B e f o r e :
Mr Justice Ouseley ____________________
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Richard Gordon QC & Gerard Rothschild (instructed by the Company Solicitor, UK Power Networks) for the Claimant Javan Herberg QC & Tom Coates (instructed by Ofgem) for the Defendant Michael Fordham QC and Naina Patel (instructed by Addleshaw Goddard) for the Interveners Hearing dates: 9 & 10 May 2017 ____________________
HTML VERSION OF JUDGMENT ____________________
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Mr Justice Ouseley:
Willmott Dixon Construction Ltd, the Interested Party, applied to UK Power Networks (Operations) Ltd, UKPN, the Claimant, for electricity connection works at the Tesco site in Woolwich. UKPN acts on behalf of London Power Networks plc, LPN, another company in the UK Power Networks group of companies. LPN is a licensed electricity distribution network operator, DNO. The Electricity Act 1989 enables a customer who wants electricity connection works to require the DNO to offer to carry them out.
UKPN issued the connection offer letter but required Willmott Dixon to pay the costs of the connection works in advance of the commencement of works. Willmott Dixon did so, paying £1,478,965 plus VAT, in three instalments, the largest of which, £1,271,656 plus VAT was paid in August 2011. After completion of the works, Willmott Dixon complained to UKPN that it ought to have paid interest on the three advance payments, by virtue of s20 of the Electricity Act 1989. UKPN disagreed, though accepting in a letter of 17 July 2014 that it ought to have asked for staged payments, that is payments in advance of the commencement of each stage of works. On that basis, it sent Willmott Dixon a cheque for £21,852 interest.
Willmott Dixon pursued the issue, referring the dispute to the Defendant Regulator, the Gas and Electricity Markets Authority, GEMA, in August 2014. After a process involving a provisional decision and further submissions, GEMA issued its decision on 26 July 2016. It concluded that, because those payments had been made in advance, interest on them was payable. Advance payments could only be taken by way of security, upon which interest was required to be paid. This decision depended on an issue of statutory construction of ss 19 and 20 of the Act and not, at least not directly, on a regulatory judgment about a fair balance between customer and electricity distributor. UKPN challenges that decision as based on an error of statutory construction.
GEMA also determined the minimum interest that it would have approved for UKPN to pay Willmott Dixon. That part of its decision is not challenged, but it is not without relevance to the issue of statutory construction.
The statutory provisions
The Electricity Act 1989, which deals with the privatised electricity distribution and supply industry, contains provisions which, so far as material, had no counterparts in earlier electricity supply legislation. There have been changes to the 1989 Act over time, parts of which have been referred to as an aid to construction, and more recent immaterial changes.
The principal objective of GEMA is "to protect the interests of existing and future consumers" in relation to the supply of electricity; s3A. A distributor of electricity is under a "duty – (a) to make a connection between a distribution system of his and any premises, when required to do so by – (i) the owner or occupier of the premises…for the purpose of enabling electricity to be conveyed…". This includes the provision of electric lines and plant; s16(1).
S16 and the next group of sections deals with how that "duty" "when required" is undertaken. S16 continues:
S16A deals with procedure. By subsection (1) the person requiring the connection "in pursuance of s16(1) shall give the distributor a notice requiring him to offer terms for making the connection." The notice must specify the premises to be connected, the date by which the connection is required and the maximum power level, and such other information as the distributor reasonably requests. Although there is provision in subsection (4A) for regulations to be made entitling the distributor to require payment of "connection offer expenses", no such regulations have been made. Connection offer expenses are however routinely required to be paid and are paid.
Subsection (5) provides for the next step by the distributor:
Section 19(1) is one of two sections at the heart of the issue. It provides:
Much of the debate related to whether the words "reasonably incurred" meant "have been" incurred as GEMA contended, or "have been or will be" incurred, as UKPN contended, and even "are likely to be incurred", or "may be incurred". In furtherance of the arguments, other parts of s19 and other sections were prayed in aid to understanding the Parliamentary draughtsman's use of tense with passive voice. At the relevant time subsection (2) permits the making of regulations to cover the position where an initial contributor "has made a payment" to the distributor in respect of the provision of an electric line or plant, and "the line or plant having been provided" another person requires connection to that line. Subsection (4) was much debated because it does refer to payment for works yet to be undertaken; it reads:
S20 is the other section at the heart of the issue. It provides:
Mr Herberg points to the language of s20 (1) which ties the taking of security to "payment under section 19". It cannot be taken for sums which do not come within s19. The consequences of that are not entirely straightforward when it comes to contingencies. He submitted for example that, were a distributor to be concerned lest the customer become insolvent while the works were underway, it could proceed by way of taking a security for sums yet to be incurred, just as if it wanted advance payment simply for its advantage in financing the cost of the works.
Section 21 deals with the terms which the distributor can require the person who requested the connection to accept:
There is a mechanism for the resolution of disputes which enables the reasonableness of a required term to be resolved by GEMA. It is the same provision, s23, as Willmott Dixon invoked here.
I need also to mention two other statutory provisions which played their role in the arguments over whether distributors could seek advance payment of connection costs otherwise than by way of deposit security under s20, on which interest would be paid.
S39A permits regulations to be made prescribing standards of performance from electricity distributors in their activities affecting customers. One set of Regulations in 2010 was replaced, without material alteration, in 2015 by the Electricity (Connection Standards of Performance) Regulations 2015 No. 698. Regulation 8 requires the distributor to pay a prescribed sum to the customer if it fails to complete certain connection steps by the agreed date, where a distributor receives, (and (b) (ii) is the focus of the point):
I do not need to set out paragraphs (2) and (3) of Regulation 8(1). Mr Gordon QC for UKPN submitted that these Regulations were not consistent with Mr Herberg QC's submissions for GEMA on the construction of ss 19 and 20.
Second, s20(4) has been repealed but it made provision for pre-payment meters in these terms:
Mr Gordon submitted that this illustrated that pre-payment was not a form of security, and was incompatible with GEMA's position on advance payment.
The Determination Letter, DL
I need spend little time on the detail of its reasoning because it is not at issue. The question for me is whether GEMA's determination of the issue of statutory construction is right or wrong, and not whether it is reasonable, even if wrong. It is also entirely open to me to come to the same conclusion as GEMA by a different route, to allow for different arguments of law, or indeed to uphold its decision while giving the Act a meaning differing to a degree from GEMA's. In that context, GEMA's expertise and experience is of lesser value, though it can illuminate the purpose of a provision or the practical effect of or problems associated with any particular interpretation.
The issue, as I have stated, is whether UKPN's requirement for advance payment of the connection costs by the customer was permissible under the Act, only if required by way of security under s20. If so, interest was payable.
GEMA decided that advance payment was indeed only permissible under s20 because s19, read in the context of the Act and particularly with s20, prohibited payment in advance of the making of the electricity connection. This was sometimes, inconsistently, referred to as the completion of works, but Mr Herberg accepted that payment in advance of making the connection was what s19 prohibited and that some works, such as of ground reinstatement, could continue after provision of electric plant and lines.
S19, on its own, suggested that payment could only be required after the event, because the tenses used indicated that. But it was the existence of s20 which was critical. GEMA said in DL [4] (the summary of decision), [54] and [58]:
…
Mr Herberg accepted that, consistently with that reasoning, it was GEMA's, at least primary submission, that staged payments were prohibited, even with the payments being made at the completion of a stage. Any stage payments, whether made before or after completion of the stage, could only be taken by way of security under s20. Mr Herberg, however, did acknowledge that a possible interpretation of s19, which it was open to me to accept, was that a stage payment, provided that it was paid only after completion of the stage to which it related, was permitted.
The DL then dealt with interest. Its reasoning on the rate is relevant because it illustrates the factors which have to be balanced when payment is made in advance of or after completion of works:
It dealt with the need for the rate of interest to be "simple to operate" and adopted "a rough and ready approach", making allowance for some of the staging of payments and the requirement for interest to be paid only where money had been in the distributor's hands for three months. Finally, it invited UKPN to submit that rate for approval so as to round off compliance with s20.
GEMA's earlier practice
GEMA acknowledged in a postscript to the DL that it was in favour of distributors seeking advance payment, which they would now have to do under s20. It said:
Whatever may be its value as an aid to interpretation, the common requirement for advance payment welcomed by GEMA, had never given rise to complaint before. It appears that advance payments were sought under s19 and not under s20; GEMA had never been asked to approve an interest rate before, nor had any dispute over this process arisen before. It is not clear whether interest rates would be fixed, variable, quotation specific, distributor specific, determined for a period or how long that period might be.
Confirmation of GEMA's past practice, and change of position, can be seen in its approval of Charging Methodologies. A DNO is required by the terms of its licence issued under the 1989 Act to produce for GEMA's approval its Charging Methodology; UKPN did so and this was approved in December 2016. Licence Condition 13.3, with which the methodology had to comply, required the charging methodology to "facilitate" the discharge by UKPN "of the obligations imposed on it under the Act and by this licence." UKPN combined the Charging Methodology with its Connection Charging Statement, the form of which GEMA has also approved. The Statement "provides the basis of charges for the provision of a connection".
The Methodology sets out the methodology under which customers will be charged for a connection. It is an elaborate document. Section 6 entitled "Our Specific Connection Charging Methodology" sets out in [6.3] the "Payment terms":
[6.4] refers to the limited circumstances – single customer requesting numerous small value connections with minimal possibility of payment default – where it accepts payment in arrears.
UKPN's standard terms and conditions include provisions for variation works, payment of the price at the time required in the notice, interest to be paid to it on money outstanding, plus an entitlement to stop work if payments are not made when required, price variations to reflect increases in the cost of materials or plant, including through exchange rate movements, a provision for reservation of capacity in the distribution system and notification of the right to refer disputes to GEMA for resolution. Clause 3.2.1 of UKPN's standard terms and conditions provides that it "shall not be obliged to begin or continue" the connection works until it "has received the Price (or where applicable the next instalment thereof)…." I accept of course, that if the Act prohibits such provisions, a distributor's Standard Terms cannot make them lawful. But their presence in terms standard among distributors for so long does not suggest that there has been much of a regulatory problem hitherto.
Conclusions
Although I can see the force of Mr Herberg's arguments, I am satisfied that they and GEMA's decision are wrong, and that the submissions of Mr Gordon along with those of Mr Fordham QC, for the Interveners, are essentially correct. These are my reasons.
First, there is no issue but that s19, and s20, need to be construed in their context in this part of the Electricity Act. This wider context is important, acknowledging the statutory objective of protecting the consumer. What is striking though, as Mr Gordon pointed out, is that the provisions settling the terms upon which the customer can require the distributor to provide connections, are expressed in quite general language; s16A(5). There is no scheduled list of required standard terms. Instead, there is an obligation on the distributor to set out the terms, not on which an offer is made as if it were a contract, but specifying the payment, security and other terms which "that person will be required to accept." The payment required must be stated. Any security required must be stated. Those other terms must be stated. And although s16A looks forward to s21, by s21 those are "any terms which it is reasonable in all the circumstances for that person to be required to accept". If reasonable but rejected by the customer, the connection works will not proceed. The reasonableness of the terms can be determined by GEMA under s23 if challenged by the customer. The language is broad and permissive rather than restrictive or prohibitory of what the distributor can reasonably require. I did not find what Lord McIntosh said about the deliberate width of s21(b) in its passage through Parliament to be of any assistance. He notes what is obvious about the word, and points to the role of s23. What he said is correct but not of value to the issue.
Although the context is a regulated process, it is not one in which the regime is tightly prescribed, quite the contrary. It is one in which the Regulator has the power to control such standard terms and conditions, through approval of the Charging Methodology and through specific dispute resolution in advance, with the interests of the consumer in mind.
Second, with that context in mind, I turn to the specific language of s19, which, as Mr Gordon pointed out, is the provision being construed. S16A(5)(b) looks forward to s19. It requires the distributor's offer notice to specify the payment which will be required. S19 is the statutory provision entitling the distributor to require the making of the payment. As Mr Gordon says, s19 contains no express provision prohibiting payment being required in advance, whether in full or in stages and that in my judgment is an important point. It is difficult to extract such a broad prohibition from the language of s19.
GEMA contends however that s19 prohibits advance payment being required, and indeed, GEMA has to contend that s19 forbids payment in advance being agreed with the customer, however reasonable a term it might be, and however the price might be adjusted to allow for accelerated receipt. If stage payments could be required under s19, and that was not GEMA's preferred contention, stage payments in advance of each stage rather than upon the completion of a stage would be equally forbidden. So GEMA's contention is that the language of the provision, which it says contains the prohibition on advance payments, is broad enough to prohibit a quite common form of payment in construction contacts generally.
I can agree with Mr Herberg that the more ordinary reading of s19(1) on its own at first blush is that it relates to payment of costs after they have been incurred; "reasonably incurred" suggests "have been" incurred. That, however, is not the only reasonable analysis of that phrase; "will be" or "are likely to be" or "may be" are permissible alternative analytical interpolations into it. None of the other words in s19(1) are of much assistance: "to be defrayed" is to my mind neutral as to when in relation to the incurring of the costs they are to be paid. There is no argument but that the timing of the receipt of the money is relevant to the amount required, as the analysis of the interest payment in the DL shows, whether it represents the advantage of accelerated receipt to the distributor or the disadvantage to him of bearing the costs of financing. That would be part of the question of whether expenses were "reasonably incurred".
More problematic for Mr Herberg was s19(4). This unequivocally allows for the inclusion in the concept of "expenses reasonably incurred" reasonable expenses yet to be incurred, but which are "likely to be" so incurred. But to my mind this is not so clear as to determine the issue in Mr Gordon's favour. First, it can be said that if recovery of future costs is to be allowed for, it has been done expressly. And the fact that it has been fitted into the language of s19(1) expressly suggests that it could not otherwise have gone in to s19(1). Second, it may just have been a convenient way of providing for one specific item which inevitably arises: the capitalised value of future costs, which became due for payment as a sum in respect of the connection once it had been made, to meet the obligation which providing the connection imposed on the distributor for its maintenance; s16 (4) (a) and (b).
S16A(4B), in relation to Regulations for covering connection offer expenses, refers to such expenses as "have been reasonably incurred". Thus, says Mr Gordon, the Act uses such language when it intends that result. But I am reluctant to give that much weight, though s16A(4A) and (4B) have some parallel with the structure of s19 dealing with connection expenses themselves, helpful to Mr Gordon, and s16A(4A) by itself could have permitted Regulations to provide for advance payment.
There was a not very illuminating debate about the scope or reach of "extent" and "reasonable in all the circumstances". The word "extent" can bear many different meanings and shades of meaning, and is broad enough in abstract to cover scope or width of application, but context gives it greater precision. Here, the "extent" to which reasonably incurred expenses are to be defrayed is more likely to cover amount alone, than to cover when the money should be paid. However, the words qualifying "such extent", i.e. "as is reasonable in all the circumstances", at least permit account to be taken of when the money is paid, or is to be paid, in judging whether defraying that amount is reasonable, even if it is not taken into account in judging whether the expenses were or are to be "reasonably incurred." Indeed, it is difficult in the end to see that this aspect of the cost of connection is meant to fall outside both aspects of "reasonableness" in s19(1). Mr Herberg is right, though, that an expense "reasonably incurred" may not be an expense which in its full extent is reasonably to be defrayed by the customer, for example where reinforcement works required as part of the connection also provide significant material benefits to other consumers, or if there were a significant delay in the connection being made.
Assistance was sought by Mr Herberg from the heading to the section: "Power to recover expenditure". "Recover" suggested, I agree, that the expenditure had taken place. The Oxford English Dictionary, over several pages, revealed that the flexibilities of the English language tended somewhat in his favour, but without being conclusive. "Recover" has also been used to mean "obtaining…judgment" making a sum or debt payable; Morris v Duncan [1899] 1 QB 4 , to which Mr Gordon referred me. More importantly: was this heading of any weight? Bennion on Statutory Interpretation 6 th ed at Section 256 said that the heading to a section may be considered, but account had to be taken of the fact "that its function is merely to serve as a brief, and therefore possibly inaccurate, guide to the content of the section." So the heading helps Mr Herberg, but not much. The limitations of reliance on headings were illustrated by the use of "recovery of charges" in the heading to the repealed s18, which applied to pre-payment meters.
The 2015 Regulations by contrast offer Mr Gordon some assistance. They continue the distinction in s16A (5) between payment and security, but the former includes (i) payment on acceptance of the quotation and (ii) payment "prior to completion of the works or a phase of the works (as applicable)". These Regulations, although approved by the Secretary of State, are made by GEMA. Mr Herberg submitted that there was no necessary inconsistency between them and his interpretation of s19: the Regulations were not made under s19, and do not refer to it, although they refer to s20. They were consumer protection provisions, giving quick remedies to consumers for defaults by distributors; they could have been making provision for "second comers" within s19(2), whose connections built upon work for which others had already paid; they could have been providing for later requests for connection offer expenses, which were not demanded as soon as they could have been; they may have made an erroneous assumption about s19 and cannot be of much weight in its interpretation.
I disagree with most of those points. I regard it as highly unlikely that these Regulations only made provision for such comparatively unusual circumstances as Mr Herberg identified, but not for the usual state of affairs which would have warranted penalising the distributor or compensating the consumer in Regulations made by the Regulator. Regulation 8 provides for a penalty or compensatory payment if the distributor, having received "payment of any amount due to be paid in accordance the accepted quotation", fails (i) to contact the customer to agree the "schedule of dates for the completion of the works" or (ii) "to complete the works (or a phase of the works)". They are clearly inconsistent with Mr Herberg's interpretation of s19 because they envisage both payment in advance of completion, and work in phases. They provide for that other than by way of security because, although the same circumstances can give rise to compensatory payment by the distributor where it has received security rather than payment in advance, security arises under s20 and is dealt with separately. They were made by GEMA, and to my mind show that GEMA, as is not disputed, took a different view in 2010 and 2015 from that which it now takes. But that does not mean that it is now wrong, and was then right. It simply means that it has changed his mind, and may still be right or wrong.
I do not regard the Regulations as a weighty factor at all, authority apart. But authority does not change that view. The relevant principles are set out in Hanlon v Law Society [1981] AC 124 per Lord Lowry at p194. Most of the circumstances in which Regulations can be used as an interpretative aid do not apply, and he warned that to allow Regulations to decide the meaning of an Act would be to substitute the interpretation of the rule-maker for that of the judge, and to disregard the possibility that the Regulations were misconceived or ultra vires. Nonetheless, Regulations which were consistent with a certain interpretation of an Act tended to confirm that interpretation; see also British Amusement Catering Trades Association v Westminster City Council [1989] 1 AC 147, at 158D, Lord Griffiths.
As Lord Browne-Wilkinson said in Deposit Protection Board v Dalia [1994] 2 AC 367 at 397, it is "only" roughly contemporaneous Regulations which can be an aid to construction. Bennion on Statutory Interpretation 6 th ed at Section 233 said much the same with a somewhat different emphasis: "delegated legislation…may be taken into account as persuasive authority" on what an Act means, "especially" where it is roughly contemporaneous with the Act, but citing DPB v Dalia as supporting authority. Lord Goff in Pharmaceutical Society of Great Britain v Storkwain Ltd [1986] 1 WLR 903 at 909A does not lay down any principles or contradict those which had been established in Hanlon ; it is of no weight here, and is no more than an illustration of Lord Lowry's point that a statutory instrument may tend to confirm the interpretation of the Act with which they are consistent.
Here the Regulations are not contemporaneous with the Act, and can do no more than tend to confirm the interpretation of the Act with which they are consistent. But I cannot give them much weight. Such value as they might have, made by the Regulator as they were, in helping to show what the Act means, is rather undermined by the Regulator's considered decision in this case. Each is a view of the Regulator. Each tends to confirm different interpretations. Each points to what it thought at different times, without pointing me to which thought was right. Indeed, it may be that rather greater consideration was given to the issue in the DL than in drafting the Regulations. It is clear that GEMA has changed its mind. Lord Lowry's strong warning is very apposite. It is for me to construe what Parliament has enacted.
In the statutory context thus far considered, with the absence of a clear prohibition in s19 and in view of the logical consequence for commonplace staged payments of Mr Herberg's position, I would have found GEMA's decision to be wrong. The other indicators after analysis by both sides were together rather inconclusive.
Third, s20, which is critical to GEMA. Mr Herberg's case is quite straight forward. There is no purpose to s20 unless it provides for the circumstances in which advance payment can be taken: it is by way of security, and if so taken, interest is due. "Security" in s20 is a way of describing the purpose and effect of an advance payment. Taking security is to be encouraged, because it leads to interest being paid on the unused funds in the hands of the distributor. That is a provision which protects the customer. Otherwise, it simply becomes an option for the distributor as to whether it pays interest or not.
Mr Gordon's case is that neither by text nor by rationale does s20 carry the implicit prohibition on advance payments into s19, for which Mr Herberg argues. Advance payment might in one sense remain in the distributor's hands, but it was different in law and in practice from a security. The distributor could use the advance payment for whatever purpose it liked; it had no need to keep it separately from its own funds, and UKPN did not do so with advance payments it received. If the customer became insolvent, security could be regained by the administrator or liquidator, but a pre-payment could not be. The DL also noted, at [74], without reaching any particular view about it, UKPN's contention that an advance payment, but not security, was rewarded by the reservation of outstanding capacity to supply the connection when made.
Mr Gordon's submission, based on dictionary definitions and case law, is that the notion of "security" is something taken for the fulfilment of another obligation; as s20 itself says, it is "security for the payment...under section 19". It is not the payment itself. Jowitt's Dictionary of English Law treats "security" as something "in addition to the original liability", something which makes the "enforcement of a right more secure". Lord Jauncey in Armour v Thyssen Edelstahlwerke AG [1991] 2 AC 339 at 354F-G, said, in the context of a stock of steel as security, that "a right in security is a right over property given by a debtor to a creditor whereby the latter in the event of the debtor's failure, acquires priority over the property against the general body of creditors of the debtor…which right must be retransferred to him upon payment of the debt."
These definitions or descriptions lose some of their force where the sum at issue is money paid to the creditor who can utilise it as payment for the obligation to secure which it was provided. And, of course, the word in a particular statutory provision takes meaning from that context and purpose, as Mr Herberg pointed out by reference to Stroud's Judicial Dictionary 9 th ed. In Singer v Williams [1921] 1 AC 41 , at p49, the normal meaning of "security" was "a right to resort to some fund…for payment". If part of the security were appropriated to meet the sums due, rather than some additional payment, that did not alter its preceding characteristic as security. Mr Herberg disputed that a security needed to be kept separately, but resolving that issue is a sidetrack too far.
I did not find these definitions of great assistance but their tenor supports Mr Gordon. Payment for works to be done is not "security for payment" that works be done, on a simple reading of s20(1).
Mr Gordon referred me to the repealed provisions of s20(4), to reinforce his point. S20(4) assisted him, he submitted, because in stating that no security could be taken where a pre-payment meter was in use, it distinguished between advance payment and security. There would have been no need to so provide if an advance payment was itself security, because security would have been taken. I see the force in that, and its repeal did not alter the meaning of the rest of s20 from that moment. But a specific provision dealing with or clarifying the particular circumstances where a pre-payment meter is installed, to prevent heavy-handed action being taken by the distributor, does not offer much guide to the general intent of the section. I did not find what Lord Sanderson said in Parliament in Committee on the Electricity Bill about this to be of any assistance; he was not addressing s19 but the reasonableness of requiring security with a pre-payment meter.
As Mr Herberg's strongest point was that, if s20 did not apply to advance payment, then it was rendered nugatory or would be very much undermined, UKPN responded with evidence of circumstances in which it could or did have a role.
Mr Baker, the Company Solicitor of UK Power Networks Holdings Limited and of its wholly-owned subsidiaries (which include the Claimant, UKPN), identified the problem of the customer who requires the connection but may lack title to all the land required for the substation and lines; it is only when the customer has accepted the connection offer that UKPN instructs a solicitor to obtain the necessary land rights. These rights should be obtained before work begins. But investigation could take a long time, as could completing any subsequent agreement with the landowner, when ascertained. If a customer wanted to proceed in the interim, UKPN as distributor could seek an indemnity from the customer. But that had been found to be unsatisfactory because, once the connection had been made, customers had no real incentive to resolve title issues, although Mr Baker could recall no case in which the indemnity, though taken, was actually called on. The approach now adopted by all three distributor companies within the holding company, and which one of them had already been using where the customer could not show good title to the necessary land, was to take a deposit by way of security under a deposit agreement to cover the costs of removing the sub-station or lines. If agreement with the landowner is reached, the deposit is refunded; otherwise it is retained against the risk that the distributor may have to remove the station or lines. Some deposits have been returned, with interest paid; a schedule was provided. But Mr Baker could not remember a case where the security had been called on.
Mr Adolphus of UKPN gave evidence of a licence under the 1989 Act which expressly permitted the distributor to accept a portion of the connection charges being recovered by way of system charges over time, with the customer giving a guarantee by way of security that that sum would be so paid. It may well be right that GEMA would not permit such a licence provision now, but that is not greatly to the point.
I consider the purpose of s20 to be reasonably straightforward. Sections 19 and 20 are the generally expressed means whereby the distributor can get paid. The ability to take security is not present in s19. S20 makes it clear that the distributor, acting under statutory powers, has power to take security. It adds to or clarifies the range of its options. Security does not have to take the form of a cash deposit. But provision is made for interest where it does. It does not have to be greatly used, so long as it has a use. The example given by Mr Baker cannot just be shrugged off as hypothetical or unrealistic; it shows that security can be used to deal with an issue experienced in practice. It illustrates the potential for security to be taken at the outset to cover events which may not arise until after a connection has been made. Mr Herberg saw it as being used also to cover the risk that the customer would default through insolvency on its payments under s19.
S20 clearly permits security to be taken for expenses that will have been incurred. On Mr Baker's example, which was not said by Mr Herberg to be an unlawful practice under s20, security was taken to cover a contingency which might well not occur but which could occur, and could be expensive if it did. There was no suggestion that the removal costs would be unreasonably incurred or that it would be unreasonable for the customer to defray them. The security was thus taken in respect of a reasonable expense which may be incurred, reasonably to be defrayed by the customer. This shows that the purpose of s20 is to enable security generally to be taken for contingencies in the connection offer which, by definition, may not come about, and for security to be realised by way of payment if they do. If the security is a cash deposit in the distributor's hands, interest is payable. Because, by definition, the contingent expense may never be incurred, it would be unreasonable to require payment in advance in respect of it. If a cash deposit is taken to cover it, interest is payable, precisely because it is not an advance payment, with the advantage that gives to the distributor being taken into account in the price. Whether taking security, and in what form, would be reasonable is another issue. The s19 debate, as to whether it could only be realised when the connection was made, or when the expense had been incurred, or upon the contingency arising but before the contingency works were actually begun, is not resolved by that analysis, but it does show to my mind that GEMA is wrong that s20 would be voided of purpose if UKPN were right.
Mr Adolphus' example may not now arise, but I see no reason why Parliament should not have considered that a mixture of advance payment and security for connection costs should not also have been accepted. The payment of the capitalised value of future maintenance costs can be required under s19(4), but I see no reason why security could not be taken for instalment payments instead. S20 to my mind gives both sides flexibility in how risk and payment for s19 expenses are covered, controllable by GEMA if unreasonably used.
Fourth, and drawing the threads together, GEMA's approach is at odds with the structure of the group of provisions which gives the distributor very broad rein as to its requirements in meeting the customer's requirements, and still protects the customer through regulatory control of what is reasonable under s23 and approval of the Charging Methodology.
If the very broad provisions of ss16A, 19, 20, 21b, and 23 were intended to contain, in contrast to their otherwise generally expressed provisions, one specific provision dealing with one aspect of the terms of the statutory arrangements between distributor and customer over payment, and that as specific as a prohibition on all advance payments unless taken by way of a security upon which interest was paid, I would have expected that to have been spelt out expressly, and in the language of advance payment. I would not have expected Parliament to address it through the word "security", a not immediately obvious choice for the task in hand, especially as advance payment and advance staged payments are common enough. I would not have expected it to be left for inference, let alone for inference from the language of a section other than the one said to contain the words of prohibition, which scarcely permit the inference at all.
GEMA's approach is also at odds with a flexible approach to how payment is made. S19, on GEMA's case, must be read as prohibiting stage payments whether in advance or in arrears of the stage. Mr Herberg accepted that GEMA's primary position was that, because the distributor could not require "any expenses reasonably incurred in providing [the line or plant] to be defrayed" before the stage of connection, it prohibited stage payments, whether before or after completion of the stage. He sought to avoid the problems this would create (a) by saying that an advance stage payment could be permitted through deposit by way of security under s20, but in my view that is not apt for stage payments in arrears, and (b) that stage payments after completion of the stage was a permissible though not GEMA's preferred interpretation of s19, reading in words of phasing such as may be found in the Regulations.
This is not an issue which its DL considered in reaching its view of the proper construction of s19, and the outcome of GEMA's construction seems distinctly odd. The simple language of ss19 and 20 is being worked quite hard to solve problems which GEMA's preferred interpretation created for a commonplace of construction works in general, and connection works in particular. I was not persuaded that Parliament's language was intended to produce such a convoluted way of dealing with staged works and payment, whether on GEMA's preferred interpretation, or on its alternative interpretation watered down to reduce the problems created by its preferred interpretation.
What is clear, and the DL demonstrates it, is that there is a relationship between price and time of payment of the costs; this relates to financing costs, cash flow advantages or disadvantages, inflation risk, and price fluctuations in plant, materials or even wages. The allocation of costs and risk is not simply and exclusively catered for by interest on advance payments, so issues will still arise as to whether the price and terms are reasonable in those respects, notwithstanding the payment of interest. It was not said that the payment of interest removed those other topics from the consideration of terms and price. Indeed, payment of interest will also affect how the works are priced, as Mr Herberg accepted; the question of whether they are still priced reasonably, with interest adding to the cost of financing the works, will still have to be addressed, by the distributor initially and perhaps then GEMA under s23. This is not, as Mr Herberg put it, using s19 to provide an exemption from s20 for interest payment. Rather it is using s19 in a way which enables effect to be given to GEMA's concern that, without advance payment, the costs of financing a connection will be borne by other consumers, unless recovered from the person seeking connection. S19 permits the relationship between timing of payment and cost of financing, and other advantages and disadvantages to be resolved in one basket rather than with what is only one element in the equation being separately resolved.
S20 does not therefore provide a simple solution to a clear problem: the distributor has the advantage of money up front and it is unfair if it does not therefore pay interest on it. Rather, that approach would instead simply add to the complexity of the issues of pricing the cost of borrowing and the advantages of having money in advance. I do not bring into account the way in which the distributor may legitimately provide a reservation of outstanding capacity only on advance payment, but in principle I see no reason why the distributor should not obtain advance payment, pay no interest on it, but account for the advantage he receives in the price or other benefit to the customer. I therefore can see no potential for regulatory benefit or for the achievement of the statutory objective in GEMA's approach.
I do not accept that UKPN's argument removes the purpose of s20. It seems to me that there is plenty of scope for its beneficial operation, including cash deposits to cover contingent expenses for which advance payment would not be appropriate, but which, if the contingency occurred, become expenses which will be or will have been incurred and will be payable, and in respect of which it would be surprising if security could not be taken, for which s20 thus makes provision.
I appreciate that on certain aspects of my reasoning GEMA has expertise and a role, but as the argument wore on, I was not persuaded that it had really thought through its position in relation to advance staged payments or indeed in relation to contingencies. I am less troubled as well because it appears to be only recently that GEMA has adopted the view that it put forward in the DL, accepting till then that the interpretation which in my judgment is correct, was indeed correct, and worked conformably with the statutory objective.
Overall conclusion
For those reasons, I do not consider that the structure of the Act and language of the sections supports GEMA, and its decision. I did not find much assistance either way from the close textual analysis of the two sections. What determined the issue in my judgment is the simple structure of the broadly expressed provisions, coupled with the unnecessary rigidity which GEMA's approach would introduce, all, it seemed to me, to no clear advantage to the consumer. It could not have been Parliament's intention, with the language it used, to achieve such a result.
GEMA's decision is quashed. The Claimant must succeed against the complaint by Willmott Dixon.