Trinity Term
[2017] UKPC 20
Privy Council Appeal
No 0002 of 2016
JUDGMENT
Jamaica Public Service Company Ltd (Appellant) v
The All Island Electricity Appeal Tribunal and others (Respondents) (Jamaica)
From the Court of Appeal
of Jamaica
before
Lord Mance
Lord Carnwath
Lord Hughes
Lord Hodge
Lord Toulson
JUDGMENT GIVEN ON
6 July 2017
Heard on 7 June 2017
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Appellant
B St Michael Hylton
QC
Kevin O Powell
Sundiata J Gibbs
(Instructed by
Myers Fletcher and Gordon Solicitors)
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Respondent (All
Island Electricity Appeal Tribunal)
Marlene
Malahoo Forte QC
(Attorney General)
Althea Jarrett
(Director of State
Proceedings)
(Instructed by
Charles Russell Speechlys LLP)
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Respondent
(Office of Utilities Regulation)
Dr Lloyd Barnett
Annaliesa Lindsay
(Instructed by
Simons Muirhead and Burton LLP)
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LORD CARNWATH:
Summary
1.
The appellant company (“JPS”) generates and supplies electricity to the
Jamaican public pursuant to the All-Island Electric Licence 2001 (“the
Licence”), which grants it the exclusive right to do so throughout Jamaica for
a period of 20 years. Its operations are regulated by the Office of Utilities
Regulation (“the OUR”), a statutory body established under the Office of
Utilities Regulation Act.
2.
The Licence provides for the charges for electricity to be set by the
OUR in accordance with a formula set out in Schedule 3. In summary (see
Schedule 3 para 2(C)) OUR is required to conduct a quinquennial review in
accordance with a detailed formula prescribed by the schedule, thereby fixing
rates at a level that allows JPS to recover “all prudently incurred costs” in
providing the service, including “salaries and other costs related to
employment”. The first such review was to take effect from 31 May 2004, based
on information filed by JPS not later than 1 March 2004. The information was to
be related to a “test year”, being the latest year for which there were audited
accounts, adjusted to reflect (inter alia) (at Part 1(ii)):
“Such changes in revenues and
costs as are known and measurable with reasonable accuracy at the time of
filing and which will become effective within 12 months of the time of filing …
Extraordinary or Exceptional Items as defined by The Institute of Chartered
Accountants of Jamaica shall be apportioned over a reasonable number of years
not exceeding five years …”
3.
The rates resulting from the quinquennial review were subject to annual
adjustment to take account of certain factors specified in Exhibit 1 to
Schedule 3, including for example changes in rates of inflation, and (relevant
to this appeal) a so-called “Z factor” representing an adjustment for “special
reasons not captured by other elements of the formula”. The Z-factor was
further defined:
“The Z-factor is the allowed
percentage increase in the price cap index due to events that:
a)
affect the Licensee’s costs;
b)
are not due to the Licensee’s managerial decisions; and
c)
are not captured by the other elements of the price cap mechanism.”
4.
The present appeal arises from the settlement in 2008 of a long-running
dispute between JPS and the unions over levels of pay, resulting in a
substantial payment in respect of back-pay due from 2001. The OUR determined
that this sum could not be taken into account under Schedule 3 because:
i)
It related to costs which were “known and measurable with reasonable
accuracy” at the time of the filing in March 2004, and therefore could and
should have been included (if at all) in the 2004 review.
ii)
Even if that were wrong, there could be no question of an annual
adjustment under the Z-factor, since the costs resulted from events due to JPS’
“managerial decisions” (excluded by para (b) of the definition).
5.
It will be convenient to refer to these issues respectively as the “2004
filing issue” and the “Z-factor issue”. To succeed in the appeal, JPS needs to
win on both issues.
Factual background
6.
In 1990 JPS had entered into Heads of Agreement with the National
Workers Union (“NWU”) for a proposed job evaluation exercise to be conducted by
Trevor Hamilton & Associates, whose recommendations would be binding on all
the parties. That exercise resulted in JPS and the NWU agreeing to its
compensation levels being placed within the top five to ten percentile of the
benchmarked companies surveyed. In 2000 there was a further agreement with the
unions for the period 1 January 2000 to 31 December 2001, providing for a
further “Job Reclassification/Evaluation exercise” to be conducted by the same
firm. To assist the process of re-evaluation there was established a so-called
“Oversight Committee” which included representatives of stakeholders at all
levels.
7.
Until 2001 the Government of Jamaica was the majority shareholder in
JPS. In March 2001, the government’s controlling interest was acquired by
Mirant Corporation, a global energy company based in Atlanta, Georgia. The
terms of acquisition included the 2001 Licence. In April 2001, the new
management signed a Memorandum of Understanding with the unions, agreeing to
continue amicable discussions on the outstanding issues from the first
negotiations.
8.
Following completion of the classification exercise in February 2002,
JPS engaged Peat Marwick & Partners (“KPMG”) to carry out a salary survey
to be used to develop a salary structure to complement the reclassification
exercise. KPMG benchmarked JPS’ salaries against 17 local companies selected by
reference to various factors including size and range of activities; 11 of the
companies participated in the survey. KPMG submitted their final report in June
2002.
9.
A dispute arose between JPS and the unions as to whether the salary
structure should be aligned with salaries of the top five to ten percentile of
the benchmarked companies, as the unions proposed (in line with the previous
position), or the average of the 11 local companies which participated in the
survey, as JPS contended. This dispute was referred to the Industrial Disputes
Tribunal (“IDT”) which on 29 August 2003 made an award resolving the issue of
principle in favour of the union, and determining the effective date for the
payment of the new rates as 1 January 2001. The IDT did not fix the amounts of
pay, but it recommended that the award should be implemented with the guidance
of the consultants previously engaged and “in conjunction and in collaboration”
with the Oversight Committee. JPS’s challenge to this award in the courts
failed, ultimately in the Court of Appeal on 7 March 2007.
10.
At this stage the Oversight Committee was reconvened and KPMG were
re-instructed to assist the process of implementation, as recommended by the
IDT. On 6 May 2008, an agreement was concluded whereby JPS agreed to make a net
payment of $2.3 billion in back-pay for the years 2001-2007 and JPS’ future
salary structure was adjusted in accordance with the award.
The OUR determination and the subsequent proceedings
11.
On 11 March 2009 JPS filed a Z-factor Submission which sought the OUR’s
approval for JPS to recover some $4.3 billion (made up of salary payments to
employees and related tax) by way of a tariff adjustment using the Z-factor
component. In a determination notice dated 2 March 2010 the OUR dismissed the
claim. It rejected any argument based on Mirant’s asserted ignorance of the
previous dealings between JPS and the unions, which should have been revealed
by “any prudent due-diligence exercise” and taken into account in the terms of
the purchase. (Any such argument has since rightly been abandoned.)
12.
On the points now in issue, the OUR held:
i)
The claim did not qualify under the Z-factor provision since they were
the consequence of “managerial decisions” in that -
“JPS agreed with the labour unions
in 2000 to embark on the reclassification exercise and must have had in its contemplation
that it would result in a likely increase in overall workers’ compensation”;
ii)
The relevant costs, “if they were to be considered as legitimate (and
this is not conceded)”, should have been taken into account in the 2004
submission:
“The IDT’s decision was handed
down in August 2003 and as such, sufficient time had been afforded the company
to include such salary adjustments in its 2004 Tariff submission. JPS exercised
the option instead to submit the matter to the courts for adjudication. This was
a managerial decision.”
13.
JPS appealed under the terms of the Licence (condition 32). That
provides for the “Appeal Tribunal” to be chaired by a former judge of the
Supreme Court or Court of Appeal, sitting with two other members appointed on
the recommendations respectively of the Licensee and the OUR (condition 32(2)).
The tribunal is required to “have regard to the legality, rationality and
procedural propriety of the Office in arriving at its decision”, and has power
to “confirm, modify or reverse” the decision in whole or part, or to refer it
back to the OUR (condition 32(1)(ii)).
14.
On 26 May 2011, following a hearing at which JPS and the OUR were
represented by counsel, the Appeal Tribunal dismissed the appeal in a detailed
and carefully reasoned decision-letter. Having set out the relevant parts of
condition 32, the tribunal commented on its powers (at para 13):
“The Tribunal regards its
procedure as that of a general statutory appeal process due to its power to
‘confirm, modify or reverse the decision,’ while observing the
administrative law features as specifically outlined, namely, ‘... the
legality, rationality and procedural propriety of the Office’ and ‘...
reasonable standards of procedural fairness and the rules of natural justice
...’ (their emphasis).”
15.
On the merits, the tribunal started by summarising what it described as
“managerial decisions prior to March 2004”, going back to the job evaluation
exercise initiated by JPS in 1990, and the new exercise in 2000. It noted in
particular the nature of the dispute referred to the IDT in 2002 (at para 30):
“JPS, on the one hand, and the
unions, on behalf of the employees on the other hand, were not in agreement on
the formula to be used in the said exercise. JPS placed the salary structure,
unilaterally, within the average of the top eleven (11) companies in the
market, whereas both the Hamilton and the KPMG report placed the Company in the
top ‘5 - 10 percentile’ of the market. JPS initially, refused to agree to pay
any retroactive compensation; JPS subsequently compromised and agreed to a
retroactive payment to 1 April 2001. The unions claimed payments retroactive to
1 January 2001.”
16.
It continued:
“(33) JPS was therefore, since
29 August 2003, aware of its compensation obligations in respect of the payment
of the new salaries of its employees. JPS was seized of certain relevant facts,
(a) the salary structure
was within the range of the top five to ten percentile of the four (4) top
companies in the market,
(b) 500 of JPS’s employees
whose salaries were below the market were to be brought up to the market
minimum, the others to remain without any loss,
(c) payment was to be retroactive
to 1 January 2001.
(34) This Tribunal is of the
view, that these are sufficient facts, in the possession of JPS, to have
enabled it to calculate the cost of the salary payments due, ‘... with
reasonable accuracy ...’ as required by paragraph 1 of Schedule 3.
(35) Despite the fact that
there is no indication that JPS sought to activate the Oversight Committee,
that did not preclude JPS from calculating such costs based on its own view of
its liability and so include it in its 2004 application to the OUR, for a new
PBRM [Performance Based Rate-making Mechanism] rate review, in accordance with
Schedule 3, paragraph 2(C). The regulatory scheme of the Licence did not permit
JPS to ignore its provisions and seek repayment of its costs outside of the
period in which it may be claimed.”
17.
With regard to the Z-factor issue, it commented that this provision
“contemplates costs arising unexpectedly, outside of the control or without any
influence or act on the part of JPS - a random occurrence” (para 38).
“(39) This Tribunal is of the
view that, on the facts, JPS’ costs would have been affected and were not
‘captured by other elements ...’, thereby satisfying the provisions of (a) and
(c), above. However, on the facts available to the OUR the (b) provision was
not satisfied. It was not unreasonable to find that the ‘events’ involved in
the reclassification salary review exercise were all due to the managerial
decisions of JPS, the corporate entity, over the years 1999 to 2002. The OUR
did not thereby act irrationally in its Determination.”
18.
JPS applied for judicial review of the tribunal’s decision. The
application was dismissed by the Supreme Court on 22 March 2013 and by the
Court of Appeal on 13 March 2015. The leading judgment was given by Phillips JA
in the Court of Appeal, to which it will be necessary to return.
The appellant’s submissions before the Board
19.
Before the Board, Mr Hylton QC, on behalf of JPS, challenges the view
that the IDT decision left the company with everything needed to determine with
“reasonable accuracy” the relevant employment costs. He submits that there was
no evidence, or no sufficient evidence, on which the tribunal could reasonably
have formed that view (citing Mahon v Air New Zealand Ltd [1984] AC 808,
820; [1984] 3 All ER 201, 210 per Lord Diplock). The conclusion was, he
submits, contradicted by the IDT’s own recommendation that the Oversight
Committee should be reconvened for this purpose, with the assistance of the
previous consultants. This is borne out by the fact that when the committee was
eventually reconvened in 2007, it took them a year to complete their work,
following a new market survey. Furthermore, even if the costs were measurable
at the time of the IDT decision, it was clear that they would not become
“effective” until the committee had completed its work, which would be long
after the 12-month period set by the definition.
20.
On the Z factor issue, he submits, as he did below, that the reference
in the Licence to “management decisions” must be taken as applying to future
management decisions, that is decisions taken since the date of the Licence.
That would be consistent with the purpose of the Licence designed to provide
protection of JPS (now under the control of private investors) against the
effect of private decisions over which they would have had no control. The
Z-factor was designed to take account of costs incurred as a result of events
occurring between rent reviews, which would include the costs arising from the
settlement in this case.
Discussion
21.
The initial decision was that of the OUR, but the provision in condition
32 for appeal to a specially constituted tribunal is an important part of the
overall scheme. Notwithstanding the specific reference in the condition to
“legality, rationality and procedural propriety”, there was no challenge (here
or below) to the tribunal’s own view of its role as going beyond that of strict
judicial review in the conventional sense. The Board has accordingly heard no
argument on the precise scope of its power to review issues of fact or
evaluation of fact, rather than pure law, or as to the material which could be
taken into account in that exercise. However, the special composition of the
tribunal, including not only a senior judge, but representatives of the two
main parties, can be seen as supporting the tribunal’s approach. There may be
some parallels with the broader approach adopted to review for errors of law
within the new United Kingdom tribunal system: see, for example, Revenue and
Customs Comrs v Pendragon plc [2015] UKSC 37; [2015] 1 WLR 2838, per Lord
Carnwath JSC at paras 47-51. By contrast, the tribunal’s own decision is
challengeable in the courts only on conventional judicial review grounds.
22.
It is not now in issue that the costs claimed by JPS were in principle
legitimate matters to be taken into account in the Schedule 3 exercise,
provided the relevant calculations were submitted at the proper time. As is now
common ground, they were “prudently incurred costs” within the statutory
definition. The OUR gave no reason for this point being “not conceded” and none
has been given to the Board. The OUR’s reasons for dismissing the claim are
also open to the criticism that they failed to address the relevant test. The
OUR commented simply that the JPS had had “sufficient time” following the IDT
decision to make the necessary salary adjustments. It failed to address in
terms the crucial question, which is not simply one of sufficient time, but
whether the company had the necessary information to render the relevant
amounts “known and measurable with reasonable accuracy” at that time. In these
circumstances, the tribunal was justified in looking in some detail at the
information which was available at the time and in forming its own view on the
application of the test.
23.
Mr Hylton does not rely on any specific error of law in the tribunal’s
reasoning, but argues instead that their conclusion was unsupported by the
evidence. In particular he points to the role in that process of the oversight
committee and the consultants, as envisaged by the IDT’s own decision. However,
in the Board’s view, in agreement with the Court of Appeal, the tribunal had
ample material to support its conclusion. In particular, it was entitled to
attach weight to the definition of the issues before the IDT and the terms of
its “award”, as opposed to what were no more than “recommendations” to assist
the process of implementation.
24.
The issue before the IDT was correctly identified by the tribunal. As
Phillips JA held (para 61), the company’s challenge was not to the correctness
of the figures or “the empirical data”, but to the “hierarchical structure”, an
issue which was resolved in favour of the unions. Nor, as she said (para 65),
was there anything in the IDT decision to indicate that a further market survey
was required at that stage, even if that may have become a prudent course by
the time (some six years after the KMPG report) when the exercise was
eventually completed. As Dr Barnett points out, for the OUR, that award (absent
any stay or other step to protect their position) was in principle effective
and enforceable from the time it was given, regardless of the subsequent legal
proceedings. Nor was it any part of JPS’ case in those proceedings that the
dispute went beyond the issues of principle, and extended to the detailed
calculations. For these reasons, the Board agrees with the Court of Appeal in
rejecting JPS’ challenge on the 2004 filing issue.
25.
This conclusion makes it strictly unnecessary to reach a conclusion on
the Z-factor issue. However, a brief comment may be appropriate. The Board has
some reservations about the approaches of both sides to the expression
“managerial decision”. Mr Hylton’s attempt to confine that phrase to decisions
made since the date of the Licence is, as the Court of Appeal held, unsupported
by the wording or the policy of the Licence. On the other hand, the Board has
some doubts about the tribunal’s simple reliance on “managerial decisions of
JPS, the corporate entity, over the years 1999 to 2002” involved in the
reclassification exercise. It is right of course that the final costs were in
part attributable to managerial decisions made by JPS before and after the
change of control, and that (as Mr Hylton accepts) the change of controlling
shareholders makes no difference in principle. But those decisions were only
part of the story.
26.
Even on the OUR’s case, the event which triggered the duty to pay was
the decision of the IDT. If, following that decision (and contrary to the
finding of the Appeal Tribunal), it had not been possible to estimate the
relevant costs in time for the 2004 filing, it would be surprising, and
potentially unfair to JPS, if there were no mechanism to allow them to be taken
into account by way of annual adjustment once the uncertainty had been
resolved. The respondents were unable to identify any policy reason for
excluding them altogether, nor any mechanism for taking them into account other
than the Z-factor. It seems to the Board at least arguable that, in the context
of the annual review, the reference to “events … due to managerial decisions”
should be read as a reference to decisions more directly connected to matters
arising since the quinquennial review. However, in the absence of detailed
argument, it would be wrong to do more than raise that possibility for possible
consideration if and when it arises in a future case.
27.
For these reasons the Board will humbly advise Her Majesty that the
appeal should be dismissed, and that, subject to any submissions received
within 14 days, the respondents’ costs of the appeal should be paid by the
appellant.
