UPPER TRIBUNAL (LANDS CHAMBER)

	
	
UT Neutral citation number: [2015] UKUT 0053 (LC)	
UTLC Case Number: RA/48/2011 (Consolidated)	
	
TRIBUNALS, COURTS AND ENFORCEMENT ACT 2007
 RATING –valuation – combined cycle gas turbine power station – length of hypothetical tenancy – duration of rent – receipts and expenditure method – whether negative divisible balance – whether respondent’s valuation reflects actuality and has a basis in law – appeal allowed – rateable value determined at £1,012,500.

	IN THE MATTER OF AN APPEAL AGAINST A DECISION 
OF THE VALUATION TRIBUNAL FOR ENGLAND

BETWEEN	MR KEIR HARDMAN (VALUATION OFFICER)	Appellant 
	and
	BRITISH GAS TRADING LIMITED	Respondent

Re: Peterborough Power Station,
Fengate Industrial Estate,
Peterborough
Cambridgeshire
PE1 5NT

Before: H H David Mole QC (sitting as a Deputy Judge of the Upper Tribunal) 
and P D McCrea FRICS

Sitting at: The Royal Courts of Justice, Strand, London WC1A 2LL
on 9, 10, 13-16 and 20 October 2014

Timothy Morshead QC and Daniel Kolinsky instructed by Solicitor’s Office HM Revenue and Customs for the Appellant
Richard Glover QC and Rebecca Clutten instructed by Dalton Warner Davis LLP for the Respondent
© CROWN COPYRIGHT 2015

The following cases are referred to in this decision:

Liverpool Corporation v Chorley Union [1912] 1 KB 270 and [1913] AC 197
Robinson Bros (Brewers) Ltd v Houghton and Chester-Le-Street Assessment Committee [1937] 2KB 445
Tulang Properties Limited v Nobel (VO) [1985] RA 47
Poplar Borough Assessment Committee v Roberts [1922] AC 93
Humber v Jones (1960) 6 RRC 161
Hong Kong Electric v Commissioner of Rating and Valuation [2011] RA 399
Staley v Castleton Oversees (1864) 5 B&S 503
Consett Iron Co Ltd v Assessment Committee for North-Western Area of County Durham [1931] AC 396
Railway Assessment Authority v Southern Railway Co [1936] AC 266
R v Adams (1832) 4 B&Ad 61
R v Audley (1700) 2 Salk 526; 1 Const 110
Dawkins v Ash Brothers & Heaton [1969] 2 AC 366
Port of London Authority v Orsett Union Assessment Committee [1920] AC 273
Allen (VO) v English Sports Council [2009] RA 289
Orange PCS v Bradford [2004] 2 All ER 651
Great Eastern Railway v Haughley (1866) LR 1 QB 666
R v South Staffordshire Waterworks Co (1885) 16 QBD 359
China Light & Power Co Ltd v Commissioner of Rating & Valuation [1996] RA 475

The following cases were referred to in argument:

R v Paddington (Valuation Officer) ex parte Peachey Property Corporation [1966] 
1 QB 390
Hoare (VO) v National Trust [1998] RA 391
Inland Revenue Commissioners v Gray [1994] STC 360
F R Evans (Leeds) Ltd v English Electric Co (1978) 36 P&CR 185
Mersey Docks & Harbour Board v The Assessment Committee of Birkenhead [1901] AC 175
St James and Pall Mall Electric Light Co v Westminster Assessment Committee [1934] AC 33
Northern Ireland Transport Holding Co v Commissioner for Valuation for NI [1997] RA 14
London County Council v Churchwardens & of Parish of Erith and Others [1893] AC 562
British Transport Commission v Hingley [1961] 2 QB 16
Kingston Union Assessment Committee v Metropolitan Water Board [1926] AC 331
Metropolitan Water Board v Hertford Corporation [1953] 1 WLR 622
Barking Rating Authority v Central Electricity Board [1940] 2 KB 493
Black v Oliver [1978] 1 QB 870
Dawkins (VO) v Royal Leamington Spa Corporation and Warwickshire County Council (1961) 8 RRC 241
Garton v Hunter (VO) [1969] 2 QB 37
Garton (VO) v Hunter (1969) 15 RRC 145
Civil Aviation Authority v Assessor for Strathclyde [1990] SLT 378
McVitie v Assessor for Edinburgh (1898) 25 R 601
Liverpool Corporation v Llanfyllin Union [1899] 2 QB 14
Imperial College of Science and Technology v Ebdon (Valuation Officer) and Westminster City Council [1984] RA 213
Eastbourne Borough Council and Wealden District Council v Allen (Valuation Officer) [2001] RA 273
Thomas v Manor Vinegar Brewery Ltd (1960) 6 RRC 353
Gilmore v Baker-Carr & Others (No.2) (1963) 10 RRC 205
Monsanto v Farris [1998] RA 217
K Shoes v Hardy [1980] RA 333
Pointer v Norwich Assessment Committee [1922] 2 KB 471
Lotus & Delta v Culverwell (VO) [1976] RA 141
Futures London Ltd v Stratford (VO) [2005] RA 75

DECISION
Introduction
1.	This is an appeal by the Valuation Officer (VO), Mr Keir Hardman, against the decision of the Valuation Tribunal for England (VTE) dated 14 March 2011 determining the rateable value of the Peterborough Power Station (PPS) at £1 with effect from 1 April 2005.
2.	PPS was originally assessed in the 2005 non-domestic rating list at a rateable value of £1,350,000 with effect from 1 April 2005. The compiled list assessment was subsequently altered by the VO on 4 May 2010 to RV £1,012,500, again with effect from 1 April 2005.  The respondent’s agents, Dalton Warner Davis LLP, submitted appeals against both assessments.  Those appeals (consolidated before us under RA/48/2011) were upheld by the VTE which determined the rateable value as above. The Antecedent Valuation Date (AVD) is 1 April 2003 and the material day is 1 April 2005.
3.	Mr Timothy Morshead QC and Mr Daniel Kolinsky of counsel appeared for the appellant.  They called expert evidence from Dr John Bower in respect of the wholesale electricity market and related matters, Mr Colin Johnson in respect of receipts and expenditure, Mr Michael Rowbottom in respect of the contractor’s basis valuation, and the Valuation Officer, Mr Keir Hardman in respect of valuation.  Mr Richard Glover QC and Ms Rebecca Clutten of counsel appeared for the respondent and called Dr Philip Lawless in respect of the electricity market and commercial operations of power stations, Dr Stephen Mancey in respect of Centrica’s operations, Mr Andrew Blumfield in respect of a power station at Coryton, and Mr Adam Davis in respect of valuation.
Facts
4.	In the light of agreed statements and the evidence we find the following facts.
5.	The appeal property is located on the Fengate Industrial Estate some 2.5km to the east of the city centre of Peterborough, Cambridgeshire.  It directly abuts Storeys Bar Road and is situated on a site of approximately 7.3ha.  
6.	The parties agreed a comprehensive explanation of how PPS operates.  It is unnecessary for the purposes of this decision to replicate that in full.  In essence, PPS is a gas-fired Combined Cycle Gas Turbine (CCGT) Power Station which was built between January 1991 and September 1993 when it started commercial operation.  It has two gas turbines and associated generators and a steam turbine.  The term “combined cycle” stems from the way in which electricity is generated.  Fuel is burnt in the gas turbines – in a similar way to which a jet engine operates.  This generates electricity, but also heat.  This heat is recycled and used to produce steam, which generates further electricity via the steam turbine.  The station can operate on either natural gas or gas-oil, known as dual fuel capability, although the use of gas-oil is limited by the site’s Environmental Permit and in practice is very rarely used.
7.	The electricity produced is exported from PPS via a switch yard onto the local distribution network which is connected to the national grid electricity network.  There is a charge for this, based upon location, known as the Transmission Network Use of System (TNUoS).  At the AVD, TNUoS charges were calculated at £1.88 per kW based upon PPS being located in TNUoS zone 7.  Other areas of the country attract different TNUoS charges, the level of which is dependent upon the amount of capacity and of demand in those areas, ranging from £9.07 per kW for the “North” region, to -£10.54 per kW for Inner London.
8.	The Transmission Entry Capacity (TEC) of all large power stations is registered and agreed with the National Grid as the maximum amount of electricity, in megawatts (MW) taken over a half an hour period, that the plant can export to the grid.  The National Grid maintains a publicly available TEC register which can be used for comparing the capacity of different power stations.  At the AVD, PPS had a TEC value of 405 MW.  This was the highest level of output which PPS could normally be allowed to export, rather than a measure of the level of generation output which PPS normally achieved at full output.  The actual output would be influenced by commercial decisions on how many hours, days of the week and at what output capacity the plant is run, ambient temperature, air pressure and degradation of the turbines.  Over a typical year, the average actual operating capacity of PPS is lower than the TEC figure.
9.	PPS comprises both rateable assets and non-rateable assets which are agreed at 35% and 65% respectively.  The rateable assets include but are not limited to land and buildings, roads, fences, services, lighting, drainage, and lifts.  The non-rateable assets include but again are not limited to the turbines, generators, pumps, filters, transformers, and compressors.
10.	The original compiled list valuation of £1,350,000 was based upon 3.5% of the VOA’s estimate of the first year’s estimated income of £38,756,511.  The revised valuation of £1,012,500 was based upon £2,500 per MW TEC. The assessments of 17 other gas fired power stations (16 agreements and one acceptance) had been agreed, based upon £2,500 per MW TEC.  The appeals of the remaining 17 gas fired power stations have been stayed at the VTE pending this decision.
11.	PPS was purchased by Centrica in October 2001 for a total of £99.5 million.  Centrica also purchased power stations at King’s Lynn (October 2001), Brigg (June 2002), Roosecote (April 2003) and Barry (July 2003).
12.	In May 2001 Mr Jake Ulrich, the Managing Director of CEMG (a business unit within the Centrica group) made an internal board presentation regarding the purchase of PPS and Kings Lynn.  In his paper, Mr Ulrich outlined the strategic benefits of purchasing the power stations, which he said would create a solid base for Centrica’s wholesale electricity procurement in future years.  The benefits identified included: providing a hedge on the “spark spread” between electricity and gas by locking in the conversion cost of gas to power at a fixed level; enabling the company to exploit opportunities for arbitrage between gas and electricity markets; avoiding the delays and risks involved in the construction of a new power station; removing counter-party credit risk from a significant part of the company’s contract purchase portfolio; providing flexibility and diversity of generation, including increasing optionality and providing a more flexible output profile compared to a single station.
13.	Mr Ulrich said that the valuation upon which the purchase proceeded was “built on conservative assumptions of operating cost, plant performance and revenues”. There were, he said, a number of significant upsides not included, in particular no residual value beyond the estimated useful lives of the assets (20 years for PPS).  No added benefit for vertical integration had been included.  There was likely to be extra value available from optimising the running patterns of the stations, thus unlocking their inherent “option value”. The key financial indicators attached to the report analysed projected performance over 12 years.
Evidence
14.	It is a feature of this case that extensive and at times highly technical evidence was given, some of which, in the end, was largely peripheral to our decision.  We have concentrated on the evidence that was relevant and necessary to put our conclusions into context. 
15.	Both Dr Bower and Dr Lawless provided background evidence in respect of the electricity market from privatisation until and beyond the AVD.    There was some common ground between them.  
16.	In 1990 the electricity supply industry was privatised, with the former Electricity Generating Board, which had up to that point owned and operated almost all power stations, being split into three electricity generating companies – National Power, Nuclear Electricity (later known as British Energy) and Powergen.  The former Regional Electricity Boards became Regional Electricity Companies (RECs), each of which supplied their respective areas and owned and operated their distribution systems.  In addition to the three generating companies, other companies which obtained and held a generation licence were permitted to build and operate Power Stations, selling electricity in an open but structured market. 
17.	The 1990 Electricity Act created a semi-regulated market that featured “the pool” in which all electricity was bought and sold at a central clearing price (“the pool price”) calculated by the National Grid each day for each half hour period of the following day.  However, privatisation had not resulted in a completely free market, as the coal-fired power stations which largely set prices were all in the ownership of just two firms - creating a duopoly that maintained wholesale prices well above a competitive level.  One of the consequences of this price level had been the construction of generation capacity that was required to meet market demand.  A number of power stations were constructed, of which PPS was one, both by incumbent firms and Independent Power Producers (IPP’s).  IPP’s were often created as joint venture agreements between new entrant businesses and REC’s.  Power Purchase Agreements (PPA’s) were often entered into to facilitate construction, and which isolated the power station company from market risk. The appetite for PPA’s by the REC’s declined through the 1990’s.
18.	The various owners and operators in the power industry comprised: electricity generators, which owned one or more power stations; the National Grid, which operated the high-voltage network; electricity distributors, which owned and operated the network that delivered electricity from the national grid to homes and businesses; electricity suppliers, which purchased wholesale electricity and sold it to consumers; and domestic, commercial, industrial and public service electricity users. Some of these participants were operated as vertically-integrated businesses (VI’s), which variously had some or all of generation, distribution and supply functions. Ofgem reviewed inter-company arrangements to ensure that customers were being treated fairly.
19.	Following the privatisation of British Gas, REC’s became involved in the supply of gas as well as electricity.  Interest in tolling agreements (a halfway house between a PPA and outright ownership of a power station) grew.  Under tolling agreements, the “toller” provides gas to the owner/operator of a power station and takes the electricity generated by that gas.  This gave the toller the option to use the gas for its own customer requirements, or to convert it to electricity for its customers’ needs.  This was sufficiently attractive to encourage companies to enter into long term tolling contracts for the construction of further power stations.
20.	In 1998 Ofgem undertook a review of the market which led to the introduction of the New Electricity Trading Arrangements (NETA) at the end of March 2001.  The pool was replaced by a commodity-type market with bilateral contracts between generators and suppliers. The nature of the NETA meant that generators and suppliers had to sell the bulk of their production or supply requirements before the electricity was actually produced and consumed.  There was still a notional central focus point known as the National Balancing Point (NBP).  Contracts entered into at the NBP were notified by the parties at any time up to one hour before delivery – known as gate closure.  These contracts could be for varying volumes in MWhs and over a wide range of delivery periods, from a few hours up to a year or more into the future.  This was known as the forward market.  The National Grid maintained overall control in balancing demand and supply in order to ensure the supply of adequate electricity via a Real Time Balancing Mechanism (“the balancing mechanism”).  The vast majority of Forward Trade Electricity was traded under one of two contract types: “baseload” for the continuous supply of electricity over a 24 hour period; or a “peak contract” for a 12 hour period from 7am – 7pm on weekdays. 
21.	A short term market, or power exchange, also developed within which participants could buy and sell electricity within a traded day up to gate closure, of blocks of half hour or four hour blocks known as EFA (Electricity Forward Agreement) Blocks.  The power exchange recorded prices of agreed transactions and reported trading prices similar to share prices on the stock market.  
22.	The short term or spot market, was used mainly by physical market participants whilst the longer term, or over the counter (OTC) forward trading market included third party participants such as banks, brokers, speculators and trading houses.  The prices paid in the OTC market were reported anonymously to two market reporting organisations – Argus and Heren – that analysed the dates and published their account of prices for varying times of the day for various contract types.  This data was widely recognised as reflecting market price with a degree of confidence.
23.	The short term prices for electricity sometimes attracted higher prices than for those in the long term market, as a result of uncertainties of the plant margin owing to various factors including power station outages and varying customer demand.  This uplift, sometimes known as the “prompt premium”, could at times be 10% higher than long term prices.  The bulk of electricity had been contracted at the stage that the prompt premium price could be achieved but the corollary was that power stations could be left with surplus output for which there may be very few buyers at large volume.  Equally, if all electricity had been committed in the forward market, electricity would have to be bought back in the event of a breakdown or outage.  Most electricity was traded in the longer term market meaning that the overall impact of the short term market was relatively limited.
24.	The balancing mechanism was operated by National Grid to balance supply with minute-by-minute customer demand for electricity and to even out fluctuations of production and demand in real time.  If generation from a power station did not match the supply in future contracted electricity, for example owing to plant failure, the National Grid corrected the shortfall by buying in from an alternative generator and charging the price to the generator with the shortfall.  If there was a surplus, National Grid sold the surplus and paid the proceeds to the generator with the surplus.  The prices for shortfall or surplus were based upon the marginal cost of asking other generators to increase or reduce generation at short notice – often at a penal rate.
25.	The same mechanism applied to suppliers (i.e. suppliers of electricity to consumers but who in respect of the balancing mechanism were actually purchasers) who required electricity if their consumers took more electricity than they, the supplier, had purchased. 
26.	The presence of extra capacity coupled with industry fragmentation and the removal of capacity payments resulted in a significant fall in electricity prices with a low point in March 2002.  
The Appellant’s evidence
27.	Dr John Bower is retired but in 2001 he was a Senior Research Fellow responsible for Electricity Market Research at the Oxford Institute for Energy Studies (OIES).  Dr Bower gave extensive evidence in respect of the background to and consequences of the privatisation of the industry. In his first report he referred to an article he had written in a trade magazine called Power UK in October 2002, in which he had concluded that the cyclical low point in wholesale electricity prices had been passed in early 2002.  By the AVD, downward pressure on prices had been significantly relieved by the mothballing of some power stations and the sale of others by financially distressed owners to remaining operators, including Centrica.
28.	However in order to meet the growth of demand forecast by the National Grid, some mothballed capacity would have to return to the system, and some new stations would have to be built.  This could only be achieved if prices and profit margins rose to a level sufficient to cover both operating costs and the financing of new build.  He pointed to Centrica’s actions in signing a 17 year tolling agreement on a new CCGT power station at Spalding, and its purchase of three older, less efficient, power stations, as an indication that their view must have been one of increasing and sustained profitability.  Centrica’s senior managers had made a statement to City investors to that effect in December 2003.
29.	In a later report, Dr Bower commented on tolling agreements, and their relevance to value.  He reviewed a range of tolling agreements provided by the respondent, and considered that the agreement for PPS, whilst an “internal” agreement (within the same group company), was in a similar format to other, external, agreements.  This was consistent with Centrica’s obligations to not cross-subsidise across its business.  He considered that tolling agreements could potentially be of use in a valuation as inputs to a receipts and expenditure calculation.  They were equivalent to rental contracts which gave the toller (the buyer) the right but not the obligation, to use the power station to convert fuel into electricity in return for paying the owner (the seller) of the power station a tolling fee made up the fixed and variable elements.  In his experience it is common to refer to a tolling agreement as a rental contract.
30.	Mr Colin Johnson is a Director of Grant Thornton UK LLP, an accountant, and a member of the Energy Institute.  He has been involved in the infrastructure sector since the early 1990s when he worked on projects to build new gas-fired power plants in the UK.  He was instructed by the Valuation Office Agency to provide a report on PPS, in particular to consider the most appropriate basis to use for a receipts and expenditure valuation in assessing rateable value. 
31.	Mr Johnson commented that by 2003 the energy market was already consolidating into several vertically integrated groups for commercial reasons.  By having a power station within a wider group containing gas supply, trading and supply activities, the station could be used in a more strategic way to generate significantly more value than by simply selling its power on the wholesale market. Vertical integration, and more sophisticated ways of using a plant, significantly changed the dynamics of the generation business of which PPS was part.  He considered that as the hypothetical tenant should be treated as being an operator in the real world at the AVD, it would be incorrect to consider the hypothetical tenant at that time to be simply someone selling into the general wholesale market in isolation and to ignore the other available methods of achieving value which would have been apparent to the more sophisticated operators of power stations at the AVD.  It would be a significant under statement of the true value of plant to confine the analysis to the largely redundant wholesale electricity market prices.
32.	Mr Johnson gave examples of how value could be obtained from PPS including: to supply customers of the integrated business directly; to produce power to sell into the balancing market or to avoid having to make purchases in that market; to sell selectively into the wholesale market at times of day when prices were higher; to sell ancillary services across the UK electricity network – including voltage stabilisation, reactive power and spinning reserve; to sell into the wholesale baseload market if doing so was profitable; and as the basis to receive additional carbon credits which were given out free to generators under the EU-ETS scheme which was anticipated to be a considerable source of further revenue at no cost from 2005.
33.	He said that the true value of the plant must therefore take account of the fact that the hypothetical tenant at the AVD could be expected to be a sophisticated operator who would have engaged in several markets rather than simply selling to the wholesale electricity market.  He had no doubt that in the real world Centrica considered such plants to be strategically important, which, he presumed, was why Centrica acquired Kings Lynn in October 2001, Brigg in June 2002, Roosecote in April 2003 and Barry in July 2003, all acquisitions at the time when wholesale market prices were low.
34.	Centrica was not unique in following this strategy - vertical integration was commonplace at the AVD. Examples of other vertically integrated power companies included E-on, Scottish Power and Scottish and Southern Electric.  PPS was acquired by Centrica PB in October 2001 from an American-based energy group that was in financial difficulties.  PPS was acquired at the same time as Kings Lynn, for a combined cost of £173.5m.  It was one of the earliest CCGT power stations and therefore one of the least efficient, but this was less of a constraint if the asset was used in a variety of ways rather than simply selling its output to the wholesale market.
35.	Mr Johnson considered that the accounts of Centrica PB Ltd were capable of providing a tangible indicator of what the actual profitability for the plant was when operated under a vertically integrated basis.  Centrica PB Ltd was incorporated on 31 July 2001.  The accounts for the years ending 31 December 2002 and 2003 stated that the principal activity of the company was “the operation of a 360MW gas-fired combined cycled gas turbine generating station at Peterborough, Cambridgeshire.”  The company operated under a capacity tolling arrangement with British Gas Trading Limited (BGTL) who were responsible for energy procurement for the Centrica Group.  Turnover principally related to the sale of power generation capacity to a fellow group undertaking during the period in accordance with the capacity tolling arrangement.
36.	Mr Johnson therefore considered it to be clear that the accounts of Centrica PB reflected the profits of operating PPS under a tolling agreement with BGTL, with prices set at pre-set rates rather than based on fluctuating market rates.  This reduced Centrica’s risk of exposure to fluctuating electricity prices which it faced when purchasing electricity on the open market.  It enabled Centrica’s traders to use the physical hedge that the power plant provided as part of their strategy.  It was for this reason that groups such as Centrica were willing to enter into such tolling agreements both internally and with third parties.
37.	He said that the accounts showed that on average in 2002 and 2003, as a result of the tolling agreement with British Gas Trading Limited, Centrica PB had an average annual turnover of £32m (predominantly from the tolling agreement with BGTL), an average annual gross profit of £21m and an average annual profit before tax of £12m.  Mr Johnson said that this actual profit was a good minimum measure of the worth attributable to the plant. He considered that Mr Davis’s valuation was based on a short term snapshot of the wholesale market, which did not reflect the extra value that could be created by placing a plant into a VI group.  It did not reflect the use to which Centrica were putting PPS at the AVD.
38.	Mr Michael Rowbottom is a Chartered Surveyor. He is employed in the VOA’s Utilities, Telecoms and Transport Team, within which he is responsible for assessment of a variety of power generating properties throughout England and Wales.  To assist Mr Hardman, Mr Rowbottom carried out a valuation under the contractor’s basis.  His valuation consisted of an Estimated Replacement Cost of £48,000,000 (stage 1), which he adjusted to £46,010,173 (stage 2), added a land value of £4,821,881 to include grid connection (stage 3), and decapitalised at the statutory rate of 5% (stage 4), to result in an annual figure of £2,541,603 (rounded to £2,540,000).
39.	Mr Rowbottom did not consider it appropriate to make any stage 5 allowance.  He said that there would always be demand for electricity: consumption had increased year on year since the early 1980’s.  There would therefore be continuing demand for the services of plant such as PPS, and whilst the market was depressed at the AVD, this was temporary and subsequent recovery had been swift.  He said that a landlord would not concede a stage 5 allowance.  In response to Mr Davis’s stage 5 allowance of 100%, Mr Rowbottom commented that he was not aware of any agreed allowances which would come close to this – including for example loss making hereditaments such as steelworks or coal mines.  His valuation was therefore £2,540,000.
40.	Mr Keir Hardman is a Chartered Surveyor.  He has had 22 years at the valuation office and 15 years in private practice dealing with rating matters.  For the last five years he has been employed by the VOA in the Utilities Telecommunications and Transportation Team where he is primarily concerned with the valuation of coal and gas-fired power generators for rating purposes.  He has negotiated settlements on both coal and gas-fired power stations in the 2005 rating list covering both compiled list assessments and appeals owing to material change in circumstances; and in the 2010 list has negotiated settlements on compiled list appeals relating to coal fired power stations.
41.	Mr Hardman’s expert report considered five methods of valuation.  The first was by reference to sales values, relying upon Liverpool Corporation v Chorley Union [1912] 1 KB 270 and [1913] AC 197; Robinson Bros (Brewers) Ltd v Houghton and Chester-Le-Street Assessment Committee [1937] 2KB 445 and the Lands Tribunal decision in Tulang Properties Limited v Noble (VO).  He outlined details of capital transactions that took place in the period leading up to the AVD and applied a split of 35% rateable/65% non-rateable assets.  Each capital transaction was converted to an annual amount using yields derived from property market reports for similar locations.  Mr Hardman also had regard to actual transactions from the Estates  Gazette Interactive website and from all of these derived a range of yields of 10% - 13.5%.  This produced a range of rental values for the rateable element of each comparable, ranging from £3,564 per MW TEC for Roosecote to £9,674 per MW TEC for PPS.  He commented that Roosecote was one of the oldest, first generation power stations and had the lowest TEC rating.  This indicated a minimum value of PPS in the region of £3,500 per MW TEC.  Mr Hardman’s valuation on this capital value basis was RV £1,417,500.
42.	His second method was by reference to receipts and expenditure, having regard to the principles set out in Ryde on Rating and in the guidance note issued by the Joint Rating Forum. Mr Hardman relied upon the evidence of Dr Bower and Mr Johnson and had regard to the published accounts of Centrica PB Ltd.  He considered that the figure stated in the accounts as operating profit could, in context of an R & E valuation, be considered to be the divisible balance from which the calculation of the tenant’s share could be made.  Mr Hardman adopted a tenant’s share of 65%, in accordance with the notional split of assets between the rateable and non-rateable parts, which provided an indication of rateable value of £5,992,000.
43.	In respect of the contractor’s basis, Mr Hardman referred to Mr Rowbottom’s evidence which had arrived at a rateable value of £3,460,000 (£8,543 per MW TEC).  
44.	Mr Hardman then considered settlements in the 2005 List as evidence of value.  He said that all 14 coal-fired power stations had been agreed at £2,500 per MW TEC, despite the method itself not being agreed. In respect of gas-fired stations, a number of settlements had also been agreed at £2,500 per MW TEC.  Of 30 appeals, 16 had been agreed on this basis and one had been accepted by lack of challenge to a VO notice.  Mr Hardman commented that many of the settlements were with experienced and high profile rating surveyors. PPS was one of the oldest power stations, and was at the lower end of the range of parameters, compared with the settlement power stations, in terms of capacity, number of turbines, and TNUoS charges.
45.	Mr Hardman said that at the date of the hearing the 2005 rating list was over eight years old and there had been a number of settlements as outlined above.  He considered that the tone of the list had now been established for gas-fired power stations at £2,500 per MW TEC.
46.	Mr Hardman then summarised the rateable values that had been arrived at using different methods of valuation as follows:
		Capital Value Method 		RV £1,417,500
		Receipts and Expenditure Method 	RV £5,992,000
		Contractors Basis Method 		RV £3,460,000
		Settlements 				RV £1,012,500
		Tone of the list 			RV £1,012,500
47.	He commented that in preparation for this appeal a great deal of additional work had been carried out by the VOA.  Had he been in possession of all of this additional knowledge and information at the time, it was likely that an offer of settlement may not have been made at £2,500 per MW TEC.  The range of outcomes from these valuation methods showed that the value in the rating list prior to the VTE decision was not excessive.  He gave greatest weight to the capital value approach and the evidence provided by agreed settlements which together pointed very strongly to a minimum level of value of £2,500 per MW TEC.  He was therefore of the opinion that a rateable value of £1,012,500 should be determined by the Tribunal with effect from 1 April 2005.
The Respondent’s evidence
48.	Dr Philip Lawless, for the respondent, has over 25 years’ experience in the power generation and electricity industries, both as a consultant and in senior management.  He has significant experience in operations and the purchase and sale of gas and electricity.  
49.	Dr Lawless’s view was that electricity prices at the AVD were insufficient to sustain the profitable operation of a CCGT power station. This had led to the insolvency of several power stations and others being mothballed. Any forecast of market recovery was unreliable and speculative.  
50.	Referring to the Argus and Heren reports, Dr Lawless said that at the AVD, price assessments for electricity had indicated that the market was not expecting a recovery. Price levels in 2004 and 2005 were essentially the same as in 2003. The Argus report had an assessment of electricity contract delivery until winter 2005/6, and the Heren report only went as far forward as summer 2005. Dr Lawless explained that the prices reported for the whole range of contract delivery periods were collectively referred to by the industry as the “forward curve”, beyond which it was not possible to establish a market price. Whilst a number of organisations provided views on future market conditions, these were economic modelling exercises and varied dependent upon the assumptions used. He accepted that it was likely that a market participant would formulate its own forward view based upon this type of modelling. 
51.	Dr Lawless said that there was a wave of VI formation from 1998, which coincided with the large scale reform of the market in 2001 and the introduction of NETA.  The advantage of a VI was one of risk management over the long term, in that it afforded an electricity supplier protection from the need to purchase electricity from competitors; and enabled the VI to form a view of reliability and the ability to meet supply of power stations that it owned.  However the extent of this benefit depended upon prices and volatility in the electricity market. At the AVD the benefit was negligible.  He considered that there were some advantages for a VI over those for an IPP, including economies of scale of corporate resources, but the price of electricity remained established in the wholesale market, and the major economic drivers for VI’s were the same as that for IPP’s.
52.	His view was that there were no tangible benefits to a VI occupier over and above an IPP occupier for the horizon of Mr Davis’s valuation.  The hedging benefits to a VI only became visible if the range of markets showed an increase in the likelihood of higher gross margins from electricity generation or increased price volatility.
53.	Dr Lawless said that the wholesale market, the government, and industry participants did not share Dr Bower’s views in respect of forward prices.  He said that Dr Bower had attached too great an importance to a single forecast of plant margin within the  seven year statement (SYS) of March 2003. He said that there were six published in the annual SYS. The March 2003 update was based upon information from local electricity distribution companies – a customer-based forecast.  It was only in the annual report that National Grid produced its own forecast, based on data from a much wider pool of sources. 
54.	A 20% plant margin level was not a regulatory requirement, merely a guide for planning purposes, and remained a topic of significant industry debate.  He said that the projected plant margin for 2007/08 was 18.2%, 6% higher than Dr Bower’s figure for the same year.  A plant margin based on National Grid’s estimates of demand was material to any view that power station developers would have on the timing of market improvement.  He considered that Dr Bower’s conclusion that the system could only maintain a reliable and secure supply of electricity if there was a 20% plant margin was inconsistent with the thoughts of the industry at the time.  There was no concern about a future plant margin shortfall. 
55.	Even on Dr Bower’s figures, the amount of mothballed capacity (which Dr Bower had not accounted for) that could be returned to service within two years, equated to an increased plant margin of 21%.
56.	Dr Lawless had provided information on load factors, efficiency assumptions, and forward electricity and gas prices consistent with the Argus and Heren price information, for Mr Davis’s valuation.
57.	Dr Stephen Mancey is employed by Centrica as a Power Strategy Advisor.  He has worked for Centrica since 1998, and was responsible for the company’s first power station acquisitions, including PPS.  He gave evidence in respect of Centrica’s purchase of PPS in October 2001. 
58.	Dr Mancey said that Centrica’s first involvement in the electricity market was in September 1998 when it entered the market supplying electricity to households via its supply business British Gas.  Until it acquired its first interest in a Power Station (60% of South Humber Bank in 2001) Centrica supplied customer electricity which came from other power stations owned by companies such as Powergen and National Power.  Until March 2001 this electricity was purchased through the pool – which led to a lack of predictability owing to fluctuating costs.
59.	Centrica therefore judged that ownership of power stations would give it greater control over some of the costs of supplying electricity.  In addition, several companies which had previously concentrated on generation started to buy REC’s, and therefore became direct competitors to Centrica in the supply of electricity.  The company also wanted to address the constant variations in consumer consumption.  This was not problematic under the pool but following NETA the company was penalised for differences in consumption between supply and demand under the balancing mechanism.  Dr Mancey explained that the closer that a supplier can “shape” his purchases to its previous half hour demand forecasts, the lower the overall cost will be.  Suppliers and generators would be encouraged to trade forward to pre-purchase requirements or pre-sell their production so that supply and demand would be approximately balanced before the half hour settlement period arrived.  If a large mismatch was left to the last minute then it would leave the system operator with a difficult job to do to maintain the electricity system in a safe and secure state.
60.	Dr Mancey explained that suppliers had a number of options on how to manage this risk: they could seek to fill in all the gaps between the four-hourly blocks of traded electricity and their forecast of half-hourly consumption by acquiring last minute half-hour blocks in the spot market; they could buy more electricity than they wanted to make sure that the four hour blocks at least covered their highest half hourly requirements; or they could use electricity generated from their own stations to provide this last minute volume of flexibility (effectively forward trading with itself).  The option chosen would depend upon the market price and the volume of contracts transacted and so a supplier would not use its own generating capacity if to do so would cost more than to purchase the electricity in the market.  He accepted however that the ownership of generated capacity was and is a protection against high price spikes in the spot market often associated with low volumes of electricity being offered for sale.
61.	By 2001, Centrica was seeking cost-effective investments in generating capacity as part of   managing the risks of being a supplier.  However it was expected that, overall, the financial and risk benefits of owning the capacity would be long term and that owing to the poor wholesale market conditions at the time, occupation of any stations acquired would be loss-making in the short to medium term.  Centrica considered that the transactions of power stations prior to 2000 had been at inflated prices, but once the excess capacity following NETA became apparent, the prices fell to more acceptable levels.  In deciding to purchase, Centrica had carried out due diligence including the construction of financial calculation models.  These calculations were based on the assessment of the present value of cash flows over the expected life of the asset which was usually in excess of 20 years.  In respect of the years immediately following the purchase, these forecasts involved the consideration of the forward prices for gas and electricity disclosed in the Heren and Argus Reports.  From these two components, the gross margin of the power station could be calculated.
62.	Dr Mancey said that Centrica’s asset valuations prior to purchase used two different gross margin forecasts owing to the uncertainty about the path of future prices.  The more pessimistic, or “base case”, assumed that the prevailing low gross margins represented by the forward market would persist for the first four years and then recover by 2011.  The more optimistic, or “faster recovery” forecast used gross margins derived from the forward market prices from the first two years and then assumed the gross margins would recover from that point.  Both forecasts assumed that the likely level of generation would be on the basis of economic despatch – i.e. the decision to run a power station based on prevailing prices for electricity and gas on that day.  Dr Mancey said that in 2003 the expectation was that any CCGT would be loss making for several years.  Centrica paid a positive price only because it was expected that in the most distant future profits would arise that would more than off-set the near term losses.  By way of example he referred to the internal board paper in the respect of the company’s acquisition of Roosecote (acquired in 2003 for £19.7m net).  This showed net losses on a base case for the first six years and on a faster price case for the first three years, although profits in years 4 and 5 were nominal.  He also referred to the acquisition of Barry in 2003.  Barry Power Station was smaller and more efficient than PPS.  The internal board paper for the acquisition showed net losses for the first six years on a base case scenario and for the first three years on faster price recovery although making nil profit in year four.
63.	On this evidence, Dr Mancey considered that in early 2003 PPS would have been facing a bleak outlook showing annual losses for the next few years.  The prices paid by Centrica took into account its view at the time: that the power stations would be loss making for at least the foreseeable future but that profit would have risen had the market price for gas recovered.
64.	Dr Mancey accepted that there were other marginal benefits of owning a fleet of CCGT Power Stations, in addition to the value derived from long-term forecasts of prices and costs.  The following additional items of value were noted in one or both of the Peterborough and Barry board papers: ancillary services for the generator – estimated in 2001 for Peterborough to be £723,000 per annum or £8.3m net present value over the lifetime of the asset of 22 years; savings of cost in the supply business – which clearly related to vertical integration and included credit costs savings, savings on brokerage costs and bid-offer spread savings.  In the case of PPS, the life time credit cost savings were about £1m, and were included in the base case valuation.  The bid-offer spread savings for PPS and Kings Lynn combined were £10m, which were not included in the base case valuation.  The savings on brokerage costs for both PPS and Kings Lynn combined were £1m – again not included in the base case valuation; optionality; and balancing mechanism revenue.
65.	In terms of optionality (the value of having the option of varying the running value of stations as circumstances dictate, either to capture the best market prices through sales or to avoid having to buy at high prices to meet customer demand) Dr Mancey said this was a very hard item to value and to do it properly required the use of complex option pricing financial models.  No value was attributed to optionality in the 2001 Peterborough Board Paper.  Dr Mancey quoted from the Board Paper which said:
“We have valued the assets on the conservative assumption of fixed running patterns.  There is likely to be extra value available from optimising the running patterns of the stations thus unlocking their inherent “option value”.  This could be for example through turning the stations off, selling the gas and buying replacement electricity at times when this is more profitable than running, or through running outside of the plan periods when prices are high.”
66.	Dr Mancey considered that the bulk of optionality value would lie well into the future when prices and price volatility would have been expected to be better. It was unlikely that much optionality value would lie in the few years after 2003.
67.	He explained that balancing mechanism revenue was not identified in the Peterborough transaction, probably because NETA had only just started and balancing mechanism revenue had not been recognised as a source of extra revenue.  By 2003, the Barry transaction included £250,000 per annum in the base case valuation for that item.
68.	Whilst some of the items were not small enough to be considered trivial, they were far from material when compared to the overall annual revenue of the power station business - £47m in the first year of electricity market revenue for PPS was forecast.
69.	Finally, Dr Mancey considered tolling contracts.  He explained that Centrica did not normally report individual power station profitability in the published accounts of Centrica Plc.  It was only by historical coincidence that PPS sits by itself within a subsidiary company – Centrica PB Limited.  Centrica had considered liquidating Centrica PB Limited to bring PPS into a Group Holding Company, but the complexity and cost of transferring various licences, consents and contracts outweighed the benefit of so doing.  The gross profit shown in the statutory accounts for Centrica PB Limited, Dr Mancey said, was not reflective of electricity market conditions in that year, but only of an internal inter-business charging arrangement described as a tolling contract.
70.	In early 2001, before PPS was acquired Centrica entered into a joint venture with TotalFinaElf (TFE) to own and operate South Humber CCGT Power Station.  When Centrica purchased their interest, it was a requirement that they take on the role of toller for part of South Humber.  The tolling fee under the contract was set at a level that enabled the power station company to cover its operating and maintenance costs and to meet its financial lease rental payments – equivalent to debt interest and principal repayments.
71.	With the acquisition of PPS, there was a need to have an internal mechanism for recovering the costs of running the stations from the part of Centrica’s business that benefited from its electricity production.  As each asset company also dealt with contractors and trade supplier it was preferable for each asset company to have profitable accounts in terms of credit worthiness.  Using the precedent of the South Humber Tolling Contract, the PPS tolling arrangement was duplicated in a much simpler form.  He said it appeared that for consistency the internal tolling fees in these new arrangements were also set by reference to the Humber Tolling Fees.
72.	The Tolling Contract for PPS was between Centrica PB Limited and a company within Centrica’s supply business – British Gas Trading Limited (BGTL).  It recorded the arrangements where PPS was run for the benefit of BGTL which was responsible for meeting the costs of supplying gas and which benefited from the electricity produced from the station.  The tolling fee covered the fixed and variable operating costs of PPS plus a profit for providing the tolling service.
73.	Dr Mancey said that the Peterborough tolling contract had no real relationship to PPS’s commercial performance because it was between two internal companies within the Centrica Group.  The profits generated by the Tolling Revenue Stream within Centrica PB Limited were netted off for external purposes such as financial reporting in the Centrica Plc accounts.  He said that it was therefore not meaningful to use the statutory accounts for Centrica PB Limited to assess the commercial viability of the power station or to determine the station’s short term value to Centrica.
74.	In general terms, Dr Mancey said that tolling revenue should not be seen as a “rental” of the power plant’s capacity.  For example, the asset owner, not the toller, normally provided the staff for the power station and carried out the physical operation and maintenance of it.  A tolling contract was a long-term asset finance supporting vehicle and a risk allocation mechanism.  To his knowledge there had never been a medium length tolling contract of say five to ten years.  At five years or less, any tolling contract would be considered by the parties to effectively be a market trade and would be priced predominately against the forward market because the contract period would cover all of the forward market and some extension beyond.
75.	In terms of his input into Mr Davis’s valuation, Dr Mancey said that Centrica provided Mr Davis with two papers submitted to the Centrica Plc Board and also the 2003 Strategic Plan.
76.	Mr Andrew Blumfield is an independent consultant working in the European Electricity sector for various clients.  He is a member of the Institution of Mechanical Engineers and qualified as a Chartered Engineer in 1989.  From June 2000 to May 2011 he was employed by InterGen (UK) Limited, latterly the firm’s Commercial Director Europe, responsible for InterGen’s five power stations in the UK and the Netherlands.
77.	He gave evidence in respect of InterGen’s ownership of Coryton Power Station, through its subsidiary Coryton Energy Company Ltd (CECL). Coryton was a CCGT power station operated as a stand-alone commercial entity for which CECL made regular financial forecasts and published statutory accounts.  He said that these accounts showed that electricity generation at Coryton was expected to be and was actually loss making in the period from 1 April 2003.  At that time, Coryton was one of the most modern and efficient power stations in the UK, and had a TEC capacity of 720 MW.  Coryton’s first full accounting year of reliable commercial operation ended on 31 December 2003.  Mr Blumfield said that the nearest retrievable financial model to the AVD was dated 26 June 2003, but he considered this remained appropriate because there were no significant changes in the market between the AVD and June 2003.
78.	In the forecast model, the gross margin assumptions for the initial years were set at quoted prices from the forward markets for gas and electricity.  In the electricity market, traded volume (also known as liquidity) was insufficient to provide a robust price beyond the first two to three years.  InterGen anticipated that Coryton would have a life of 35 years and the project’s finance debt had a tenor of sixteen operating years.  In the absence of a liquid forward market beyond the first two to three years, InterGen made use of long-term price forecasts based on a variety of electricity generation, electricity demand and macro economic assumptions utilised in a whole industry economic model. InterGen and its banks procured these long term forecasts from the longest established UK forecaster at the time, Ilex.  So in its June 2003 model, InterGen used forward market quoted prices for the first two and half years and thereafter the most recent available Ilex forecast of October 2002, but there was uncertainty in the long term forecast.
79.	Mr Blumfield had been asked by Mr Davis to make a number of adjustments to the operating profit which resulted in negative divisible balances of £12,720,814 for the year ending December 2003, and £17,235,988 for that ending December 2004.
80.	Mr Blumfield also considered the historic accounts and having made the same adjustments as requested by Mr Davis, the statutory accounts showed negative divisible balances of £6,937,239 for the year ending 31 December 2003, and £12,545,762 for that ending December 2004.
81.	Given these figures, why did InterGen choose to develop such a project?  In the late 1990’s, there was a restriction on CCGT planning consents and InterGen therefore sought to acquire a project which already had consent in place.  In order to assess whether the costs of the construction and the sponsor’s equity investment were justified, the revenues from the power station were forecast over the anticipated useful life of the project (approximately 25 years).  InterGen took the view that as the ageing population of coal-fired power stations retired and the market became short of generation, market prices would have to rise to a level at which the construction of new power stations would become economic.  As an efficient power station, Coryton could be despatched before less efficient rivals.  Based on these factors, in 1999 InterGen forecast a positive rate of return on equity invested.  However as Dr Lawless had explained, electricity prices dropped significantly and the low and actual forecast returns in 2003/2004, compared with the forecast in the late 1990’s, showed the unpredictable nature of operating profits in the power generation sector. 
82.	Why then did InterGen continue with Coryton rather than mothballing it?  The factors which drove the higher expected rate of return were judged to be delayed rather than incorrect. InterGen believed that it was worth enduring losses to gain long term returns. InterGen considered the relative losses for mothballing against the losses from continued operation and chose to continue operation at a loss.  However the return to profitability was slow.
83.	Mr Adam Davis is a Chartered Surveyor, a member of both the Institute of Revenues, Rating and Valuation and the Rating Surveyors Association.  He is a partner in Dalton Warner Davis LLP, and has extensive rating experience including representing the majority of independent electricity generating companies.  He gave evidence at the Valuation Tribunal.
84.	The driving force behind Mr Davis’s assessment of the rateable value of the appeal property was the duration of the hypothetical tenancy and the possibility for the rent under that tenancy altering.  He said that the hereditament is to be assumed to be let from year to year on a tenancy of indefinite duration.  It may be brought to an end upon the giving of notice of either party but it is assumed to have a reasonable prospect of continuance.  Mr Davis’s interpretation was that the rent was therefore not fixed for a period longer than one year.  It may endure for more than one year but each party will be aware of the ability of the other to terminate the tenancy and therefore trigger a renegotiation of the rent.
85.	He considered that the likely rental endurance would be influenced by economic conditions at the valuation date.  Typical behaviour in the market from which the valuation evidence is drawn may also assist.  Where market conditions or market data/evidence demonstrates that normal practice was to work to known horizons, then it was appropriate to assume that the hypothetical parties would expect the rent not to endure beyond those horizons.  
86.	He said that the electricity marketplace agreed values for its main constituents (the price of electricity and the cost of gas) no further than one to 2 years ahead.  The only visible evidence upon which to base a rental valuation of a power station is consequently also over one to two years.  For business planning, asset development and purchase, companies do make long term income and expenditure predictions but these are volatile and not relied upon other than for a specific long term purpose.
87.	He relied upon Dr Lawless’s evidence that both electricity and gas markets trade in forward prices, and that electricity market prices are visible for twelve to twenty four months ahead, with gas prices over a slightly longer period.  The hypothetical landlord and tenant would therefore be able to form a reasonable view of the expected commercial returns for power stations for one to two years ahead, based on actual achieved market gas and electricity prices.
88.	Mr Davis therefore considered it reasonable to assume that the rent of the power station would not be agreed for a period longer than that over which the profitability of the power station can reasonably be assessed.  In this case, the hypothetical parties would expect the rent to endure for a period of one to a maximum of two years.  There was no requirement to calculate rateable value on the assumption that the rent would endure for more than one to two years when market evidence is that income and expenditure can not be estimated for more than one or two years ahead.
89.	Mr Davis relied on Dr Lawless’s report in saying that the best information that would be available to the hypothetical parties in agreeing the rent would be the market price assessments shown in the Heren and Argus reports.  
90.	In 2002 and 2003 the market was depressed, gross margins for CCGTs had collapsed and there was no tangible forecast of improvement in the foreseeable future.  The time scale of any return to prices at which electricity generation would be perceived to be generally economically viable was speculative.  Mr Davis accepted that the hypothetical tenant could be either an independent power producer or a vertically integrated company.  But he had not been able to identify any reason to suggest that the category of company would materially affect the rental bid in the market conditions at the AVD.  
91.	Mr Davis carried out a valuation using the receipts and expenditure method.  It is unnecessary for us to outline that valuation in detail, but the outcome of it was an average loss of between 2003 and 2004 of £9,124,390 after depreciation.  As there was no divisible balance, he concluded that the only possible assumption therefore was that the rent would be set as a nominal sum which he adopted at £1.
92.	Mr Davis also carried out a contractor’s basis valuation, and after the first four stages of this arrived at a level of £492,480.  However he then applied a stage five allowance, effectively at 100%, to reduce the rent to £1.
93.	Mr Davis reviewed his valuation by reference to forecast and actual performance of Coryton Power Station relying on Mr Blumfield’s information.  He said that accounts for CECL showed substantial losses from electricity generation for 2003 and 2004, even without the deduction of depreciation.  Since Coryton also had a negative divisible balance, and therefore a nominal rateable value of £1 for one of the newest CCGT power stations in the UK, the determination of a nominal rateable value of £1 for all CCGT power stations was reasonable.
94.	Mr Davis did not place any weight on the settlements that Mr Hardman had achieved on other power stations at £2,500 MW TEC.  He considered the figure to be arbitrary and that settlements were made on the basis of commercial expediency which had been confirmed by other operators.
95.	In summary he considered that the appropriate rateable value of PPS was fairly represented at the nominal figure of £1.
The Valuation Tribunal Decision
96.	The VTE heard this appeal over three days in March 2011. Mr Glover QC appeared for British Gas Trading Limited (BGTL) and Centrica Energy Ltd. Dr Lawless, Dr Mancey, Mr Blumfield and Mr Davis gave evidence. Mr Hardman appeared for the Valuation Officer. Dr Lawless gave evidence about the operation of CCGT stations and the operation of the markets including the market prices of gas and electricity. He explained about the development of vertically integrated electricity companies and their advantages over IPPs, while remarking that with electricity prices as they stood at 1 April 2003 and as they were anticipated to remain in the foreseeable future, there was no tangible short term benefit. (Paragraph 35) Dr Mancey is recorded as identifying and explaining some of the benefits that would come to Centrica through purchasing the power station in October 2001, adding that overall the benefits of ownership of the power station would be reflected in a slightly lower rate of return being acceptable on the asset's purchase price. "Such benefits are, however, for the long-term and insofar as they can be identified would have to be spread evenly over the life of the asset." (at paragraph 62) 
97.	The VTE summarised Mr Davis’s valuation evidence thus (at paragraph 82) –
"The duration of the hypothetical tenancy and rent reviews had been touched upon in Mr Glover's opening remarks and it was confirmed that this is on the basis of a letting from "year to year" with an assumption of a reasonable prospect of continuance. The hypothetical tenant's objective in this case would be to obtain a reasonable commercial effect on the operation of the power station. The electricity market had been explained by Dr Lawless and this showed that the hypothetical landlord and tenant would be able to take a reasonable view of the expected commercial return on a power station for two years ahead, having regard to actual achieved (forward) market gas and electricity prices. In Mr Davis's view the rent agreed on a power station would not be for a period longer than that for which profitability could reasonably be assessed. It follows therefore that the hypothetical landlord and tenant would expect the rent to endure for a period of no more than two years." 
(Emphasis added)
98.	Mr Davis then considered methods of valuation, outlining why he had adopted the receipts and expenditure method and criticising the VOA's approach. He argued that agreed assessments on the other CCGT hereditaments did not provide useful valuation evidence.
99.	Mr Hardman did not cross-examine Mr Davis on his evidence. He gave evidence and was cross-examined by Mr Glover. It does not appear that he disagreed that the receipts and expenditure method was regarded as an appropriate one for power stations nor that he challenged Mr Davis's contention that the rating hypothesis meant that it would not be right to look further than two years into the future, although he did argue that capital transactions would be of some value. He appears to put most weight on the proposition that the tone of the list had now been established for such power stations.
100.	In their Decision and Reasons at paragraph 159 the Panel said it – 
“… was satisfied that there was no material difference between the parties as to the factual matters relevant to this appeal, such as the extent of the rateable hereditament concerned and the matters mentioned in Paragraph 2 (7) of Schedule 6. The evidence presented by the appellant was both very detailed and substantial and provided an in-depth analysis as to both the overall state of the power supply industry and market as it was around the AVD and as to the operations and nature of the appeal property itself. The Valuation Office made no material challenge to any of the assertions and submissions made by the appellant's witnesses on the evidence they presented and while he explained that this was because he did not consider the approach being taken by the appellant to have any merit, the Panel had to conclude that, other than on that point the evidence and the conclusions drawn from it as regards to market conditions and such matters were not contested." 
(Emphasis added.)
101.	After discussing the methods of valuation and the VO's reliance on what was said to be an established tone, the Panel continued at paragraph 161 –
"the Panel was therefore presented with two different approaches to arrive at the value to be determined in these appeals; on the one hand, the appellant had argued that by carrying out a detailed valuation of the appeal property having regard to its specific nature, it's expected and actual operating profile during the period around AVD, and to the broader state of the electricity market in which it operated at that time, it had no more than a nominal value. The Valuation Officer by contrast, looked at what he argued was a tone which had become established for this type of hereditament and that the appeal property was sufficiently similar to the hereditaments on which this tone had been applied, and where this had been accepted, for it to be applied to the subject property."
102.	The panel then went on to consider Mr Hardman's arguments on tone and to identify the point at which his arguments lacked substance, which was that he needed to provide at least an arguable case for the basis being adopted, but had failed to do so. (See paragraphs 164 to 168.) The appellant's case, however, had been extremely well presented and their evidence was clear. Receipts and expenditure valuations were an appropriate approach to take. 
103.	The Panel was aware 
"…that rating was not a measure of profitability and it would be wrong to assume that just because a business may not make a positive return that the rent it would agree to pay it would necessarily be nominal. The Panel therefore looked to see if there were any reasons why a hypothetical tenant looking to rent the appeal hereditament at AVD would offer to pay a positive rent in the knowledge that there would be little or no prospect of making any positive return on his occupation of the hereditament for the foreseeable future. While of course there was evidence of power stations being sold around AVD the motives of a purchaser of very different, most particularly in the length of time over which he might expect to make a return, from those which would apply to a tenant on a year-to-year letting. On such a basis, while there may have been a positive capital purchase price market for power stations at around AVD, the panel could find no reasonable commercial reasons why a tenant would at AVD have been prepared to offer anything more than a nominal rent to occupy the property on a letting under the rating hypothesis the prospects, in the short term, of making a profit to offset any early losses at AVD were not visible, and any benefit that a tenant might gain from longer term changes in market conditions would be likely to be reflected in the rent he would then have to pay, as such improvements could not be expected to arrive during the term of the hypothetical letting for rating purposes." (At paragraph 172.)
104.	The Panel therefore concluded that there was no realistic prospect of a positive return being achieved by a hypothetical tenant and that he would offer no more than a nominal rent, therefore the appeal property had no more than a nominal value and the appeals were allowed.
Submissions
The Appellant’s Submissions
105.	Mr Morshead QC submitted that the VTE was manifestly wrong to hold that the rateable value should be £1. It had adopted Mr Davis's valuation approach which did not reflect a correct application of rating valuation principle nor the way in which PPS was in fact being operated by the ratepayer, or would have been operated by the hypothetical tenant, at the antecedent valuation date. The assumption of a rent review in the hypothetical tenancy, which was central to Mr Davis's valuation is wrong in law and was further based upon flawed method and analysis. If the Tribunal rejects that valuation then the practical consequence is that it should confirm the value in the list prior to the VTE hearing.
106.	Mr Morshead began by identifying the essential purpose of the rating hypothesis as being to set a standard by which every hereditament in the country can be measured in relation to every other hereditament, by establishing the value that the occupation of the hereditament has to the occupier. The enquiry is primarily economic. Although the tenant is imaginary the conditions in which his rent is determined are those that affect the hereditament at the time the valuation is made. The tribunal must be guided by what the rating hypothesis is trying to do. He supported this submission by reference to Poplar Metropolitan Borough Assessment Committee v Roberts [1922] AC 93. To paraphrase Lord Buckmaster, the statute established a measure of value and should not be interpreted in a way that would destroy the object for which that measure was set up; hence the requirement that a year-to-year tenancy must be interpreted with the assumption that the tenancy may continue from year to year. Mr Morshead referred us to the judgement of Scott LJ in Robinson Bros as one of several high authorities that demonstrate the proposition that rateable value may include long-term as well as short-term benefits of occupation. The respondent's argument is that the hypothetical tenant will know that the tenancy may be brought to an end by notice at the end of the first or perhaps second year and, even if it is not, rent review is possible in the course of the hypothetical tenancy. Therefore the hypothetical tenant would enter the tenancy in the knowledge that to look at anything other than short-term prospects in the fixing of the rent would be an increasingly dangerous gamble. 
107.	Mr Morshead summarised his basic submission that there is no room in rates for the possibility of a "rent review" during the hypothetical tenancy in seven points. 
108.	Firstly assuming a rent review would violate the principle that rateable value includes long-term as well as short term benefits of occupation. The effect of assuming a rent review after the first or any later year of tenancy would be to postpone until the possible rent review quantification of benefits which may come after it. Thus, said Mr Morshead, this approach necessarily has the effect of excluding any long-term benefits of occupation from the rateable value. Therefore it is inconsistent with and defeats this fundamental aspect of rating principle.
109.	Secondly it would violate the principle that occupation is likely to be indefinite. ‘Indefinite’ could mean for as long as the 20 year economic life of the asset, as Mr Davis accepted would be the likely expectation of the hypothetical tenant on the facts of this case. Either the hypothetical tenancy is likely to be of indefinite duration or it is not. If it is, the tenant need not fear notice to quit nor will he need to offer an increased rent at any time in the future. To put it another way; if the initial rent is set so low that there is a material risk of a rent review in the future then there is a failure to set the rent high enough to secure a likelihood of indefinite occupation. If a rent review is to be assumed the tenant would never make a bid based on his expected returns beyond the first (or possibly second) year of occupation, as Mr Davis accepted in cross-examination.
110.	Thirdly, making an assumption that rent review would be possible during the hypothetical tenancy would violate the principles of uniformity and fairness. Rateable value is a measure for expressing the relative values of different hereditaments compared with each other. The valuation of every other hereditament, if done correctly in accordance with authority, will take account of long-term as well as short term benefits of occupation. So to leave long-term benefits out of account in the valuation of one hereditament or class of hereditament contravenes the principle of uniformity. 
111.	Fourthly, assuming rent review during the hypothetical tenancy would mean that irrelevant considerations would influence the rating hypothesis. The particular irrelevant consideration Mr Morshead focused on stemmed from Mr Davis's evidence that where market conditions show the normal practice is to work to known horizons it is appropriate to assume that the parties would expect the rent not to endure beyond those horizons. It would not be proper, said Mr Morshead, for valuers to confine their gaze in this way and to ignore the requirements of the statute. 
112.	Points six and seven were that the respondent's rent review theory made no logical or economic sense. It made no logical sense because there would be no way of controlling the rent on a rent review. The negotiation could be at any time and on any basis. It would make no economic sense because the hypothetical tenant would face an extraordinary and irrational financial risk "gambling" that the hypothetical landlord would allow him to continue paying at an unnaturally low rent for long enough to make it worthwhile. However, by way of contrast, a tenant paying a positive rent in the early years, a rent that reflects the prospect of indefinite continuance, would be acting in a way both logically and economically sensible and in a way that would enable the value of his occupation to be fairly related to others.
113.	Mr Morshead added, referring to the Joint Rating Forums R&E Guidance, that if rent review had a proper platform in rates, it was not credible that the guidance could have taken the form that it does, where it speaks of ironing out fluctuations in the economic cycle.
114.	Finally the respondent's argument that there may be a rent review during the hypothetical tenancy is unsupported by authority. The authorities cited, such as Humber v Jones (1960) 6 RRC 161 or Hong Kong Electric v Commissioner of Rating and Valuation [2011] RA 399 do not, on proper examination, provide any support.
115.	Mr Morshead then turned to examine the practical consequences of the respondent’s approach and the evidence put forward in support of it. Mr Davis's approach was to exclude from the assessment of rateable value any element referable to the benefits of occupation after the second year of the hypothetical tenancy. That was profoundly and irretrievably misconceived. There were plainly long-term benefits of occupation which it was acknowledged had not been brought into account. It followed that the appeal should be allowed for that reason alone.
116.	The evidence in the case showed that there was substantial value to be obtained from the occupation of PPS, as viewed at the AVD, both in the short and in the long-term. Centrica PB's accounts for 2002, 2003 and 2004 showed large profits based upon tolling contracts with BGTL. It was impossible to dismiss those profits as notional or illusory. The evidence showed that they reflected elements of real value. Mr Hardman had attempted to undertake a valuation on the receipts and expenditure basis using those accounts simply as a test to see whether the rateable value in the list was excessive. While this exercise had its difficulties it confirms that the power station had a substantial positive value to its occupier. The data necessary to identify that value exists, if anywhere within Centrica, but they have produced no evidence that displaces the inferences to be drawn from the profits shown in the accounts. Mr Morshead also referred in some detail to the evidence about the tolling agreements and the ways in which demand for electricity was forecast and met. 
117.	Mr Morshead emphasised that the VO had sought to address the full scope of the evidence available to him and had offered four different approaches, decapitalisation, receipts and expenditure, Mr Rowbottom's contractor’s basis valuation. No doubt it could be argued that adjustments to each of these were necessary but, given Mr Davis's narrow valuation approach there had not been engagement at that level. Finally, weight was placed on the fact that ratepayers advised by specialist rating surveyors in other firms had entered into settlements without entering caveats.
The Respondent’s submissions
118.	Mr Glover QC submitted that it was agreed that a valuation on the receipts and expenditure basis was the preferred approach, provided that the inputs to the valuation were reliable. Mr Davis's valuation best fitted the valuation hypothesis as properly understood and on that basis the parties to the hypothetical negotiation would see no further than that the power station would make losses, judged on the basis of the facts before the start of the tenancy. Mr Davis's forecast of receipts and expenditures meant that those losses would be of the order of £7.5 million in the first and second years of the tenancy. The hypothetical parties are reasonable and willing and because it is impermissible for the valuer to assume that the parties simply walk away from the hypothetical letting, it must be assumed that it takes place. However it would only do so at a nominal rent of £1 a year.
119.	Turning to the proper interpretation of the hypothetical tenancy, Mr Glover took us through the authorities to make good the contention, which we accept, that the rent that had to be identified was that which would be paid for a tenancy from year to year and that it was not permissible to identify the rent as such as might be obtained for a term of years or as the value of freehold ownership of the hereditament. He argued that, in effect, the VO was making the mistake of implicitly valuing a reasonable fixed term of years. Staley v Castleton made it plain that it was illegitimate either explicitly or implicitly to assess the value of a tenancy for a term of years, and this was well recognised in the cases. The significance of the reference in the cases to the ability of a hypothetical landlord to give notice to the hypothetical tenant (see for example Lord Warrington in the Consett Iron case) is that it would put the hypothetical tenant at risk. A hypothetical tenant who foresaw losses in the early years but a significant improvement in profitability thereafter would fear that a commercially motivated landlord, with the right to terminate, would give notice when he saw profitability improve with, at least, the intention of renegotiating the rent. The hypothetical tenant who offered a rent reflecting the value of profits only foreseeable in a few years time would be taking the gamble that his hypothetical landlord would not give him notice as soon as those profits started to materialise. The reasonable tenant would not be prepared to take that gamble and would only offer a minimal rent for a period no longer than one or two years. To value on the basis of a longer period than that would be to ignore the landlord's ability to terminate the tenancy on notice and would therefore be the equivalent to giving the tenant a term of years, contrary to the rating hypothesis. The VO was criticised for his inability to imagine a tenancy as short as a single year or two, apparently because of such matters as the need to acquire expensive non-rateable assets and assemble staff and management. He had failed to take account of the answer to that problem given in the case of Railway Assessment Authority v Southern Railway Company [1936] AC 266 by Lord Hailsham LC at page 285, that it is a mistake to allow the valuation to be influenced by capital sums, the difficulty of finding a tenant with enough money or difficulties of providing or realising the necessary equipment rolling stock and other capital. It has to be assumed that the tenant comes to occupy the hereditament with all that is necessary to its operation already provided and can leave it all behind him freely when he departs.
120.	Mr Glover then turned to the evidence and criticised Mr Hardman, firstly for his misunderstanding of the way in which deals were done for periods longer than two years, contrasting the evidence of Dr Mancey about circumstances at Spalding and Coryton, and for relying on Dr Bower's evidence in support of a five yearly repeating cycle of economic activity in the electrical generation business and concluding, in consequence that an upturn had been foreseen at the valuation date. While margins were expected to improve eventually it would be a slow process. Dr Bower's five-year cycle was exploded on the evidence, which dealt with Mr Hardman's evidence that the tenant would take the risk of looking at a five-year period in this case, whatever might be appropriate in other circumstances.
121.	It was a profound misunderstanding of the evidence, continued Mr Glover to suggest that PPS was in fact used on a different basis from that on which Mr Davis had made his forecasts. It was operated on the basis of ‘economic dispatch’ meaning that the decision whether to operate the power station was made between the comparison between wholesale price and operating cost with the forecaster using the forward curve to reach a view as to the most likely price. It was also wrong to suppose that such additional value factors as optionality had not already been taken into account. The evidence failed to show how a different valuation would wipe out a supposed loss of the scale of £7.5 million in the early years. He examined the reliance put upon the tolling agreements and set out the reasons why, on the evidence, those tolling agreements and the profits they produced in the accounts did not reflect the market value of the power station.
122.	As for other methods of valuation, Mr Glover accepted that if Mr Davis's valuation was rejected the Tribunal should go no further than the VO's figure of £1,012,500. Nonetheless he took the precaution of making some comments about the appropriateness of the contractor’s basis and the difficulties of taking into account certain important factors that could affect valuation.
The Issues
123.	The issues upon which this case turns are of law and of fact. The issue of law concerns the proper interpretation of the terms of the hypothetical tenancy, which lies at the very heart of the assessment of the rateable value of the non-domestic hereditament. If those terms are to be interpreted in the way argued for by the respondent, then the way Mr Davis has approached the valuation of PPS is right in principle and, subject to some examination of the way he has undertaken it, his valuation at a nominal figure will be broadly correct. However, if those terms are to be interpreted as the appellant VO contends they should be, Mr Davis's valuation cannot stand and both sides agree that the list value of £1,012,500 is to be taken as the rateable value of the hereditament.
The Law
124.	The statutory basis for the determination of rateable value is contained in schedule 6 to the Local Government Finance Act 1988, paragraph 2(1): 
“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 on these three assumptions:
(a)	the first assumption is that the tenancy begins on the day by reference to which the determination is to be made; 
(b)	the second assumption is that immediately before the tenancy begins the hereditament is in a state of reasonable repair, but excluding from this assumption any repairs which a reasonable landlord would consider uneconomic; 
(c) 	the third assumption is that the tenant undertakes 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 the rent mentioned above.” 
125.	It is useful to start consideration of these statutory provisions by a reminder of their purpose. We were referred to the first (1900) edition of Ryde on Rating which, at pages 135 to 136, said "The Statute of Elizabeth" (the Poor Relief Act 1601) "does not accurately define how the value of land is to be measured; it speaks of “taxation” of the occupiers and other persons “in such competent sums of money as they (the overseers) shall think fit” and of collecting a stock of goods “according to the ability of the parish.” It is, however, implied in the statute that the rate must be made with equality  and it was early so decided; for many years decisions on questions of amount were little more than examples of attempts to ascertain how “equality” amongst the several ratepayers was to be arrived at”. (R v Adams (1832) 4 B&Ad 61, Parke J at 66,; and R v Audley (1700) 2 Salk 526; 1 Const 110 were cited.)
126.	The concept of a hypothetical tenancy from year to year as a yardstick to achieve equality first entered the statute book in the Parochial Assessment Act 1836. Schedule 6, paragraph 2 (1) of the 1988 act is the latest statutory expression of this device or ‘machinery’, as Lord Pearson described it in Dawkins v Ash Brothers and Heaton Ltd [1969] 2 AC 366, at 389. In the same case, at page 381, Lord Pearce said 
"… the question here is whether reduction in value due to an impending demolition order comes within that area of rating where realities are acknowledged or within that where necessarily fiction prevails over fact. It is near the border-line which separates those areas. One has a natural inclination to prefer reality to fiction if and where this is compatible with the basis of rating, with the statute, and with the cases. 
Rating seeks a standard by which every hereditament in the country can be measured in relation to every other hereditament. It is not seeking to establish the true value of any particular hereditament, but rather its value in comparison with the respective values of the rest. Out of various possible standards of comparison it has chosen the annual letting value. This is appropriate since the tax is charged annually. …. This standard must be universal even though in many cases it demands various hypotheses. In practice, sewage works, portions of railway lines, shops and factories where heavy and valuable machinery is installed are not let from year to year. So one must assume a hypothetical letting (which in many cases would never in fact occur) in order to do the best one can perform some estimate of what value should be attributed to a hereditament on the universal standard, namely a letting "from year to year." But one only excludes the human realities to a limited and necessary extent since it is only the human realities that give any value at all to the hereditament."
127.	Lord Buckmaster expressed this in Poplar Assessment Committee v Roberts [1922]AC 93 at page 98:
"But although the tenant is imaginary, the conditions in which his rent is determined cannot be imaginary. They are the actual conditions affecting the hereditament at the time when the valuation is made. This was stated by this house in Port of London Authority v Orsett Union Assessment Committee …. it is in respect of his occupation that the rate is levied, and the standard in the Act is nothing but a means of finding out what the value of that occupation is for the purposes of the assessment."
128.	 (See also: Port of London Authority v Orsett Union Assessment Committee [1920] AC 273; see also Allen (VO) v English Sports Council [2009] RA 289, 307;  Orange PCS v. Bradford (VO) [2004] 2 All ER 651)
129.	In Robinson Brothers (Brewers) Ltd v Houghton and Chester-Le-Street Assessment Committee [1937] 2 KB 445, (approved in the House of Lords) Scott LJ enumerated the steps taken in applying the statutory test. He noted, at page 469, that 
"In weighing up the evidence bearing upon value, it is the duty of the valuer to take into consideration every intrinsic quality and every intrinsic circumstance which tends to push the rental value either up or down," 
130.	and he continued at page 470:
"the objective being the real value of the actual hereditament, the enquiry is primarily economic and not legal; it is only legal insofar as logical relevance is the measure of legal admissibility." 
131.	The duration of the hypothetical tenancy, which is essentially the issue in the present case, has engaged the courts many times over the years. In one of the earlier cases, Staley v The Overseers of Castleton (1864) 5 B&S 503 the court had to address the question whether the hypothetical tenant could properly reflect in the rent he would pay the expectation that, although a cotton mill would not be profitable in the first year of the hypothetical tenancy due to the effects of the American Civil War, he might reasonably anticipate large profits in a few years time. In words emphasised by counsel for the respondent, Blackburn J said (at page 923) that such a construction could not be maintained without altering the language of the Act of Parliament from "let from year to year" to "let for a reasonable term of years." The facts were, he said, that "under existing circumstances, the hypothetical tenant hiring it as a cotton mill would not give anything for it, because, working it as a cotton mill in the current year, he would be out of pocket." After considering another authority he added "if there were a reasonable prospect that during the current year the hypothetical tenant would give a higher rent, the amount of that rise might be taken into account, but deferred and reversionary prospects cannot." (Page 924)
132.	By contrast, in Great Eastern Railway Company v Haughley (1866) LR 666 the court had to consider an appeal against the rating of a railway in which an arbitrator had allowed for depreciation in the railway rolling stock over a number of years in calculating the value that the hypothetical tenant would give. The court refused to interfere, holding that it was a question of fact, in all the circumstances for the arbitrator to decide. Cockburn CJ said, at page 679, 
"I quite agree with (first leading counsel for the appellant) that if we were to start upon any other assumption than that we are dealing with a case of letting from year to year, we should be construing this statute in a manner in which we should not be warranted in doing. But I think it is one thing to start with the assumption that you are dealing with a tenancy from year to year, and another thing to say that the hypothetical tenant, in calculating what he can reasonably pay as a rent for the premises, is necessarily to assume that his tenancy would not last beyond a year. I think the possibility of its longer duration is one of the surrounding circumstances which the tenant from year to year would take into account." 
133.	Twenty years later the Court of Appeal had to consider the rating of a waterworks company in R v South Staffordshire Waterworks Company (1885) XVI QBD 359. At page 370 Lord Esher MR had to deal with the second point in the case which concerned the deduction of rates in the necessary calculation. The point was whether, in estimating the rateable value of the works, the deduction from rates should be in respect of those which were then actually payable, or in respect of those which the hypothetical tenant would have to pay if he were a real tenant. In the course of dealing with that point Lord Esher said:
"A tenant from year to year is not a tenant for one, two, three, or four years, but he is to be considered as a tenant capable of enjoying the property for an indefinite time, having a tenancy which it is expected will continue for more than a year, but which is liable to be put an end to by notice."
134.	In this case Mr Glover stressed the last phrase in that quotation.
135.	Staley v Castleton and Great Eastern Railway Company v Haughley were considered by the House of Lords in Consett Iron Company Ltd v Assessment Committee for Durham [1931] HL (E) 396. Lord Sankey LC said (Page 408-409) that while expressing his great personal hesitation in criticising the judgement of Blackburn J in Staley, the statement that the hypothetical tenant would not give anything for the cotton mill was, in effect, substituting the Judge’s own opinion for the finding of the arbitrator or court of Quarter Sessions.  The true principle to be applied was that laid down by Cockburn CJ in the Great Eastern Railway case (and quoted above). Lord Warrington, agreeing with the Lord Chancellor, added
"the sentence (quoted above) in Blackburn J’s judgment seems to indicate that the only term which is to be considered is the current year, that is to say, one year certain. I think the true view is very well put by Greer LJ in his judgement, where he says: "it does not follow because during the first year of the tenancy there is very little prospect of any profit that it is not worth the while of the proposing tenant to say to himself: "though my landlord at the end of six months may give me six months notice, he is very unlikely to do so, and if he does not do so I will have the right to occupy for 18 months, and though at the end of 18 months from the beginning of the tenancy he may still give me six months notice, judging by the probabilities and the way business is conducted in matters of this sort, at any rate judging by the probabilities, I do not think he will give me six months notice; then he will let me go on a little longer."" That seems to me to be the right view of the Act on that point." (Page 412)
136.	Returning to the Robinson Brothers case, after referring to the early railway and canal cases, Scott LJ said
"… in the case of such a statutory undertaking it is obvious that the "year to year" tenancy must be interpreted with the implied addition that a prospect of continuance may be assumed." (At page 475)
137.	Referring to the authorities we have set out above he continued:
"These cases also dispose of the contention …. that the statute forbids any account being taken of a tenancy lasting more than a year and that, therefore, although brewers might be ready enough to buy, the idea of their competing for a tenancy is in a practical sense absurd. The answer is that the statute properly construed does not so limit the hypothetical tenant's prospects. The idea of a lease for years is excluded, but the prospect of the tenancy from year to year continuing must be assumed."
138.	Scott LJ then turned to the difficulties involved in ascertaining the real value of the hereditament, expressed in terms of the hypothetical tenancy, and taking into account all its circumstances, including the need to take into consideration every imaginable motive which makes people want a thing, creates demand, and thus affects value. He recorded that "where better evidence is in the circumstances of a particular hereditament impossible, resort may be had to either capital value or cost of construction either of which can, with appropriate corrections, be converted into approximately equivalent terms of annual value." (Page 481)
139.	In Dawkins v Ash Brothers and Heaton Ltd [1969] 2 AC 366 the House of Lords had to consider an appeal from the Lands Tribunal in relation to a hereditament consisting of factory premises which had been compulsorily acquired for a road widening scheme and were expected to be demolished in about a year. The Lands Tribunal had held that the probability of demolition within about a year was a circumstance which should be taken into consideration in assessing rateable value. The VO appealed to the Court of Appeal and then to the House of Lords, arguing that the Lands Tribunal had assumed a tenancy for a year instead of a tenancy from year to year with the possibility of indefinite continuation. One could not have tenancies from year to year which gave different values, it was submitted. (See the argument of junior counsel for the VO at page 375.) The House of Lords conducted a full analysis of all the authorities. Lord Wilberforce concluded (at 387G):
"so we should regard the words "from year to year" as meaning no more than that the tenancy is not a fixed or definite one; it is one of indefinite duration, determinable by notice, but not, I would think, according to the technicalities governing the giving of notice in tenancies of this kind. What then, are we to say of the tenant's expectations and of the rent he is consequently willing to pay? I see no reason why, if there is evidence to prove it, a greater and more reliable expectation of continuance should not be allowed to affect his calculation. In this I am content, as this House did in the Consett Iron Co’s case… to follow Cockburn CJ …"
140.	He concluded that the agreed facts provided amply sufficient basis for the Lands Tribunal's decision.
141.	Lord Pearson, dealing with the duration of the tenancy at 391E, said:
"The assumed tenancy is a normal tenancy from year to year running on indefinitely until terminated by notice. There has not been in this appeal any argument or discussion as to the required length of the notice or when it must expire, and I am not expressing a concluded opinion, but I think it is usually taken to be a six months' notice expiring at the end of the first or any later year of the tenancy. Therefore, the tenancy may be terminated by notice at the end of the first year or it may have a longer duration. The nature and the terms of the hypothetical tenancy could be the same in this case as in any other case."
142.	This is a passage upon which the respondent places considerable weight.
143.	Lord Pearson continued (at 392 E) 
"I think the main argument for the appellant… is that you cannot bring into account the probability of a portion of the hereditament being demolished in about a year without destroying the hypothesis, required by statute, of a tenancy from year to year. But at its highest the argument was that the respondents’ contention and the Lands Tribunal's decision necessarily assumed that the tenancy would come to an end in a year, and therefore it would be in effect a tenancy for one year only, which would not comply with the statutory requirement. To the appellant's argument so presented there is the simple answer that on the agreed facts it could not be assumed that the hereditament would come to an end in a year; it might go on for several years. But the argument for the appellant can also be presented in this form: that, although the statute is silent on this point, authoritative dicta ….. have put a gloss on the statute, requiring a reasonable expectation of continuance of the hypothetical tenancy; and a reasonable expectation of continuance cannot be reconciled with a reasonable expectation of termination within about a year; and therefore the reasonable expectation of termination within about a year must be disregarded in order to permit the application of the statutory measure of value as authoritatively interpreted. In my opinion, however, the authoritative dicta should not be understood as putting a gloss on the statute. The statute requires quite simply a tenancy from year to year, and that is a tenancy which may be determined at the end of the first year or may run for several years or many years. The circumstances of a particular case may show that the hypothetical tenancy from year to year is likely to be long (e.g. where the subject-matter is or forms part of a waterworks undertaking or a railway undertaking) or that it is likely to be short (as in this case)." 
144.	Lord Pearson also expressly approved the statement of principle by Cockburn CJ in the Great Eastern Railway case.
145.	Lord Pearson considered the submission that equality of rating required the application of the principle of "rebus sic stantibus". He asked the question:
"In the expression rebus sic stantibus which are the res? In other words, which are the factors to be taken into account in order to produce equality of rating? There is, in this case, a present probability of a future happening, and the present probability affects the present value of the hereditament. There is inequality of actual value if of one of two otherwise identical hereditaments one is likely to have part of it demolished within about a year and the other is likely to remain intact. If they had to be deemed to be of the same value, although in fact one is worth less than the other, there would be artificiality and fiction and unfairness in the valuations. Lord Parmoor said in Poplar Metropolitan Borough Assessment Committee v Roberts [1922] 2 AC 93, 120 -- 121:
"In ascertaining this annual value, all that can reasonably influence the judgement of an intending occupier or to be taken into consideration including not only the natural conditions that any statutory provisions which may tend either to enhance or diminish the value of the beneficial occupation of the property or its profit-earning capacity."
146.	Caution must be taken not to burden the hypothetical tenant with all the practical problems that would face a real life tenant seeking to take a tenancy from year to year of the sort of hereditament that would never be let on such a basis. This was made plain in Railway Assessment Authority v Southern Railway Company [1936] AC 266. Lord Hailsham LC (at page 285) said:
"A further general observation occurs to me and that is that one may be led astray in the case of a railway undertaking by attempting too detailed or elaborate a personification of the hypothetical tenant. In the case of an ordinary house a rating authority may well visualise an ordinary citizen with all the usual desires, tastes and avocations of mankind as the tenant who is to pay the rent; but when we come to a railway undertaking in which vast sums have been invested and in which the share of the tenant's capital amounts to many millions it is apparent that the effort to visualise an actual tenant involves an almost impossible strain. In my opinion it would be a mistake to allow the percentage to be influenced by the largeness of the sum which the tenant is supposed to supply for capital, or by the difficulty in finding a tenant with such extensive means, or by the difficulty the tenant might find either in realising his rolling stock and other chattels or in reinvesting so large an amount of capital on the exploration of his tenancy. Since the landlord is to be contemplated as a possible tenant, none of these considerations must be allowed to come in."
147.	Mr Glover relied on Staley v Castleton for the submission that it is illegitimate "either explicitly or implicitly" to assess the value of a tenancy for a term of years. He said that was a proposition endorsed by the Hong Kong Court of Appeal in the first China Light and Power case. The case of China Light & Power Company Ltd v Commissioner of Rating and Valuation [1996] RA 475 was one where the Commissioner took the point on appeal that the Lands Tribunal of Hong Kong had not valued the tenements on the basis of a hypothetical tenancy from year to year but valued them instead on the basis of a finite tenancy for four years. Godfrey J A said (at pages 534-535):
"There is no doubt that, as a matter of law, the Lands Tribunal was bound to determine the rateable values on the basis of a hypothetical tenancy from year to year; the only question is whether they did or did not do so. This apparently simple question is complicated by the consideration that the hypothetical tenant, although only a tenant from year to year, is to be supposed to have a reasonable prospect of continuing to be a tenant: see R v South Staffordshire Waterworks Co. It is legitimate, in my judgement, to base the valuation on the footing of a reasonable prospect of the hypothetical tenant continuing to be a tenant, not simply in the abstract, but for some reasonable period of time, and I can see nothing wrong with the Lands Tribunal, as part of the process of valuation, making an assumption as to the duration of that reasonable period of time. It would not be legitimate for the Lands Tribunal to value the tenements on the footing that the hypothetical tenant had a term of, say "X" years certain. But it would be legitimate for the lands Tribunal to value the tenements on the footing of a tenancy from year to year, with a reasonable prospect that the tenancy would in fact continue for "X" years."
148.	Godfrey JA then turned to what the Lands Tribunal had actually said and decided that, although the passage in question might have been more happily expressed, it was sufficiently clear that the Lands Tribunal had not misdirected itself.
149.	We do not think that authority assists Mr Glover. It is not in contention that it would be wrong in law to value the hereditament on the basis of a term of years, which is doubtless what Mr Glover means by ‘explicitly.’ It is less clear what he means by ‘implicitly’ or what support he can get from this case given the finding that it was legitimate to value on the basis of a tenancy from year to year with a reasonable prospect that the tenancy would in fact continue for four years. The Hong Kong Court of Appeal clearly did not consider that valuing on such a basis was "implicitly" valuing on the basis of a term for four years. We agree.
150.	Mr Glover particularly drew us to the case of Humber Ltd v Jones (VO) (1960) 6 RRC 161, and the words of Hodson LJ, at page 168:
"I draw attention to the fact that the way in which the Lands Tribunal put this is that it would not be satisfied "that the rent offered and accepted in this hypothetical world would differ materially from the actual rent as agreed." Prima facie, that is a finding of fact." 
151.	Hodson LJ then declared that he did not see any misdirection in the passage he had read from the Tribunal's decision.
152.	The court then noted the valuation evidence that had been before the Lands Tribunal (at page 169). The value called for the VO put a valuation on the factory and then is reported as saying 
"He thought that the most prominent feature of the statutory definition was its indefiniteness; in fact, the hypothetical tenant could stay as long as he liked, for, if the landlord gave notice to the tenant in a case of this kind, he would know that he would never find another tenant to go into that factory." 
153.	Hodson LJ continued:
"Counsel for the valuation officer in his argument pointed out that in a yearly tenancy it may well be that notice is given at the proper time in order to determine the tenancy, not to get rid of the tenant but in order to adjust the rent to make it fit with the market value at the time."
154.	Willmer LJ agreed with the outcome, saying (page 171) that the matter was properly treated as a question of fact, the Tribunal had the evidence of values and he came to his conclusion as a matter of fact. He had not misdirected himself.
155.	Mr Morshead pointed out that nothing turned on the words quoted above, they were ‘flotsam’, a use of words that Mr Glover took to be a sign of desperation. But in fact nothing did turn on those words. Hodson LJ recorded the views of the valuers on either side, as expressed to the Lands Tribunal, having already said that it was for the tribunal to make up its own mind on the facts, which it had done. Neither expressly nor implicitly did he indicate approval of either argument nor voice any opinion of his own that could even amount to a dictum.
156.	We were also referred to a passage in the case of Hong Kong Electric Company Ltd v Commissioner of Rating and Valuation [2011] RA 399, where, in the Court of Appeal, Lord Millet recorded the Lands Tribunal as saying (at page 473):
"the hypothetical tenancy is from year to year, with a reasonable prospect that it would continue for an indefinite duration, although the rent must be assumed to be capable of review at the end of the year."
157.	However this is in a passage where Lord Millett is simply setting the scene, noting how the Tribunal had summarised the statutory hypothesis, without indicating any approval or disapproval of it. That particular passage played no part in the decision that we can discern and we do not find it of any assistance.
Consideration and Conclusions 
158.	The overwhelming weight of high authority, reviewed by the House of Lords in Dawkins v Ash Brothers in 1969 and not challenged since then, leaves us in no doubt that the concept of the hypothetical tenancy as a tenancy from year to year but one with an indefinite prospect of continuance, requires the valuer (and if necessary this Tribunal on appeal) to consider, in the light of all the facts and circumstances, what probable length of time the hypothetical landlord and the hypothetical tenant would attribute to that prospect of continuance. In our judgement it is wrong as a matter of law to suppose that the possibility of a rent review must prevent the hypothetical parties from contemplating continuance much beyond two years. It is also wrong, to put the point in a slightly different way, to say that the consequence of valuing the hypothetical tenancy on the basis of continuance for some or possibly many years is implicitly to convert a tenancy from year to year into a tenancy for a term of years. The correct approach requires the valuer to consider all the facts and circumstances that relate to the hereditament in order to judge what sort of length in terms of a prospect of continuance would be appropriate in that particular case. In the case of some forms of hereditament the exercise may be perfectly straightforward and the prospect of continuance may have little or no role to play in the valuation. In the case of hereditaments that involve a considerable initial investment, such as canals and railways in the old cases and power stations in modern times, the facts and circumstances may well provide powerful evidence upon which the valuer will conclude that the hypothetical parties would contemplate a tenancy from year to year with a lengthy prospect of continuance.
159.	That means that the respondents’ valuer has undertaken the valuation of PPS on a basis that is wrong in law, in that he has mistakenly conceived his horizon to be restricted to a period of two years.
160.	We acknowledge and accept the references (set out above) in the speeches of Lords Wilberforce and Pearson in Dawkins v Ash to the possibility of a rent review playing part in assessing the duration of the hypothetical tenancy. However it is perfectly clear to us from their speeches that neither of their Lordships intended to limit the possibility that the facts of the individual case might indicate a prospect of extended continuance. For our part, we do not say that the possibility of a rent review can never be a relevant matter in considering the appropriate prospect of continuance; that is not necessary for our decision; there may arise circumstances in different cases when it might be appropriate to take into account the prospect of a rent review in deciding as a matter of fact how far ahead the hypothetical parties would be likely to look in fixing the hypothetical rent. That is not this case but we would not wish to rule out such a possibility and we think the references we have been shown in the other cases are also explicable on that basis. We do not accept Mr Glover's submission that the possibility of a rent review means that the hypothetical tenant would be deterred from valuing his tenancy on the basis of more than one or two years continuance. The valuation hypothesis is preserved by assuming that, as reasonable parties, the hypothetical landlord and the hypothetical tenant would view the prospect of continuance in the light of the rent that was agreed; if the hypothetical rent is assessed on the basis of a tenancy from year to year with a prospect of continuance of several years it is rational to assume that the reasonable hypothetical tenant and the reasonable hypothetical landlord contemplate a prospect of continuance that bears a fair relationship to the rent to be paid and is the same likely period in the minds of both of them. There is no gamble. There is no implicit term of years.
161.	In the end all the authorities show that it is a matter of fact for us in the light of all the circumstances to find what degree of prospect of continuance the hypothetical parties to the tenancy from year to year would be likely to contemplate. In the light of all the facts in this case, amongst which we note the facts that this gas-fired power station was purchased for £99.5 million shortly before the AVD, the reasons given by Mr Ulrich for recommending its purchase to his Board, and the level of annual profits ascribed to the power station, measured in tens of millions of pounds in the audited accounts, we unhesitatingly find as a fact that both the hypothetical landlord and the hypothetical tenant would contemplate that the tenancy from year to year would have a prospect of continuance for a substantial period of time. We do not have to find how long it would be but we are sure that, on the facts of this case, to consider that it might only be for two years would be perverse; it might be substantially more than that. 
162.	We also find that Mr Davis's receipts and expenditure valuation which attributes a nominal £1 rateable value to PPS is fatally flawed for other reasons. In brief summary it was based on a valuation method, assuming sales into the wholesale market two years in advance, that was not the way that the power station was actually operated as part of a vertically integrated operation. We do not accept the respondent’s arguments that in practice it came to much the same thing. It left out of account several real sources of value, as identified by Mr Ulrich to his Board, such as the extra flexibility and optionality occupation of the power station would bring. We do not think that flaw was removed by the efforts made in evidence and argument to suggest that these extra sources of value would not counterbalance losses in the early years of the tenancy and thus not overturn Mr Davis's conclusion. Even if that were so, it might make a substantial difference to the length of time that the hypothetical parties might think they had to wait before the power station became profitable and therefore affect the hypothetical rent they would agree upon.
163.	We observed at the start of the case that the proposition that not just PPS but necessarily all the gas-fired power stations in England put together, were worth less in terms of rateable value than a corner shop, might be thought a little surprising. Although, of course, if that had been the conclusion we were driven to on the law and the evidence, then we should not have hesitated to reach it. We do think that where a valuer finds that the application of a particular method of valuation produces such a result, it would be wise to step back and consider whether or not the result should be tested appropriately by using another method of valuation, such as deriving a rent from capital expenditure or by the application of the contractor’s test. That is what Mr Hardman sought to do. His results were examined in the evidence. In the light of our conclusion it is not necessary for us to consider the results he obtained in any detail. It is possible that criticisms could be made of the results he achieved and adjustments would be necessary; but the significant point of his efforts is that in each case the valuation produced a strongly positive figure.
164.	We feel bound to add that, if the VTE had had the benefit of the submissions of law and the considerably fuller evidence that we have had, we do not think that it would have reached the conclusions it did. Mr Morshead argued powerfully that the VTE's decision appears to show that the impression that it was given about the operation of PPS and its benefits was at significant variance to the facts as they have been put before us. We think there is some force in that. Nor, it is clear, did they have the benefit of any coherent challenge to the legal basis upon which the rate payer's case was put. For a lay Panel that was a substantial disadvantage and we feel sympathy for their predicament.
165.	We conclude that Mr Davis's valuation on behalf of the respondents must be rejected, both on the law and on the facts and the appeal allowed. Both counsel agree that in that event the rateable value to be attributed to Peterborough Power Station is the value as entered in the list by the VO on 4th May 2010, which is £1,012,500.
166.	The appeal succeeds and we determine that Peterborough Power Station must be entered into the local non-domestic rating list as “gas-fired power station and premises” with a rateable value of £1,012,500 with effect from 1 April 2005.
167.	This decision is final on all matters other than costs.  The parties may now make submissions in writing on the issue of costs and a letter containing further directions accompanies this decision.

								13 February 2015

								HH David Mole QC

								Peter D McCrea FRICS