Albion Water Ltd, R (on the application of) v Water Services Regulation Authority [2012] EWHC 2259 (Admin)

[2012] EWHC 2259 (Admin)Case No CO/1037/2012
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
ADMINISTRATIVE COURT
Venue Royal Courts of Justice, Strand, London, WC2A 2LLDate 16/08/2012
Before
MR JUSTICE EDWARDS-STUART
Between
THE QUEENClaimantWATER SERVICES REGULATION AUTHORITYDefendantDWR CYMRU CYFYNGEDIGInterested Party
Mr Thomas Sharpe Q.C, Mr Matthew Cook & Mr Mehdi Baiou (instructed by Shepherd & Wedderburn Solicitors) for ClaimantMs Kassie Smith (instructed by Water Services Regulation Authority (Ofwat) Legal Department) for DefendantMr Meredith Pickford (instructed by Hogan Lovells International LLP) for Interested PartyHearing Hearing dates: 25 & 26 July 2012
Judgment

Introduction

[1]This is a renewed application for permission to apply for judicial review following refusal of permission by Blair J on 22 March 2012. The claim concerns the arrangements by which the Claimant ("Albion") purchases non-potable water (and some potable water) from Dŵr Cymru Cyfyngedig (“Welsh Water”) for onward supply to UPM Shotton Paper Mill (“Shotton”). Acting under section 40A of the Water Industry Act 1991 (“the Act”), the Defendant Authority (“Ofwat”) made a decision dated 31 October 2011 determining the terms and conditions on which Albion purchased the water from Welsh Water (“the Determination”). The Determination is the subject of this application.[2]This is a dispute with a long history. Shotton is a very substantial paper mill which makes newsprint. It uses about 6,600 Ml (mega litres) of non-potable water every year. To put this figure in context, it is the equivalent of the annual consumption of about 35-40,000 domestic households. There are about 20 statutory water undertakers in England and Wales, of which Welsh Water is one. In effect, they have a monopoly unless another company is permitted, by way of an "inset" appointment, to interpose itself between one of the statutory undertakers and an end user who consumes in excess of 50 Ml of water per annum.[3]At the risk of considerable oversimplification, I must explain briefly how this works - at least, in the context of this case. In most cases where there is an inset appointment the inset company will only be able to supply water to the end user by buying it from the local statutory water undertaker. This will usually be an entirely paper transaction, because the water will come from the same source, be carried in the same pipelines, be processed at the same treatment plant and be delivered to the end user in exactly the same way as it was before the appointment. However, the statutory water undertaker is now supplying the water on a wholesale basis to the inset company for which it will be expected to charge a wholesale price that one would expect to be lower than its prevailing retail price. The inset company, having procured the supply of water to the end user, then provides appropriate retail services. However, if it cannot do this at a price to the end user that is lower than the price formerly charged by the statutory water undertaker, the whole exercise may be pointless. The fact that companies may be prepared to apply for inset appointments provides an element of competition in the water industry although, as the evidence in this case shows, there have been relatively few such inset appointments since the privatisation of the water industry some 20 years ago.[4]If the inset company and the local statutory water undertaker cannot agree a price for the water, either party can apply to Ofwat for a determination to vary the terms of the agreement for the supply of the water. In this situation, Ofwat effectively makes a contract for the parties. That is what eventually happened in this case by the Determination. Albion is not happy with the Determination and claims that it was one that no reasonable regulator in the position of Ofwat could have made or that, in reaching its conclusions, it failed to take into account matters that it should have considered, failed to take proper steps to ascertain the relevant facts and gave inadequate reasons for its conclusions on some points. For the purposes of this introduction, this brief summary of Albion's complaints will suffice. It is Albion's challenge to the Determination that gives rise to this application for permission to apply for judicial review.

The background

[5]The brief narrative that follows is taken partly from a witness statement prepared by Dr Jeremy Bryan, Albion's Executive Chairman, and partly from the judgments of the Competition Appeal Tribunal ("the Tribunal"). Whilst Dr Bryan’s account may be viewed by Ofwat and Welsh Water as somewhat slanted, it provides a convenient summary of the history of the dealings between the parties. I should emphasise that I use it at this point simply for the purpose of exposition only, not as a basis for any of the conclusions reached in this judgment.[6]In 1996, following extensive discussions with Shotton, Albion made an application to replace Welsh Water as the supplier to Shotton under the inset regime. The application procedure took some time, but in 1999 Ofwat agreed to Albion's appointment and Albion then took over responsibility for the supply of water to Shotton. However, Albion and Welsh Water could not agree on a price for the supply and so Ofwat was invited to determine one, which it did on a "minded to" basis: in other words, it did not make a formal determination but indicated the price that it would be “minded to determine” if formally required to do so. This price was 26 p/m 3 (ie. 26 pence per cubic metre). It is said by Albion that, following this decision, Welsh Water offered to supply Shotton with non-potable water at exactly the same price. In spite of this, Albion agreed to go ahead for the time being - but charging Shotton exactly the same price that it was paying to Welsh Water. Its hope was that once it had its foot in the door, it would be able to negotiate from a stronger position.[7]If this was Albion's expectation, then it seems that it was not realised. Albion says that it asked Ofwat to reconsider the bulk supply price, but Ofwat declined. It then approached United Utilities, the water undertaker who extracted the water in question from the River Dee and sold it to Welsh Water, to ask if it would be prepared to sell the water direct to Albion with a view to Albion negotiating with Welsh Water a price for the partial treatment and transportation of the water from United Utilities’ pumping station at Heronbridge to Shotton.[8]On 20 February 2001 Welsh Water indicated its proposed price for this transportation and partial treatment (what is known as "common carriage"), which was 23.2 p/m 3. Since Albion would not have been able to purchase the water from United Utilities for less than 3 p/m 3 (the price apparently paid by Welsh Water) and was in fact quoted a price by United Utilities of 9 p/m 3, this left it facing an overall acquisition price in excess of 26 p/m 3, which was uneconomic. It is perhaps worth pointing out that a 1 p/m 3 variation in the price translates into an additional annual cost to Shotton of about £65,000.[9]On 8 March 2001, Albion complained to Ofwat that in fixing its price at this level Welsh Water had set a price that was excessive and gave rise to a "margin squeeze" in breach of the prohibition imposed by the Competition Act 1998. It is unnecessary to go into any detail but, to cut a long story short, it seems that in March 2002 Ofwat stated that it did not intend to make a decision. It was then invited by Albion to reconsider that decision. The process dragged on and, because Ofwat had not taken a decision in response to Albion's complaint, Albion instituted further proceedings. It seems that this prompted Ofwat to issue a decision, which it did on 26 May 2004. Albion was not satisfied and so appealed to the Tribunal.[10]The Tribunal gave an interim judgment on 22 December 2005. The final judgment was given on 6 October 2006. The Tribunal found that Ofwat's conclusions that Welsh Water's price was not excessive and that there had been no "margin squeeze" could not be supported. The Tribunal noted that the potential elimination of the only new undertaker to enter the water industry since 1989, namely Albion, was a matter which it viewed with serious concern. The Tribunal subsequently issued a supplementary judgment on 18 December 2006 dealing with certain issues of substance and relief that remained to be decided following the principal judgment. In that judgment the Tribunal decided that Welsh Water had in fact abused its dominant position by imposing a margin squeeze.[11]I should explain at this point that in the course of these proceedings the Tribunal directed Ofwat to carry out an analysis of Welsh Water’s local accounting costs in relation to treatment and distribution. This exercise resulted in a report to the Tribunal (which is not dated, but was submitted in about mid-June 2007) which has been referred to subsequently as “the Referred Work”. Some of the figures taken from it (for 2000/01) were subsequently updated to 2008/09 values for the purposes of the Determination.[12]In the meantime there had been a further decision of the Tribunal on 8 January 2007 in relation to costs. Welsh Water appealed the substantive judgment, having been given permission to appeal by the Court of Appeal on two grounds: the correct legal test for finding a margin squeeze and the jurisdiction of the Tribunal to make a finding in relation to dominant position. The appeal was unsuccessful.[13]On 7 November 2008 the Tribunal issued a further judgment on the question of whether the common carriage charge proposed by Welsh Water was an unfair price. It concluded that the price was unfair. The Tribunal, whose chairman had by this time changed, noted in the introduction to its judgment that it was far longer than it would have wished and that, as a specialist tribunal, it would have liked to have been able to state the facts in a few paragraphs and its reasoning in not many more. It ran to 276 paragraphs.[14]There was then a further hearing on 13 February 2009 in relation to questions of remedy and costs. The judgment following that hearing was handed down on 9 April 2009.[15]On 8 June 2009 Welsh Water applied to Ofwat for a formal determination of the terms and conditions of the bulk supply agreement with Albion for the supply of non-potable water. Ofwat issued an initial determination in February 2010, which was followed by the Determination in October 2011. Now we have these proceedings.[16]So this has been a long war.

This application

[17]As I have already mentioned, on 22 March 2012 Blair J refused permission after considering the application on paper. He had before him, so far as I can tell, three ring binders containing the documents supporting the application, a witness statement of Dr Bryan (running to 210 paragraphs and incorporating a ring binder’s worth of exhibits), a witness statement from Mr Davis, Welsh Water’s Director of Planning and Regulation, Albion's Grounds (150 paragraphs) and Ofwat's summary grounds (38 paragraphs together with various attachments). I do not know how long he took to reach his decision, but I would be very surprised if it was less than the best part of a day.[18]Blair J indicated, when refusing permission, that in the event of a renewed application the parties should agree the time estimate for the hearing, together with an estimate of the required reading time. He thought that a hearing of at least two days would be required. He considered that a "rolled up" hearing would not be appropriate because of the factual complications.[19]I had most of a day to read the papers, but it was still barely enough. When opening the application, Mr Thomas Sharpe QC, who appeared for Albion, together with Mr Matthew Cook and Mr Mehdi Baiou, was inclined to be a little dismissive of Blair J's estimate of two days. He and his opponents anticipated, he told me, that they would be able to deal with it in a single day. Perhaps he did not know his judge. In the event, he completed his reply at about 4:30 pm on the second day.[20]I make these points because in his skeleton argument Mr Meredith Pickford, who appeared for Welsh Water, said this:
“Dŵr Cymru is content with the pre-reading estimate of 4 hours but contended at the time of listing, and continues to contend, that for mere renewal of permission to apply for judicial review Albion’s time estimate of up to 2 days for the hearing is excessive. As Auld LJ stated in R (Mount Cook) v Westminster City Council [2003] EWCA Civ 1346, [2004] 2 P&CR 22 at [73]: “… judges before whom contested permission applications are listed, and in their conduct of them, should discourage long hearings and/or filing by both parties of voluminous documentary evidence for consideration at them. In short, they should not allow the court to be sucked into lengthy and fully argued oral hearings that transform the process from an inquiry into arguability into that of a rehearsal for, or effectively, an expedited and full hearing of the substantive claim.” “… judges before whom contested permission applications are listed, and in their conduct of them, should discourage long hearings and/or filing by both parties of voluminous documentary evidence for consideration at them. In short, they should not allow the court to be sucked into lengthy and fully argued oral hearings that transform the process from an inquiry into arguability into that of a rehearsal for, or effectively, an expedited and full hearing of the substantive claim.”
[21]Whilst I would not like to be thought to be disagreeing in any way with these observations, the fact is that Blair J was faced with the documentation that I have already listed and was in no position to do anything about it. I found myself in much the same position. This is one of those applications where it is very difficult for the court to form a view about the issues raised without first having a good grasp of the underlying facts. As Mr Sharpe put it in his skeleton argument: “. . . there is an outer crust of facts which must be penetrated before the issues appropriate for judicial review can be revealed. This outer crust is bigger in cases reviewing the decisions of economic regulators but once it has been penetrated the Court then finds itself in familiar territory." I am not sure that I endorse Mr Sharpe's comment about the familiarity of the territory, but otherwise the point is a fair one.[22]Whilst with hindsight, some parts of the argument could perhaps have been more condensed and the interruptions from the bench reduced, the fact remains that this was a complicated application which had to be presented fully so that the court could understand the real issues. Without a considerable amount of pre-reading, in an application of this sort the court is not in a position to appreciate the questions that it needs to ask and the areas of the case that it needs to probe. As it turned out, Blair J's estimate of two days was spot on.[23]At all stages I have reminded myself that this is a permission application, not the substantive hearing. Arguability is the test (assuming, of course, that the issues are ones that would merit a full hearing - which is clearly the case here).

The brief facts relating to the supply

[24]United Utilities abstracts water from the River Dee at its Heronbridge pumping station, as I have already mentioned. Water leaves the pumping station through two (or more) pipelines. One leads to Welsh Water’s Ashgrove treatment plant, where the non-potable water is partially treated. It then flows under gravity down a non-potable main towards what used to be the Sealand water treatment plant. That treatment plant has long been out of use and the water now has only two destinations: one is Shotton and the other is Tata steel (formerly Corus).[25]At a point very shortly after the water leaves the Heronbridge pumping station it passes through a meter before entering the pipeline to Ashgrove and, thereafter, Shotton. Downstream of that meter the water belongs to Welsh Water; upstream it belongs to United Utilities.[26]Once the water has passed through the Welsh Water meter it can go to no ultimate destination other than Shotton and Tata. It is not on any network from which other consumers are or could be supplied. Shortly before Shotton the pipeline divides, one branch leading to Tata the other leading to Shotton. There is a meter on each branch, after which the water belongs to either Albion/Shotton or to Tata.[27]Welsh Water buys the Heronbridge water from United Utilities under the terms of an agreement that was signed in 1994, although it may have been performed for some years before that, by which Welsh Water pays a price for the water fixed by a formula plus a return on the assets employed. One of Albion’s complaints is that it has never seen any documents verifying the sums actually paid by Welsh Water under the agreement.[28]A question of fact which may be relevant is whether the United Utilities Integrated Supply Zone (which is the zone of which the Heronbridge abstraction point is a part) has an overall water shortage and whether or not any such shortage is anticipated over the next decade or so. I will explain the relevance of this later in this judgment, but for present purposes the point is that the water abstracted at Heronbridge would have no other potential use if it was not being taken by Shotton unless there was an overall water shortage in the area. Mr Sharpe submits that if it had no other use, it would have no value.

The grounds for the application

[29]These are as follows:(1) Ofwat failed to gather and use relevant evidence. Five areas are identified: (i) operating expenditure; (ii) water resource cost; (iii) depreciation and capital employed: (iv) infrastructure renewal charge; and (v) indexation.(2) Ofwat imposed an excessive water resource price.(3) Ofwat imposed a depreciation charge, although the assets in question had been fully or mainly depreciated.(4) Ofwat failed to gather any information to support its infrastructure renewal charge.(5) Ofwat imposed a return on capital which substantially exceeded the actual cost of capital employed by Welsh Water. There are two additional related grounds: 5A, which is that Ofwat calculated capital employed on an inflated basis, and 5B, which is that Ofwat used a cost of capital which substantially exceeded Welsh Water's actual cost of capital.(6) Ofwat imposed indexation by reference to RPI, without any evidence or reasoning.[30]I will deal with each of these later in this judgment, but first I must turn to the law. The statutory framework and relevant authorities The statutory framework

The statutory framework and relevant authorities

[31]The Determination was made under section 40A of the Act, which gives Ofwat the power to vary the terms and conditions of a bulk supply agreement on the application of any party to that agreement. In this case Welsh Water was the party that applied to Ofwat. Section 40A provides as follows:
“(1) This section applies, where, on the application of any party to a bulk supply agreement— (a) it appears to the Authority that it is necessary or expedient for the purpose of securing the efficient use of water resources, or the efficient supply of water, to vary the agreement . . ., and (b) the Authority is satisfied that that cannot be achieved by agreement to the parties to the agreement". (2) The Director may by order— (a) vary the agreement by— (i) varying the period for which the supply of water is to be given; or (ii) varying any of the terms or conditions on which that supply is to be given; or (b) terminate the agreement. […] . (4) Where an order is made under this section the agreement concerned shall have effect subject to the provision made by the order or (as the case may be) shall cease to have effect. (5) An order under this section may require the payment of compensation by any party to the agreement to any other party. (6) The obligations of a water undertaker under subsection (5) above shall be enforceable under section 18 above by the Director. (7) In exercising his functions under this section, the Director shall have regard to the expenses incurred by the supplier in complying with its obligations under the bulk supply agreement and to the desirability of— (a) facilitating effective competition within the water supply industry; (b) the supplier's recovering the expenses of complying with its obligations by virtue of this section and securing a reasonable return on its capital; (c) the supplier's being able to meet its existing obligations, and likely future obligations, to supply water without having to incur unreasonable expenditure in carrying out works; (d) not putting at risk the ability of the supplier to meet its existing obligations, or likely future obligations, to supply water.” (a) it appears to the Authority that it is necessary or expedient for the purpose of securing the efficient use of water resources, or the efficient supply of water, to vary the agreement . . ., and (b) the Authority is satisfied that that cannot be achieved by agreement to the parties to the agreement". (a) vary the agreement by— (i) varying the period for which the supply of water is to be given; or (ii) varying any of the terms or conditions on which that supply is to be given; or (b) terminate the agreement. (a) facilitating effective competition within the water supply industry; (b) the supplier's recovering the expenses of complying with its obligations by virtue of this section and securing a reasonable return on its capital; (c) the supplier's being able to meet its existing obligations, and likely future obligations, to supply water without having to incur unreasonable expenditure in carrying out works; (d) not putting at risk the ability of the supplier to meet its existing obligations, or likely future obligations, to supply water.”
[32]There was an issue as to the extent to which the purposes of securing the efficient use of water resources or the efficient supply of water, referred to in subsection (1), were overarching considerations that governed the approach to the factors listed in subsection (7). Ofwat's position, supported by Welsh Water, was that they were. Mr Sharpe, by contrast, submitted that once the subsection (1) threshold had been crossed, the focus shifted to consideration of the factors set out in subsection (7). However, I did not understand him to go so far as to say that once over the threshold, the considerations in subsection (1) could be ignored altogether.[33]This is a straight question of statutory construction. In my view, the answer is not obvious and it raises an arguable issue. Whether or not that, of itself, is sufficient to determine any part of this application is another matter.

Albion’s submissions on the law

[34]Albion submitted that a public body has a basic duty to take reasonable steps to acquaint itself with that material which is relevant to its decision. It relied on the passage in Secretary of State for Education and Science v Tameside Metropolitan Borough Council [1977] AC 1014, where Lord Diplock described what is now referred to as the Tameside duty when he said, at 1065B: “Or, put more compendiously, the question for the court is, did the Secretary of State ask himself the right question and take reasonable steps to acquaint himself with the relevant information to enable him to answer it correctly?” (Albion’s emphasis)[35]Mr Sharpe referred to the description of the Tameside duty by Lord Woolf MR in R v Secretary of State for the Home Department, ex p Iyadurai [1998] Imm AR 470 at 475, in which he said that the Court should ask: “whether the Secretary of State has (i) taken adequate steps to inform himself of the position…(ii) properly considered the information which is available to him and (iii) come to an opinion which is consistent with that information, recognising that it is his responsibility to evaluate the material which is available to him.” (Albion’s emphasis) (Albion’s emphasis)[36]Mr Sharpe accepts that it is true that the level of enquiry required is primarily a matter for the decision-maker. Nevertheless, he submits, that discretion is still subject to the rationality test. In R (Khatun) v London Borough of Newham [2004] EWCA Civ 55, Laws LJ stated at [35] that: “35 In my judgment the CREEDNZ Inc case (via the decision in In re Findlay) does not only support the proposition that where a statute conferring discretionary power provides no lexicon of the matters to be treated as relevant by the decision-maker, then it is for the decision-maker and not the court to conclude what is relevant subject only to Wednesbury review. By extension it gives authority also for a different but closely related proposition, namely that it is for the decision-maker and not the court, subject again to Wednesbury review, to decide upon the manner and intensity of inquiry to be undertaken into any relevant factor accepted or demonstrated as such. This view is I think supported by the judgment of Schiemann J in R v Nottingham City Council, Ex p Costello (1989) 21 HLR 301 , to which Mr Luba referred us. That case concerned the degree of inquiry which an authority was obliged to undertake into issues of priority need and intentional homelessness. Schiemann J said, at p 309: "In my view the court should establish what material was before the authority and should only strike down a decision by the authority not to make further inquiries if no reasonable council possessed of that material could suppose that the inquiries they had made were sufficient." This approach is lent authoritative support by the decision of this court in R v Kensington and Chelsea Royal London Borough Council, Ex p Bayani (1990) 22 HLR 406 , which was concerned with the authority's duty of inquiry in a homelessness case. Neill LJ said, at p 415: "The court should not intervene merely because it considers that further inquiries would have been sensible or desirable. It should intervene only if no reasonable housing authority could have been satisfied on the basis of the inquiries made." (Albion’s emphasis) "In my view the court should establish what material was before the authority and should only strike down a decision by the authority not to make further inquiries if no reasonable council possessed of that material could suppose that the inquiries they had made were sufficient." "The court should not intervene merely because it considers that further inquiries would have been sensible or desirable. It should intervene only if no reasonable housing authority could have been satisfied on the basis of the inquiries made." (Albion’s emphasis)[37]In relation to the question of whether or not a decision was properly supported by evidence, Mr Sharpe referred me to Begum v Tower Hamlets London Borough Council [2003] UKHL 5 in which Lord Millet stated that “a decision may be quashed if it is based on a finding of fact or inference from the facts which is perverse or irrational; or there was no evidence to support it” (at [99]). He submitted that thisground is often characterised as an error of law. And he cited, as an example, Lord Clyde's statement in Reid v Secretary of State for Scotland [1999] 2 AC 512, in which he referred to the test as being whether the decision was “erroneous in respect of a legal deficiency, as for example, through the absence of evidence, or of sufficient evidence, to support it”.[38]Mr Sharpe submitted that in other cases, the courts have seen this as an aspect of natural justice. He cited, as an example, Mahon v Air New Zealand Ltd [1984] AC 808, in which Lord Diplock referred to this as a principle of “natural justice” when stating that an investigative decision-maker “must base his decision upon evidence that has some probative value”. He referred also to R v West London Coroner, ex p Gray [1988] QB 467, in which Watkins LJ said, at 479, that “the development of judicial review to its present state with its devotion to, amongst other things, natural justice, cannot possibly allow verdicts by juries at inquests to stand which are based upon no or wholly insufficient evidence.”.[39]Mr Sharpe reminded me also of the general rule that a public body should take into account all relevant considerations and no irrelevant ones, and a material failure to do so is a common ground for judicial review. In Re Duffy [2008] UKHL 4, at [53], Lord Carswell said that “the Secretary of state was bound to have regard to the proper factors, and not to have regard to any other improper factors, in reaching his decision”. Similarly, Lord Slynn said in R (Alconbury Developments Ltd) v Secretary of State for the environment Transport and the Regions[2003] 2 AC 295, at [50], that “if the Secretary of State…takes into account matters irrelevant to his decision or refuses or fails to take account of matters relevant to his decision…the court may set his decision aside.”.[40]Mr Sharpe submitted also that where the statute is silent as to relevant factors, it is clearly within that decision-maker’s discretion to decide what he considers to be relevant or irrelevant: see R (Khatun), per Laws LJ at [35] (supra).[41]Finally, in the context of whether a conclusion was unsustainable or a decision unreasonable, Mr Sharpe referred to Adan v Newham London Borough Council [2002] 1 WLR 2120, in which Brooke LJ said at [41] that “What is quite clear is that a court of supervisory jurisdiction does not, without more, have the power to substitute its own view of the primary facts for the view reasonably adopted by the body to whom the fact-finding power has been entrusted.”[42]Mr Sharpe also reminded me of the well-known observations of Lord Radcliffe in Edwards v Bairstow [1956] AC 14, where he said (at page 36):
“…it may be that the facts found are such that no person acting judicially and properly instructed as to the relevant law could have come to the determination under appeal. In those circumstances, too, the court must intervene. It has no option but to assume that there has been some misconception of the law and that, this has been responsible for the determination. So there, too, there has been error in point of law.”
[43]In other words, submitted Mr Sharpe, the courts can intervene if the decision-maker has reached a decision that cannot be justified on the basis of the material before it. He referred again to Begum and to the statement by Lord Millet at [99] that: “A decision may be quashed if it is based on a finding of fact or inference from the facts which is perverse or irrational; or there was no evidence to support it; or it was made by reference to irrelevant factors or without regard to relevant factors. It is not necessary to identify a specific error of law; if the decision cannot be supported the court will infer that the decision-making authority misunderstood or overlooked relevant evidence or misdirected itself in law. The court cannot substitute its own findings of fact for those of the decision-making authority if there was evidence to support them; and questions as to the weight to be given to a particular piece of evidence and the credibility of witnesses are for the decision-making authority and not the court. But these are the only significant limitations on the court's jurisdiction, and they are not very different from the limitations which practical considerations impose on an appellate court with full jurisdiction to entertain appeals on fact or law but which deals with them on the papers only and without hearing oral evidence.” (Albion's emphasis) (Albion's emphasis)

Ofwat's submissions on the law

[44]As to the approach for the Court on judicial review, Ms Kassie Smith, who appeared for Ofwat, submitted that the applicable principles are those set out by Simon J in R (Fraser) v National Institute for Health and Clinical Excellence [2009] EWHC 452 (Admin) 29, at [47]:
“i) When a decision is made by a public body in good faith, following a proper procedure and applying conscientious consideration, a claimant must show more than that a mistake has occurred. It must be shown that the decision was one that could not reasonably have been reached on the material or was otherwise irrational, see Lord Templeman in R v Independent Television Commission, ex.p TSW Broadcasting Ltd [1996] JR 185 , cited in the Western Riverside case at §52. ii) Facts which have been found by a body charged with making decisions based on their findings of fact are not readily susceptible to challenge. The principle was expressed by Lord Brightman in Puhlhofer v Hillingdon LBC [1984] AC 484 at 515E “Where the existence or non-existence of a fact is left to the judgment and discretion of a public body and that fact involves a broad spectrum ranging from the obvious to the debatable to the just conceivable, it is the duty of the court to leave the decision of that fact to the body to whom Parliament has entrusted the decision making power save in a case where it is obvious that the public body, consciously or unconsciously, are acting perversely.”
The principle of proper weight being attached to the decision-maker's conclusion is echoed in an observation of Lightman J in R v Director General of Telecommunications, ex p Cellcom[1999] ECC 314 at §26, referred to in the Rail Regulator case at §29, “The court must be astute to avoid the danger of substituting its views for the decision makers and of contradicting … a conscientious decision maker acting in good faith and with knowledge of the facts.” iii) There is an important distinction to be drawn between the question of whether something is a material consideration and the weight which should be given. The latter is a matter for the decision maker, subject to questions of Wednesbury irrationality; and, providing the decision-maker has taken into account, the fact that it has given it no weight is not a ground for review, see the observations of Lord Hoffman in the Tesco case at 780F-H and 784C and Laws LJ in Khatun at §34-35. iv) The Court should be wary of invitations to engage in detailed analysis of the phraseology used and drawing fine distinctions between different parts of what may be long and complex reasoning. This is to say little more than that a Court of Review is, in this context, concerned with rationality, rather forming its own view on part of the material available to the decision-maker.” “Where the existence or non-existence of a fact is left to the judgment and discretion of a public body and that fact involves a broad spectrum ranging from the obvious to the debatable to the just conceivable, it is the duty of the court to leave the decision of that fact to the body to whom Parliament has entrusted the decision making power save in a case where it is obvious that the public body, consciously or unconsciously, are acting perversely.” “The court must be astute to avoid the danger of substituting its views for the decision makers and of contradicting … a conscientious decision maker acting in good faith and with knowledge of the facts.”[45]Ms Smith characterised Albion’s claim as a challenge to the merits of the Determination. But, she submitted, judicial review does not permit a challenge “purely on the merits of the impugned decision”: seeT-Mobile (UK) Ltd and Telefonica O2 v Ofcom [2008] EWCA Civ 1373, CA, per Jacob LJ at [18] and [30].[46]Ms Smith referred me also to the judgment of Moses J (as he then was) in London and Continental Stations v The Rail Regulator [2003] EWHC 2607 (Admin), where he said, at paragraph 34: “In considering the various challenges advanced to the Regulator's directions I must, accordingly, bear in mind that he was reaching his conclusions in a field in which he was both expert and experienced. He was advised by experts. He gave ample opportunity to [the Claimant] to challenge his provisional conclusions. That opportunity was far greater than that which was afforded by the statute. Further, he was concerned with predictions for the future incapable of any exact measurement. All these factors demonstrate that what Simon Brown LJ described as "the constraining role of the courts" . . . is indeed modest."

Welsh Water’s submissions on the law

[47]Mr Meredith Pickford, who appeared for Welsh Water, adopted the submissions made by Ms Smith (subject to one point about the extent to which the price should be cost reflective). In particular, he relied on the whole of the relevant passage from the judgment of Lightman J in the Cellcom case, part of which has already been set out above, which was in the following terms, at [26]: “Where the Act has conferred the decision-making function on the Director, it is for him, and him alone, to consider the economic arguments, weigh the compelling considerations and arrive at a judgment. The applicants have no right of appeal; in these judicial review proceedings so long as he directs himself correctly in law, his decision may only be challenged on Wednesbury grounds. The court must be astute to avoid the danger of substituting its views for the decision maker and of contradicting (as in this case) a conscientious decision maker acting in good faith and with knowledge of all the facts." He reminded the court also of Lord Hoffmann's observation that judicial review is concerned with the legality rather than the merits of the decision (Kemper Reinsurance Company v Minister of Finance [2000] 1 AC 114H).[48]Mr Pickford also relied on the extract from R (Khatun and Others) that I have already set out. It follows, he submitted, that "the court should not intervene merely because it considers that further inquiries would have been sensible or desirable … [but] only if no reasonable [decision-maker] could have been satisfied on the basis of the inquiries made." (see R v Royal Borough of Kensington and Chelsea, ex parte Bayani (1990) 22 HLR 406, per Neill LJ at 415).[49]As one would expect, Mr Pickford's submissions largely marched in step with those made by Ms Smith.[50]In truth, I did not detect any real difference between the parties on the relevant principles of law applicable to this application. In effect, Albion and Ofwat/Welsh Water are just looking at the same points from different ends of the telescope. Albion's grounds - discussion Ground 1

Albion's grounds - discussion

[51]I have already set out the history of the dispute. The process leading to the Determination under challenge took from June 2009 to October 2011. Following the issue of the Initial Determination in February 2010 Ofwat undertook a detailed consultation and information gathering exercise. It issued requests for information. The parties were invited to make written and oral representations on the draft final Determination, which was published in October 2010. Both parties made submissions and commented on the submissions put in by the other.[52]Albion complains that Ofwat failed to obtain relevant evidence in relation to(i) Welsh Water’s operating expenditure;(ii) Welsh Water’s water resource cost;(iii) depreciation and capital employed;(iv) Welsh Water’s expenditure on infrastructure renewal and(v) changes in cost over time that might be relevant to indexation.[53]Albion complains that Ofwat, instead of seeking up-to-date information in relation to Welsh Water’s operating costs, took values that it had arrived at when preparing the Referred Work and then updated those figures to reflect the position in 2008/09. Albion contends that Ofwat should have looked at Welsh Water’s internal accounting documents for that year, for which it had the power to call. Ms Smith submitted that it was quite reasonable and proportionate for Ofwat to use the Referred Work as a base and then invite the parties to update it. The parties had invested a substantial amount of time in it: the Referred Work was a substantial document running to well over 200 pages.[54]In my judgment, there was nothing unreasonable about Ofwat's choice of methodology and, in particular, its decision to use the Referred Work as a base: it was merely one of several ways of approaching the problem and Albion was given, and, I think, took, the opportunity to participate fully in the exercise. The choice of methodology was one for Ofwat.[55]It is said that in relation to water resource costs Ofwat adopted the figures which Welsh Water put forward without making any attempt to verify them. One example of this was the price that Welsh Water paid United Utilities for the water abstracted at Heronbridge: Welsh Water disclosed the 1994 agreement but not any invoices or other records which showed the amounts actually paid. Instead, Welsh Water just submitted the relevant figures without any supporting documentation.[56]Albion is entitled to make the point, as it does, that Welsh Water does not have an unblemished record where disclosure was concerned. The Tribunal expressed criticism, on more than one occasion, of the material, or lack of it, produced by Welsh Water in the course of the proceedings in the Tribunal.[57]Ofwat may have on its staff expert accountants and the like, but I do not regard as realistic the suggestion that it should in effect have carried out an audit of Welsh Water’s books and accounts in order to obtain the information that it required. Statutory water undertakers are required by law to provide certain information to the regulator, and failure to do so can be a criminal offence. If, for example, Ofwat asked Welsh Water to provide details of the price paid to United Utilities and Welsh Water responded by producing a table of figures, I cannot see how it can possibly be said that Ofwat acted unreasonably in accepting those figures at face value. After all, Welsh Water would be taking an extraordinary risk if it provided inflated figures knowing them to be false. The process took long enough as it was; to prolong it further in order to verify every figure submitted by Welsh Water would have been disproportionate unless there was a very strong suspicion, on reasonable grounds, that the figures, or some of them, were not being put forward in good faith. The material here falls far short of establishing anything like that.[58]In relation to matters such as depreciation, capital employed and infrastructure renewal charges, these are essentially matters of approach. They are susceptible to more than one method of analysis, and the choice of method is essentially a matter for the expert regulator. Albion disagrees with the methodology adopted by Ofwat in relation to each of these matters, as it is entitled to do, but that disagreement is not sufficient to found a challenge in the context of judicial review. I can see nothing unreasonable about the course adopted by Ofwat.[59]On some issues Albion complains that Ofwat did not take steps to obtain information that Albion says it needed. However, if Ofwat decided to adopt an approach in relation to, say, the imposition of a depreciation (or similar) charge that rendered certain information irrelevant, then it cannot possibly have been under any obligation to obtain that information. Once it properly decided on a particular approach, it could only be criticised if it unreasonably failed to obtain information that was relevant to that approach.[60]As to the method of indexation, that is pre-eminently a matter on which a regulator is entitled to form its own view. Further, the correspondence to which I was taken by Mr Pickford gives no hint that Albion might have an objection to the use of RPI as an appropriate index. On this Albion does not come within a mile of establishing a case based on unreasonableness or perversity.[61]Like Blair J, I have no hesitation in rejecting Albion's submissions in relation to ground 1. In my judgment the points advanced by Albion cannot form the basis of an arguable challenge by way of judicial review.

Ground 2

[62]The basis of this complaint is that Ofwat did not have regard to the price that Welsh Water paid United Utilities for the Heronbridge water, but instead assessed Welsh Water’s expense in terms of the cost of the water by taking Welsh Water’s average water resource cost for 2008/09, which it considered could be taken as a reasonable estimate of the average water resource cost for the relevant United Utilities’ water resource zone. This produced a figure of 15.3 p/m 3, which Albion says was 2½ times higher than the true cost.[63]Ms Smith submitted that at the heart of Ofwat’s approach was the fact that the relevant resource was the water ex-river, not the water that left the meter downstream of the Heronbridge pumping station: see paragraph 6.39 of the Determination. That is why, she argued, it was legitimate for Ofwat to consider average costs in the relevant zone. Mr Pickford submitted that the requirement of the statute that Ofwat should have regard to Welsh Water’s expenses did not mean that Ofwat had to use the price paid by Welsh Water to United Utilities as a starting point, or at all. He reminded me of the well-known observations of Lord Hoffmann in Tesco Stores v Secretary of State for the Environment [1995] 1 WLR 759, at 780 F-G: “The law has always made a clear distinction between the question of whether something is a material consideration and the weight which it should be given. The former is a question of law and the latter is a question of planning judgment, which is entirely a matter for the planning authority. Provided that the planning authority has regard to all material considerations, it is at liberty (provided that it does not lapse into Wednesbury irrationality) to give them whatever weight the planning authority thinks fit or no weight at all. The fact that the law regards something as a material consideration therefore involves no view about the part, if any, which it should play in the decision-making process."[64]These observations, well-known as they are, obviously carry great weight. However, I am not sure that Lord Hoffmann would have used quite the same words if he had had in mind a specific consideration identified in a statute, as opposed to the raft of factors that might normally fall to be considered in relation to a particular question. I have to say that I find it a little difficult to accept that a decision-making body can give no weight at all to, and thereby effectively ignore, a consideration to which it is told to have regard by a statute. In this context, see B v Lewisham London Borough Council [2008] EWHC 738 (per Black J at paragraph 20), and the consideration of that paragraph in TT v London Borough of Merton [2012] EWHC 2055 (Admin). However, that is a point that remains to be argued.[65]It seems to me that it is at least arguable that, in adopting the approach it did, Ofwat did not have regard to the expenses incurred by Welsh Water in obtaining the water as a resource as the statute required. Alternatively, it can be argued that Ofwat’s approach was misconceived because what it was in truth doing was assessing a value of the resource, and not the expense incurred in obtaining it in order to comply with the obligation to supply it.[66]There may also be something in Mr Sharpe's further point about whether there would in fact be any demand for this water if it was not being used by Shotton. This requires evidence, but on the limited evidence presently before the court it appears to be the case that this is an area in which there is never a shortage of water so that it could be said that a source of water that was surplus to requirements might have little or no value.[67]There is also, in my view, an arguable point about whether or not it was legitimate for Ofwat to adopt an approach which effectively involved Albion making a cross subsidy to other customers of Welsh Water.[68]For the purposes of this judgment, I do not consider that it is appropriate to do anything more than identify the points that are, in my view, arguable. However, by the conclusion of the argument I had formed a provisional view, but that is all it was. I am not confident that it is a view that represents the correct answer, or that I would not alter it following further evidence, argument and reflection. So I do not need to say whether my provisional view favours Albion or Ofwat because, either way, I am quite satisfied that a contrary conclusion is reasonably open.[69]I should make it quite clear that, for the reasons I have already given in relation to ground 1, I do not accept that there is anything in the complaint about the failure to gather information. The point that I regard as arguable is Ofwat's approach to the assessment of Welsh Water’s expenses in relation to the water resource.

Ground 3

[70]This concerns the approach taken by Ofwat towards depreciation. As is demonstrated by the witness statement of Mr Davis, the Planning and Regulatory Director of Welsh Water, questions of depreciation and maintenance charges can be extraordinarily difficult.[71]Albion's complaint is that Ofwat did not look at the actual capital expenditure that Welsh Water had incurred or consider the extent to which assets had been fully depreciated. What Ofwat did, summarised very crudely, was to assess the value of Welsh Water’s assets employed in the provision of partial treatment to the Shotton water and its transport and then derive from that value an annual capital maintenance and depreciation charge. Albion made representations about Ofwat's proposed approach (see, for example, paragraphs 6.71 to 6.85 of the Determination).[72]The question of the correct approach to be adopted in relation to these matters is, in my view, clearly one for the regulator. Unless the regulator arrives at a conclusion that can be properly characterised as perverse, his decision is immune from review. I would regard any challenge on a perversity ground as hopeless.[73]For these reasons I regard this ground as unarguable.

Ground 4

[74]This relates to the infrastructure renewal charge, which Albion contains was assessed on a false basis. Albion submits that it should have been assessed on a Modern Equivalent Asset Value (“MEAV") and that Ofwat should have taken a mean asset life of 180 years, not 120 years (which is what it took).[75]Ofwat contends that its approach, which was based on the Referred Work, was in line with a standard regulatory approach to assessing the appropriate infrastructure renewal charge for a long-lived asset. Ms Smith submitted that Dr Bryan has simply “reverse engineered” the figures.[76]This is another area where it seems to me that the choice of approach is pre-eminently a matter for the regulator. I can see nothing unlawful or irregular in Ofwat's approach at paragraphs 6.81 to 6.85 of the Determination and the result cannot be described as perverse.[77]In my judgment there is nothing in this ground. It is not arguable.

Ground 5

[78]This relates to Ofwat’s assessment of the return on the capital employed. Yet again, Ofwat used as a starting point the information contained in the Referred Work. This was also the subject of correspondence and discussion before the issue of the Determination. Ofwat did not use Welsh Water’s asset register, as Albion now says it should have done, but instead used capital values taken from the Referred Work which it adjusted as it thought appropriate.[79]In my view, this is again a case where Ofwat was entitled to use its expert professional judgment. No other error of law has been identified by Albion, and there is no material to justify, or on which to begin to base, a conclusion that Ofwat's approach was so unreasonable as to be perverse or irrational.[80]A further point raised by Albion was that Ofwat used a "disaggregated cost of capital", namely that it looked at the Ashgrove system on a stand-alone basis rather than as part of a larger organisation. This resulted in Ofwat taking a figure of 11.1% as the cost of capital, rather than a figure of 6.8% which was used for Welsh Water’s assets as a whole in the 2009 Price Review. This was another figure derived from the Referred Work, which in turn was based on independent expert evidence. So Albion's submission seems to come down to the assertion that Ofwat should have relied on different evidence. I consider that, in the context of an application for judicial review, one only has to state this proposition in order to reject it.[81]Again, I find there is nothing in this ground and I conclude that it is not arguable.

Ground 6

[82]This is Albion's complaint about Ofwat's use of the Retail Price Index as the index to be used for making future adjustments to the price. As Ms Smith pointed out, the calculations relied on by Albion in relation to the likely future application of the index related only to potable water. It seems to me that it is self-evident that the choice of index is primarily a matter for Ofwat’s professional judgment.[83]In particular, the forecasting of trends is a paradigm area for the exercise of judgment by a regulator: see the extract from the Rail Regulator case which I have quoted above. There is no arguable error of law here. I regard this ground as hopeless.

Conclusion

[84]In spite of Mr Sharpe's eloquent and forceful submissions, I agree with Blair J that all the grounds advanced, save for ground 2, amount to no more than an attack on Ofwat's Determination on the merits.[85]I have already indicated why I think that there is an arguable case on ground 2. The component of the price fixed by Ofwat that related to the cost of the resource was 15.3 p/m 3, as against Albion's contention that it was no more than 6.2 p/m 3. There is a significant difference between these two figures which, when translated into an annual charge, would amount to a significant amount of money. Although Mr Sharpe would, I think, wish to contend the contrary, I am very doubtful if there is anything in section 40A that comes close to requiring Ofwat to take the actual cost of the water paid by Welsh Water as the relevant expense. But even if the correct answer is somewhere between these two figures, as I suspect it could be, I have already indicated that a movement of a few pence either way on the price can have a significant impact on the annual cost to Albion and Shotton. It is certainly a matter that, if arguable as I have found it to be, warrants a hearing.[86]I therefore give permission to apply for judicial review in relation to ground 2. I am not persuaded that this is one of those cases where it would be appropriate to give permission on any of the other grounds. Mr Sharpe submitted that I should do so because the grounds were interrelated. To some extent I accept that is true - as, for example, in the case of depreciation and infrastructure renewal charges. However, I do not consider it applies to ground 2. That seems to me to raise issues, both in terms of statutory construction and analysis of the Determination, which are entirely different to those raised by the other grounds. I cannot see how a decision in Albion's favour on ground 2 could have any impact on any of the other grounds.[87]I am grateful to all counsel for their excellent arguments, and to Albion’s and Welsh Water’s solicitors for the very well prepared bundles.[88]I will hear counsel on any questions of costs, form of relief or further directions for the conduct of the claim that cannot be agreed. However, I should indicate my view that the hearing should not take more than one day, provided that the judge has a clear day for pre-reading and is given a reading list in advance.