Clp Power Hong Kong Ltd v. Commissioner of Rating and Valuation
Read the full judgment text of LDGA 241/2004 on BabelCite. This LDGA judgment was delivered on 3 January 2014.
1. On 24 April 2013, this Tribunal handed down its judgment (“the Main Judgment”) allowing CLP’s appeals against CRV’s assessment of rateable value for 2004/05 of the Tenement (as defined therein) and its leased land (for the purposes of the Government Rent (Assessment and Collection) Ordinance (Cap 515)).
Cites 4 cases
|
LDGA 241 / 2004 & LDRA 365-369 / 2004 IN THE LANDS TRIBUNAL OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION GOVERNMENT RENT APPEAL NO 241 OF 2004 _______________
IN THE LANDS TRIBUNAL OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION RATING APPEAL NO 365 - 369 OF 2004 _______________
Date of Hearing: 13, 16-20 December 2013 Date of Judgment: 3 January 2014 ________________________________ J U D G M E N T O N R E V I E W ________________________________ Au J: A. INTRODUCTION 1.On 24 April 2013, this Tribunal handed down its judgment (“the Main Judgment”) allowing CLP’s appeals against CRV’s assessment of rateable value for 2004/05 of the Tenement (as defined therein) and its leased land (for the purposes of the Government Rent (Assessment and Collection) Ordinance (Cap 515)). 2.Thereafter, both CRV and CLP applied respectively for a review of parts of the Main Judgment. The Tribunal gave leave to both review applications on 16 May 2013. 3.This is the judgment of the reviews. It should be read together with the Main Judgment. For consistency, unless otherwise stated, we would adopt the abbreviations used in the Main Judgment. 4.The reviews concern the following issues arising from the Main Judgment[1]:
5.For this part of the judgment, I will primarily concern myself with matters concerning principles. Member Lo will focus on the valuation aspects of these issues in the later part of the judgment. B. THE ISSUES B1. The R&E accounts adjustment B1.1 The Main Judgment and the parties’ position in the reviews 6.This issue arises from the Main Judgment in the following manner. 7.At section M1 of the Main Judgment, the Tribunal dealt with the question of “estimation of gross receipts”. Under this heading, for the purpose of the R&E Method, the principal differences between CLP and CRV (as recorded at paragraph 360 of the Main Judgment) are (a) the use of customer numbers to reflect the physical and economic growth; and (b) the choice of accounting data. 8.In relation to these differences, Member Lo said these at paragraphs 361 to 365 of the Main Judgment (omitting the footnotes):
9.In substance:
10.The Tribunal further directed the parties at paragraph 389 of the Main Judgment to agree on, inter alia, the final figure on the rateable value of the Tenement in accordance with that judgment. 11.Both CRV and CLP seek to review this part of the Main Judgment. It is both CRV’s and CLP’s submissions that the conclusions of the Tribunal summarised at paragraph 9 above render the parties unable to work out the rateable value. 12.CRV also says these conclusions are inconsistent with each other. This is so as Ms Jim’s valuation method which took into account the growth in customer numbers and the per customer profitability (as preferred by the Tribunal) did so by adopting CLP 2004 accounts (which was rejected by the Tribunal). As a result, the parties would be unable to work out the gross receipts and expenditures in accordance with these determinations of the Tribunal. 13.CLP on the other hand submits that these determinations are not inconsistent. It says that the Tribunal at paragraph 362 went no further than to endorse the concept of also making an adjustment using the per customer profitability to reflect the economic growth (in addition to the physical growth) in the Tenement up to 1 April 2004. The Tribunal did not find that the actual method used by Ms Jim in using CLP’s accounts ending 31 December 2004 was a proper way of making the adjustment. What is therefore left is the question of how should effect be given to the Tribunal’s conclusion at paragraph 362 in working out the gross receipts. 14.Thus, in these review applications:
B1.2 Discussion 15.I would prefer CLP’s above understanding of paragraph 362 of the Main Judgment. However, that still requires (as CLP submits) the Tribunal to deal with in these reviews the problems arising from the conclusions made under section M1 of the Main Judgment as identified by the parties. 16.As can be seen above, the main contentions between the parties under this issue lie in whether Ms Jim’s use of CLP’s 2004 accounts (ie, up to 31 December 2004) is permissible. In other words, how “hindsight” can be used for that purpose. 17.The question arises in this context. 18.Section 7(2) of the RO sets out the terms of the hypothetical letting. It provides that the valuation date (“AVD”)[2] is 1 October of the relevant rating year, where the tenancy is to be treated as starting on that date. Thus, for the present appeals, the AVD is 1 October 2003. 19.At the same time, s 7A(2) requires certain specified factors to be ascertained as they were on the date the list came into force (“the List Date”) as at 1 April of the year following the AVD. For these appeals, the List Date is 1 April 2004. 20.In particular s 7A(2) of the RO requires that the “state” of the Tenement to be taken as it is on 1 April 2004. Two aspects under this requirement have to be considered:
21.Both Mr Davis’ Original or Revised Methods and Ms Jim’s Method dealt with the physical state of the Tenement in the same way, by taking into account in the valuation the actual customer numbers as at 1 April 2004. 22.The principal difference between the two experts in the present dispute lies in how they each dealt with the economic state of the Tenement. 23.Mr Davis originally considered CLP’s accounts up to 31 December 2003 to estimate the HT’s economic performance as at 1 April 2004 for the purposes of valuing the Tenement at the AVD. 24.Ms Jim also used CLP’s accounts to 31 December 2003 to assess the economic performance of the Tenement. However, in addition to that, she used CLP’s accounts up to 31 December 2004 to “assist” her valuation in the following way. She has used the accounting information in the account for the calendar years in 2003 and 2004. She has compared the per customer profitability (taking receipts and expenditures separately) for each of those two years to derive the annual rates of change, and then used those rates to adjust the accounts for the year ending 31 December 2003 over a period of three quarters of a year[3]. This is demonstrated by various mathematical presentations set out in a note produced by Mr Yu SC (for CRV) to the Tribunal at the hearing. For convenience, I have attached this note to this judgment as the Appendix. 25.What it means is this: Ms Jim has made use of CLP’s actual accounts ending 31 December 2004 in her valuation of the rateable value of the Tenement as at 1 October 2003, for the hypothetical tenancy between 1 October 2003 and 30 September 2004. 26.I accept Mr Holgate’s contention that this amounts to mathematically an interpolation between two known sets of data.[4] In that way, as I think also rightly described by Mr Holgate in his skeleton, Ms Jim has derived rates of change in profitability which are driven by the actual changes in CLP’s economic performance to the end of 2004, that is, 9 months after the List Date. 27.CLP objects to Ms Jim’s said way of using post List Date actual accounting information in her valuation. 28.I agree that Ms Jim’s said way of use of “hindsight” information and data is not permissible. My reasons are as follows. 29.First, as a matter of principle, that does not conform to the valuation exercise envisaged under the RO in assessing the rateable value of the Tenement. As accepted by CRV[5], the objective of the valuation exercise is to assess what the HL and HT (as reasonable persons in the higgling of the market) would have projected as at 1 October 2003. It is thus wrong as a matter of principle simply to rely upon hindsight to adjust accounts by using an actual rate of change which is defined by the actual outturns in the subsequent year in substitution for the projection required from the valuation date. This is particularly so as the R&E Method may not be used in a way so that rates are levied as a tax on profits. The method was to assess what rent a HT would be prepared to pay for the use of the Tenement in order to make the expected or anticipated profit[6]. 30.As observed by the Scottish Land Valuation Appeal Court in Suburban Taverns (Glasgow) Ltd v Assessor for Glasgow (2008) SC 298 at paragraphs16-17:
31.Second, Ms Jim’s said use of hindsight also involves deriving a rate of change of profitability by looking at the whole year of 2004. In other words, it also makes use of information of the last quarter of 2004, which not only goes beyond the period of the relevant hypothetical tenancy but also forms part of the valuation exercise for the next rateable year (ie, 1 October 2004 to 30 September 2005). This also cannot be right as a matter of principle. 32.Third, both experts took the customer numbers up to 1 April 2004 (as required and permitted by s 7A(2) of the RO) as proxy for the physical state of the Tenement. If one follows Ms Jim’s above method for deriving the rate of change for the purpose of looking at the economic state of the Tenement, it would make use of the actual customer numbers up to the end of 2004 as part of that exercise. This results in a discord within the same method between assessing the physical state and the economic state. Unless there is good justification to do so, this should in my view be discouraged for lack of internal consistency. 33.Mr Yu for CRV however contends that Ms Jim’s use of the CLP’s 2004 accounts is clearly permissible as a matter of principle for a number of reasons. I would deal with them one by one. 34.As a start, Mr Yu says at least for the purposes of rating appeals, such use of hindsight is clearly allowed. Mr Yu relies on the Tribunal’s previous judgment in China Light and Power Co Ltd v CRV [1997] 4 HKC 461 (“the 1994 CLP case”)[7] to support his argument. 35.In the 1994 CLP case, the Tribunal was also hearing an appeal by CLP against CRV’s rating value assessment of its tenements for the rateable year between 1 July 1990 and 30 June 1991. Under the then RO, the valuation date was 1 July 1990 and the valuation list date was 1 April 1991. At that time, the financial year of CLP ended on 30 September. The disputed items in the appeal involved receipts, expenses, depreciation and an allowance for economic or physical growth. In calculating growth, both parties agreed that an acceptable proxy was to compare the average number of customers for the year ended 30 September 1990 with those as at 1 April 1991. This comparison produced an increase in customer of 3.51%. CLP’s expert (Mr Duncan) applied this growth percentage to each relevant element of his valuation to arrive at the rateable value of the tenement. On the other hand, in addition to this 3.51% growth, CRV’s expert (Mr Cheng) took CLP’s 1991 accounts ending 30 September 1991 (thus after the List Date) to work out the revenue per customer growth of 1.68% per quarter and for expenditure 3.69% per quarter. On the basis of these increases, he inferred that on 1 July 1990, the HT could reasonably have anticipated similar growth. With that, he arrived at his assessment of the rateable value. 36.The Tribunal observed that both experts made use of hindsight in their valuations albeit to a different degree. The Tribunal went on to say two things. First, it was clear that it was permissible to use hindsight by the valuers. Second, when the matter came on appeal and where post List Date information became available, the Tribunal would prefer the valuation method which made use of the then available later accounts for reasons of greater accuracy. The Tribunal explained these at pp 478B-479B as follows:
37.Mr Yu submits that this authority supports the contention that, at least on a rating appeal, the valuer is entitled to use post List Date information and accounts in his assessment of the relevant rateable value. He says in the present case, what Ms Jim has done in the use of CLP’s 2004 accounts is in exactly the same way as what the CRV expert (ie, Mr Cheng) had done in the 1994 CLP case, which was accepted. 38.In my view, the 1994 CLP case must be looked at carefully for the present purpose. 39.It must be noted in the above quoted part of the judgment that, the Tribunal in that case was mainly concerned with the question of whether it was permissible to use hindsight at all. It therefore went on to explain why it must be permissible to do so: firstly because both experts employed hindsight, secondly in light of the authority of Bwllfa & Merthyr Dare Stream Collieries (1891) Ltd v Pontypridd Waterworks Co [1903] AC 426 at 431, and thirdly given that there were no statutory or other restrictions prohibiting the use of hindsight in determining rateable values. 40.It is not disputed in the present case that a valuer can make use of hindsight in his valuation for rateable value. The real question for the present purpose is whether a valuer could interpolate the actual figures contained in post List Date accounts and use them to say that the HT would have reasonably forecasted this exact growth rate at the time of the hypothetical bargaining of the tenancy at the valuation date. 41.The Tribunal in the 1994 CLP case further apparently accepted that a valuer could do so, principally based on the Bwllfa case as quoted therein. However, as I have emphasized above, the Tribunal’s then reference to Bwllfa was focused predominantly on the question of whether generally hindsight could be used when the information became available. Once that question was answered in the affirmative by the Tribunal, the next question the Tribunal had was which one of the valuation methods was more accurate. It does not appear from the report that the parties had made any submissions as to whether the way the CRV’s expert had used the 1991 accounts was permissible or not. 42.However, it is that question (which in my view was not the focus of the contentions in the 1994 CLP case) which one must in the present reviews examine to see whether the Tribunal’s reliance on the Bwllfa case in the 1994 CLP case to answer it in the affirmative to be correct. 43.In this respect, I agree with Mr Holgate that Bwllfa is a very different case, and the statement made by Lord Macnaghten(as quoted and relied on by the Tribunal in the 1994 CLP case) should not be adopted in a wholesale manner for the valuation exercise envisaged for rating purposes. I will explain further. 44.As submitted by Mr Holgate, Bwllfa was concerned with the amount of compensation to be paid to a mine owner not to work a seam of coal beneath a statutory undertaker’s land where there was a delay between the relevant notice being served and an arbitration award being made. A consequence of the delay was that the value of coal rose following the service of the notice and the question was whether the arbitrator in making his award was entitled to take into account that rise in value. The statutory context for the question was the Waterworks Clauses Act 1847 which required the undertaker to pay full compensation for the value of the lands used by the undertaker and for the mine owner not being able to work the coal in addition to any expenses and losses occasioned by the exercise of the statutory undertaker’s powers. Lord Macnaghton said, in the context of that statutory regime, that for the purposes of assessing the compensation a line could not be drawn at the date of the notice and that anything occurring after that date had to be ignored. Lord Macnaghten also said at p 431:-
45.However, the inquiry in a rating valuation is not to assess the full compensation required to be paid by a statute for a continuing loss of the ability to work valuable minerals. It is an exercise in arriving at the annual letting value of the tenement at the AVD (which is a specific point in time), applying the rating hypotheses. It is a wholly different exercise to be undertaken in a very different statutory context and for a different purpose where the valuation date is mandated by the RO. 46.In this regard, it is pertinent to also note Staughton J’s observations in Segama NV v Penny Le Roy Ltd [1984] 1 EGLR 109[9] to the effect that:
47.In addition to agreeing with Staughton J’s above observations on the irrelevance of Bwllfa to valuation of market rents, I would also add that if such use of post List Date accounts is allowed, it would not only defeat the objectives of the rating valuation exercise as summarised at paragraph 29 above, but also likely lead to a floodgate of rating appeals. This is so as the said “accuracy” can only be achieved where the ratepayer appeals the entry in the valuation list and the rateable value is determined by the Tribunal significantly after the List Date. By definition, the use of the actual figures, which would only be available and be allowed to be used in appeals, would almost certainly produce a different figure from the estimation by way of projection based on historic figures. 48.In the premises, and also for the reasons I have given at paragraphs 29 to 32 above, insofar as if the Tribunal in the 1994 CLP case was saying that a valuer in a rating appeal could make use of the post List Date subsequent accounts in the way as Ms Jim is using them in the present case, I would disagree with that holding[10] and would not follow it in the present case. To that extent, Mr Yu’s further reliance on Land Compensation and Valuation Law in Hong Kong, supra, at pp 438-9 and Fook Hong Enterprises Co Ltd v CRV [1983-85] CPR 380 at 388B-F does not take the matter any further, as the propositions therein also relied principally on Bwllfa. 49.Ms Jim also relies on the JRF Guidance Note (“the Note”) to support her approach. Paragraph 5.11 of the Note provides relevantly as follows:
50.Although there is no dispute that the Note supports that hindsight can be used in an R&E Method, it makes clear that it may be used to confirm the trends apparent to the valuer at the AVD. It is thus a tool to corroborate the assessments of the future profitability of the tenement but not a means to retrospectively determine what profits were. This is what CLP’s expert did in the 1994 CLP case (see the above quoted passage). This is also what Mr Davis did in the present valuation exercise. He looked at the profits of CLP in a number of years subsequent to 2003 and came to the conclusion that there was no pattern of increasing or decreasing trend of profits in its business. He was of the view that this confirmed his view that the HT would have reasonably projected no further economic change of its business from 31 December 2003[11] to the end of the hypothetical tenancy. In my view, the Note however does not provide further support of the use of hindsight in the manner as adopted by Ms Jim. 51.For these reasons, I do not think as a matter of principle, Ms Jim’s said way of using “hindsight” in adopting the actual per customer profitability under CLP’s accounts up to 31 December 2004 is permissible[12]. 52.Finally, even if I were wrong in my above view on principle, I would also fully agree with Member Lo’s conclusion at paragraph 131 below that, as matter of valuer’s judgment, Ms Jim’s said use of CLP’s 2004 accounts is in any event not to be preferred in the present case for the reasons given by him. 53.In light of my above conclusion on the use of post List Date accounting data, Member Lo would later in this judgment deal with the Tribunal’s choice between Mr Davis’ Original Method, Mr Davis’ Revised Methods and Ms Jim’s Method. B2. AUC and CS 54.The Tribunal concluded at paragraph 376 of the Main Judgment that deductions for AUC and CS should be made in the same manner as the Tribunal had decided in the HEC case (see also paragraphs 213 to 214, 235(5) and 375 of the Main Judgment). CLP in its review contends that the value of HT’s AUC and CS should not be also so deducted. 55.Member Lo would in his part of this judgment determine CLP’s review application concerning AUC and CS. 56.I may however add that, in Mr Davis’ Approach 1 valuation method (which the Tribunal has accepted), he has included HT’s AUC and CS within his assessment of the HT’s asset base on the basis that the HT has invested this capital in the business at the AVD. However, he has specifically excluded HL’s AUC and CS from the HL’s asset base as they are not rateable. However, in order to be fair, he has at the same time made an adjustment within the R&E Method by deducting an estimate of the PR on these items of the HL from the DB, because he appreciates that the PR as permitted under the SOC includes a return of the value of these HL’s non-rateable AUC and CS (as they are on the SOC register). He accepts that this (ie, the return) is plainly the HL’s money although it is not rent. By taking it out from the DB, it ensures that the HT would not unjustly share this after having the HT’s own AUC and CS assets included in its assets base to split the DB[13]. 57.This is consistent with the suggestion that although the value of the AUC and CS should be deducted from the HL’s asset base in the asset split exercise, the HT’s AUC and CS should not be so excluded. B3. Wayleaves, pole sites and DCS 58.We have at paragraphs 215 to 226 of the Main Judgment concluded that DCS are rateable. 59.We have also at paragraphs 227 to 234 of that judgment concluded that, among others, the electrical cables and pipe works are also rateable under s 8A of the RO by reason of the land or building occupied by them. In the premises, CRV also submits that, for the same reason, the wayleaves for cables and two gas pipelines and the pole sites are similarly rateable. 60.There is no dispute that wayleaves are valuable in their contribution to the Tenement[14]. 61.CRV therefore in this review asks the Tribunal to further determine how the value of the DCS and wayleaves should be assessed for the purpose of including them as part of the HL’s asset base in the asset split exercise. It is CRV’s submissions that, in the asset split exercise (as approved by this Tribunal):
62.CLP however principally contends that although the DCS and wayleaves are rateable in principle, they should and need not be specifically included in the HL’s asset base in the asset split exercise[15]. 63.Alternatively, if they are to be so included in that exercise, they should only be attributed with (for the DCS) their annual rental value, and (for the wayleaves) the rental value based on a “snake coil” method[16]. 64.I would deal with CLP’s principal contentions in this part of the judgment as to whether the values of the DCS and wayleaves should be specially included in the asset split exercise. Member Lo would deal with the valuation aspects later. B3.1 The applicable approach in the present case 65.CLP principal argument is premised on the contention that the asset split exercise should be done by reference to the SOC assets register (“the SOC register”) only. In other words, as a start, the asset split between the HT and HL is made by reference to their respective NRA and RA which are on the SOC register. 66.As I understand from Mr Holgate’s arguments, this is so because:
67.I agree that, in the present case, the starting position of the asset split exercise should be made by reference to the NRA and RA on the SOC register. I will explain why. 68.I will first look at the HEC CFA Judgment. 69.The principal dividing line in the HEC case between HEC and CRV was that, in adopting the R&E Method, whether one should use the WACC approach (favoured by CRV) or asset split approach (relied on by HEC). Lord Millett was fully conscious that the asset split approach as advanced by HEC was premised on the basis that the HT’s required return would be the rate of return on its ANFA as at the same rate the Company’s actual return on the total ANFA (see paragraphs 162 and 163 of the HEC CFA Judgment). 70.Further, the learned NPJ at paragraphs 162, 167(e), 169, 170 and 177 of the judgment confirmed that the Tribunal’s adoption of the asset split approach in the HEC case was premised on, among others, the Tribunal’s crucial finding that the company’s actual return represented by the DB was also derived at the same rate from all its assets whether the RA or NRA in the SOC register[18]. 71.At the same time, in discussing the relevance of the SOC in the rating exercise, Lord Millett says at paragraph 165 that the SOC is relevant as it, among others, contains a register of the assets employed in the undertaking and gives their ANFA. When this relevance (ie, the SOC register) is understood in the above context of the HEC’s split asset approach (which was accepted by the Tribunal and confirmed by the CFA), it appears to me to have also been accepted by Lord Millett that the asset split exercise was premised on the proportion of the HT’s assets and HL’s assets on the register. 72.On the other hand, it is of course noted that Lord Millett has also said at paragraph 164 that, where the PR was not achieved in the relevant year, the SOC is not relevant to either ascertaining the amount of the DB or the HT’s share. This is so, as I understand it, since the DB represents the company’s actual return and is derived from its books, not from its SOC (see paragraph 166)[19]. 73.However, when the company earned the PR in the relevant year (as in the present case), in my view the above distinction does not in practical terms apply, as the actual earning of the company was the PR. 74.Mr Yu seeks to distinguish the above understanding of the CFA’s judgment from the present case. He submits that in the HEC case, it was part of HEC’s case that the value of its assets was pinned to the NBV as provided in the SOC. Thus, this constituted the underlying basis of the conclusion therein that the asset split was to that extent referenced to the SOC register. However, in the present case, as CLP is asking to pin the value of the assets to DRC (which has been accepted by this Tribunal in the Main Judgment), a wholly different consideration arises and the underlying basis of the above understanding of the HEC case no longer applies. 75.With respect to Mr Yu, I am not persuaded. 76.As submitted by Mr Holgate (which I accept), both NBV and DRC are only proxies employed by the valuers to give a particular set of assets its market value. They do not change the nature of the assets. In other words, whether NBV or DRC is adopted in the valuation exercise, it does not affect the assets’ nature and therefore how they should be treated in the asset split exercise. I therefore do not agree that there is such a distinction between the present case and the HEC case in relation to the question as to whether the asset spilt exercise should be referenced to the SOC register. 77.Mr Yu has also argued that, as Mr Davis in his Approach 1 has included the value of some assets in the HT’s asset base in the asset split exercise which are not on the SOC register, this is therefore inconsistent with CLP’s now submissions that its asset split is premised on the SOC register. These non-SOC assets are mainly some of the customer substations which are subject to short term tenancies (“STT”). The fact that they have been so included by Mr Davis can be for example demonstrated by reference to Appendix AMD5 and AMD7, and paragraphs 5.14 to 5.16, 5.23 of Mr Davis first report, as well as the AC4 Table. Mr Davis has also reiterated in his first report that he has adopted the valuation of those assets in the CB exercise as provided by Mr Child into his R&E Method. 78.It is not disputed (and I think it also cannot be disputed) that Mr Davis in his Original Method had included some of these STT customer substations in the asset split exercise. Mr Holgate submits that it was clearly a mistake made by Mr Davis by simply incorporating the values of all the assets arrived at under the CB Method, without making a fine or careful distinction of whether all those assets are on the SOC register or not. 79.There is of course no clear evidence before me by Mr Davis to say that he has made the mistake as Mr Holgate submits. 80.I would therefore prefer to look at what Mr Davis has said in his first report as to what he has intended to do. 81.To that extent, I note that at paragraph 5.16 of his first report, he makes it clear that he is “using both CB and R&E valuations to arrive at my final opinion of value. It is therefore important that a consistent approach to asset value is used in both cases” (emphasis added). 82.What I understand objectively from this paragraph is that the principal reason why Mr Davis has incorporated in a wholesale manner the CB valuations into his R&E Method for asset split is that he wants to maintain a consistent approach in relation to the values of the assets used in the R&E Method and the CB Method. 83.At the same time, Mr Davis at paragraph 13.31 of his first report summarises his Approach 1 as follows:
84.This is (as Mr Holgate emphasises) consistent with using an asset split by reference to the SOC register base. 85.When these paragraphs I have referred above are read together, I am prepared to accept that it is Mr Davis’ objective intention to base his asset split approach by reference to SOC register asset base as a starting position. However, he also intends to maintain a consistent approach in arriving at the values of those assets by simply incorporating the values arrived at by the CB Method. In that exercise of incorporating the asset value, it is in my view more likely than not that Mr Davis has overlooked the fact that a small portion of the STT customer substations (which are not on the SOC register) are included with the other substations (which are on the SOC register) [20]. 86.However, to add to his above contentions, Mr Yu also draws the Tribunal’s attention to paragraph 27 of Mr Hardaker’s affidavit filed in support of CLP’s leave application to apply for review, where he deposes:
87.This is (Mr Yu submits) also a clear position taken by CLP that even DCS (which are not on the SOC register) should be included in the HL’s asset base in the asset split exercise. This is inconsistent again with CLP’s present submissions that the asset split is to be referenced only to the SOC register assets. 88.I am also not persuaded. What Mr Hardaker has said[21] in the leave application cannot in my view significantly or materially change my reading and understanding of Mr Davis’ report and the other relevant documents as explained above. 89.I therefore accept that the starting position of the asset split exercise is by reference to the asset base on the SOC register. But in my view, the above starting position is subject to the following qualifications to cater for the special circumstances of the Tenement so as to provide a better proxy to assess its rateable value. 90.First, even if certain asserts are on the SOC register, but if as a matter of law they should not constitute part of the RA (for example if they were not yet capable of occupation, such as the AUC), they should be discounted from the HL’s asset base in the asset split exercise[22]. 91.Second, even if certain assets are not on the register, but in fact they had contributed to the actual earning in the business (and thus the DB) in a relevant year, although they do not specifically feature in the asset split exercise, their value would have been already captured by the R&E Method and reflected in the DB. As such, the HL and HT have already shared this part of the contribution under the asset split approach. 92.This is in line with Lord Millett’s observations in the HEC CFA Judgment. In the HEC case, the CRV advanced an argument in the Court of the Appeal that the Tribunal’s acceptance of the asset split approach valuation was an error of law, since that approach did not take into account the value of (among others) the wayleaves and customer substations which had contributed significantly to the earnings of the undertaking. The Court of Appeal accepted that argument. However, the CFA overruled that. In rejecting the CRV’s argument, Lord Millett said these at paragraphs 183 and 184:
93.In other words, the CFA has confirmed that, in relation to the rating valuation of specialised properties such as the present one, although a R&E method based on an asset split approach does not take into account the value of items such as wayleaves and customer substations, that is acceptable as a matter of valuation and rating principle, since their values have already been captured by the method and reflected in the DB. 94.Finally, in addition to the above qualifications, it is in my view also acceptable in the present case (as for any valuation methods) for a valuer to make any further necessaryadjustments in order to (if justified) reflect and cater for any special circumstances. 95.The China Assets constitute an example of such a special circumstance in the present case. 96.Given the common ground in this case of its very significant 30% contribution to CLP’s power production to serve its customers in Hong Kong, the Tribunal therefore accepted Mr Davis’ proposed adjustment in giving a further 10% uplift of the DB in order to reflect this particular and significant feature of these assets. B3.2 Applying these principles to the present contentions 97.In light of the above principles I have arrived at, I accept Mr Holgate’s submissions that the DCS and wayleaves (as well as the pole sites), even though rateable, should not be specifically included in the HL’s asset base under the asset split exercise, as they are not on the SOC register. However, their respective critical values in contributing to the undertaking’s earning have already been captured by the R&E Method and reflected in the DB. B4. Decapitalisation rate 98.This issue concerns the choice of the decapitalisation rate when it needs to be applied for the purpose of the valuation exercise. This would be dealt with by Member Lo later in this judgment. B5. Interests 99.The only outstanding issue[23] under this matter is whether (as contended by CRV) CLP should be disallowed interest on the over-paid rates for the entire or part of the period from December 2004 to July 2008 when these appeals were adjourned sine die. B5.1 Applicable principles 100.There is no dispute that this Tribunal has a discretion to disallow CLP certain period of interests on the refund of the rates, and that the principles governing that exercise of discretion are as follows:
B5.2 Discussion 101.CRV’s case in support of a disallowance can be summarised as this. 102.It is common ground that the present appeals were lodged by CLP in November 2004. CRV filed its opposition in December 2004. By consent, the Tribunal adjourned sine die these appeals on 17 December 2004 with liberty to restore. 103.On 10 July 2008, CLP took out an application (“the interlocutory application”) seeking to restore the rating appeals under LDRA 536/1999 with the related directions on the filing of factual and expert evidence. It also sought a direction to consolidate the hearing of LDRA 536/1999 with the present appeals and seven other CLP’s rating appeals (collectively, “the Other Rating Appeals”) that had also been lodged by CLP. 104.On 3 November 2008, Lam J (as he then was) granted the order to restore the present appeals. His Lordship however also ordered the stay of all the Other Rating Appeals and LDRA 536/1999. 105.On 24 November 2008, the Tribunal gave directions on the conduct of these appeals together with the directions on the filing of factual and expert evidence. These directions were later subject to a number of consented extensions of time. 106.Under this procedural context, CRV now contends that there are at least 37 months of unjustifiable delay by CLP in prosecuting the present appeals. This is because:
107.With respect, I am unable to accept these submissions. In my view CLP is not guilty of unjustified delay when the following matters are looked at realistically and in the round:
108.After taking into account of all these matters, and echoing Jackson J’s observation in Claymore Services Ltd, supra, at para 460 that “it is not reasonable to expect any party to take litigious step at the first possible moment, or to concentrate on litigation to the exclusion of all else”, I am not satisfied that CLP had committed any unjustifiable delay in the subject period so that I should exercise my discretion to disallow its entitlement to interests. B5.3 Conclusion on interests period 109.For these reasons, I therefore conclude that CLP should have interests at the agreed interests rate also for this disputed period between December 2004 and July 2008. Member Lo: C. INTRODUCTION 110.The parties could not agree on a number of inputs that would be needed before Mr Davis’ Approach 1 (as accepted by the Tribunal in the Main Judgment) could be employed to assess the rent and therefore the rateable value (“RV”) of the Tenement. They applied for the review of parts of the Main Judgment so that the Tribunal should give determinations on the areas of disputes. 111.The details of their disputes over a number of areas in the present reviews of the Main Judgment have been set out by Au J above. I have the benefit of reading Au J’s above decisions of which I agree. I would deal with the valuation issues in this part of the judgment. 112.It is noted that the parties have the following valuation disputes which prevent them from agreeing the outstanding matters so that they could work out the RV following the Main Judgment: (a) the R&E accounts adjustment, (b) wayleaves, (c) DCS, (d) AUC and CS, and (e) capitalisation rate. C1. The R&E accounts Adjustment 113.I refer to Au J’s judgment above on the context of this issue. As I mentioned above, I agree with Au J’s reasons and determination under this issue. What I would focus on in this part of the judgment is the choice between Mr Davis’ Original Method, Mr Davis’ Revised Methods or Ms Jim’s Method. 114.CRV submits that Ms Jim’s use of receipts and expenses per customer involved using the accounts for the years ending 31 December 2003 and 31 December 2004 to make a projection of the annual rate of change of gross receipts and operating expenses per customer. She then made an estimation of the annual gross receipts and operating expenses for the rating year 1 October 2003 to 30 September 2004 by reference to (a) the customer numbers as at 1 April 2004, and (b) the projected annual rate of change of gross receipts and operating expenses per customer. Therefore, in these reviews, CRV asks the Tribunal to reconsider the issue of which method should be used to estimate the gross receipts and expenses. 115.CLP submits that “in LT 362 the Tribunal went no further than to endorse the concept of making an adjustment using receipts and expenses per customer to reflect economic growth in the tenement up to 1st April 2004…The Tribunal did not go further and find that the actual method employed by Ms Jim using the accounts ending 31st December 2004 was a proper way of making the adjustment. In that way it can be said that LT 362 and 365 are not in conflict, but that would leave open the question how should effect be given to LT 362”.[25] 116.The Tribunal has given leave to the parties to adduce expert’s additional evidence for “a proposed method to resolve the inconsistency of the Tribunal’s ruling on 24 April 2013”. 117.Mr Davis filed a report (“the Review Report”) for this purpose which, apart from clarifying and endorsing his original method, contained four alternative methods of adjustments (of which he gave his preference to one alternative method in the event that the Tribunal is not satisfied that his original method adequately reflects economic growth) (ie, Mr Davis’ Revised Methods). 118.Similarly, Ms Jim clarified in her report adduced for this review her original valuation method. She has not proposed any alternative method to resolve the “inconsistency” of the Tribunal’s determinations, but maintained that her original valuation method was preferable to Mr Davis’ Original and Revised methods. In these reviews, both experts gave evidence and were cross-examined. 119.Therefore, in reconsidering the issue of which method should be used to estimate the gross receipts and expenses, there are before the Tribunal a choice of several methods: (a) Mr Davis’ Original Method, (b) Mr Davis’ Revised Methods, and (c) Ms Jim’s Method. 120.CLP submits that the Tribunal merely preferred the use of changes in receipts and expenses per customer to reflect economic growth in tenement but did not endorse Ms Jim’s use of accounts ending 31 December 2004 for that purpose,[26] but the Tribunal specifically rejected the use of Ms Jim’s accounts to 31 December 2004 for the following reasons[27]:-
121.Therefore, in these reviews, the primary position of CLP is that there is no conflict between paragraphs 362 and 365 of the Main Judgment, and that Mr Davis’ original approach is appropriate; and that Ms Jim’s use of CLP’s 2004 accounts is wrong. However, in the event that the Tribunal upholds its findings in both LT 362 and 365, Mr Davis has proposed in his Review Report for the Tribunal’s consideration four possible alternatives ways of reconciling (a) the use of customer numbers to reflect physical growth in the tenement between 31st December 2003 and the List Date, with (b) the use of accounting data up to 31st December 2003 only.[28] 122.In the Review Report, Mr Davis summarised comprehensively both his original valuation method and that of Ms Jim as follows:
123.On the basis that it is necessary to combine (a) the use of customer numbers to reflect physical growth in the Tenement between 31 December 2003 and the state of the Tenement at 1 April 2004, and (b) the use of CLP’s accounting data up to 31 December 2003 only, Mr Davis has provided four alternative methods in his Review Report[29]:
124.For these four alternatives, Mr Davis opines that as alternative (1) has 2002 as its starting point, it is too far away from AVD to be helpful. Alternatives (3) and (4) simply spread the exercise over a longer period and can add nothing to accuracy in view of the lack of either a constant growth or decline pattern in CLP’s accounts. He has at the end undertaken a calculation based on his alternative (2) with the result shown in Appendix AMD A. He concludes that if the Tribunal, on undertaking the reviews, is not satisfied that his Original Method adequately reflects economic growth, he offers the above alternative (2) in its place. 125.On the other hand, CRV submits that Ms Jim’s Method is preferable to both Mr Davis’ Original Method and Revised Methods because (a) evidence based on hindsight is admissible as a matter of law, and where available, is preferable as a matter of rating valuation practice; and (b) Ms Jim’s method produces a more reasonable and accurate estimation of what the hypothetical parties, standing as at 1 October 2003, would have predicted for CLP’s business performance over the next year.[30] 126.More specifically, CRV claims that Ms Jim’s Method produces a more reasonable and accurate estimate for the following reasons[31]:
127.Furthermore, CRV submits that “the valuer in any event should avoid the pitfall of artificiality created by shutting out post-valuation data evidence… Thus, the use of accounting information available only after the date of the hypothetical haggling will yield a more reliable value of occupation”[32]. 128.I have read and noted Au J’s decision above on the issue of whether and how hindsight could be used in the R&E Method, particularly in the adjustments of accounts for receipts and expenses. I agree entirely with his reasons and conclusion on the proper use of hindsight in valuation. 129.I also agree with CLP’s submissions that under paragraphs 5.6 to 5.10 of the JRF Guidance Note, the general approach is to use accounts for the years preceding the valuation date. The use of hindsight, in the sense of accounts post-dating the valuation date is mentioned only in the context of “new ventures where previous years’ accounts do not exist” and even then only “as a means of confirming trends discernible at the AVD” (see paragraph 5.11 of the Note). 130.The RO requires the HL and HT (and therefore the experts advising the parties, in this case Ms Jim and Mr Davis) to project, as at 1 October 2003 the receipts and expenses of the accounts for the Tenement for the rating year commencing on 1 April 2004. Therefore, instead of using the actual rating year’s accounting data, the parties are expected to project, as at the valuation date of 1 October 2003, the estimated rate of change of the receipts and expenses from the adopted actual year’s accounting data to the relevant rating year. I am of the view that the use of actual accounting data for the rating year in the way as Ms Jim has proposed to use them is not envisaged in the RO. The parties could not simply wait till the date that the accounting data for the rating year becomes available and then use the actual data in the analysis thus negating the need to make a projection at the valuation date that is required under the RO. Instead, we have to remind ourselves that the RV requires projection. 131.After reviewing Ms Jim’s valuation, I do not agree with her that the parties would have projected the growth per customer as at the date of valuation of 1 October 2003 in the manner as what she has done in her valuation. She has simply adopted the actual accounts for the year 2004 (from 1 January 2004 to 31 December 2004), calculated the rate of change from 2003 to 2004 and applied that to the rating year. She has assumed that the HL and HT would have predicted and agreed for the estimated rate of change (which was exactly as the actual rate of change) in the purported projection of CLP’s business performance over the rating year. In other words, she is in fact saying that the HT would have been able to predict with exact accuracy the business change (or the per customer profitability change) for the next year. From a valuer’s judgment point of view, I do not think this is justified and preferred simply because you could now make use of the post List Date accounts, which were not available to the parties on the valuation date or the List Date. 132.In addition, after reviewing the evidence, I agree with CLP’s following submissions[33] that CRV was wrong in submitting that Mr Davis did not explain how his technique provides a reasonable projection of how the business would perform during the first year of the letting:
133.In CLP’s Supplemental Submissions, the issue of whether and how the effects of SARS should be taken into account in the projection of the business performance of the occupier of the Tenement as at 1 October 2003 are discussed is details. I reproduce below those relevant paragraphs:
134.Having reviewed the evidence of the original hearing for this case, and after considering the submissions of the parties on this hotly debated issue in these reviews, I agree that in considering what the effect of SARS may have on the valuation, the following evidence as at 1 October 2003 is relevant:
135.Therefore, I agree with CLP that the evidence given by these witnesses in the original hearing indicated that, by 1 October 2003, although the SARS had subsided, it was simply uncertain that the SARS might come again or not. I also find that we could not use the economy performance 10 years down the road to say that by 1 October 2003, the outlook for the rating year from 1 October 2003 must be so much better than the period of the year 2003 which was affected by SARS. 136.In addition, I find that as at the valuation date of 1 October 2003, there is no valuation evidence adduced before the Tribunal in the original hearing to show that Mr Davis was wrong in (a) forming his opinion and value judgment that the business performance would not go further up or down, but would continue to be at the same rate as for the last 3 months of 2003, and (b) consequently, using that rate of change in projecting the business performance for the remaining 9 months of the rating year (ie, from 1 January 2004 to 30 September 2004). 137.In these reviews, Mr Davis was criticized that being not a local practising rating valuer residing in Hong Kong, he had limitation in appreciating the dampening effects of SARS on the economy of Hong Kong as a whole and on the outlook of the business performance of the ratepayer of the Tenement in particular. However, I find that it is reasonable for Mr Davis to base on the evidence adduced by the parties in the original hearing of the case in forming his assessment of the effects of SARS on the valuation for the Tenement. It does not necessarily follow that, since he had no prior actual working knowledge in Hong Kong during the SARS period, his evidence must be tampered. 138.Mr Davis was also criticized because on the one hand, he said “history does not repeat itself”, and on the other hand, he studied and analyzed 7 previous years’ accounts before coming to his conclusion of value, including his valuation decision of using the last 3 months of 2003 actual accounts in his projection for the remaining 9 months of the rating year commencing from 1 October 2003. I find this criticism unfair. Any prudent valuers should and must undertake to study the previous few years’ accounts before coming to the conclusion of the projection for the year commencing from the beginning of the rating year. What’s wrong with that? What Mr Davis has come to conclude was that the previous 7 years’ of historical performance did not indicate a clear upward or downward trend for those years. However, he was entitled, as a valuer, to form his opinion judgment as to what would be the most probable estimate of value as at the date of valuation and, in the context of this case, more precisely, what would be the most probable rate of change of receipts and expense of the business under study. 139.Also, I prefer Mr Davis’ Original Method to his Revised Methods, including alternative method (2), because the latter method only uses one year’s rate of change (ie, the rate of change between the performance of year 2002 and 2003) to adjust the latest year’s actual accounts (the accounts for the year 2003). On the contrary, Mr Davis’ Original Method uses the actual year 2003 accounting data available at that time, analyses the accounting data for the previous 7 years and makes his projection and judgment as to the performance of the business as at the date of valuation of 1 October 2003. The Original Method, by comparison, clearly has the advantage of not relying on one single year’s rate of change in the valuation. 140.To conclude, on balance, I find in favour of the evidence adduced by Mr Davis. I conclude that it is more likely than not that the HL and HT would have estimated the rate of change in the manner as undertaken by Mr Davis in his Original Method, than in accordance with the method adopted by Ms Jim. Upon reviewing and reconsidering the evidence of Mr Davis and Ms Jim, I am satisfied that Mr Davis’ Original Method already adequately reflects the economic change per customer that might have been projected by the HL and HT in the negotiation for the rent for the Tenement. C2. Wayleaves, pole sites and DCS 141.Au J has at paragraphs 89 and 97 above determined that as a matter of valuation principle, the asset split exercise to be undertaken under Approach 1 is to be referenced to HT and HL’s respective asset base as registered on the SOC register, subject to the qualifications set out at paragraphs 90, 91 and 94. Thus, the wayleaves, pole sites and DCS need not be included in the HL’s asset base in the asset split exercise. 142.I agree with Au J’s conclusion and reasoning. 143.It is thus strictly speaking unnecessary for the Tribunal to decide on the proper valuation of those assets for the purpose of the including them in the HL’s asset base. 144.However, for completeness, and in case we were wrong in agreeing to exclude them from the HL’s base, I would in below set out my views on what I regard to be the proper valuation of these assets for the asset split exercise. C2.1 Wayleaves 145.I first deal with the valuation of wayleaves. 146.In this review, the Tribunal has not given leave to the parties for adducing further evidence from the experts on this matter. Therefore, I have to consider that part of the evidence adduced by the experts for the parties in the original trial in the estimation of the market value of the wayleaves, and make a determination. 147.In these reviews, CLP asks the Tribunal “to reject as a valuation the decapitalisation of a rental figure which is capable of giving such widely divergent results.”[34] CLP submits that the main problems in adopting that are (a) the lack of true comparables; (b) the reality is that the wayleaves, or rather the block licence granted by Government only commands a nominal fee of $2.3 million per annum, and (c) the range of error in estimating the market rental figure for the wayleaves will be magnified by the use of a capitalisation factor. 148.Therefore, CLP submits that that in case the Tribunal should conclude that more than a nil or nominal value is justified for the wayleaves, “the only sensible approach is to add a rental valuation to the outcome of the R and E valuation and not to attempt to incorporate a capitalised rental figure in the asset split”[35]. CLP’s contends that the rental value for the wayleaves is about $89,372,102 per annum, based on the maximum estimate made by Mr Child in his evidence adduced in the trial.[36] 149.This position is seriously opposed by CRV, who submits that “it is not open to CLP to introduce the amended method of valuation” at this late stage as it is “a matter on which evidence should have been called by the CLP”[37]. Instead of this rental estimate, CRV submits that the wayleaves should be valued by the capitalization of Ms Tang’s annual rental estimate of $841,610,112 by adopting a decap rate of 6% per Mr Rose’s estimate. C2.1.1 Should rental valuation instead of capital valuation be used in the asset split? 150.In these reviews, therefore, CLP firstly seeks to argue that instead of a capital valuation, a rental valuation method should be used in the step of “asset split” in the Approach 1 valuation. 151.In CRV’s Submissions, she has recounted the evidence given by CLP’s experts to show that under Approach 1, CLP had clearly proceeded on the basis that the HL/HT’s asset split should be ascertained by capitalizing rental valuations of the HL assets by use of Mr Rose’s decap rate[38]. It is thus CRV’s submissions that:
152.CRV therefore submits that “[f]rom the above, it is clear that Mr Davis’ (and Mr Rose’s) approach to obtaining HL asset values for the purpose of the asset split approach, where the empirical valuation had been carried out on a rental basis, was to capitalise the rental value using Mr Rose’s decapitalisation rate. The wayleaves, Dedicated Customer Substations and pole sites have always been treated as part of the same category of assets. There was never any qualification that this was not the right approach for these assets; the only rider was that the valuation was subject to CLP’s primary case that the substations were not part of the Tenement. Accordingly, it is submitted that the value of the wayleaves, Dedicated Customer Substations (as well as the Non-Dedicated Customer Substations) and pole sites should be included in the HL asset base by capitalisation of the annual rental values.”[39] 153.After reviewing the evidence adduced at the trial, I find and agree with CRV’s submissions that that as part of his Approach 1 valuation, Mr Davis has used Mr Rose’s decap rate to obtain capital values for all of the HL’s assets. I therefore find that there is no reason why in these reviews, a different method or approach of valuation should be applied to the wayleaves (and similarly, to the DCS and pole sites, which will be dealt with in the following section). 154.I also agree with CRV that since this is a review but not a rehearing, this is not an occasion for the parties to re-open the rating appeals generally, including putting forward new approaches to valuation. CLP has already had ample opportunity to put forward different approaches to the Tribunal, and it did in fact develop 3 such approaches. Therefore, I decide that CLP should not be allowed to develop a modification of its Approach 1 in these reviews. 155.In other words, as a matter of proper valuation of the market value of these relevant assets, I conclude that the approach should be one based on their capital values. 156.The next questions are: (a) what should be the appropriate decap rate, and (b) what should be the proper estimated market rental value for applying the decap rate. C2.1.2 What should be the de-capitalisation rate? 157.I have already decided above that in case it is necessary to assess the market value for the wayleaves, it should be based on the capital value of the wayleaves. In this respect, I agree with CRV that the capital values of the wayleaves would be estimated by multiplying the estimated market rental value of the wayleaves with an appropriate capitalization rate. Based on the experts’ estimates of the rental value, and applying the different capitalization rates suggested by the parties in the reviews, the estimated market value of the wayleaves would be in the range of about $0.6 billion to $14.0 billion, as calculated in the table below:
158.CLP sets out in his skeleton[40] a long section on the capitalisation rate used by the experts for the parties in the trial of this Appeal. I summarise below CLP’s submissions:
159.CRV submits that as Mr Davis has applied “the decap rate of 6% to arrive at capital values for all properties valued on a rental basis which CLP accepted to be rateable” as part of his Approach 1 valuation, there is no reason that “the decap rate of 6% should not similarly be applied to any other HL properties valued on a rental basis which need to be converted into a capital value for inclusion into the asset base.”[41] The range of properties is wide-ranging, including: the Former Tsing Yi Power Station, industrial buildings, staff quarters, shops, and other properties. 160.In reply, CLP submits that first, any positive value should be dealt with as a rental valuation added to the R&E valuation output; second, Mr Davis’ exercise needs to be seen in context and more importantly, there is nothing in the evidence of Mr Davis or any other CLP’s or CRV’s witnesses which could justify treating the exercise carried out by Mr Davis as one of general application because it is thought appropriate to capitalise rental values for any other set of assets. 161.At the end, CLP has the following submissions on the choice of decapitalisation rate (or capitalisation rate if we take that to be the rate used to capitalise the estimated market rent of the relevant asset to estimate the market value)[42]:
162.After reviewing the evidence adduced in trial, I decide that the capitalization rate should be based on the WACC estimate first proposed by Mr Hatchwell and later revised and also agreed by the other experts as to quantum. The reasoning is basically the same as that decided by the Tribunal in the HEC case at paragraphs 318 and 319 of the HEC LT Judgment (as corrected under the corrigendum) as follows:
163.I do not find that there should be a difference in the treatment in the choice of the decap rates between the present appeals and the HEC case. This is so because the nature and type of their respective business and tenements are practically the same. As such, the principle behind the estimation of capitalization rate for their respective assets should also be the same. 164.To sum up, upon review, I decide that the capitalization rate for the estimation of asset in the present appeals should be 12.35% for the relevant year of assessment. C2.1.3 What should be the estimated market rental value of the wayleaves 165.Both Ms Tang and Mr Child used the comparison method of valuation in estimating the market rental value of the wayleaves. However, both agreed that there was no true comparable of rent for wayleaves for the purpose of valuation. Instead, they used indirect comparable as a basis in arriving at their opinion of values. 166.Ms Tang in her valuation report acknowledged that CLP was allowed to lay cables and to erect lines in or over Government land without the payment of fees or charges under the Block Licenses with the Government. Ms Tang made reference to the standard rates in the Revenue Assessment Manual (“RAM”) of the Lands Department charged by the Government for pipes or cables. As at 2004/2005, the standard rate was $4.80 per annum per 10mm diameter per metre run of the pipelines or cables. Having been unable to find any evidence of other wayleave charges for cables and pipelines, Ms Tang has applied that unit rate to the entire CLP network which, for the year 2004/2005, extended to over 34 million metres, giving an annum rental estimate of $841,610,112. 167.Mr Child opined that it was not appropriate to use the standard rate in RAM as the “wayleave fees charged by the Lands Department apply only to relatively short lengths of pipelines and cables, predominantly for the supply of cooling water to buildings which may not have direct access to seawater supply.” Therefore it was entirely inappropriate to use Ms Tang’s figures as these rates were usually applicable only for short lengths of pipelines for a specific purpose. Besides no adjustment had been made either for the nature of the use, location and more particularly for the quantum. 168.Alternatively, Mr Child considered that if it was necessary to look at other values as a check or as a reasonable proxy for what the land might be worth, he preferred to look at values of land for short term uses on the basis that “the cables are in, under or over land which is not normally built on such as roads, pavement or other yard”. He therefore analysed rentals of short-term tenancies (“STT”) of lands leased by Government for open storage uses the results of which were set out in Appendix 14 of his first report. He found that the average monthly unit rent was $44 per sq m as at the date of valuation of these appeals. He then opined that a large discount of 70% was warranted to take account of the following factors: (a) the extended network of linear strips of land in the wayleaves under consideration when compared with the open storage sites which were generally regular in shape, (b) the cables occupied land with a total equivalent surface area of about 1.7 million sq m as compared with the average site area of the comparable open storage sites of about 4,300 sq m, and (c) the wayleaves was a comprehensive network through, under or over land extending throughout Kowloon and the New Territories with much of the land being inaccessible whilst the STT sites were mostly in the urban areas and new towns with reasonable accessibility. 169.Mr Child also added this in his valuation report:
170.The approach taken by Mr Child has been termed as the “snake coil” method in these appeals. 171.After reviewing the evidence at trial, I decide that given the choice between the indirect comparables adduced by Ms Tang and Mr Child, I prefer to adopt the comparable used by Ms Tang. 172.It is undisputed that the RAM unit rates have been adopted by the Government. The nature of the use permitted under the wayleave for cable or pipeline is more akin to the use permitted by the Block License given by the Government to CLP (which is the basis of wayleaves the values of which are in disputes under these reviews) and is quite different to the open storage use of the STT that Mr Child preferred to use and took us to those evidence in his reports. I also disagree with the snake coil method as suggested by Mr Child. Having regard to the use permitted by the Block License, it is inconceivable that one could justifiably compare the present wayleveas with packing all these cables and pipelines on a piece of land and assess the rental figure for the land which can only accommodate the cables and pipelines. 173.However, I agree with Mr Child that a big discount is warranted for the reasons given by him. 174.Therefore, in the absence of any other more relevant and better evidence, I decide that the unit market rental value of the wayleaves in question should be assessed by (a) adopting Ms Tang’s unit rate derived from RAM (at $4.80 per annum per 10 mm diameter per metre run of the pipeline or cables), and (b) adopting Mr Child’s suggested discount of 70% (therefore multiplying Ms Tang’s rate by 0.3). Applying that to Ms Tang’s estimate of the physical size of the wayleaves (which was agreed by the parties), it gives a figure of $252,483,033 (Ms Tang’s figure of $841,610,112 x 0.3). 175.Therefore, applying the estimated rental figure of $252,483,033 to the capitalisation rate of 12.35%, one derives a figure of $2,044,397,028. C2.1.4 Conclusion on the capital value of the relevant wayleaves 176.In the premises, if the value of the wayleaves has to be separately assessed in the asset split, I determine this at $2,044,397,028 which is rounded to $2,044,400,000. C2.2 Pole sites 177.The ancillary assets under the category of wayleaves include 2 gas pipelines and pole sites. The experts for the parties adopted different valuation treatments for these assets similar to that of the wayleaves for the cables. 178.Mr Child stated in his valuation report that since the poles are not subject to any payment, he has not included them in his valuation[43]. However, he said that if the Tribunal were to find that they should be included in the valuation, he would agree with Ms Tang’s valuation of the annual rental value of $30,400. 179.For the 2 gas pipelines in his valuation, Mr Child said that although he had not previously included them in valuation, he has subsequently valued them by reference to STT rentals for open storage uses.[44] 180.CLP submits that these assets should not be included, or alternatively, should be assessed at a nil or nominal rent, or in the case of 2 gas pipelines, should be assessed as for the wayleaves for the cables. CRV submits that the poles sites and the gas pipelines sites should be included in the HL asset base by capitalization of the annual rental values. 181.For reasons similar to the wayleaves for the cables, I agree with CRV that should a value be required for these assets in the asset split, they should be valued by capitalization (of the same decap rate I have concluded above) of the annual rental values. In view of the minute nature of the assets, I adopt the figures estimated by Ms Tang. C2.3 DCS 182.CLP argues that if the substations are to be valued, they should be valued by using some kind of a new modified Approach 1. CRV however submits that for the reasons already given in relation to the wayleaves, this argument should not be countenanced. 183.After reviewing the evidence, I agree with the submissions from CRV and would not allow CLP to run a case on a new modified Approach I, for the reasons I have already set out above in the section on wayleaves. 184.CRV further submits that[45]:
185.I agree with the above submissions as to the values of the DCS and hold the same. To avoid any confusion, the same decap rate I have concluded above under the item of wayleaves also applies to the valuation of DCS on the above basis. 186.Towards the end of the reviews’ hearing, CRV also asks this Tribunal to include in the values of the DCS (if they should be so included in the HL’s asset base for the asset split) their civil and building cost. Mr Yu on instructions refers us to parts of the “Summary of Agreed Figures”[46], which sets out the ERCs (estimated replacement costs) of certain power stations[47]. 187.I agree with Mr Holgate’s submissions that the Tribunal should not be concerned with this for the present reviews:
188.I would therefore not deal with this part of CRV’s submissions. C3. AUC and CS 189.CLP asks that the Tribunal should review its decision in paragraphs 372 to 376 of the Main Judgment that the deductions for AUC should be made in the same way as in the HEC case because it is “unclear” how the deductions for AUC and CS were made in the HEC case. 190.CRV clarified the position through the Department of Justice’s letter of 31 July 2013 and again in the Submissions for the Review as to HEC’s treatment of the matter[48]. In the HEC case, deductions were made from both the HT’s and HL’s asset base. She therefore submits that (following the Tribunal’s above decision in the Main Judgment) the parties in this case should follow the same treatment. 191.CRV further submits in her Reply Submissions that CRV is not in these reviews asking the Tribunal to revisit its ruling that AUC and CS which have been completed but not commissioned are not rateable. However, CLP in substance wants to re-open the argument on AUC because instead of adopting the HEC approach which excluded both HL’s and HT’s AUC from the parties’ asset bases and their receipts from the DB, CLP now wants to exclude the HL from any return on AUC and CS, but allow the HT to earn a return on the HT’s AUC[49]. This, CRV says, should not be permitted. 192.For the purpose of these reviews, I have revisited the evidence, including Mr Davis’ valuation reports for his Approach 1. In particular, I note the point made by Au J at paragraphs 56 and 57 above that Mr Davis has all along in his first report included HT’s AUC and CS within the assessment of the HT’s asset base on the basis that the HT has invested this capital in the business at the AVD for the reasons explained there (see paragraph 5.12 and also Table 5.1 of Mr Davis’ first report). Therefore, even though the AUC and CS were ruled “non-rateable” in law with the result that the HL’s AUC and CS has to be specifically excluded from the HL’s asset base, it does not follow that the HT’s AUC and CS also have to be excluded from the HT’s asset base. As such, CLP’s treatment of the parties’ AUC and CS should be accepted, instead of CRV’s suggested treatment (in following the HEC case’s treatment). 193.In the Main Judgment, reference was made by me that “deductions should be made in the same manner as we have held in the HEC case” (at paragraph 376). Upon review, I find that that statement was a mistake. As I have considered and accepted in the Main Judgment the Approach 1 valuation, on a proper construction of Approach 1 (as explained above), I should not have asked for adjustments to be made in the same manner as what HEC had done. As the parties in HEC had no dispute in this area of their case, I was not fully alerted to Mr Davis’ above treatment of the AUC and CS in the asset split exercise at the time of giving the main Judgment of the present case. Au J: D. CONCLUSION 194.I also agree with Member Lo’s above reasons and determinations. 195.In the premises, for the issues raised under these reviews, we conclude as follow:
196.As CLP is substantially successful in the reviews, we also make an order nisi that costs of the review applications be to CLP, to be taxed if not agreed, with certificate for two counsel. Unless any of the parties applies to vary it, the orders shall become absolute 21 days from today. 197.Lastly, we thank counsel for their helpful assistance in these reviews.
Mr David Holgate, QC, leading Mr John Litton,instructed by Holman Fenwick Willan, for the appellant Mr Benjamin Yu SC&Ms Yvonne Cheng SC, instructed by the Department of Justice, for the respondent APPENDIX
[1] CRV seeks to review the issues under (1), (3) and (5): see Affirmation of Or Siu Hung dated 15 May 2013. CLP seeks to review the issues under (1), (2), (4) and (6): see Affidavit of Hardaker dated 16 May 2013. [2] The antecedent valuation date. [3] See also footnote 4 to Ms Jim’s Summary of Evidence produced at the main trial. [4] See also Ms Jim’s effective acceptance of this under cross-examination [Day 2/36:15-45:23]. [5] See CRV’s closing submissions at paragraph 542. [6] See the HEC CFA Judgment at paras 94 and 152. [7] The rating appeal in that case was in fact decided by the Tribunal in 1994, although it was only reported in the law reports in 1996 (in [1996] RA 475) and in 1997 ([1997] 4 HKC 461). The case is also important for its determination that the word “state” of the tenement under s 7A(2) included physical state and intangible factors (and economic growth was a relevant factor to be taken into account although it was left open as to whether that belonged to a physical or intangible factor). [8] See also Lord Robertson at p 433 who said: “I have only to add that my view exactly coincides with that of Phillimore J when he says: ‘The true inquiry here is not what is the value of the coalfield or of the coal, but what would the colliery company, if they had not been prohibited, have made out of the coal during the time it would have taken them to get it.” [9] At pp4-5 of the internet copy provided to this Tribunal. [10]In particular, as I have mentioned above, there appears to be no competing submissions made in the 1994 CLP case for this question as in the present case. The Tribunal in the 1994 CLP case therefore did not have the benefit of these submissions as we now have. [11] As he has used the CLP accounts up to 31 December 2003. [12] However, if a valuer (advising the HT) has properly made a projection of say the economic growth of the relevant business at say the rate of X% based on all the information that was available at the AVD, and that projected rate turns out to fall exactly as or very close to the actual rate based on the post List Date accounts, it may then of course be open to the valuer to make use of those accounts to confirm his earlier projection. See also paragraph 50 above. [13] See paragraph 5.12 and also Table 5.1 of Mr Davis’ first report. [14] See paragraph 268 of the Main Judgment. Cf also HEC CFA Judgment, para 184. [15] CLP initially in its review application seeks also to review the Tribunal’s decision that the DCS are rateable. At the hearing, it has decided not to pursue this aspect of the review but to serve its right to appeal against that decision. CLP however maintains its submissions in these reviews that the DCS and wayleaves should not be included in the HL’s asset base for the asset split exercise. [16] Member Lo would explain further this method in his judgment. [17] See also HEC CFA Judgment, at paragraph 141. [18] See also the Main Judgment, paras 66(1) and 72. [19] I also repeat this position arising from the HEC CFA Judgment at paragraph 50 of the Main Judgment. [20] Mr Yu also points out at the hearing that in the AC4 Table, Mr Child has expressly indicated that if the wayleaves are rateable, he would not disagree with the valuations of them as provided by Ms Tang. Further, there is no qualification in that table that it was only intended to be used for CB Method. Given that Mr Davis has consistently incorporated the CB valuations into his R&E Method, it is a clear inference (Mr Yu says) that it is also Mr Davis’ intention to include the non-SOC register wayleaves in the HL’s asset base in the asset split exercise if they are rateable. For the reasons set out in paragraphs 81 to 85 above, I do not agree with Mr Yu’s submissions. Trying to maintain consistency in the values of the assets between the CB Method and the R&E Method is a different thing from whether to include some of those assets in the asset split exercise. I therefore cannot draw the clear inference that Mr Yu has invited us to do. [21] Mr Holgate also in his submissions suggests that it is typographical mistake in Mr Hardaker’s paragraph 27. The word “CLP” should have meant “CRV”. However, again, Mr Hardaker has not filed any further evidence to “correct” that mistake made in an affidavit, if there is one. I am unable to accept that suggestion on face value. [22] They are thus also at the same time not rateable as held by Ribeiro PJ in the HEC CFA Judgment. [23] The parties have by the time of the reviews hearing agreed on the applicable interest rate, which was initially in issue. [24] See 3rd Affidavit of Hardaker at paragraphs 29 to 35. [25] CLP’s Skeleton at para 6. [26] CLP’s Supplemental Submissions at para 4. [27] CLP’s Skeleton at para 9. [28] CLP’s Skeleton at para 10. [29] Bundle Review 1, page 282 [30] CRV’s Submissions at para 36. [31] CRV’s Submissions at paras 42 to 44. [32] CRV’s Submissions at para 41. [33] CLP’s Supplemental Submissions at para 16. [34] CLP’s Skeleton at para 88. [35] CLP’s Skeleton at para 89. [36] CLP’s Skeleton at para 90. [37] CRV’s Reply Submissions at para 31. [38] CRV’s Submissions at para 21. [39] CRV’s Submissions at paras 21.8 and 22. [40] CLP’s Skeleton at paras 111 to 120. [41] CRV’s Submissions at para 19.2. [42] CLP’s Skeleton at para 120. [43] AC Report / Tab 2 / para 3.2.12 [44] AC Report / Tab 2 / para 3.2.27 [45] See paras 53 and 54 of CRV’s Submissions. [46] That was provided to the Tribunal on 25 May 2012 for the purpose of the original trial. [47] See ADD Review Bundle, at p 508. [48] CRV’s Submissions at para 56.2. [49] CRV’s Reply Submissions at paras 60-61. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Cases cited in this judgment
Further hearings and rulings under LDGA 241/2004