For these reasons I consider that the ESI Order was not ultra vires, either as a matter of construction of paragraph 3(2) or because, as Edison have submitted, the Secretary of State acted irrationally or contrary to Edison's rights of property under Article 1 of the First Protocol to the European Convention on Human Rights.

    58. There are two matters to be mentioned in conclusion. The first is the decision of the Court of Appeal in Milford Haven Conservancy Board v Inland Revenue Commissioners [1976] 1 WLR 817, on which both sides placed some reliance. The 1967 Act, as I have said, consolidated the provisions for the formula rating of a number of public utilities including Electricity Boards, for which the formula was contained in Schedule 7. In the case of mines and quarries, statutory dock and harbour undertakings and broadcasting, however, the particular circumstances were thought likely to be so varied that no formula was included in the primary legislation. Instead, the Minister was given power in section 35(1) to make provision by order for determining rateable values "by such method as may be so specified". The formula prescribed by the Minister for dock undertakings was based on 4% of their receipts, including receipts from some parts of their property which had been let and on which the occupiers were therefore paying rates in the ordinary way. The Milford Haven Conservancy Board complained that the order was ultra vires because it involved double taxation. But the Court of Appeal rejected this submission. Cairns LJ said (at pp. 824-825):

    "In my view the language of [the statute] is sufficiently clear to entitle the Secretary of State to prescribe any method of valuation, however far it departs from previously established principles…rateable value, whenever it departs from net annual value, either by being related to net annual value in some specific way or by being assessed without reference to net annual value, is an artificial concept. The profits basis of valuation was a means of estimating the rent that the hypothetical tenant would pay: see the Kingston case [1926] AC 331, 339. But none of the methods of assessment under sections 31 to 35 have that character. Water, gas and electricity undertakings are dealt with on the basis of supply. Mines and quarries…are given a rateable value ascertained by applying a fraction…to the rateable value previously assessed."

    59. This reasoning seems to me to apply equally to the formula adopted by the Secretary of State in the ESI Order. The other matter on which I should comment is the closely reasoned and, on its own terms, persuasive dissenting judgment of Dyson LJ in the Court of Appeal. He first characterised the ESI Order as giving rise to a possibility of double rating and then analysed the provisions of the 1988 Act to see whether it disclosed a clear intention to allow such a consequence. His conclusion was that it did not.

    60. If one looks no further than the scheme of the 1988 Act, I would be inclined to agree. The Act is, as I have said, is based on the assumption that conventional valuation will be the norm, and the formula rating applied by the ESI Order is so violent a departure from that norm as to make one doubt whether it could have been authorised by Parliament. But once one looks, as Lord Oliver of Aylmerton in Regina v Inland Revenue Commissioners, ex parte Woolwich Equitable Building Society [1990] 1 WLR 1400, 1412 said one should do, at the "circumstances surrounding the enactment of the…legislation", the meaning of the statute becomes plain. The background of formula rating over the previous thirty to forty years provides the key to understanding both the purpose of the powers conferred upon the Secretary of State by paragraph 3 and the way in which he used them. For these reasons and those given by my noble and learned friends Lord Millett and Lord Scott of Foscote, I would dismiss the appeal.


My Lords,

    61. This is a very curious case. The appellant Edison First Power Limited ("Edison") claims that an assessment to central rates in respect of two electricity power stations amounted to double taxation and was unlawful. The Secretary of State denies that the assessment was unlawful but has agreed to reimburse Edison if its claim is upheld. Yet Edison has never been assessed to central rates in respect of the power stations and has never paid them. They were assessed on and paid by PowerGen (UK) plc. ("PowerGen"). If there was a victim of double taxation it was PowerGen. But PowerGen makes no complaint about the assessment and although it is not directly affected by the outcome of the present appeal it has intervened to support the Secretary of State's contention that the assessment was validly made.

    62. While this may make one sceptical about Edison's claim that anything as oppressive as double taxation is involved, it is not determinative. The case does not turn on Edison's locus standi to challenge the assessment on PowerGen. If it was unlawful, Edison has sufficient interest to entitle it to a declaration to that effect.

The Facts.

    63. PowerGen was created when the Central Electricity Generating Board ("the CEGB") was privatised in 1990. Its business was subsequently diversified and now extends to a wide range of activities but continues to include the generation of electricity. Along with other public utilities it was a designated person for the purposes of central non-domestic rating and the hereditaments which it occupied for the purposes of generating electricity were entered on a central rating list. They were rated under a special statutory scheme established by Part III of the Electricity Supply Industry (Rateable Values) Order 1994 (SI 1994/3282) ("the ESI Order") made by the Secretary of State pursuant to powers conferred by para. 3(2) of the Sixth Schedule to the Local Government Finance Act 1988 ("the 1988 Act").

    64. In 1998 PowerGen was required to dispose of a proportion of its coal-fired generating capacity. In compliance with this requirement PowerGen put two electricity power stations, Fiddlers Ferry and Ferrybridge C, up for sale. Edison agreed to acquire them on long leases from PowerGen.

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