CLP POWER HONG KONG LTD v. COMMISSIONER OF RATING AND VALUATION

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

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J U D G M E N T   O N   R E V I E W

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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]:

(1)   The adjustment of accounts for receipts and expenditure (“the R&E accounts adjustment”);

(2)   Deductions for AUC and capital stores (“CS”).

(3)   Wayleaves.

(4)   Dedicated Customer Substations (“DCS”).

(5)   Decapitalisation rate.

(6)   Interests.

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):

“361. On the first difference, Mr Davis has used customer numbers alone to reflect the physical growth of the Tenement as at 1 April 2004, while Ms Jim has used both customer numbers and receipts and expenses per customer to reflect the physical and economic growth of the Tenement in the state as at 1 April 2004.

362. I prefer to adopt Ms Jim’s approach, as it is clearly more logical and reasonable to use the changes in the receipts/expenses per customer to reflect the physical growth of the Tenement.

363. On the second difference of the choice of accounting data, both experts use ‘accounts which would not have been available at the valuation date as a proxy for a projection from that date’. This is an agreed fact because the accounts in which the valuation date fell were only published about more than one month after the deadline for the CRV to complete the valuation. Therefore, the accounts would be looked at, according to Ms Jim, only at the time of the proposal review. Mr Davis used the accounts up to 31 December 2003 for the year beginning 1 October 2003; in other words, “hindsight” was only used by him for the period of 1 October 2003 to 31 December 2003. On the other hand, Ms Jim used both the year 2003 and 2004 accounts and adopts ‘hindsight’ in projecting the figures for the accounts for the year commencing 1 October 2003, ie the statutory valuation date for the rateable value of the tenement for the year of assessment of 2004/2005 (ie, from 1 April 2004 to 31 March 2005).

364. Mr Davis explained that his valuation adopts ‘accounting information that could have reasonably been anticipated by the HT and which is available to both CRV and the Appellants at the time that the rating valuation is to be undertaken. In this appeal, Ms Jim prefers to use accounting information that is only available some 18 to 24 months after AVD. The approach adopted by Ms Jim can therefore only be applied in the circumstances of an appeal that takes place some two years or more after the valuation date. That approach is therefore inappropriate.’ He further added, ‘R& E valuations, conventionally adopt accounts from the years immediately prior to the valuation date in order to estimate the future likely receipts and expenditure of the business. In rating valuation, it is inappropriate to treat subsequent accounts which would not have been available at the valuation date as a proxy for a projection from that date when they are really no more than a set of post event outturns.’

365.  I agree with the reasoning and approach of Mr Davis in the choice of accounting data.”

9. In substance:

(1)   The Tribunal preferred Ms Jim (CRV’s expert)’s approach to use both customer numbers and receipts and expenses per customer (ie, the per customer profitability) to reflect the physical and economic growth of the Tenement in the state as at 1 April 2004.

(2)   The Tribunal preferred Mr Davis (CLP’s expert)’s choice of accounting data, by adopting the accounts up to 31 December 2003, to Ms Jim’s adoption of CLP’s 2004 accounts.

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:

(1)   CLP has put in a revised valuation approach by Mr Davis set out in his report dated 30 August 2013, suggesting alternative methods (“Mr Davis’ Revised Methods”) which could give effect to the Tribunal’s above conclusions.

(2)   However, it is Mr Davis’ (and thus also CLP’s) position that he still prefers his Approach 1 under his original valuation method (“Mr Davis’ Original Method”) that was set out in his original first report, which approach has been adopted by the Tribunal (see paragraph 387 of the Main Judgment). Mr Davis clarifies in these reviews that this original method had in fact taken into account of the economic growth of the Tenement up to 31 December 2003.

(3)   Moreover, CLP submits that Ms Jim’s use of CLP’s 2004 accounts for the purpose of rating valuation in the relevant year is not permissible as a matter of principle.

(4)   CLP in the reviews therefore ask the Tribunal to change its view to adopt Mr Davis’ Original Method even in relation to the elements of physical and economic growth of the Tenement. Alternatively, it asks the Tribunal to adopt Mr Davis’ Revised Methods for that purpose.

(5)   On the other hand, Ms Jim has not put in any new method for the present purpose. She is contented to rely on her original valuation method (ie, the one which made use of the 2004 CLP accounts) (“Ms Jim’s Method”) as the only method advanced for CRV.  Therefore, CRV asks the Tribunal to change its view in preferring Mr Davis’ choice of accounting data (at paragraph 365 of the Main Judgment) and to adopt Ms Jim’s Method.

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:

(1)   The first is the physical state of the Tenement. The parties have agreed (and accepted by the Tribunal in the Main Judgment) that the number of customers served by CLP’s network on 1 April 2004 can be taken to represent the Tenement’s physical state as at that date.

(2)   The other is the economic state of the Tenement. This is reflected by the per customer profitability.

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:

(1)   The rental value must be assessed in the circumstances prevailing at the valuation date. But since the best available evidence of rents or turnovers may sometimes relate to a different date, it may be necessary to adjust it for the valuation;

(2)   Therefore evidence emerging after the valuation date may be relevant “in certain limited circumstances”. Just as a valuer can take a rent struck before the valuation date and adjust it forward, he may also take a rent struck after the first date and adjust it back;

(3)   However, it is impermissible to base a valuation as at the valuation date on an accounting year subsequent to the valuation date because that is a “valuation method based on the sure and certain knowledge of hindsight”.

See: similar approach taken by the English Lands Tribunal in K Shoe Shops Ltd v. Harding [1983] RA 26 (cited in Cruden, Land Compensation & Valuation Law in Hong Kong (3^rd ed) at p 439).

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:

“At least by 1 July 1990 a number of trends were clearly evident. Both revenue and costs of the existing customer base were increasing but at different rates. The overall customer base was also growing. Mr Duncan took these trends into account before exercising his valuer's judgment. In addition, he was prepared to assume that the actual results later shown in the annual accounts for the year ended 30 September 1990, would have been known to the HL and HT on 1 July 1990. This assumption significantly reduced the subjectivity of Mr Duncan's assessment. In effect he improved the accuracy of valuation by relying on an element of hindsight.

Mr Cheng attempted to go even further towards eliminating the risks inherent in projecting growth and depreciation to 1 April 1991. He considered this could be achieved if actual growth and depreciation figures were taken, from the now available annual accounts to 30 September 1991 and apportioned for the period from 1 October 1990 to 1 April 1991.

Both valuers' approaches involved exercising varying degrees of hindsight. Hindsight may be available to a valuer depending on the statutory or other terms of reference. Where hindsight can be used it is obviously desirable, if the material is available, to achieve greater accuracy by using actual figures, rather than falling back on assumption based projections. This Tribunal has for many years, encouraged valuers to take advantage of hindsight where, as a matter of law, that course is permissible. At times valuers too readily ignore post-relevant date evidence, by self-imposed rules of practice, which have no basis in law.

If authority for taking advantage of the benefit of hindsight is required, it is to be found in the judgment of Lord Macnaghten in Bwllfa & Merthyr Dare Steam Collieries (1891) Ltd v Pontypridd Waterworks Co [1903] AC 426. Although the House of Lords was concerned with an arbitration compensation award, the judgment is of wider application. Lord Macnaghten declared at p 431:

In order to enable him to come to just conclusion it is his duty, I think, to avail himself of all the information at hand at the time of making his award which may be laid before him. Why should he listen to conjecture on a matter which has become an accomplished fact? Why should he guess when he can calculate? With the light before him, why should he shut his eyes and grope in the dark?

There are no statutory or other restrictions, when determining rateable values, which prohibit the use of hindsight. The Tribunal during the hearing of rating appeals, has frequently admitted evidence based on hindsight. Valuation evidence based on hindsight is equally admissible on this appeal. It follows that Mr Duncan was entitled to refer directly to the annual accounts to 30 September 1990, without having to resort to any assumption, as to the information which would have been available to the HT at the earlier date of 1 July 1990.

Mr Cheng was similarly entitled to use hindsight to the even later date of the annual accounts for the year ending 30 September 1991. Calculations based on actual growth and depreciation rates, are clearly to be preferred to calculations based partly on projections. We find that generally Mr Cheng accurately incorporated the actual figures into his valuation. We also find that his apportionments are reasonable.”

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:-

“The mine owner prevented from working his minerals is to be fully compensated – the Act says so. That means that so far as money can compensate him he is to be placed in the same position he would have been if he had been free to go on working. Here it has been proved to demonstration that if he had not been interfered with he would have made between 5000l. and 6000l. I cannot understand upon what principle it is maintained that he should be content with half, and that that half is full compensation.”[8] (emphasis added)

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:

(1)   Bwllfa was concerned with the assessment as a particular date of facts in the future, ie, the loss of profits of the mine owners: “[w]hen the task is to make a finding as to some fact which lies in the future, or to assess the probability of some future event occurring, the Bwllfa case is powerful authority that evidence of later facts will be relevant”.

(2)   Bwllfa is however irrelevant to the question whether later events are material to the determination of an existing market rent on a given date.

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:

“The use of hindsight, ie consideration of accounts for years following the AVD, may be used a means of confirming trends discernable at the AVD.” (emphasis added)

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):

(1)   The DCS should be given their capitalised value as agreed between the parties’ experts (Ms Tang for CRV and Mr Child for CLP). The agreed figures are set out in the table attached to Mr Child’s last report (for convenience, this is called the AC4 Table).

(2)   The wayleaves should be given the value provided by Ms Tang by using the RAM rate multiplying the actual length of the wayleaves.

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:

(1)   One of the fundamental underlying rationales for the asset split approach in the R&E Method is that the respective assets of the HL and HT should be earning the profit at the same rate.

(2)   In the present case, it is the assets on the SOC register which set the PR for the relevant year, and in turn the tariffs[17]. In the particular rateable year under these appeals, it is common ground that the PR was earned by CLP.  

(3)   In the circumstances, it was the SOC register assets which had “earned” the PR, and the NRA and RA earned it at the same rate (as they constituted the entire SOC register assets).

(4)   Further, Mr Holgate submits that Lord Millett in the CFA HEC Judgment has made it clear that (a) the asset split exercise is to be done by reference to the asset base on the SOC register, and (b)  as a matter of legal or valuation principle, assets which are not on the register such as the wayleaves need not be included in the HL’s asset base for the asset split exercise, as their immeasurable contributions have been captured by the R&E Method and reflected in the DB. 

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:

“13.31 Approach 1 starts with the premise that negotiations would be based on respective asset values. This follows the use ofasset values by the SOC to calculate Permitted Return and acknowledges the very substantial investment required by both parties as a principal consideration. If the parties were equal in every respect, other than asset value, one might consider apportioning the DB by reference to their respective asset values. The parties are however not equal nor are they in a partnership that would be implied by such an appointment. I have amalgamated the very significant differences between the landlord and tenant into three categories, namely:-

a) The tenant’s responsibility for operating almost the entire business (tenant’s remuneration);

b) The tenant’s China investments; and

c) The tenant’s greater operational and asset risk and the nature of a tenancy.” (emphasis added)

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:

“…if the [Tribunal] should find that DCS do have value, then it is necessary for the [Tribunal] to determine how the valuation should be carried out. CLP submits that the substations should be included in the HL’s asset base in order to apply the asset split approach under Mr Davis’ Approach 1 (which the [Tribunal] held was the correct approach)”. (emphasis added)

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:

 “183. Leaving assets and the value of synergy and monopoly of place out of account. The assets which the Court of Appeal had in mind consisted of distribution pillars, poles and pylons and the land they occupied, wayleaves over land occupied by cables and some 3,500 substations provided by customers, all of which (it said) were obviously of substantial value and essential to the undertaking.  The Court of Appeal was evidently under the impression that none of these were listed in the SOC register.  In fact the distribution pillars, poles and pylons and substations were listed in the SOC register; only the parcels of land which they occupied were not listed.  Only a minimal consideration is paid for the use of such land, because it is either the subject of a block licence granted by the Government for a nominal consideration or because the facilities are accommodated on private land for the benefit of the owners and in most such cases no consideration is paid.  In the few cases where payments are made they are operating expenses which serve to reduce the divisible balance; conversely, of course, the absence of payment serves to increase the divisible balance and enures to the benefit of both parties.

184.  The whole passage in the Court of Appeal’s judgment, however, in which it said that no landlord would agree to a rent on the basis of leaving assets out of account and disregarding the value of monopoly of place and synergy, betrays a fundamental misunderstanding of the manner in which the R&E basis of valuation operates.  As I have explained, while the Contractor’s basis of valuation assigns a separate value to every asset comprised in the tenement, the R&E basis does not.  It employs the concept of the divisible balance which represents the profits of the undertaking carried on as a going concern which are derived from all the assets employed in it.  The divisible balance automatically takes into account the value of all the elements whose presence contributes to the profits of the undertaking, including the essential but otherwise immeasurable contribution made by wayleaves, synergy and monopoly of place and the like.” (emphasis added)

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:

(1)  The Tribunal could disallow interests for the period where CLP is guilty of unjustifiable delay in persecuting the appeals;

(2)  However, in exercising that discretion, the Tribunal must take a realistic view of the alleged delay.  Delay should only be characterised as unreasonable for these purposes when, after making due allowance for the circumstances, it can be seen that CLP has neglected or declined to pursue its appeals for a significant period.

(3)  Further, when determining what disallowance or reduction of interests should be made to mark a period of unreasonable delay, the Tribunal should also bear in mind that CRV has had the use of the money during that period of dely.

See: HEC v CRV (unrep., LDGA 224/2004 & LDRA 358/2004, 12 April 2010, Au J and Member Lo) at paras 19 and 20, adopting Birkett v Hayes [1982] 1 WLR 816 at 825 per Watkins LJ, and Claymore Services Ltd v Nautilus Properties Ltd [2007] BLR 452 at 460 per Jackson J (as he then was).

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:

(1)   In light of the directions sought in the interlocutory application and the subsequent consent orders to extend time for the filing of the expert reports, and giving allowance to the fact that CLP had to first prepare for the expert reports to pursue the appeals, CLP should reasonably only need about 6 months as lead time before the interlocutory application to start preparing the first round of expert reports. 

(2)   There are about 43 months between December 2004 (when these appeals were stayed) and July 2008 (when they were asked to be restored). 

(3)   Even discounting the 6 months’ lead time reasonably required by CLP to prepare for the reports, there is still a delay of some 37 months for CLP to restore and prosecute the present appeals. 

(4)   CLP has only explained in its evidence[24]that it needed a lot of time to prepare the expert reports since the experts had to consider and prepare expert reports for the present appeals and the Other Rating Appeals.

(5)   This is unjustified, since (insofar as the present appeals are concerned) it was unreasonable and unnecessary for CLP to ask the experts to look at and prepare expert reports covering also all the Other Rating Appeals.

(6)   There is therefore an unjustified delay of 37 months, and CLP should be disallowed interests for that period.

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:

(1)   I do not think it is unreasonable or unnecessary for CLP to instruct their experts to look at and prepare the expert reports covering also the Other Rating Appeals.  This is so because the Other Rating Appeals would raise similar issues concerning expert valuation as the present appeals.  Therefore, it was not unreasonable for CLP to ask the experts to prepare the reports covering also all the Other Rating Appeals for saving time and costs, with a view of having a consolidated hearing of all the appeals together. This was in fact what it sought to do in the interlocutory application.  The fact that the consolidation application was later refused for reasons of case management with all the Other Rating Appeals stayed does not make this earlier conduct unreasonable.

(2)   Moreover, in light of the complicated and complex issues raised in the valuation under these appeals (and the Other Rating Appeals), I also do not find it unreasonable for CLP’s experts to have taken such time during the adjournment to prepare the expert reports before restoring the appeals.

(3)   Further, it should be noted that the initial adjournment was made by consent. CRV could also seek to restore the hearing of the present appeals if she had so wanted, especially if she believed that there was unreasonable delay on CLP to restore the same.

(4)   And this must also be looked at against the facts that (a) CRV had refused to accede to CLP’s requests to hold over any parts of the payment of the rates as assessed despite the appeals, and (b) during this period of “inaction”, CRV has had the use of the money paid by CLP under CRV’s original assessment.

(5)   When viewed as such, CRV could be regarded as also condoning or consenting to the delay. 

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 1^st April 2004…The Tribunal did not go further and find that the actual method employed by Ms Jim using the accounts ending 31^st 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]:-

(1)  The accounting data relied on by Ms Jim would only be available 18 – 24 months after the valuation date and, therefore, could only be applied where an appeal was determined 2 or more years after the AVD.

(2)  As advised by the Joint Rating Forum (“JRF”), an R & E valuation conventionally uses historic accounts for the years immediately preceding the valuation date in order to estimate the future receipts and expenses at the AVD.

(3)  Post-valuation date accounting data, which was neither available nor reasonably anticipated at the AVD, was used by Ms Jim as post-event outturns and not as a proxy for estimating the receipts and expenditure at the AVD.

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 31^st December 2003 and the List Date, with (b) the use of accounting data up to 31^st 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:

(1)  First, there is agreement between the parties on the use of customer numbers as a means of increasing (or if applicable decreasing) the receipts and expenses that would apply to the Tenement of the physical size that exists on 1 April 2004. This calculation reflects the increase in customer numbers between (a) the average number pertaining between 1 January 2003 and 31 December 2003, and (b) the number at 1 April 2004.  In other words, the accounts for the year to 31 December reflect the receipts and expenses for that year.  If however the Tenement has grown in physical size by 1 April 2004, the agreed calculation will reflect the estimated receipts and expenses that would be applicable to the physical size of the larger Tenement at 1 April 2004. It is common ground between the parties that the use of customer numbers in this way is a “size adjustment” only.

(2)  The parties could not agree on the assessment which has been termed the “economic growth” (or the “economic change” as it could equally decline), which is the means of calculating the amount of receipts and expenses that would be estimated by the parties for the year commencing 1 October 2003 relevant to the Tenement as at 1 April 2004 and upon which the rental bid would be based.

(3)  Mr Davis’ means of estimation followed a careful study of CLP’s accounts over eight years (1999-2007).  He identified the requirement to take account of both the economic change in the tenancy year commencing at AVD and the state of the Tenement at 1 April 2004. Over this period, the results fluctuated equally between growth and decline. For the reference year, he concluded that “taking the accounts to 31 December 2003 would achieve the most accurate forecast compliant with the rating hypothesis and capable of practical implementation at the valuation date”.

(4)  On the other hand, Ms Jim calculated the income and expenditure per customer for the year ending December 2003. She adjusted these figures by applying three quarters of the annual rate of growth (also per customer) between the 2003 and 2004 accounting years. She then applied the resulting figures to the customer number at 1 April 2004 to arrive at the receipts and expenditure for the tenancy year ending 30 September 2004.

(5)  In using the customer numbers at 1 April 2004, Ms Jim is reflecting the physical size of the tenement at 1 April 2004. Mr Davis agrees with Ms Jim the use of customer number in this way.  What he does not agree with her is in the use of year 2004 accounting data to arrive at the receipts and expenditure growth rates.  Apart from the practical difficulties it presents in arriving at the correct rateable value effective from 1 April 2004, Ms Jim’s use of the actual accounting outturn to 31 December 2004 incorrectly incorporates the economic change of the Tenement post 1 April 2004.

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]:

 (1)  An extrapolation of the annual rate of change, from 2002 to 2003 and applied that to the 2002 accounts (alternative (1));

(2)  As in (1) but applied the 2002 -2003 rate of change to the 2003 accounts (alternative (2));

(3)  Apply a longer term average accounting change, say a three years’ average to the 2002 accounts (alternative (3)); and

(4)  As in (3) but applied the rate of change to the 2003 accounts (alternative (4)).

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]:

(1)  By 1 October 2003, the Hong Kong economy was starting to recover from the devastating effect of SARS, which had affected it severely in early 2003.  A reasonable HL and HT would not have considered that the negative economic growth (ie, economic decline) from 2002 to 2003 to be an accurate prediction of what would happen in the coming year;

(2)  In contrast, Ms Jim’s Method, which is based on the rate of economic growth from 2003 to 2004, much more accurately captures what would have been anticipated as at 1 October 2003;

(3)  There is no suggestion in the present case that any unusual or unforeseen events happened in 2004 which affected CLP’s receipts and expenditure. That being the case, and given CLP’s stable business, a reasonable HL and HT would have been able to predict the business’ performance the next 12 months in a fairly accurate way.

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:

“16. He explained that method at (inter alia) AD1 paras 12.5, 12.9 to 12.10; AD2 paras 84-89; AMD3 paras 192 to 194). He demonstrated that over the years under appeal the DB decreases in more years under appeal (4 years) then it increases (3 years). He therefore judged that using the accounting year which ends 3 months after AVD would be as reliable a method for making a projection as any other. The method uses the 9 month period immediately pre-dating the AVD and 3 months of actual performance post-dating the AVD, to project what would be likely to happen overall in the first 12 months of the letting. The same point was made in paragraph 8 of his Review Report …”

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:

“(1) Paragraph 31 [of CRV’s Skeleton] asserts that Mr Davis’s new method is inappropriate because the Hong Kong economy was hit by SARS “at the beginning of 2003” and thus rates of change between the 2002 and 2003 calendar years should not be used for a projection from 1^st October 2003. The same point is repeated in para 42 of CRV’s Skeleton. Ms Jim purports to give new evidence on SARS and its effect on the Hong Kong economy (without sources) at paras 3.11 and 4.5.1 to 4.5.2 of her Review Report, in particular the start of a recovery “in October 2003” or “towards the end of 2003”. She has produced no evidence as to what was the market’s perception as at 1^st October 2003 for the following year, so as to (a) contradict Mr Davis’s method; or (b) support any argument that as at that date the market would have predicted CLP’s future performance to be the same as its actual performance through to the end of 2004, some 15 months later. Thus, Ms Jim’s reliance upon SARS at this late stage undermines her own method for the rating year 2004/5 (and also for the rating year in which SARS began – ie 2003/4).

(2)  At para 42 of the Skeleton CRV quotes selectively and incorrectly one paragraph of Mr Pendleton’s summary, to the effect that as at 1^st October 2003 “the outlook for the CLP tenement was good”. In fact, what Mr Pendleton said was that “unlike retail/office premises, there was less risk that the CLP tenement would fall in value due to competition, future economic downturn or a return of SARS” and “compared to those sectors the outlook for the five years from 2003 to 2008 was good for the CLP tenement”. So that reference is nothing to the point. It was explaining a disagreement with Mr Poon on the estimation of a yield for the CLP tenement, in terms of a 5 year look (not a projection for the first year of the hypothetical letting), and by expressing risks relative to the office and retail sectors. The main evidence of Mr Pendleton summarised in paragraph 17 of his Summary (RP2 paras 3.8 and 3.10) does not assist CRV. Appendices RP11G and RP11H show that as at 1^st October 2003 the risk of SARS still affected the economic outlook. Mr Pendleton also noted 7.6% growth by CLP Holdings in the first half of 2003 compared to the first half of 2002 despite the adverse effect of SARS (footnote 10 on p 11 of RP2).

(3)  In addition, at RP2 para 3.7 Mr Pendleton said that increases in value after 1^st October 2003 to October 2004 (for retail and offices) are misleading because they were not expected by the market as at 1^st October 2003. At paras 10.1.27 to 10.1.28 and Note 1 on p54 of RP 1, Mr Pendleton pointed to an additional factor which was seen to be having an adverse effect on the Hong Kong economy continuing beyond the AVD, namely deflation. Dr Lam identified the same factor extending into 2004 (LPL 1 para 4.3.13). It is therefore inappropriate for CRV to take one factor, SARS, and to use that to claim that Mr Davis’s alternative method is inaccurate because circumstances prevailing before the AVD had ceased to have any effect by that date. CRV has failed to look at all the factors and evidence and is being selective.

(4)  In any event, Mr Lancaster’s unchallenged evidence was that the SARS outbreak in early 2003 had a general dampening effect on the Hong Kong economy “throughout the rest of 2003” (RL 1 para 115). Thus, no evidence has been adduced during the trial, with supporting material, nor any cross-examination conducted to show how the effect of SARS on the Hong Kong economy should influence the treatment of CLP’s accounts in the rateable valuation, whether by reference to Ms Jim’s method or any other method. If, however, the Tribunal has sufficient doubts about the alternative method for 2004/5, then, on the evidence, the appropriate course would be to prefer Mr Davis’s original method for that year.”

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:

(1)  By 1 October 2003, although the SARS have subsided, it was simply uncertain that the SARS might come again or not. In the words of CRV’s own witness, Mr Pendleton: “as at 1 October 2003 the risk of SARS still affected the economic outlook”.

(2)  The performance of CLP Holdings was not that much affected by SARS (as maybe the case for some other sectors of the economy in Hong Kong) as CRV has submitted. At the same time, Mr Pendleton noted that there was 7.6% growth by CLP Holdings in the first half of 2003 compared to the first half of 2002 despite the adverse effect of SARS.

(3)  Mr Lancaster’s evidence was that the SARS outbreak in early 2003 had a general dampening effect on the Hong Kong economy throughout the rest of 2003.

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:

“21.1 Mr Child was instructed to provide land valuations for the power stations, substations and other CLP land and buildings, on the basis that they would be used both in the CB valuation by Mr Rose and the R&E valuation by Mr Davis: Child I para 5.1 [AC/1/20].

21.2 Mr Child provided capital values of some land assets, and annual rental values of other land assets. He considered that there was no need to value the 7,939 Dedicated Customer Substations as they were part of the electricity supply to the buildings in which they were located: Child II para 3.1.19 [AC/2/66]. Ms Tang valued the dedicated customer substations on a rental basis and Mr Child agreed that her approach was appropriate if, contrary to CLP’s case, a valuation was necessary: Child II para 3.1.23 [AC/2/67].

21.3 Mr Child and Ms Tang went on to agree on what the values for the substations should be if it was necessary to value them: see Child/Tang Agreement schedule [AC/tab 4].

21.4 Mr Davis explained that in order to obtain the asset split ratio between HL and HT, using DRC figures for their respective assets (which was necessary for his Approach 1), he calculated the capital value of the parties’ respective assets. Where those assets had been valued on a rental basis (by Mr Child), he converted the rental value into a capital value by applying Mr Rose’s decapitalisation rate. See Davis I para 5.14(a) and Appendix AMD 5 (row 7) [AD/1/18, AD App/5/14].

21.5 Mr Davis subsequently revised his valuations based on the agreed figures of Mr Child and Ms Tang: see his Valuation Review para 1, Appendix 5(A) (row 7) [Bundle 4/2/2/52]and Appendix AMD 34 [Bundle 4/2/4/51]. His general approach to land assets valued on a rental basis was to capitalise the rental values using Mr Rose’s decapitalisation rate. He did not suggest that if the wayleaves, Dedicated Customer Substations and pole sites – being assets which were addressed by the Child/Tang Agreement – were rateable, some other valuation treatment should apply.

21.6 Mr Rose also took the approach of capitalising land assets valued on a rental basis, using his decapitalisation rate, to derive the HL : HT asset split ratio based on DRC figures. See Rose I para 8.25 (table); Appendix EIR 6.0 [ER App/6/35].

21.7  Mr Rose subsequently revised his valuations based on the agreed figures of Mr Child and Ms Tang: see his Valuation Review para 3.1 [Bundle 4/1/4]. Whilst the revisions did not (given CLP’s primary case) include a value for the dedicated customer substations, he maintained his approach of capitalising land assets valued on a rental basis for the purpose of deriving the HL: HT asset split ratio based on DRC figures. Furthermore, whilst no value was ascribed for the wayleave fees, substations, or pole sites, they were nevertheless expressly categorised together with other land assets also valued on a rental basis: see Appendix EIR 4.2B [Bundle 4/1/22] (cf. EIR 4.1B, being the assets valued on a capital basis). These other land assets, such as pylons and tower sites, and land for ancillary uses (eg the former Tsing Yi Power Station), were all included in the asset split in Mr Davis’ Approach 1 valuations by capitalisation of their rental values using Mr Rose’s decapitalisation rate.”

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:

(1)   The CRV valuer who gave evidence on de-capitalisation rate was Mr Poon.

(2)   On 30 November 2009, the Tribunal gave its main decision in the HEC case in which the Tribunal rejected the use of industrial yield by Mr Poon (who also gave evidence in that case)

(3)   When Mr Poon produced his “Summary” report, he changed his approach, adopting Mr Hatchwell’s decapitalisation rate of 11.9%, which was revised to 12.35% by the time of Mr Hatchwell’s oral evidence was given.  Mr Poon followed suit in his Speaking Note.

(4)   In closing the case in the original hearing in the present appeals, CRV submitted that if, contrary to her case, the Tribunal needed to assess a decap rate, then the rate assessed by Mr Hatchwell was more reliable and should be preferred to that of Mr Rose (who adopted 6% as the decapitalisation rate in CLP’s CB valuation.)

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]:

“120. Now that the CB method and its inputs have been rejected for the purposes of the valuation of the tenement using the R and E method, it would make no sense to capitalize a relatively high rental component at say 6% for inclusion in an asset base for the splitting of the DB where the Tribunal has held that all relevant assets, whether RA or NRA, earn the same rate of return. If capitalisation is required, CLP submits that because all the assets earn the same rate of return, and in CLP’s case the assets earned the PR or 15%, the proper capitalisation factor should be based upon a decap rate of 15%. Aternatively, the CRV’s rate (based upon the WACC estimate) of 12.35% should be used. A lower decap rate would introduce a large distortion within a valuation based solely upon ‘Approach 1’ and could not be justified. No evidence has been led directed to the capitalisation of those assets for which the CRV now contends, or the rates applicable.”

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:

“318. We are of the view that the decapitalisation rate for the Tenement should not be assessed by reference to the property yield of flatted factories, but should be assessed by reference to the cost of borrowing:

(1) We are not convinced by the evidence that the property yield of flatted factories provides a good reference to the cost of borrowing for the reasons submitted by HEC.

(2) Further, in our judgment, if it were right to use the yield of flatted factories as the basis of the decapitalisation rate for the Tenement in this case, it would have also been appropriate to adopt the yield of flatted factories as the basis of the decapitalisation rate for all other tenements (regardless of the differences between these tenements and the flatted factories) that are to be assessed under the CB method of valuation. However, the very reason for adopting the CB method of valuation is usually because there is an absence of suitable rental evidence. As a result of this, there is usually no evidence of capital and rental values of the tenements for which a check of the adopted property yield could be used. Therefore, it is incorrect to assess each and every of these tenements using the property yield of flatted factories as the basis of decapitalisation rate and applying the subjective adjustments to reflect the differences between these tenements and the flatted factories (such as in the present case where Mr Poon suggested a 20% adjustment).

319.  On the other hand, whilst we have accepted in principle to use the cost of borrowing as the basis of the decapitalisation rate in the CB valuation for the Tenement, we agree with the CRV that there is no reason why the owner occupier’s WACC (ie HEC’s WACC) should not be used to assess the decapitalisation rate. This should be used to assess the full cost of borrowing, instead of the headline cost as assessed by Mr Parsons.”

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:

“3.2.23 The cable network extends to over 34,000 kilometres throughout Kowloon and the New Territories, a major part of this being ground. I have been provided with the dimensions of all the cables and based upon this have calculated the notional area of land which they occupy. The calculation is the product of the section lengths and the corresponding diameter when considered in plan. This gives a total area of land occupied by the cables of 1,773,250 square metres.

3.2.24  If the figure were to be to applied to the total land area occupied by the cables it would produce an annual rental of $89,372,102. I think this is a useful check on the land value and I could not imagine that if it was any other figure that it should be any higher than that.”

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]: 

(1)  The parties have agreed the valuations for the DCS: $400,608,674 (being a rental valuation for the 7,939 dedicated 11kV distribution substations), and $153,758,705 (being a capital valuation for the 30 132kV primary and 33kV substations on customers’ land): see AC4 Table. Mr Child did not himself provide a valuation, but indicated that he would not disagree with Ms Tang’s valuations if the Tribunal were to hold that the DCS were to be valued.

(2)  The Tribunal should therefore hold that the DCS should be valued in accordance with the agreed figures, and that the rental value for the dedicated 11kV distribution substations should then be capitalised using the decap rate to arrive at a capital value.

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:

(1)  The said inclusion of civil and building cost is outside CRV’s review application. As I mentioned above, it was only raised for the first time towards the end of the hearing.

(2)  In any event, apparently the said ERCs set out in the “Summary” are not related to the DCS or other customer substations, but to the very large CLP’s power stations  such as Castle Peak B.

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:

(1)   For the R&E accounts adjustment, we would adopt Mr Davis’ Original Method for the choice of accounting data and for reflecting the relevant physical and economic state of the Tenement to arrive at the RV.

(2)   For AUC and CS, we find that they need not be deducted from the HT’s asset base in the asset split exercise, although the same should be deducted from the HL’s asset base.

(3)   For wayleaves, pole sites and DCS, their values also need not be included in the HL’s asset base in the asset split exercise.

(4)   For the decap rate, if needed, we adopt the rate of 12.35%.

(5)   For the question of interests, we hold that there should not be any disallowance of any interests period.

(6)   Finally, if values have to be given to the above subject assets, they should be valued in the way as set out by Member Lo above.

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.

APPENDIX