Court dismissed appeal on carbon levy inclusion in opportunity cost calculations under electricity licence.

THE SUPREME COURT

[Appeal No: 285/2011]

Denham C.J.

Murray J.

Hardiman J.

Macken J.

McKechnie J.

Between/

Viridian Power Limited

and

Huntstown Power Company Limited

Applicants/Appellants

and

Commission for Energy Regulation

Respondent

and

The Attorney General

Notice Party

Judgment delivered on the 23rd day of February, 2012 by Denham C.J.

1. This is an appeal by Viridian Power Limited and Huntstown Power Company Limited, the applicants/appellants, referred to as “the

appellants”, from the judgment of the High Court (Clarke J.) delivered on the 9th June, 2011 and from the order of the High Court of

the 23rd June, 2011 (perfected on the 29th June, 2011), whereby the High Court refused the reliefs sought by the appellants in the

Notice of Motion of the 13th December, 2010.

2. The appellants had, by Notice of Motion, sought the following reliefs:-

“(a) An order of certiorari, by way of judicial review, quashing the purported decision of the respondent, dated 8

October 2010, directing the first named [appellant] to ensure that the price components of all Commercial Offer

Data submitted by it in relation to any generation unit for which it is the licensed generator, do not include any

amount in respect of the Levy paid or to be paid by it to the Commission pursuant to section 40D of the Electricity

Regulation Act 1999 (as amended by the Electricity Regulation (Amendment) (Carbon Levy) Act 2010);

(b) An order of certiorari, by way of judicial review, quashing the purported decision of the respondent, dated 8

October 2010, directing the second named [appellant] to ensure that the price components of all Commercial Offer

Data submitted by it in relation to any generation unit for which it is the licensed generator, do not include any

amount in respect of the Levy paid or to be paid by it to the Commission pursuant to section 40D of the Electricity

Regulation Act 1999 (as amended by the Electricity Regulation (Amendment) (Carbon Levy) Act 2010);

(c) If necessary, a Declaration, by way of judicial review, that the price components of the Commercial Offer Data

submitted by the [appellants] or any of them in relation to a generation unit of which an [appellant] is the licensed

generator may lawfully include the amounts in respect of the Levy paid or to be paid by the [appellants] to the

Commission pursuant to section 40D of the Electricity Regulation Act 1999 (as amended by the Electricity Regulation

(Amendment) (Carbon Levy) Act 2010.”

3. In a reserved judgment delivered on the 9th June, 2011, the learned High Court judge dismissed the application.

4. The appellants filed a Notice of Appeal on the 5th July, 2011, citing the following grounds of appeal:-

“(a) The learned High Court judge erred in concluding that the Levy payable by the [appellants] pursuant to the

Electricity Regulation (Amendment) (Carbon Revenue Levy) Act, 2010 (“the Levy”) is not required or permitted to be

included as a price component in the [appellants]’ Commercial Offer Data submitted to the Single Market Operation

Business under the Single Electricity market Trading and Settlement Code (hereafter referred to the Levy being “bid

in”), pursuant to the Electricity Generation Licences granted by the respondent to the [appellants] (“the

Licences”).

(b) The learned High Court judge, having correctly concluded that the Levy was a cost attributable to the operation

of the generating plants operated by the [appellants’] (para. 7.13 of the judgment), erred in not concluding that

the Levy was thereby a cost liable to be bid in by the [appellants] in accordance with Condition 15 of the Licences.

(c) The learned High Court judge erred in concluding that the terms of the Bidding Code of Practice could validly

have the effect of precluding the bidding in of a cost (the Levy) which (as the judge concluded) formed part of the

Short Run Marginal Cost relating to the generation units operated by the [appellants] within the meaning of

Condition 15.3 of the Licences and was thus a cost which the [appellants] were required to bid in accordance with

the principle of cost-reflective bidding mandated by Condition 15.

(d) The learned High Court judge erred in his construction of Condition 15.4 and 15.5 of the Licences and, in

particular (but without prejudice to the generality of the foregoing) erred in construing those provisions as

permitting the respondent to adopt a Bidding Code of Practice the effect of which was to preclude the bidding in of

costs properly coming within the scope of Condition 15 and, in particular, costs attributable to the generation of

electricity as the judge found the Levy to be.

(e) Without prejudice to the foregoing, the learned High Court judge erred in his construction of the Bidding Code of

Practice and, in particular, paragraphs 7 and 8 thereof.

(f) Without prejudice to the generality of the foregoing paragraph, the learned High Court judge erred in construing

paragraphs 7 and 8 of the Bidding Code of Practice as permitting only the bidding in of costs items that are inputs

into electricity generation and/or “employed” in the generation of electricity.

(g) Further, and in any event, the learned High Court judge erred in concluding that the Levy was not an input into

electricity generation and/or employed in the generation of electricity insofar as such was properly a requirement of

the Bidding Code of Practice (which the [appellants] do not accept). In this regard, the learned High Court judge

erred in holding that the Levy was materially different to other costs-items permitted to be bid in, such as (but not

limited to) excise duties on fuels, employer taxes and other levies.

(h) The learned High Court judge erred in concluding that the Levy did not have an Opportunity Cost for the

purposes of Condition 15 and of the Bidding Code of Practice.

(i) Further, or in the alternative, the learned High Court judge erred in holding that it is implicit in the Bidding Code

of Practice, and in particular paragraphs 7 and 8 thereof, that only costs which are “inputs” into electricity

generation may be bid in by generators. In this regard, the learned High Court judge erred in implying a term in the

Bidding Code of Practice which is not provided for, and is not consistent with, the plain meaning of the Bidding Code

of Practice as adopted by the Commission, construed by reference to the Licence.”

5. The appellants, the Commission for Energy Regulation, “the Commission”, and the Attorney General filed written submissions on this

appeal and counsel were heard by the Court from each party, including the notice party.

6. The central issue in these proceedings is the interpretation of the Electricity Generation Licences, “the Licences” issued to

generators, including the appellants, and so far as relevant, the Bidding Code of Practice, “the BCOP”, as they apply to the Carbon

Revenue Levy, “the Levy”, imposed on certain electricity generators, including the appellants, pursuant to Part VIB of the Electricity

Regulation Act, 1999, inserted by s. 3 of the Electricity Regulation(Amendment) (Carbon Levy) Act, 2010, “the Act of 1999, as

amended”,

7. In essence, this requires the interpretation of Condition 15 of the Licence and the BCOP.

8. The main issue is whether the Levy required to be paid by the appellants under the Act of 1999, as amended, may be included in

their prices when bidding in to supply electricity demands.

9. The High Court held that the respondent had construed correctly the relevant terms of the Licence as not permitting the

appellants to bid in the amount of the Levy.

10. The decision of the High Court required the appellants, when submitting bids for the sale of electricity generated by them into the

Single Electricity market, the SEM, must not include in the price components of such bids any amount in respect of a Levy which the

appellants were obliged to pay in the event that they generated revenue by using fossil fuels to generate electricity, pursuant to Part

VIB of the Act of 1999, as amended.

Submissions

11. Extensive written and oral submissions were received and heard from the parties. On behalf of the appellants, in conclusion, it was

submitted that the learned trial judge erred in holding that the appellants were not entitled to the reliefs sought. It was submitted

that the decisions of the Commission purporting to direct the appellants not to bid in the cost of the Levy had no basis in law. It was

submitted that their submission is the conclusion the Court should reach. It was submitted that the effect of the Commission’s

decisions was that a significant cost of generating electricity could not be recovered by the appellants. Such a situation, it was

submitted, is fundamentally at odds with the principles of cost reflective bidding. A convoluted rationale, it was argued, invoking

esoteric distinctions between private and public costs, social costs and real resource costs, was offered by the Commission but was

rejected; rightly, it was submitted, by the learned High Court judge. In the absence of that proffered rationale, the High Court failed

to ask what justification there could be for a position where, as he stated, what was “undoubtedly … a cost attributable to the

operation of the plant” should not be recoverable in the Single Electricity Market, “SEM”. On any view, it was submitted, such an

outcome would be manifestly and seriously at odds with the terms and objectives of Condition 15 and constitute a serious attack on

the property rights of the appellants. Consequently, the appellants sought the reliefs in their Notice of Appeal.

12. The Commission opposed the appeal of the appellants entirely. In essence, the Commission submitted that the High Court applied

a test of ‘legal correctness’ and determined on an objective basis and in accordance with the ordinary principles applicable to the

construction of documents having legal effect, that the Commission had correctly construed the relevant terms of the Licence as not

permitting the appellants to bid in the amount of the Levy. The High Court had concluded that, “in issuing a direction which precluded

[the appellants] from so doing, the Commission correctly interpreted the Licence and directed [the appellants] to take steps which

were required to ensure compliance with the Licence and the BCOP”. The Commission requested the Court to agree with the High

Court’s construction, and therefore, with its construction of the definition and calculation of “Opportunity Costs”, as defined by the

BCOP, by which it determined that the Levy had no such opportunity costs, and being an expenditure arising incidental to the

production of electricity, was not the type of cost which the definition in the Licence and the BCOP allows to be included in the

calculation of the appellants’ Short Run Marginal Costs, and could not, therefore, be “bid in”.

13. It was submitted on behalf of the Attorney General that to the extent that the issues before the Court concern the construction

of the Licence and/or BCOP, it was primarily a matter for the parties to make submissions. It was submitted that it may be relevant in

considering how the Levy falls to be dealt with on an ordinary construction of the Licence and/or BCOP to take account of the nature

and purpose of the Levy. It was submitted that, contrary to the appellants’ description of it, the Levy does not apply to the use of

carbon. It is imposed on windfall revenues obtained by electricity generators, through their participation in the SEM, from the use of

emissions allowances which were allocated to those generators free of charge. The terms of the Act of 1999, as amended, it was

submitted, and the context in which it was amended, demonstrates that the Oireachtas’ intention in introducing the Levy was to

apply it to these windfall revenues. The Levy, it was submitted, is a Levy or tax on revenues, and not on allowances, emissions,

electricity or any other form of operational cost. It was argued that this is a matter to which the Court may have regard in

considering what constitutes the correct treatment of the Levy under the provisions of the Licence and/or BCOP.

14. Thus this case raises an issue of construction of the Licence. In construing the Licence it is necessary also to consider certain

paragraphs of the BCOP.

15. The issue on this appeal revolves around Condition 15 of the Licence. Condition 15 has a heading: “Cost-Reflective Bidding in the

Single Electricity Market”, and provides:-

“1. The Licensee shall ensure that the price components of all Commercial Offer Data submitted to the Single Market

Operation Business under the Single Electricity Market Trading and Settlement Code, whether by the Licensee itself

or by any person acting on its behalf in relation to a generation unit for which the Licensee is the licensed

generator, are cost-reflective.

2. For the purposes of this Condition, the price component of any Commercial Offer Data shall be treated as cost-

reflective only if, in relation to each relevant generation unit, the Schedule Production Cost related to that

generation unit in respect of the Trading Day to which the Commercial Offer Data submitted by or on behalf of the

Licensee apply is equal to the Short Run Marginal Cost related to that generation unit in respect of that Trading

Day.

3. For the purposes of paragraph 2, the Short Run Marginal Cost related to a generation unit in respect of a Trading

Day is to be calculated as:

(a) the total costs that would be attributable to the ownership, operation and maintenance of that

generation unit during the Trading Day if the generation unit were operating to generate electricity

during that day;

minus

(b) the total costs that would be attributable to the ownership, operation and maintenance of that

generation unit during that Trading Day if the generation unit was not operating to generate electricity

during that day.

the result of which calculation may be either a negative or a positive number.

4. For the purposes of paragraph 3, the costs attributable to the ownership, operation and maintenance of a

generation unit shall be deemed, in respect of each relevant cost-item, to be the Opportunity Cost of that cost-

item in relation to the relevant Trading Day.

5. The Commission may publish and, following consultation with the holders of Generation Licences and such other

persons as the Commission considers appropriate, from time to time by direction amend, a document to be known as

the Bidding Code of Practice, which shall have the purposes of:

(a) defining the term Opportunity Cost;

(b) making provision, in respect of the calculation by the Licensee and other generators of the

Opportunity Cost of specified cost-items, for the treatment of:

(i) the costs of fuel used by generators in the generation of electricity;

(ii) the value to be attributed to credits issued under the Emissions Trading Scheme established

by the European Commission;

(iii) variable operational and maintenance costs;

(iv) start-up and no load costs; and

(v) any other costs attributable to the generation of electricity; and

(c) setting out such other principles of good market behaviour as, in the opinion of the Commission, should be

observed by the Licensee and other generators in carrying out the activity to which paragraph 1 refers.

6. The Licensee shall, in carrying out the activity to which paragraph 1 refers, act so to ensure its compliance with

the requirements of the Bidding Code of Practice.

7. The Commission may issue directions to the Licensee for the purposes of securing that the Licensee, in carrying

out the activity to which paragraph 1 refers, complies with this Licence and with the Bidding Code of Practice, and

the Licensee shall comply with such directions.

8. The Licensee shall retain each set of Commercial Offer Data, and all of its supporting data relevant to the

calculation of the price component of that Commercial Offer Data, for a period of at least four years commencing on

the date on which the Commercial Offer Data is submitted to the Single Market Operation Business.

9. The Licensee shall, if requested to do so by the Commission, provide the Commission with:

(a) a reasoned explanation of its calculations in relation to any Commercial Offer Data; and

(b) supporting evidence sufficient to establish the consistency of that data with the obligations of the

Licensee under this Condition.

10. In any case in which Commercial Offer Data are submitted to the Single Market Operation Business which are

not consistent with the Licensee’s obligation under paragraph 1 of this Condition, the Licensee shall immediately

inform the Commission and provide to the Commission a statement of its reasons for the Commercial Offer Data

submitted.

11. In this Condition:

‘Bidding Code of Practice’ means the document of that title published by the Commission in accordance with paragraph 5,

as it may be amended from time to time;

‘Commercial Offer Data’ has the meaning given to it in the Single Electricity Market Trading and Settlement Code;

‘Opportunity Cost’ shall have the meaning set out in, and the value calculated in accordance with, the terms of the

Bidding Code of Practice;

‘Schedule Production Cost’ has the meaning given to it in the Single Electricity Market Trading and Settlement Code:

‘Short Run Marginal Cost’ means certain costs attributable to the ownership, operation and maintenance of a generation

unit, as calculated in accordance with paragraph 3 of this Condition;

‘Single Market Operation has the meaning given to it in the

Business’ Licence granted pursuant to section 14(1)(j) of the Act; and

‘Trading Day’ has the meaning given to it in the Single Electricity Market Trading and Settlement Code.”

16. Thus, the Licence provides that the price components of all Commercial Offer Data submitted to the Single Market Operation

Business under the Single Electricity Market Trading and Settlement Code be cost reflective. The Licence refers to terms which are

terms of art within the licensing system, and which are identifiable in the Licence by the first letter of each word of the term being in

upper-case, e.g. Commercial Offer Data. Under this Condition, for the specific purpose of this Condition 15, the price component of

any Commercial Offer Data shall be treated as cost-reflective only if, in relation to each relevant generation unit, the Schedule

Production Cost related to that generation unit in respect of the Trading Day, to which the Commercial Offer Data submitted by the

Licensee apply, is equal to the Short Run Marginal Cost related to that generation unit in respect of that Trading Day. Thus, the

Licence sets out, by reference to specific technical terms, how the price component of any Commercial Offer Data shall be treated.

17. Paragraph 3 of Condition 15 sets out the calculation to be conducted to determine the Short Run Marginal Cost in respect of a

Trading Day. I shall return to this calculation later in the judgment.

18. Paragraph 4 of Condition 15 provides that for the purposes of paragraph 3, i.e. the calculation, the costs attributable to the

ownership, operation and maintenance of a generation unit shall be deemed, in respect of each relevant cost-item, to be the

Opportunity Cost of that cost-item in relation to the relevant Trading Day.

19. Paragraph 5 of Condition 15 states that the Commission may publish, and, after consultation, from time to time by direction amend

the BCOP, which shall have a number of purposes. The first purpose is stated to be:

“defining the term Opportunity Cost”.

20. Thus, inherent in the Licence is the right of the Commission to publish a BCOP, one of the purposes of which is to define the term

Opportunity Cost. Thus as part of the Licence it is stated that the technical term ‘Opportunity Cost’ shall be defined in the BCOP.

21. The Licensee is required, under paragraph 6 of Condition 15, when carrying out the activity in paragraph 1 of Condition 15, to

ensure its compliance with the requirements of the BCOP.

22. Paragraph 11 of Condition 15 is clear and specific in defining a number of technical terms relevant to the Licence. Included is a

definition:-

“’Opportunity Cost’ shall have the meaning set out in, and the value calculated in accordance with, the terms of the

Bidding Code of Practice;”

Also included are definitions:

“’Short Run Marginal Cost’ means certain costs attributable to the ownership, operation and maintenance of a

generation unit, as calculated in accordance with paragraph 3 of this Condition.”

[Emphasis added]

23. Thus, within the Licence are technical terms which are defined, or defined by reference to the BCOP, and a technical calculation

to establish the Short Run Marginal Cost related to a generation unit in respect of a Trading Day.

24. The relevant part of the BCOP provides:-

“BIDDING CODE OF PRACTICE

INTRODUCTION

1. This Bidding Code of Practice (this Code) is published jointly by:

a. the Northern Ireland Authority for Utility Regulation (the Authority), in accordance with paragraph 5

of the following conditions of Licences in Northern Ireland:

(i) Condition 17 of each electricity generation Licence; and

(ii) Condition 57 of the public electricity supply Licence granted to Northern Ireland Electricity plc

under Article 10(1) of the Electricity (Northern Ireland) Order 1992 under a Licence document

dated 31 March 1992 and transferred to NIE Energy Limited; and

b. the Commission for Energy Regulation (the Commission), in accordance with paragraph 5 of the

following conditions of Licences to generate electricity in the Republic of Ireland:

(i) Condition 17 of the interim electricity generation Licence granted to the Electricity Supply

Board on 21 April 2006;

(ii) Condition 16 of the electricity generation Licence granted to Synergen on 31 July 2002; and

(iii) Condition 15 of electricity generation Licences granted to all other licensed generators of

electricity.

2. For the purposes of the Licence conditions under which it is made (the relevant conditions), this Code defines the

concept of Opportunity Cost, makes provision for the calculation of cost-items and sets out other principles of good

behaviour in the Single Electricity Market.

3. In accordance with paragraph 6 of each relevant condition:

a. electricity generators are required to comply with the provisions of this Code in submitting

Commercial Offer Data under the Single Electricity Market Trading and Settlement Code, whether

by themselves or through intermediaries; and

b. the Power Procurement Business of NIE Energy Limited is required to comply with the provisions

of this Code in submitting Commercial Offer Data under the Single Electricity Market Trading and

Settlement Code.

4. This Code aims to facilitate the efficient operation of the Single Electricity Market by ensuring that:

• in combination with the Capacity Payment Mechanism established under the Single Electricity Market

Trading and Settlement Code, generators are appropriately compensated for making available their

generation sets or units (as appropriate) and for generating electricity in the Single Electricity Market;

• generators cannot exercise market power in the generation of electricity on the island of Ireland or

any part thereof; and

• the Power Procurement Business cannot exercise market power by virtue of generation sets or units

contracted to it under long term power purchases agreements in Northern Ireland, in respect of which it

has been appointed an intermediary.

5. Words and expressions used in this Code and not defined shall, unless the context otherwise requires, have the same

meaning as when used in the Licences containing the relevant conditions or (where appropriate) in the Single Electricity

Market Trading and Settlement Code.

DEFINITION OF OPPORTUNITY COST

General Principles

6. When calculating the Short Run Marginal Cost of a generation set or unit in respect of a Trading Day, constituent cost-

items are to be valued at their Opportunity Cost, and so that a reasoned explanation of the calculation of that

Opportunity Cost is capable of being given to the Authority or the Commission (as appropriate) on request.

7. The Opportunity Cost of any cost-item shall comprise the value of the benefit foregone by a generator in employing

that cost-item for the purposes of electricity generation, by reference to the most valuable realisable alternative use of

that cost-item for purposes other than electricity generation.

8. In calculating the value of the benefit foregone in employing a cost-item for the purposes of electricity generation, the

following principles shall, unless it can be demonstrated to the satisfaction of the Authority or the Commission (as

appropriate) that there is good cause not to, be applied:

(i) where there exists a recognised and generally accessible trading market in the relevant cost-item,

the Opportunity Cost of that item should reflect the prevailing price of the cost-item, which may be for

immediate or future delivery or use as appropriate to the circumstances of the relevant generator,

having regard to:

(a) costs the relevant generator would incur in offering that cost-item for sale, or acquiring that

cost-item, on a recognised and generally accessible trading market;

(b) reasonable provision for the variability of the prevailing price of a cost-item on a recognised

and generally accessible trading market;

(ii) where no recognised and generally accessible trading market exists in the relevant cost-item the

Opportunity Cost of that item should reflect the costs which would be incurred by the relevant

generator in replacing that cost-item; and

(iii) reasonable provision for increased risks to plant and equipment as a result of the operation of a

generation set or unit may be included.

9. Subject to paragraph 12, all Commercial Offer Data submitted in respect of a generation set or unit are to reflect the

costs relating to that generation set or unit when considered on a stand-alone basis.”

25. Thus, the Licence stated that the BCOP shall define the term Opportunity Cost (paragraph 5 of Condition 15) and that in

Condition 15 “Opportunity Cost” shall have the meaning set out in, and the value calculated in accordance with, the BCOP (paragraph

11 of Condition 15). The BCOP defines Opportunity Cost.

26. Thus, the technical term ‘Opportunity Cost’ in this specific Licence has the meaning as stated in the BCOP.

27. Under the general principles, when calculating the Short Run Marginal Cost of a generation set or unit on a Trading Day, only

cost-items that satisfy the definition of Opportunity Cost may be bid in at their value calculated per the terms of the BCOP.

28. The Opportunity Cost of any cost-item shall comprise the benefit of the value foregone by a generator in employing that cost-

item for the purposes of electricity generation, by reference to the most valuable realisable alternative use of that cost-item for

purposes other than electricity generation. Principles are established for calculating the value of the benefit foregone.

29. It is necessary to construe and interpret Condition 15 so as to determine the meaning and calculation under the Licence of the

Short Run Marginal Cost.

30. The calculation required is set out in paragraph 3 of Condition 15 which states:-

“(3) For the purposes of paragraph 2, the Short Run Marginal Cost related to a generation unit in respect of a

Trading Day is to be calculated as:

(a) the total costs that would be attributable to the ownership, operation and maintenance of that

generation unit during the Trading Day if the generation unit were operating to generate electricity

during that day;

minus

(b) the total costs that would be attributable to the ownership, operation and maintenance of that

generation unit during that Trading Day if the generation unit was not operating to generate electricity

during that day.

the result of which calculation may be either a negative or a positive number.”

31. Paragraph 4 of Condition 15 has a deeming provision. It provides that for the purpose of the above calculation “the costs

attributable to the ownership, operation and maintenance of a generation unit” shall be deemed, in respect of each relevant cost-

item, to be the Opportunity Cost of that cost-item in relation to the relevant Trading Day. Thus, the term “Opportunity Cost” is to be

read instead of the words “costs [that would be] attributable to the ownership, operation and maintenance of a generation unit” in

paragraph 3 of Condition 15. Further, this is mandatory, pursuant to the words “shall be deemed … to be”.

32. Thus, placing the deemed term in paragraph 3 of Condition 15, it would read:-

For the purposes of paragraph 2, the Short Run Marginal Cost related to

generation unit in respect of a Trading Day is to be calculated as:

(a) the total Opportunity Costs [that would exist] during that Trading Day if the generation unit were

operating to generate electricity during that day;

minus

(b) the total Opportunity Costs [that would exist] during that Trading Day if the generation unit was

not operating to generate electricity during that day.

33. It is clear from the Licence, and stated expressly in paragraph 11 of Condition 15, that “Opportunity Cost” shall have the meaning

set out in, and the value calculated in, the BCOP.

34. The BCOP is also explicit. It states in paragraph 2 that for the purpose of the Licence conditions under which it is made, the code

defines the concept of Opportunity Cost.

35. In paragraph 6 of the BCOP it is stated that when calculating the Short Run Marginal Cost of a generation set or unit in respect of

a Trading Day, constituent cost-items are to be valued at their Opportunity Cost.

36. Paragraph 7 of the BCOP states that the Opportunity Cost of any cost-item shall comprise the value of the benefit foregone by a

generator in employing that cost-item for the purposes of electricity generation, by reference to the most valuable realisable

alternative use of that cost-item for purposes other than electricity generation. This paragraph refers to Opportunity Cost in the

singular; however, paragraph 3 of Condition 15 of the Licence refers to the total: the total Opportunity Costs is the sum of each

Opportunity Cost.

37. Thus, the calculation in paragraph 3 of Condition 15 of the Licence, with the mandating requirement of paragraph 4 of Condition

15, is as follows:-

For the purposes of paragraph 2, the Short Run Marginal Cost related to a generation unit in respect of a Trading Day is

to be calculated as:

(a) the total of Opportunity Cost 1 + Opportunity Cost 2 + … [that would exist] during the

Trading Day if the generating unit were operating to generate electricity during that day;

minus

(b) the total of Opportunity Cost 1 + Opportunity Cost 2 + … [that would exist] during the

Trading Day if the generation unit was not operating to generate electricity during that day, and

the result of that calculation may be either a negative or a positive.

38. Consequently, it is clear that the costs in paragraph 3 of Condition 15 of the Licence are Opportunity Costs which are to be

valued in the manner determined by the definition. This is required because of the deeming provision in paragraph 4 of Condition 15 of

the Licence, and because the Licence requires in paragraphs 5 and 11 of Condition 15 that the BCOP shall define the ‘Opportunity

Cost’. The BCOP defines Opportunity Cost in paragraph 7. In paragraph 7 of the BCOP the components of the term Opportunity Cost

are set out with the words “shall comprise”.

39. Paragraph 3 of Condition 15 of the Licence was designed to work whether or not there was a definition of Opportunity Cost in a

BCOP. Without the benefit of the BCOP, paragraph 3 of Condition 15 would require that the Short Run Marginal Cost is the result of

the operating costs of a generation unit if producing electricity less the operating costs of a generation unit if not producing

electricity, i.e. only the costs directly arising from the activity of producing electricity are part of the Short Run Marginal Cost. The

definition of Opportunity Cost in the BCOP achieves the same aim in a more precise manner.

40. With the benefit of a definition of Opportunity Cost in paragraph 3 of Condition 15, it can be seen that sub-paragraph (a) asks

what is the opportunity cost of a cost-item used for purposes of electricity generation and in the quantity so used and where that

cost-item has a valuable realisable alternative use for purposes other than electricity generation, and sub-paragraph (b) will always

equal zero. Sub-paragraph (b) will equal zero because the definition of Opportunity Cost requires that the cost-item be employed for

the purposes of electricity generation, but the situation in sub-paragraph (b) is that the generation unit is not operating to generate

electricity during that day.

41. The Levy cannot satisfy the definition of Opportunity Cost in either of its conditions. In the BCOP paragraph 7, Opportunity Cost

is defined:

“… Any cost-item shall comprise the value of the benefit foregone by a generator in employing that cost-item for the

purposes of electricity generation, by reference to the most valuable realisble alternative use of that cost-item for

purposes other than electricity generation.”

[Emphasis added]

42. It does not make sense to speak of the Levy as being employed for the purposes of electricity generation for a number of

reasons: (a) the Levy is a liability that arises from the product of the activities and cannot be said to be employed for the purposes

of electricity generation; (b) the Levy is on the revenue, i.e. the income of the business, and although the Levy is calculated in a

specific manner, it is not a Levy on an item, like fuel, employed for the purposes of electricity generation; (c) the main element in the

calculation of the Levy is carbon, which is produced when fossil fuels are burnt; carbon is the product of generation: the product of

generation cannot be said to be employed for the purposes of electricity generation.

43. In other words, the Levy is paid on revenue, and is calculated, according to the terms of the Licence and BCOP, by reference to

carbon emissions. Both revenue and carbon emissions are the products of generation and it cannot be said that they were employed

for the purposes of electricity generation.

44. Also, the Levy does not have a most valuable realisable alternative use for purposes other than electricity generation. The cost-

item must have a valuable realisable alternative use for purposes other than electricity generation.

45. The Levy cannot have a valuable realisable alternative use for purposes other than for electricity generation because the Levy

arises only because of generation and on the products of generation, and thus it cannot satisfy the definition of Opportunity Cost.

46. Confusion over the proper interpretation of the Licence may have arisen from paragraph 6 of the BCOP, which reads:-

“When calculating the Short Run Marginal Cost of a generation set or unit in respect of a Trading Day, constituent cost-

items are to be valued at their Opportunity Cost, and so that a reasoned explanation of the calculation of that

Opportunity Cost is capable of being given to the Authority or the Commission (as appropriate) on request.”

If this paragraph is to be read in addition to the requirement in paragraph 4 of Condition 15 of the Licence, where the costs in

paragraph 3 of Condition 15 of the Licence are deemed to be the Opportunity Costs, i.e. are the Opportunity Costs, then there is no

conflict because the costs in paragraph 3 of Condition 15 are both defined as Opportunity Costs and valued as Opportunity Costs.

However, if paragraph 6 of the BCOP purports to interpret Condition 15 of the Licence as excluding the costs in Condition 15 being

Opportunity Costs then paragraph 6 of the BCOP must be incorrect and ultra vires the Licence because the purpose of the BCOP is

not to interpret the Licence but rather is to define the term Opportunity Cost, make provisions in respect of the calculation of the

Opportunity Cost of specified cost-items, and set out other principles of good market behaviour as per paragraph 5 and 11 of

Condition 15 of the Licence.

Conclusion

47. Paragraphs 4, 5 and 11 of Condition 15 require that the definition of Opportunity Cost is read instead of the words “costs [that

would be] attributable to the ownership, operation and maintenance of a generation unit” in paragraph 3 of Condition 15. Opportunity

Cost is described in paragraph 7 of the BCOP. The definition of Opportunity Cost requires that the cost-item be employed for the

purposes of electricity generation and be capable of having a valuable realisable alternative use for purposes other than for electricity

generation. While fuel, labour, etc., can satisfy these criteria, the Levy cannot and therefore the Levy is not an Opportunity Cost for

the purposes of Condition 15 of the Licence.

48. This case turns on the construction of words in the Licence and the BCOP, as defined in the Licence and the BCOP. Thus, it is a

decision on a construction of terms on a given set of documents only. For the reasons given, I would dismiss the appeal.