R (Gwynt-y-Môr Offshore Wind Farm Ltd) v The Gas and Electricity Markets Authority
| Jurisdiction | England & Wales |
| Judge | Mrs Justice May DBE |
| Judgment Date | 21 March 2019 |
| Neutral Citation | [2019] EWHC 654 (Admin) |
| Date | 21 March 2019 |
| Court | Queen's Bench Division (Administrative Court) |
| Docket Number | Case No: CO/21/2018 |
[2019] EWHC 654 (Admin)
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
ADMINISTRATIVE COURT
Royal Courts of Justice
Strand, London, WC2A 2LL
Mrs Justice May DBE
Case No: CO/21/2018
Sam Grodzinski QC, Adam Fenton QC & Sarah Wilkinson (instructed by Norton Rose Fullbright LLP) for the Claimant
Monica Carss-Frisk QC & Daniel Cashman (instructed by Office of Gas and Electricity Markets) for the Defendant
Michael Fordham QC & Mark Vinall (instructed by Jenner & Block LLP) for the First Interested Party
Hearing dates: 15, 16 and 17 January 2019
Approved Judgment
Introduction
The Gwynt-y-Môr wind farm is located off the shore of North Wales. It comprises 160 wind turbines and produces a very large amount of renewable electricity. It is owned and operated by the Claimant. The electricity it generates is transmitted onshore via a number of subsea electricity cables and other transmission assets that are owned and operated by the First Interested Party (“the GyM OFTO 1”).
In these proceedings, the Claimant seeks a review of the decision by the Defendant (“Ofgem”) dated 8 September 2017, that the physical failure of one of the GYM OFTO's subsea electricity cables should be treated as an “Income Adjusting Event” (“IAE”). The meaning of that term is explained below.
The effect of Ofgem's decision was that the GyM OFTO's pre-determined 20-year revenue stream could be adjusted to take account of the event, by allowing relevant costs associated with the cable failure to be “passed through”. It is common ground that the effect of this pass-through, in the context of the regulatory charging regime, is to re-route the majority of any IAE award in respect of costs associated with repairing the damaged cable to the Claimant.
The Claimant's PAP letter was dated 7 November 2017, to which Ofgem responded on 23 November 2017. Proceedings were issued on 7 December 2017, and permission was given by Mostyn J on 20 July 2018.
Factual and regulatory background
Offshore transmission regulatory regime
Generators of electricity like the Claimant are required to be separate from the owners of transmission equipment. In the case of the transmission infrastructure that connects an offshore wind farm to the National Grid on the mainland (National Grid Electricity Transmission Plc (“NGET”)), the Authority is required to operate a competitive tender process for the right to own and operate those transmission assets 2. The successful tenderer becomes an Offshore Transmission Owner (“OFTO”) and is granted an offshore transmission licence by the Authority. The OFTO owns, operates and maintains the transmission assets for a period of 20 years, in exchange for a regulated revenue payment.
Bidding to become an OFTO is on the basis of the amount of the required revenue stream for the 20-year period, based on each tenderer's required return on investment, the cost of financing its investment in acquiring the assets and the ongoing cost of financing, operating and managing the assets. For the 20-year period after purchasing
Costs adjustment to the Revenue Stream
Amended Standard Condition E12-J3 (Restriction of Transmission Revenue: Allowed Pass-Through Items) of an OFTO's licence (“the IAE Condition”) sets out cost adjustment terms for eight different “ Allowed pass-through items”. If the relevant conditions are satisfied, each adjustment term allows costs incurred by the OFTO to be “passed through”, thereby adjusting the revenue stream received by the OFTO for the relevant year. Paragraph 1 of the IAE Condition provides:
“ The purpose of this condition is to provide for revenue adjustments to reflect certain costs that can be passed through to consumers as part of allowed transmission owner revenue.”
The criteria for whether an event is an IAE are set out in paragraph 15 of the IAE Condition, as follows:
“ An income adjusting event in relevant year t may arise from any of the following:
(a) An event or circumstance constituting force majeure under the STC;
(b) An event or circumstance resulting from an amendment to the STC not allowed for when allowed transmission owner revenues of the licensee were determined for the relevant year t; and
(c) An event or circumstance other than listed above which, in the opinion of the Authority, is an income-adjusting event and is approved by it as such in accordance with paragraph 21 of this licence condition,
Where the event or circumstance has, for relevant year t, increased or decreased cost and/or expenses by more than £1,000,000 (“the STC threshold amount”).”
(STC stands for System Operator Transmission Owner Code).
It is the application of (c) above which has been the focus of these proceedings. The parties referred to this provision as “Limb (c)”.
Paragraph 21 of the IAE Condition provides for Ofgem to consult with “the Licensee and such other persons as it considers desirable”.
Paragraph 22 of the IAE Condition provides for a time limit of 3 months from the latest of (i) the service by an OFTO of an event said to be an IAE, or (ii) the receipt by Ofgem of any further information which it has requested, for Ofgem to make its determination as to whether or not the claimed event is an IAE. In default of a determination within the prescribed period, the full costs claimed are deemed to have been passed through.
The Charging regime — TNUoS
Payment of the Tender Revenue Stream to the OFTO is made by NGET. NGET recovers this sum through Transmission Network Use of System Charges (“TNUoS”) which all network users, including offshore generators such as the Claimant, are required to pay to NGET.
The terms of NGET's electricity transmission licence require NGET to establish and maintain a TNUoS charging methodology in accordance with certain stipulated objectives. The calculations of the amounts paid and received by relevant parties are set out in the TNUoS charging methodology contained in section 14 of the Connection and Use of System Code (“CUSC”).
The intricacies of TNUoS calculations under the CUSC were set out in detail in the witness statement of Min Zhu, Deputy Director of Electricity Transmission at Ofgem. Happily, it was not necessary to examine the CUSC charging regime or details of the various charging algorithms at the hearing as the effect of the regime on the Claimant was not in dispute: through the system of TNUoS charges some 75% of the costs of repair of the relevant undersea cable (approximately £13.2 million) will, as a result of the IAE pass-through, be charged to, and paid by, the Claimant.
GyM cable failures and insurance cover
The Gwynt-y-Môr wind farm and its four subsea cables were originally constructed by a joint venture of developer companies. The cables were known as SSEC1-4, SSEC being an acronym for sub-sea electricity cable.
The transmission assets at GyM were transferred to the GyM OFTO on 11 February 2015, pursuant to the terms of a Sale and Purchase Agreement of the same date (“the SPA”). The SPA contained various indemnities and warranties as between the Claimant as vendor and the GyM OFTO as purchaser.
At the time of purchasing the assets the GyM OFTO had in place an Operating All Risks (“OAR”) insurance policy dated 6 February 2015 (commencing on 17 February 2015) (“LEG2 cover”). Clause 14 of this policy, entitled “Exclusions”, included at sub-paragraph (g) the “LEG [London Engineering Group] 2/96” exclusion. The effect of the various LEG exclusion clauses is conveniently summarised in a presentation by the GyM OFTO's brokers, Willis Towers Watson (“Willis”) in February 2017:
“ The cover provided for internal faults is addressed primarily by way of the defects exclusions which, depending on the level of cover afforded, writes back an element of cover.
The cover written back from the exclusion is referred to as a LEG clause. The London Engineering Group (LEG) is an informal association of engineering underwriters which has drafted various clauses to address the extent of defects cover which may be provided. These fall into three categories:
LEG1 – “full exclusion”
LEG2 – “consequences design cover”. The policy would exclude the cost which would have been incurred if replacement or rectification of the insured property had been put in place immediately prior to the damage (e.g. would exclude the cost of replacing/rectifying the faulty parts but would cover the consequential losses).
LEG3 – “full defects design cover”. The policy would exclude the cost incurred to improve the original material workmanship, design plan or specification (e.g. would cover also the replacement of the faulty part but not the costs of rectifying/improving the original design/workmanship).
…
As might be expected, the broader the cover selected the greater the premium rate applied.”
As appears from the above, a LEG2 policy provides a lesser degree of cover than a LEG3 policy.
On 2 March 2015 one of the four cables owned by the GyM OFTO suffered a physical failure (“the SSEC1 failure”). The GyM OFTO notified a claim to its insurers and in August 2015 insurers made an advance payment to the GyM OFTO in respect of the SSEC1 failure. (The GyM OFTO was later obliged to repay this sum when insurers denied liability under the terms of the LEG2 cover).
Engineers Edif ERA undertook a detailed laboratory examination of the faulty section of the SSEC1 cable on 2 September 2015. The technical...
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Gwynt Y Môr Ofto Plc v Gwynt Y Môr Offshore Wind Farm Ltd
...acquired the Assets. As explained by May J in R (Gywnt-y-Môr Offshore wind Farm Limited) v The Gas and Electricity Markets Authority [2019] EWHC 654 (Admin): “Bidding to become an OFTO is on the basis of the amount of the required revenue stream for the 20-year period, based on each tender......