Lands Tribunal for Scotland

OPINION

Shell UK Limited
v
Assessor for Grampian Joint Board

This is an appeal by Shell UK Limited, on behalf of Shell UK Exploration and Production Limited, against the net annual value appearing in the valuation roll for the revaluation year 1995/96 in respect of their Gas Terminal at St Fergus, Peterhead. The Assessor had entered the appeal subjects in the roll at a net annual value and rateable value of £3,400,000 effective from 1 April 1995. However, following discussion and negotiation with the appellants' surveyor, he revised his valuation to a figure of £3,000,000. A further result of those discussions and negotiations was that many, indeed most, of the items which go to make up the total assessment of the Gas Terminal were agreed between the parties. Relatively few issues remained in dispute before us.

At the hearing, Mr C S Haddow QC, appeared for the ratepayers with Mr Neil C. Kinnear, Advocate and led the following witnesses: Mr H G Rushford, BSc, PhD Chemistry, the Manager of the St Fergus Plant (since November 1995); Mr D Pentland, HNC, Mechanical Engineering, Production Co-ordinator at the Gas Plant; Mr R A Collins, BSc, Chemical Engineering, a Chartered Engineer and a Member of the Institution of Chemical Engineers, he is Head of Process Engineering and Development with Shell Expro and is based in Aberdeen; Mr John Laird, HNC, Mechanical Engineering, a Cost Engineer based at the Shell Expro Office in Aberdeen, Mr S W Campbell, a Chartered Engineer and a Member of the Institution of Chemical Engineers, he is a Senior Project Manager with Costain Oil, Gas and Process Limited based in Manchester and finally Mr A J Borthwick, FRICS and a Member of the Rating Surveyors Association. He is based at Shell's headquarters in London. Mr H N Currie QC with Mr G N M Liddle, Advocate, appeared for the Assessor and led as witnesses Mr A A McConochie FRICS, IRRV, the Grampian Assessor, and Mr I H Milton BSc (Hons), ARICS, a Depute Assessor in Grampian. The Tribunal carried out a site inspection on 7 January 2000.

Counsel for the parties produced a helpful written statement concisely setting out the issues outstanding and the contentions of the parties. We shall deal in turn with these under their separate headings. Our ultimate task, of course, is to determine rental value of the Gas Terminal for the purposes of section 6 of the Valuation and Rating (Scotland) Act 1956. The valuation date was 1 April 1995. It was agreed that the valuation should proceed on the contractor's basis. One major issue related to evidence of the "modern substitute plant", which, it was said, Shell could and would have built on the site at the valuation date if they had been starting afresh. The other issues raised questions of interpretation of The Valuation for Rating (Plant and Machinery) (Scotland) Regulations 1994 (hereinafter "the 1994 Regulations") as they applied to an item of plant called a "slugcatcher", to the fire protection system, to the security and alarm systems and to four vessels known as "knock out drums". (We set out the relevant provisions of the Regulations under each head). As will appear, a question of assessment of evidence of value also arises in relation to the slugcatcher. Values in respect of the other items were agreed on alternative bases.

The Shell St Fergus Gas Plant is situated between Peterhead and Fraserburgh and is adjacent to the terminals of three other operators, Total, Mobil and Transco.

The Shell plant was designed to process natural gas and associated liquids (NGLs) obtained from major oil and gas fields in the North Sea. The FLAGS (Far North Liquids and Associated Gas Systems) pipeline of 36" inside diameter was laid over the distance of approximately 250 miles from the East Shetland Basin to the St Fergus site. Simultaneously the plant was constructed and the pipeline/plant system was started up in 1982. Then, as now, methane and some ethane was supplied to the National Transmission System but at that time the remaining NGLs were sent by pipeline to Peterhead Power Station as fuel.

In 1983, the Fife Natural Gas Liquids Plant (FNGL) was commissioned at Mossmorran in Fife along with the St Fergus/Mossmorran pipeline. The NGLs were then routed to Mossmorran for separation into their components - ethane, propane, butane and light gasoline.

In 1987, a second offshore pipeline was completed and commissioned: that was the 20", 120 miles long Fulmar Pipeline which connects St Fergus to the Central North Sea area and, in particular, to the Fulmar Field. Since the FLAGS and Fulmar systems were completed many other fields have been connected to them.

Shell St Fergus is a part of Shell Expro's Gas Systems and Plants (GSP) Business Unit whose business is the transportation and processing of natural gas and some associated NGLs for sale to customers or transfer to other business partners. The plant can process up to 43 million cubic metres per day of wet gas producing over 40 million cubic metres per day of sales gas and possibly 14,000 tons per day of NGLs. A high percentage of Britain's gas supply comes from St Fergus.

The Shell terminal covers an area of approximately 38 hectares (about 94 acres). The site is approximately rectangular in shape. Surrounding the site (excluding only a car park) is a high chain link fence with concrete supports. Within this fence there is a 4 metre high security fence equipped with high specification detection equipment. This was provided by central government in the interests of national security.

The site is at two different levels. The lower level, about three quarters of the site, accommodates the main process and export facilities, firewater pond, utilities and storage, control room, gatehouse, administration building, contractors' facilities, warehouse and workshops. The remainder, on the higher level, comprises the pipeline inlet facilities and elevated vent and flare facilities.

The whole site is laid out with roadways forming blocks used for specific activities. The main parcels include the slugcatcher and pipeline inlet area, module areas 1 and 2 (comprising separation, drying and regenerating plant), a desulphurisation plant, a distillation unit, the administration office and workshops, the control room and utilities buildings, the vent and flare stacks, storage and fire training areas, the fire water pond and the car park. There is also one block of land available for expansion of the facility with a third module.

Broadly the rateable elements of the facility include the buildings, hard surfaces, concrete foundations and steelwork supporting the process plant. Most of the process plant and pipework is not rateable. Some plant is free standing (such as furnaces) but in the main, items of plant such as separators or demethanisers, are supported within structural steel frames.

The parties are agreed that the contractor's basis is the correct approach to valuation of the St Fergus gas terminal. At the hearing both parties made reference to a publication entitled "The Contractor's Basis of Valuation for Rating Purposes - A Guidance Note". It was not in dispute that after the 1990 Revaluation of non-domestic properties for rating purposes, the Government set up a Committee under the Chairmanship of Derek Wood QC to examine the rating of plant and machinery. The Wood Committee's report was published in 1993 and its recommendations formed the basis for the 1994 Regulations which came into force on 1 April 1995, the revaluation date. Like legislation was simultaneously enacted in England and Wales.

Although repeated reference was made to the Wood Report, it was not formally introduced in evidence and our references to it are limited to setting the background to the Regulations and to the Guidance Note. We are aware that the Wood Committee expressed views on problems identified with the contractor's basis of valuation and, in particular, on the need for harmonisation in the use of the method. As a result representatives from the Royal Institution of Chartered Surveyors, the Institute of Revenues, Rating and Valuation, the Incorporated Society of Valuers and Auctioneers, the Valuation Office Agency, the Scottish Assessors Association and, slightly later, the Northern Ireland Valuation and Land Agency, formed the Rating Forum which published the Guidance Note.

Although the Guidance Note was not published until November 1995, both parties were agreed that it could be relied on as a sound approach to the method of valuation implicit in the contractor's basis. They were, however, in dispute as to how the Guidance Note should be applied. In light of the parties' agreement, it is unnecessary for us to comment on the Guidance Note. We have no reason to doubt that it sets out a sound approach to determination of annual value using the contractor's basis. It does so using separate stages. These stages may be helpful. We are not to be taken as confirming that they are essential as matter of principle. The Guidance Note does not purport to be more than a guide. We set out many of its provisions below in relation to the modern substitute plant issue and also certain of its provisions in relation to valuation of the slugcatcher.

In addition to the statement of outstanding issues produced by counsel, a joint agreement prepared by the parties was produced at the hearing. It stipulated (with reference to an earlier agreement between the parties and submitted as a production) that:-

“… the following values have been agreed in respect of the 1995 appeal at this subject, without prejudice as to make up.

Items NAV/RV £
Valuation excluding items in dispute and appellant's contentions in respect of Substitute contentions   2,250,000
If Fire Protection system determined rateable Add 130,360
If Security and Alarm system determined rateable Add 71,000
If Lighting "on steelwork" determined rateable Add 40,000
If V6002 A-D determined rateable Add 57,309
Assessor contends that the slugcatcher is rateable. If the Tribunal agree that it is rateable the Assessor will argue for a value of £503,000. Add 459,780
The appellants say the slugcatcher is not rateable. However if it is determined rateable the appellants will contend for a value of £219,000. Or add 219,000

The Assessor will argue for the maximum figure achievable from the above. This will be for NAV/RV £3,000,000.

Shell will argue for the minimum figure achievable from the above. This will be for a NAV/RV of £2,250,000. Both this figure and the amounts noted in respect of the disputed items will be subject to the appellant's contentions in respect of Substitute considerations.”

In the course of the hearing the appellants intimated that, because they considered that the evidence available was insufficient to be a proper basis for decision, they would not insist in their submission that the lighting "on steelwork" was not rateable. Thus the annual value of £40,000 in respect of that item is not now in issue.

We now deal with each of the outstanding issues in turn. As parties tended to use the present tense in their descriptions of plant etc, we have followed that course unless precise dates seem of relevance. Parties were aware of the need to have regard to the state of knowledge and technology at 1st April 1995. This was of particular significance in relation to the "modern substitute plant".

A. Substitute Plant

In relation to the "modern substitute plant" issue, the appellants founded on a study which had been carried out to provide full evidence of the plant which they "could and would" have constructed to meet their operational needs on the site at the valuation date. It was contended that comparison between that plant and the existing subjects provided evidence of an overall deficiency in the existing subjects for which allowance had to be made. The assessor's position was that the appellants were, in effect, seeking to value the modern substitute plant instead of the existing subjects. An appropriate allowance should, admittedly, be made in valuing subjects under the contractor's basis in order to reflect identifiable deficiencies, and this assessment could be assisted by reference to modern substitute costs. However the starting point was to identify a relevant deficiency. That had not been done in the present case.

In view of the extent of the evidence relative to the Guidance Note it will be helpful if we set out at this stage the provisions of certain relevant passages. However the Guidance Note must be read as a whole and our consideration of its meaning and effect is not limited to the undernoted material.

Guidance Note

B. The Contractor's Basis - The Need for Guidance
B.1   The 'traditional' explanation of the theory underlying the adoption of the contractor's basis is that the hypothetical tenant, instead of taking the subject property at a rent, has the option of building a precisely similar property for his own occupation, and that his rental bid for the subject property will be related to the annual equivalent of the capital cost of providing the site for and of building such a property.
B.2   Whilst this 'classic' explanation may have received approval in case law, closer examination reveals that it is completely artificial since the hypothesis underlying the concept of rateable value means that the tenant does not in reality, have the choice between renting the property and building an alternative himself.
B.3   Furthermore, the way in which some practitioners are now seeking to apply the contractor's basis in practice is creating unnecessary complications for the valuation exercise and, in the view of the Rating Forum, warrants a review of the appropriate approach.
B.5   It has to be assumed that the property is owned by a hypothetical landlord who wishes to let it and that there is a hypothetical tenant who is willing to pay a rent in order to occupy it.
B.6   Although the parties to this transaction are hypothetical, the property is real and the valuer's concern is therefore with ascertaining the rental value of the actual property.
B.7   The Rating Forum considers it is an unjustifiable departure from the reality of the valuation exercise to make an assumption that either the hypothetical tenant, or someone else, could or would build an alternative property; it is even more unrealistic to assume, as suggested in some quarters, that such a person has already built an alternative property which happens to be available for occupation as at the valuation date.
B.8   To adopt either of the foregoing assumptions introduces scope for considerable dispute over the location of such an alternative, the nature of the alternative, the length of time it may take to build (or have built) the alternative, the arrangements for payment of the cost of providing the alternative… and other imponderables which adversely impact on the reliability of the contractor's basis.
B.9   In the view of the Rating Forum, the further the valuer strays from reality the less weight can be attached to the valuation produced.
B.10   It is the rental value of the actual property which is required and the justification for adopting a cost based approach is that - when properly applied - it provides a guide to the rent which may be paid where no other, more direct, valuation method can be used.
B.11   In applying the contractor's basis, the valuer is concerned with ascertaining the cost of building the subject property, but it should be made clear that the valuer is costing a notional building of the subject property.
B.12   There will be no actual building of the property either on its present site or elsewhere, either immediately or in the future. The costing exercise which underlies the contractor's basis merely provides the basis from which a rental value can ultimately be derived by the careful application of the subsequent stages in the valuation method.
B.13   That is not to say that some departure from what is 'on the ground' cannot be allowed. Clearly, even a notional building involves a costing exercise based upon the 'provision' of a new replacement; such a new property would be built with modern materials to present day standards and may not, in every case, be identical to the actual property.
B.14   However the valuer should not venture into a world of speculation which involves departing too far from the replacement of the actual property in this exercise and it is the Rating Forum's view that, in most cases, the costing exercise should be related to the notional reinstatement of the actual property which is the subject of the valuation exercise.
B.15   With regard to plant and machinery, it is important to note that it is the actual plant and machinery forming part of the property which has to be considered in connection with determining rateability. Whilst alternatives, some of which may be non-rateable, may be considered in ascertaining the value of the plant and machinery forming part of the property, they cannot determine the extent of it.
1.   Introduction
  It should be assumed [in using the contractor's basis of valuation] that the property is owned by a hypothetical landlord who wishes to let it and that there is a hypothetical tenant who is willing to pay a rent in order to occupy it. However, although the parties to this transaction are hypothetical, the property is real and the valuer's concern is therefore with the rental value of the actual property.
2.   The Approach to Valuation
2.1   The recommended approach to valuation comprises the five component Stages listed below which are dealt with in more detail in Section 3.
Stage 1 - Estimate the replacement cost of the siteworks, buildings, rateable structures and rateable plant and machinery.
Stage 2 - Adjust the replacement cost to reflect any deficiencies in the buildings etc.
Stage 3 - Value the land.
Stage 4 - Decapitalise the sum of Stage 2 and Stage 3 by the appropriate interest rate.
Stage 5 - Stand back and look at the result of Stage 4 and make any further adjustments considered appropriate.
3.   The Process of Valuation in Detail
3.1   Stage 1 - Estimated Replacement Cost
3.1.1   The first stage of the contractor's basis is to estimate what it would cost to construct the property, including all the buildings, site works and all rateable plant and machinery within the property, on an undeveloped site.
3.1.2   The estimated cost of replacement should include all the elements which would go to make up an actual cost. Design costs, site works, provision of services and supervision costs (including fees) must all be included in the estimated replacement cost.
3.1.3   Initially, the valuer must decide whether to cost the actual property or a substitute. In most cases costs will relate to the actual property, but there may be exceptional cases where it would be appropriate to cost a modern substitute.
(Details of the Guidance Note, paras. 3.1.4 to 3.1.11, relative to valuation by use of unit costs or by actual costs are set out later in this Opinion when we deal with valuation of the slugcatcher).
3.1.16   Where a property is such that perhaps because of age, design or type of construction it would not be realistic to envisage rebuilding it in its present form, an alternative to estimating the cost of the actual property can be adopted with the valuer estimating the cost of a modern substitute property in order to arrive at any adjustments appropriate to Stage 2.
3.1.17   Where a substitute property approach is adopted costs should be estimated on the basis of the substitute being of a design and specification to enable the use of the actual property to be carried out in a fully satisfactory manner.
3.1.18   Where the substitute approach is adopted, then it would be usual practice to cost on the basis of the actual building's floor area. Where, however, the reason for adopting the substitute approach is because the actual building is larger than required, due, for example, to changes in technology (and not for reasons that are personal to the actual occupier) then the substitute should be costed on the basis of size to reflect modern trade and business practices.
3.1.19   The foregoing paragraphs 3.1.17 and 3.1.18 outline the basis of the substituted building approach. It should be noted that any adjustments required to take account of differences between the actual building and the substitute will be reflected at Stage 2, or possibly Stage 5. Care should be taken to ensure that any adjustments made when determining the size of the substitute building to be costed are not duplicated by way of allowances at Stage 2 or Stage 5.
3.1.20   No adjustment should be made at Stage 1 (or Stage 2) for grants, or similar financial contributions that were either paid or would have been available at the valuation date, as these do not affect the cost of construction. Grants, or the prospect of them, do not reduce the contract price…
3.2   Stage 2 - Adjusted Replacement Cost
3.2.1   The replacement costs estimated at Stage 1 relate to the provision of new buildings, structures, plant and machinery, etc. As it is the actual property which has to be valued, in its existing physical state, adjustments may properly be considered at this Stage to reflect certain deficiencies in comparing the actual property with the 'new' property costed at Stage 1.
3.2.2   The deficiencies which may be taken into account at Stage 2 can, for convenience, be grouped under the heading of 'obsolescence' and usefully subdivided into physical and functional aspects as follows:

  • 'physical obsolescence' relates to the deterioration of the buildings or other parts of the property through the wear and tear of the components. Although age is not in itself justification for an allowance, the tenant will reflect the prospect of increased maintenance costs due to deterioration over time by a reduction in his rental bid;
  • 'functional obsolescence' covers the problems which may be present in the design of the property which could be deficient by comparison with current requirements, eg excessive ceiling heights, inappropriate layout, inadequate load bearing of floors, inferior heating and ventilation, etc; and
  • 'technical obsolescence', which may be regarded as an extension of functional obsolescence, arises where current technology has changed so radically that the actual plant to be valued or the buildings housing the equipment have become significantly redundant or economically outmoded.
There may also be 'economic obsolescence' factors which should be taken into account at Stage 5 (see paragraph 3.5 etc.) not at Stage 2.

Evidence

The basis of the appellants' claim rested on the New Substitute Plant Study ("the NSP Study") prepared by Costain Oil, Gas and Process Ltd, on their instructions. Costain are international process engineering contractors with extensive experience of Shell's operations and requirements. The main evidence in relation to the modern substitute plant approach came from Mr Borthwick who explained the origin of the study. It was an exercise carried out solely for the purpose of providing evidence to minimise the rates bill. Mr Borthwick had carried out a general assessment of the plant in 1994. This overview persuaded him that there were grounds for consideration of a modern substitute plant as a basis for rating valuation. At his instigation Shell put in hand a project to produce a theoretical redesign of the plant to determine whether arguments could be advanced in relation to valuation for rating.

The initial draft work scope drawn up by Mr Raimund Wege of Shell UK Exploration and Production set out the purpose of the operation as perceived at that time. The intention was to reduce the value for rating purposes of the plant at St Fergus and Mossmorran. It included the following: "… the following actions have been identified: 1. Develop a basis of design for St Fergus with the target to minimise equipment size and numbers with the following premises:…" It then set out various assumptions to be made in the design. Mr Wege later also proposed development of a suitable yardstick for measuring plant capacity versus value of the plant which would allow comparison with other plants in Scotland. The intention was to use the tool to establish whether the plant rates imposed were fair.

Mr Borthwick by Minute of 27th March 1995 to Mr Wege referred to the minimisation of equipment and pointed out that, "… it would be more appropriate to consider the type of plant which would be constructed in terms of normal operational requirements, consistent with normal efficiencies, which may be built in order to minimise running costs. This could certainly include works to minimise rate liability but I would not want it to be the overriding requirement as regards plant design. It is essential to quantify the elements of construction in relation to a plant which might actually be built to reflect operational requirements as at 1st January 1995 rather than a theoretical plant which was designed to minimise rate liability." Mr Borthwick sent to Mr Wege a copy of the 1994 Regulations with a detailed commentary thereon.

A Minute of Meeting between Shell personnel and representatives of Costain confirmed Mr Wege's draft work scope as representing the actual scope of work for the project, with Mr Borthwick's note as clarification. This is reflected in the file note of a meeting on 23 June 1995 written by J. Moylan of Shell. It included an entry under Flares and Vents saying "Consider use of HIPS [if] it saves on rateable equipment".

On 30th June 1995, Mr Hoppenbrouwer, a senior manager within the Shell group convened a meeting the purpose of which was: "To define a hypothetical, minimum cost gas plant in North Scotland for the processing of currently forecasted gas and NGL streams. … The aim of this exercise is to prove to the tax inspector that present feedstocks would require much simpler facilities than the present ones and that property tax should therefore be lowered to reflect such simpler processing."

A document called "NSP Rates Reduction Study - Scope of Work" was produced in August 1995 to provide information for submission to the assessor. The Scope of Work noted that the project would be handled in four phases. The first phase was the evaluation exercise of computer software called ICARUS, Costain's normal estimating tool. Phase 2 involved the plant redesign and estimation of quantities of materials. In the event, the project did not proceed to Phases 3 and 4 as it was agreed that the summary of Phase 2 would suffice as the report stage for present purposes.

The Scope of Work outlined the background changes to the approach to the rating valuation of specialised plant and provided certain information relevant to the assessment of rates. It stated that the study was to quantify materials, services and infrastructure that attract rates. The quantification was to be for a modern substitute plant, in other words, a plant that would be built as at 1995, with the benefit of the knowledge of current and foreseen business at 1995 and using equipment and design techniques appropriate to that date. The study would provide the necessary design data to demonstrate that Shell could and would construct any new plant differently from the existing one and to demonstrate to outside bodies the differences between the existing and the proposed plants and show that the proposed plant was technically and commercially viable. The document set out certain assumed modifications to the existing plant which were to form part of the basis of design. The purpose of the Scope of Work was to provide data for an appraisal of the valuation consequences of the recommended modern substitute plant. There was no requirement to specify construction costs. Instead unit costs were to be applied to the quantities of materials derived from the study in order to directly calculate the rateable value of the substitute plant.

The Scope of Work expressly provided: "The St Fergus 'Modern Substitute Plant' will be designed according to the assumptions specified in Section 4.0 below". The following are examples of entries under Section 4.0:

"The concreted, tarmac, gravel, grassed etc areas are to be minimised. The plant area is to be reviewed to minimise surface areas.

"The vents and flares are to be rationalised and rates minimised wherever possible."

"Roads and surfaced areas are to be minimised."

"Minimise plot space, and space for expansion";

"Compressor buildings are to be minimised/eliminated if possible with sound attenuation specified as part of the compressor package";

"Maintenance facilities are to be minimised".

In addition to these references to minimisation there were various references to a need to simplify. The fire station was to be deleted. Administration and control buildings were to be combined and located remote from the plant. Unit U-2600 was to be deleted.

The first stage of the study was to demonstrate that ICARUS was able to produce estimates of quantities with an acceptable degree of accuracy. For the Phase 1 study, quantities from a completed project were used. The quantities generated by the computer were compared with the actual materials used. Shell personnel assessed the results of this exercise and satisfied themselves that it was sufficiently accurate to be used as a basis for Phase 2.

Although we accept that Shell personnel satisfied themselves that the results produced by ICARUS were sufficiently accurate to have been a basis for tendering and for the purposes of the study, it may be important to observe that they were aware that it was only a notional exercise. Various margins of error were accepted at different stages.

After Shell satisfied themselves that the ICARUS programme was sufficiently accurate for the purpose, their staff continued to work closely with Costain staff throughout Phase 2. They were involved in a process of evaluation and checking throughout. Costain undertook the study based on their experience of the design of gas processing and natural gas liquid processing plants and their experience of working for Shell. While the underlying purpose of the study, to provide information for rating purposes, was clear, the necessity of ensuring that the plant could be built was applied rigorously. The method adopted was in line with Costain's normal manner of estimating quantities requiring a high accuracy of definition for project sanction or tender submission purposes. The process configurations were evaluated and fixed. This was straightforward as it had been decided by Shell to retain the existing process configuration with a number of discrete modifications. The modifications were each examined and confirmed as acceptable or otherwise. There was evidence that where the modification proposed by Shell was considered to be out of line with industry or Shell normal design practice, it was not incorporated. The mechanical design data for equipment was produced based on the size of current equipment and multiplied, where appropriate, by a scaling factor developed from fundamental chemical engineering principles.

The plant layout was developed incorporating the revised process configurations, the revised mechanical design data and based on the established alterations to the philosophy of the current plant layout. Each alteration was examined and confirmed as acceptable or otherwise. Safety was reviewed to ensure that it was in line with the requirements of current codes. Safety systems were assessed and quantified. The construction aspects of the layout were assessed to ensure that the plant could be erected in a safe and economical manner. The civil engineering infrastructure was designed and quantified based on the developed plant layout taking account of a soil survey report. The underlying philosophies for electrical and instrument design were reviewed to ensure that they conformed to proper standards. The size of buildings to house electrical and instrument equipment was estimated. The estimate of quantities was prepared using the ICARUS programme and manual calculations based on information generated in the study.

Any process plant comprises elements of "equipment" and elements of "infrastructure". The equipment and associated costs are significantly greater than the infrastructure costs. The main purposes of the Costain study were concerned with quantifying rateable infrastructure. The only purpose of examining equipment was to derive sufficient data to allow the infrastructure design to proceed. It was recognised that was necessary to ensure that the equipment design was feasible. This was achieved principally by application of the engineers' experience to identify equipment that would be beyond normal design limits. Mr Campbell, a chartered engineer employed as senior project manager by the Costain Oil, Gas and Process Company Limited gave evidence which we accept. He said there was no short cut to deriving the conclusions of the study. These conclusions were built up in a logical sequential manner by engineers experienced in their field.

In addition to the substantial material setting out the conclusions of Phase 2, which was produced before the Tribunal, we heard evidence that there were some 30 boxes of additional backup material. This had been offered to the assessor but he had declined an opportunity of examining it.

The written material produced on behalf of the appellants stressed that the intention of the study was to minimise liability to rates. Mr Borthwick in his evidence emphasised that this had been simply at the initial stages. He accepted that the written material bearing on the exercise was potentially misleading but he had satisfied himself that the work was done on the basis of process requirements only. We accept that in the later stages personnel involved with the project had not deliberately worked to minimise the liability of the plant to rates. All concerned were aware of the need to quantify the elements of construction in relation to a plant which Shell would be prepared to build rather than a plant designed solely to minimise rating liability.

In particular, we are satisfied that Mr Laird the cost engineer responsible for liaison between Mr Borthwick and Costain did not consciously take decisions based on rating considerations. His aim was to see that the exercise properly designed and quantified the materials of a plant which could and would be built by Shell at St Fergus had they been rebuilding on the assumptions set out for them as at 1995.

We accepted Mr Campbell's evidence that although he was aware that the purpose of the study was solely to provide information for rating purposes, Costain's work was not consciously influenced in any way by consideration of rating issues.

It may be observed that the concept of building a plant which would minimise rates liability and a plant which "could and would" be built are not mutually inconsistent. There was no evidence, and indeed, no suggestion that the Costain study represented the "ideal plant" which Shell would have built for themselves in 1995 if they had been starting again without regard to rating. Accordingly, although the parties directly involved in production of the Costain Report, including Shell personnel responsible for liaison and discussion, intended to produce a design of plant of a nature which could and would be built by Shell, we are not satisfied that the exercise has produced a plant which would be chosen by a hypothetical tenant as the optimum plant for his requirements at the site

Although we heard evidence that this was plant which "could and would" be built it was plain that the "would" was hypothetical. The precise hypothesis upon which it was based was not established to our satisfaction. The evidence tended to show that if Shell had wished to build a minimum cost plant, albeit to their normal engineering standards, which minimised rating liability, the Costain study was fairly indicative of what they would have built. The results of the study can be taken as a reasonable assessment of the quantities of material which would have been required in relation to the rateable aspects of the substitute. We are not satisfied that Shell would, in fact, pay significant regard to minimisation of rating liability if designing plant from new. It may be assumed that regard would be had to keeping running costs low but minimisation of running costs cannot be assumed to be a dominant characteristic of design and we heard no evidence to suggest that this was the appellants' approach in practice. There was no suggestion that the study showed the "ideal" plant which Shell would have provided in 1995 if they had indeed been starting afresh.

In addition to the evidence bearing on the substitute plant exercise we heard evidence relating to the state of the actual plant and evidence of other cases where reference had been made to modern substitutes. This material was spoken to in detail by Mr Milton. We can make the following findings.

The appeal subjects were commissioned in 1982 and extended in 1987. The U-2600 plant was added in 1992 to deal with Fulmar gas. In the SEGAL brochure produced by Shell in August 1994 the plant was described as, "… the most sophisticated and flexible gas processing facility serving the UK North Sea" and referred to as, "… the most efficient and flexible [facility] serving the North Sea". We heard no evidence to show whether and to what extent the flexibility of the plant was reduced by the rationalisation and minimisation process. We accept that the design allowed for current and expected needs at 1995. We do not know to what extent, if any, it limited Shell's capacity to accept feedstock from different sources. We heard no evidence to show what specific changes in design philosophy or technological advance between the initial design of the plant and the Costain study had led to change. There was, however, evidence that a particular process, the "Puraspec" process, was not available before 1990. Puraspec is a cheaper sulphur absorption unit which could replace Unit U-2600, a relatively high energy consumer, to 'sweeten' the feedstock from the FLAGS pipeline. We accept that this was an identified technological improvement. However we heard no detailed evidence of the impact of this particular element in making the existing plant 'significantly redundant or economically outmoded'.

The plant in fact receives feedstock under some ten to twenty separate contracts. Shell are always seeking new opportunities to process feedstock from other sources. Such feedstock might have different characteristics from the present. Flexibility is a valuable asset. Space for development is also valuable to Shell, as is evident from their promotional literature. No attempt was made to lead evidence of any defect or deficiency in the actual plant. Indeed, when it was put to Mr Borthwick in cross-examination that he should be looking for specific evidence that particular plant was redundant or outmoded, he said that this was unnecessary. What was necessary was to show what Shell would have designed and provided as at 1 January 1995.

Evidence was given of the site development master planning documents prepared in 1991 and in 1994. It was clear from the introduction to these documents that they were simply considering possible development. However, they could be contrasted with the NSP Study in respect that they dealt with development which might actually be undertaken. The 1991 edition included a proposal to install a Module 3 similar in capacity and processing type to the existing two modules. The proposed facilities are described as being, "… intrinsically similar to others installed on the site." A plan provided for reference demonstrated no intention to design such module to occupy a smaller land parcel than those occupied by the existing Modules 1 and 2. Nothing in these reports suggested that the existing facility was inadequate, over specified or suffering from operational inefficiencies, or otherwise deficient in comparison with current requirements.

Mr Borthwick gave evidence that in his initial assessment as at the beginning of 1995 it appeared that the U-800 area would not have been required because it had initially been built to allow the plant to operate pending construction of the NGL pipeline and Mossmorran facilities. In 1992 an additional processing facility U-2600 and support areas were built to land and process gas from the Fulmar field. He understood that this was not necessary in 1994.

We are satisfied on the evidence that Shell could, if necessary, have operated the plant without the U-800 and U-2600 facilities. The latter consumes a lot of energy, and over the years the H2S levels in the gas from FLAGS had declined. They would not have used the U-2600 if they had had the Puraspec system. However, both these facilities were in fact being used in 1995. We infer that they were useful facilities for the appellants at that time. We heard no more detailed evidence to determine whether their use was wasteful or manifestly inefficient. Mr Rushford said that these units gave him a measure of flexibility. The possibility that there would be an increase in the H2S to be dealt with as the oil fields neared the end of their lives was discussed by Shell in relation to the capacity of St Fergus. It was decided that the risk of this did not require positive action to be taken. At that stage, of course, they had available the existing U-2600.

By planning application dated 22 September 1994 in relation to the third module reference was made to the Fulmar gas desulphurisation and dehydration process. The process of dealing with the unacceptable levels of hydrogen sulphide was described as being carried out by Unit U-2600. There is also reference to part of the NGLs being directed to Unit U-800 to strip out light hydrocarbons if required. The planning application stressed the ease of maintenance of the existing plant. We are satisfied that beneficial use was being made of these units in 1994 and that such use was continuing in 1995. The NSP Study proceeded on the basis that these units were not required.

No attempt had been made to make an accurate assessment of the possible differences in running costs between the actual plant and the modern substitute plant to demonstrate that the actual plant is economically outmoded. Mr Rushford estimated the difference at a possible figure of about £300,000. The total budget was also estimated at about £19 million. We do not consider that total reliance can be placed on either figure. We observe, however, that these figures would demonstrate that the existing plant operates at over 98 per cent efficiency compared with the modern substitute. This is consistent with the fact that no significant redundancy or deficiency was identified in the existing facility.

We heard credible evidence that allowances had been made by reference to modern substitute plant in the course of valuation of Shell plant at the Shell Haven and Stanlow refineries in England. Both these plants were very much older. They had been subject to years of piecemeal development. They had been clearly identified as having many obvious technical and functional deficiencies before any question of modern substitute plant was considered.

The Shell Haven refinery first became operational in 1916 and is due to cease refining shortly. In an appeal to the Valuation Tribunal in respect of its 1990 revaluation reliance was placed on evidence of a modern equivalent plant. An effective allowance of 14.9% was made. This decision was appealed and settled prior to hearing with a total allowance of 23.9%.

At Stanlow, energy inefficiencies, maintenance inefficiencies and over-manning due to the nature of the plant contributed to an annual excess running cost of £37.44 million. The 1990 revaluation assessment was £18 million.

There was detailed evidence of deficiencies in the Stanlow complex. A rail car loading facility was redundant. There was identified redundancy in the tanks available. The site had developed piecemeal since 1922. The layout was described as "Dickensian" by witnesses dealing with the valuation. Redundancies in sizing of stacks were identified. Positive deficiencies in the layout of process plant and associated furnaces were spoken to and compared with modern parallel string layout. Boilers used for steam and electrical generation were out of date and would be replaced by modern gas turbine facilities. The piecemeal development had led to a scatter of dispersed control rooms. These could be centralised into two main control rooms. Transport links within the site were obsolete. Evidence of the design available for a comparable new refinery in China was available. An effective allowance of 16.7% was made to allow for identified technical and functional obsolescence.

In his evidence Mr Borthwick advanced various submissions as to the operation of the contractor's basis of valuation. He stated the principle underlying the method as being that the tenant would not pay, by way of rent, a sum higher than it would cost him (in annual terms) to provide himself with ownership of something equivalent (his emphasis). He referred to Armour on Valuating for Rating 5th Edition, 19 - 38 to 19 - 44 and to the Guidance Note for detailed exposition. He founded particularly on paragraphs 3.1.16 to 3.1.19 of the Note.

He contended that the property as it existed in 1995 did not match current business practices nor was it built to current standards. Accordingly, the tenant's rental bid should be at a discount to the landlord's annualised cost of construction of the actual subject. By current standards the subject was inefficient. He argued that the rental equivalent of an unadjusted estimated capital value would include unremunerative expenditure and to the tenant would, accordingly, represent an uneconomic bid. This led him to the conclusion that, consideration of a modern substitute for the existing site would show that there was considerable over specification at the St Fergus plant, and consequent obsolescence, which should be reflected by making appropriate allowances in the valuation. He accordingly contended that the assessor had failed to make allowance or had failed to make sufficient allowance for physical, functional and technical obsolescence in respect of the site, plant and buildings.

Mr Borthwick valued the actual subjects on a unit cost basis. He then adopted the quantities identified in the NSP Study and used the same unit costs to value a substitute plant. The effect of this method was to substitute the modern plant for the actual plant in carrying out the Stage 2 evaluation. An alternative approach would, he thought, be to adopt the value derived from that exercise and derive a percentage by comparing that figure with the unadjusted value based on actual plant. This percentage could be applied as an end allowance for obsolescence at Stage 5. It was not disputed that the result of both these approaches was, in effect, to base the whole assessment on the cost of the modern substitute plant.

Both Mr McConochie, the Grampian Assessor and Mr Milton, Divisional Assessor, gave evidence as to their understanding of the proper approach to application of the contractor's basis and the interpretation of the Guidance Note. Mr McConochie expressed his belief that much of what was said in the Note in relation to 'substitute' and 'alternative' plant had more to do with practice south of the border. (See: para. B.3). He supported the Note's emphasis on the actual property (paras. B.11-B.15) and observed that the effect of Mr Borthwick's calculations was to value not the actual subjects but a hypothetical alternative. It was, in effect, being contended that if Shell had provided the St Fergus terminal in 1995, they would have provided something different from what was actually there. This he considered to be contrary to the application of the contractor's basis of valuation: (para. B.7).

He contrasted the appeal subjects with examples where specific deficiencies had been established in relation to the subject properties. Old duty-free warehouses built of stone would now be replaced by steel framed, lightly clad buildings. In these cases it would be appropriate to cost the modern equivalent type of construction as a clear case of functional obsolescence. In relation to telephone exchanges, modern technology required much less space. Allowance would be made for this established redundant space by costing on the basis of a smaller building as a clear case of technical obsolescence. The NSP Study had not identified any particular deficiency in the actual subjects. The existing process and configuration had been replicated in the substitute. The express aim of the exercise had been to minimise the liability of the plant for rates.

In his opinion the starting point in a contractor's basis of valuation should be the property to be valued. The rates reduction study proceeded on the basis of, "Could we still do what we do at St Fergus and save rates by minimising the property?". This was not the same as making specific allowance for a clearly identified and significant deficiency.

He accepted that the site area of the plant could be reduced by moving the process modules closer together and areas given over to concrete, gravel or grass could be made smaller and roadways reduced. However that was not what had to be valued. The hypothetical tenant would pay rent for the actual site area and actual areas of concrete, gravel, grass and roadways because that is what he would occupy. There was no established redundancy in these areas. The plant referred to in the NSP Study would be a different plant and not the one available to the hypothetical tenant.

Mr Milton had carried out a careful examination of previous valuation exercises at Shell sites. He gave detailed evidence of his findings. We have relied on this evidence in making our findings about Shell Haven and Stanlow. We noted his evidence that no argument based on the modern substitute plant concept had been advanced in respect of Grangemouth, Bacton or Sullom Voe although these plants dated from 1950, 1968 and 1977 respectively. We cannot, however, attach great significance to that. In each case allowance had been made for obsolescence in respect of identified redundancy or functional deficiency. It is plain that the exercise of establishing sound costings for hypothetical substitute plant is an expensive one. The exercise at Stanlow was facilitated by the existence of documents prepared for construction of comparable plant in China. The fact that a similar exercise to the present was not previously carried out does not reduce its potential validity.

Mr Milton gave evidence stressing the conflict between the actual plans produced for the possible development of the site and the NSP Study. We attach no significance to this. It is plain that the latter was a hypothetical redesign from new. Proposals based on a need for development of existing plant would, inevitably, follow a completely different course. It is quite misleading to criticise the NSP Study as not showing the appellants' true intentions. On the other hand we think that it is relevant that there is no evidence that the appellants considered their existing plant to be over-specified, or otherwise functionally or technically obsolescent. No underlying philosophy of desiring to minimise facilities is apparent in these development proposals.

Mr Milton also criticised the NSP Study as giving no detail of the cost of construction of the substitute plant. It was therefore impossible to judge its commercial viability. We accept, however, that a test of commercial viability can be found by comparison with the existing plant. The engineers had sufficient familiarity with the equipment to be satisfied that it would function economically. We do not think any doubt as to commercial viability in fact arises.

It may be observed, however, that the Scope of Work, and therefore the NSP Study, made no provision for the assessment of any economic benefit to be gained from its hypothetical implementation.

Attention was directed by Mr Milton to the detail of the documentary material relating to the rates reduction study. We have accepted this as supporting a finding that the underlying intention of the study has been to design a plant which could and, no doubt, would be built by Shell if the underlying intention was to minimise the liability to rates. We are not satisfied that it would be built to the same specification if this constraint were removed. Mr Milton stressed that the primary concern of a prospective occupier of subjects such as these would not be to minimise the liability to rates.

In relation to the actual figures in the NSP Study Mr Milton expressed his reservation concerning the philosophy behind it but had not examined in any detail the estimating process. The work was that of specialists. There was little in it which a rating surveyor could verify or challenge. He did, however, point to the dangers of relying on an estimating tool. He referred to the conclusion reached in relation to the Phase 1 process. The comparison between the predicted quantities using the estimating tool in respect of concrete, steel work, lights and painting compared with the actual quantities used at Mossmorran, Module 3. Reference to the Table of Results showed that the estimate for concrete was 4% under-estimated; the steelwork 12% under-estimated and lighting 19% under-estimated. The painting was grossly under-estimated for reasons which were explained in evidence. Mr Milton considered therefore that the accuracy of the ICARUS programme was questionable. Further, it had been accepted that the results of the study were only accurate within 10 per cent. He considered this was not satisfactory as a basis for comparative fairness in valuation for rating.

Submissions

Mr Haddow submitted that his starting point was to establish that the evidence as to the modern substitute plant showed that the figures produced could be relied upon. Sound bases of assessment had been used. The design should be accepted as based entirely on functional needs and not influenced by the underlying desire to minimise rates. In particular he stressed that Mr Campbell had not been challenged in his evidence that development of the design had never been based on rating considerations rather than functional ones.

If the costs of the modern substitute plant were not, in themselves, open to challenge, there was no reason why they should not be used in the assessment. They could be used either at Stage 2 or Stage 5 of the application of the contractor's basis. There were no hard and fast rules to apply to allowances. The question was one of method rather than principle: Armour 19 - 58. "In England use has long been made of theoretical costings of a modern equivalent subject": Armour 19 - 50A. In Scotland it has, from the outset of its use, been recognised that the full rigour of the contractor's basis of valuation required modification by allowances if an unfair or unreasonable result would otherwise follow. There was no limit to the types of situation where modification was appropriate: Armour 19 - 40. It would not be fair or reasonable that a tenant should pay the same rent for existing plant as he would for a perfect plant.

It had been accepted by the assessor that various factors of obsolescence could be taken into account such as over-capacity or technological change. The Guidance Note refers to the norm of simple replacement with modern materials but appears to accept that there could be a departure from this: (para. B.14).

Mr Haddow accepted that the St Fergus plant works perfectly well. The deficiency was not based on how well it worked but simply on comparison with a modern substitute. He accepted from the Tribunal that his submission could be expressed in terms of a continuous progression from perfect subjects to subjects with clearly identified gross deficiencies. Allowance was made for the latter: Civil Aviation Authority v Assessor for Strathclyde 1990 SLT 378. If it was established that the subjects fell short of modern standards to a degree which a landlord and tenant would not simply ignore as insignificant, allowance should be made to reflect that shortfall. It was simply a matter of evidence. Positive evidence of identified obsolescence admittedly justified allowance. Positive evidence of overall difference between the actual plant and an equivalent modern substitute also justified allowance. Comparison showed a deficiency and allowance had to be made for it. The obvious measure for allowance is the amount positively proved.

Although Mr McConochie had criticised the Guidance Note as really intended to clarify the position in England, there was, in Mr Haddow's submission, no essential difference in approach, north or south of the border. There was a temptation to look at the matter from the landlord's angle because that was what the assessor could see and assess. However both jurisdictions have recognised the need to look at the tenant's position: Assessor for Fife v Distiller's Company 1989 SLT 770 at 779. For example it was clear in relation to the decapitalisation rate that the Scottish approach had recognised the need to look at the tenant's position. The rate could reflect his risk: Shell UK v Assessor for Lothian 1990 SLT 666. There was no longer an opportunity to reflect variations in the attractiveness of subjects from the tenant's point of view by adjustment of a decapitalisation rate. It had to be allowed for in some other way.

What the ratepayers sought here was essentially the same as had previously been allowed for in relation to obsolescent telephone exchanges or duty-free warehouses. The only difference was that the calculations were inevitably more complex. Examples of the same approach could be found in the material spoken to from Sullom Voe and from the English cases before the Valuation Tribunal of Shell UK Ltd v Shiel (Shell Haven) and Shell UK Ltd v Glenwright (Stanlow). These were examples of the modern substitute plant being considered at Stage 2. Mr Haddow also referred to evidence of the agreement reached over Mossmorran which, in his submission, also showed that the principle of the substitute plant was not in dispute although there had been a dispute over the figures.

As far as quantification was concerned the results of the substitute plant exercise were set out fully in the productions spoken to by Mr Borthwick. Actual and substitute quantities were set out and a comparative ratio applied on an item by item basis. In the past there had been criticism of arbitrary allowances "picked from nowhere". In the present case the allowances had been carefully calculated and now faced criticism for being too exact.

There was no evidence before the Tribunal as to how a tenant would, in practice, use these figures in assessing rent. He accepted, from the Tribunal, that in the Bacton case a "clawback" had been allowed at Stage 5 to reflect the fact that a tenant would not seek the full difference disclosed by the calculation. However this had not been raised in the present case. The matter should be assessed by reference to what the tenant would want to have, in other words the modern substitute plant. Costing of that was the true key to rental value of the existing plant. In any event, he submitted, there was a buffer to be considered in relation to the "higgling" permitted at Stage 6. On the evidence the modern substitute plant would be some £300,000 per annum cheaper to run. That would also influence a tenant. He accepted, however, that although the matter had been presented by the parties on an all or nothing basis, it was open to the Tribunal to accept the calculation in part rather than in full.

Mr Currie, for the assessor, submitted that the proper approach to the contractor's principle was well established in Scotland. The estimated replacement cost of the actual subjects had to be determined and any appropriate deductions allowed: Assessor for Central Region v United Glass 1981 SC 389. There was nothing in Scottish authority to justify costing a modern substitute. It was clear from the Guidance Note that what was to be costed were the actual subjects: (para. B.7). There was good reason for this in avoiding the potential abuses of the modern substitute approach. South of the border there had been a tendency to accept that the tenant could and would build an alternative. The Guidance Note stressed the importance of the actual subjects: (paras. B.7 - B.8). If there was a conflict between these provisions and the provisions of paragraph 3.1.16, it could be answered by seeing the modern substitute plant as a basis for adjustment which was only justified in particular circumstances, ie where deficiencies had been identified. The appellants have not attempted to justify their approach in this way. In other words they had failed to address the issues set out in the Guidance Note at paragraph 3.2.2 where the necessary factors under the heading of obsolescence were discussed.

To begin to justify an allowance for obsolescence it was necessary to satisfy certain criteria. The primary question was, "Were the subjects or part of them significantly redundant or outmoded?"

It was wrong to see the matter in terms of a point on a line or a continuance progression from perfect to seriously obsolescent. The starting point was to identify some significant defect in the actual subjects. Subjects could fall well short of ideal before they came within the scope of the Guidance Note at paragraph 3.2.2. It was necessary to address these criteria.

As another example of the fallacy inherent in the appellants' approach, he submitted that it was wrong to say that exactly the same effective percentage allowance could be made at Stage 2 or at Stage 5. The stages represented different concepts. If an allowance could not be justified at Stage 2 the same allowance could not be made at Stage 5.

The appellants' position, put crudely, came down to saying that it would be cheaper now to build a different plant. Reference to modern substitute plant could not be justified simply on the basis that the applicants could and would have built a cheaper plant in 1995 than they did in 1982. This goes far beyond anything countenanced by the Guidance Note or authority. It was clear on the appellants' own evidence that the necessary criteria were not met. The situation was far removed from the facts of Civil Aviation Authority v Strathclyde Assessor where limited use of excessive facilities was established. With the possible exception of the U-800 unit, the evidence demonstrated that all the plant functioned perfectly well and satisfied the purposes for which it was provided. Even allowing for the gloss of marketing it was relevant to have regard to the appellants' own material describing the facilities as modern, sophisticated and flexible. The evidence of discussion about possible changes was relevant as showing that there was no evidence whatever of change being required because of possible deficiencies in the existing plant.

Even the suggested saving of £300,000 in annual running costs is only about 2% of the total cost. That figure had not been clearly established by the evidence.

The position contrasted sharply with Stanlow where massive inefficiencies were demonstrated. Similarly at Sullom Voe and Shell Haven there had been clear evidence of redundancy in the existing plant. This justified reference to substitute plant as a basis for allowance. Mr Currie suggested that the evidence about Mossmorran was not clear and had to be approached with caution.

As far as submissions based on the approach to decapitalisation rate were concerned, these were irrelevant. There was no evidence that the hypothetical tenant would be undertaking any abnormal risk in respect of any deficiencies in the plant.

As regards the Phase 2 report, the appellants' evidence amounted to no more than assertion. The Tribunal had only been given the briefest explanation of what was involved and comparison of the results of the exercise with what was actually present. A proper explanation of the Phase 2 material was incumbent upon the appellants. The evidence was that the cost of the exercise was substantial. No assessor could carry out such an exercise. It was unsatisfactory that the Tribunal was invited to take the exercise at face value and in particular to take at face value that the result was commercially viable. Although it is accepted that calculations were carried out and back-up material was available, this had not been produced.

Although bad faith was not suggested, it was clear that the whole purpose of the exercise was to reduce the rates bill. The exercise was wholly artificial. The inference that it was influenced by rating considerations was not removed simply because witnesses for the appellants, in good faith, denied this. He posed the question: How was the Tribunal to test the validity of the contentions? It would be a massive exercise.

In summary, the substitute plant exercise was wholly misconceived. It did not address the necessary criteria. If the Tribunal accepted this approach it would endorse as correct an allowance for technical and functional obsolescence on the sole ground that plant would be cheaper to build in 1995 than 1982. There was no warrant for this.

If the assessor's approach was not accepted Mr Currie submitted that the Tribunal should, in any event, accept Mr Milton's evidence in relation to the extent of any allowance. The appellants are claiming effectively the same allowance as in the Shell Haven case where gross technological and other obsolescence was demonstrated. This reveals the unreasonableness of the allowance now claimed.

Decision

Although the appellants attempted to use the results of their modern substitute plant study to derive an allowance at Stage 2 or at Stage 5, the reality was that, in relation to the rateable items of plant, the cost being assessed at Stage 2 was the cost of the modern substitute, not the cost of the actual plant. The hypothetical plant was thus the effective base of valuation.

In other words, the method adopted represented a move from valuation of the actual subjects of assessment to valuation of hypothetical subjects. Mr Haddow accepted, of course, that if the comparison did not show any significant difference, no allowance would be made. Where there was a difference of significance to landlord and tenant, allowance had to be made. He did not attempt to demonstrate positively what effect the difference brought out by the study in this case would have on a hypothetical landlord and tenant. His submission was based on showing a difference between the actual and the hypothetical modern plant. The figures derived from the latter were to be the basis of assessment. We find no justification for this either in established practice or in the Guidance Note.

The appellants did not found on any specific deficiencies. Mr Borthwick's evidence that the St Fergus plant did not "match current business practices nor is it built to present day standards" was not based on complaints by the appellants, as occupiers of the plant, but on a study carried out by him for rating purposes. It was not based on any specific change in business practice nor change in standards. For the assessor, it was contended that reliance could be placed on various published materials emanating from the appellants tending to show the plant as modern and efficient. We consider that, in its context, it would be wrong to read too much in to this but we accept that it does sound a note of caution against too ready acceptance of any idea that lapse of time necessarily produces significant change in acceptable standards.

As the parties were agreed that the Guidance Note represented a sound approach to assessment on the contractor's basis, it is appropriate for us, in this case, to proceed on the basis of the guidance in the Note. The Note does not, of course, have the force of statute and the risk of according too much weight to particular paragraphs must be guarded against. It is, however, appropriate to give due weight to the broad underlying principles to be found in it.

The Guidance Note throughout recognises the limited range of types of properties which might be subject to valuation on the contractor's basis. Examples given were: airports, oil refineries, major chemical works, steel works, shipbuilding yards and certain municipal buildings. We heard no evidence to suggest that the appellants' plant had any inherent speciality which made it an exception in itself. The Guidance Note at paragraph 3.1.3 in relation to the estimated replacement cost stage states clearly, "In most cases costs will relate to the actual property, but there may be exceptional cases where it would be appropriate to cost a modern substitute". We have no reason to doubt that the word "exceptional" was intended to convey its usual sense of something quite distinctly out of the ordinary. In other words in most cases costs would relate to the actual property. The appellants made no attempt to establish that there was anything exceptional about the subjects as a whole justifying a move to costing a modern substitute.

This view of the intention of the Guidance Note is reinforced by consideration of the terms of paragraphs 3.2.1 and 3.2.2. Adjustments may be considered at Stage 2 "to reflect certain deficiencies". The adjustment proposed by the appellants was not to reflect any identified efficiencies but to reflect the fact that it would be possible to operate the plant at a lower or simpler specification and that this would meet the tenant's needs.

The examples given in Guidance Note paragraph 3.2.2 further support the view that the Note expects positive deficiencies to be identified before adjustment is made. This reflects the introductory material. At paragraph B.13 it is said, "… even a notional building involves a costing exercise based upon the 'provision' of a new replacement; such a new property would be built with modern materials to present day standards and may not, in every case, be identical to the actual property." That plainly recognises that in most cases the aim is to cost the actual property.

This view of a meaning and intent of the Guidance Note is consistent with the reason expressed for the review which led to the promulgation of the Note. In paragraph B.3 it was said that it was, "… the way in which some practitioners are now seeking to apply the contractor's basis in practice is creating unnecessary complications for the valuation exercise and, in the view of the Rating Forum, warrants a review of the appropriate approach". This suggests quite clearly that the purpose of the Guidance Note was, as Mr McConochie said, to deal with problems which had arisen and to restate clearly the proper approach. It is, in our view, wrong to see the Guidance Note as marking a new approach to application of the contractor's basis in Scotland although, no doubt, it represents a shift of emphasis in relation to certain matters, for example, the use of unit costs.

The traditional explanation of the theory of the contractor's basis of valuation in England is to be found in Dawkins v Leamington Spa Corporation and Warwickshire County Council 1961 32 DRA 195 at page 209 where it was expressed in terms of the argument that the hypothetical tenant has an alternative to leasing the hereditament and paying rent for it; he can build a precisely similar building himself (our emphasis). We are satisfied that a precisely similar building is the traditional starting point. Adjustment can be made for deficiencies. We find no authority to support an approach which starts by examining the tenant's essential needs and bases the calculation directly or indirectly on them. That, we are satisfied, is what is being attempted in the present case.

An approach which lays too much stress on the actual subjects may be criticised as biased towards the landlord. This, no doubt, explains the willingness shown in the Scottish authorities to make full allowance for deficiencies or to make such other allowances to ensure that the result is not unfair or unreasonable from the viewpoint of the tenant. Willingness to allow for identified deficiencies is not a warrant for a switch from the actual subjects to hypothetical subjects as the base for valuation.

There is ample authority for a flexible approach to valuation on the contractor's basis in Scotland. Reference was made to Civil Aviation Authority v Assessor for Strathclyde, a case which related to airports at Islay and Tiree. In both cases runways had been built, during the Second World War, which were very much larger and to a much higher standard than would ever have been contemplated for their present use. There was also evidence that use or potential use of the airport would inevitably fall very far short of capacity. The Lands Valuation Appeal Court held that allowance should be made on both these heads. It is, however, clear that the present case is quite different in both respects. The Shell plant was, broadly speaking, designed and built for its present use. Evidence that more modest provision would have sufficed does not bring the case within the scope of the specific dicta in the Civil Aviation Authority case. Further the plant is fully used. Even the U-800 and U-2600 units which were originally required for a purpose which has been superseded are still, in fact, put to use. The capacity of the plant for greater use is an asset. It gives flexibility for the tenant in seeking new business.

We note, of course, the observations made in that case in relation to use of the contractor's basis. Its weaknesses are well known and stress was laid on the need to use every available means of checking the result. Where rigid application of the method leads to an unreasonable or unfair result, allowance must be made. However, it is not unreasonable or unfair to base an assessment on what is actually provided simply because a cheaper provision would suffice. A hypothetical tenant is not motivated solely by lowest cost. That may be one of a number of equally important criteria for a tenant to consider in making a decision about occupying land and buildings.

In the submissions before us the arguments crystallised on the concept of deficiencies being represented by a line or continuous progression. If a deficiency was clearly identified before a modern substitute plant exercise was carried out, allowance would be made for it and the modern substitute plant exercise might be useful evidence of the extent of deficiency. If some overall difference was identified by comparison with plant which, it was said, the appellants could and would build if they had had a bare site in 1995, allowance should be made for it as a deficiency. It was entirely a matter of degree. It did not matter how the deficiency was established as long as it was proved and did not fall to be ignored as de minimis.

We think, however, that there are several weaknesses in this approach. In the first place, it must not be forgotten that we are dealing with a hypothetical landlord and hypothetical tenant. The fact that Shell might chose to minimise various aspects of design as a positive policy does not exclude the possibility that a hypothetical tenant would simply wish an approach based on "reasonable provision". What Shell could and would build with rates saving prominently - albeit not predominantly - in mind does not necessarily reflect what Shell could and would build if free of that constraint. It does not, necessarily, represent what any hypothetical tenant would build. Secondly, we are not satisfied on the evidence that the study identified any deficiency which would be of relevance to a prospective tenant. The comparison showed that what was essentially a smaller and therefore cheaper plant could be built using different specifications which would serve the purpose as it appeared in 1995. This does not, of itself, demonstrate that the larger and more expensive plant is defective in a sense relevant to a prospective tenant.

We did hear evidence that the modern substitute plant would reduce running costs. No attempt was made to demonstrate the calculations and both the prospective saving and current running costs were given to us as estimates. The material founded on by the appellants in relation to the substitute plant exercise demonstrated that the questions of operating efficiency and running costs were seen as important live issues in course of the study. In light of this it is surprising that the only evidence led on the matter was from Mr Rushford who had not been involved in the study and that his evidence was couched in very general terms. We draw the inference that proper analysis of the figures would be unlikely to demonstrate any significant comparative operating inefficiency.

On any view, we think it necessary to take a very conservative approach to the figures given in evidence. At a simple level, if Mr Rushford's estimate of £300,000 savings is compared with the estimated overall annual costs of £19 million the percentage saving is less than 1.6%. Attempting a more careful comparison looking only at direct running costs and allowing for the range of error inevitable in such estimated figures, the percentage saving appears likely to be under 2%. These figures do not appear to us to justify any inference that the current plant is economically outmoded. It may also be observed that where the initial Study proceeds on the basis of a tolerance of up to 10%, little confidence could be placed on an assessment of savings which was only of the order of 2% although we accept that there is no direct relationship between capital and running costs.

Further, in relation to the comparison of capital cost between actual and substitute plant, it must be observed that we heard no evidence as to the overall comparative costs. We do not know whether the savings in rateable items were at the expense of increase in cost of non-rateable items in the modern substitute plant. This is a weakness in the appellants' approach. A tenant would not necessarily expect to pay less in respect of something actually provided by the landlord simply because he could, at his own expense, provide an alternative.

For example, the instructions given as a basis for the NSP Study included: "Compressor buildings are to be minimised/eliminated if possible with sound attenuation specified as part of the compressor package". As we have seen, this instruction appeared in the context of other instructions referring to minimisation of various rateable items. We heard no evidence of any operational justification for a move from compressors housed in buildings to compressors with greater inherent protection as part of the plant package. We could see on inspection that compressor houses provide shelter from the elements for equipment and operatives as well as attenuation of noise. No claim was made of functional or technical obsolescence in relation to any of the compressor houses. An allowance of 8% was given for each under the head of Physical Obsolescence. The Study removed all these buildings. We are entitled to infer from the instruction that the sound attenuation they provided was replaced as part of the plant package. In other words a valuable rateable item was replaced by a non-rateable item. We do not know what steps if any were taken to replace the general protection from the elements. The nature of the exercise provided no detail of the cost of the replacement compressor package. The total reduction in NAV which would have followed from elimination of the compressor houses was comparatively modest being of the order of £40,000. However, this is an example of a comparison between the actual subjects and the modern substitute which cannot support any inference that the actual subject is in any way "deficient" from a prospective tenant's point of view.

Another element in the explicit instruction which formed a given for the NSP Study was minimisation of layout. We heard no evidence of any change of circumstances to show that the appellants had planned their original layout on a false assumption as to functional, technical or safety requirements. They started with a bare site and could choose their layout. The selection of a minimum layout in the Study led to lower cost figures but did not, of itself, justify any inference that the appellants themselves, far less any hypothetical tenant, would have perceived the actual layout to be deficient in any way.

We accept the evidence of Mr Laird and Mr Campbell that they were using their best endeavours to produce accurate figures for a plant which could be operated by Shell if it came to be built. We also accept as genuine their belief that it was the plant which would have been built if they had been building it in 1995. However, it must not be forgotten that the whole exercise was unreal in the sense that, despite all the effort that went into it, it had no practical purpose. It was prepared simply as evidence for "submission to the rates officer". We have no reason to suppose that a hypothetical tenant would have access to such a study or would have reason to attempt to carry it out. As Mr Campbell explained, there was no shortcut way to do it. It required skilled input from engineers working progressively. It would serve no purpose for a tenant to carry out such an exercise. The landlord has produced plant capable of serving the tenant's purpose. The tenant is unable to point to any significant deficiency by way of technical redundancy, redundancy of plant, functional obsolescence or otherwise. The best that a tenant can say is that if he had the option of creating a different plant on the same site he would use less or cheaper rateable elements to serve the same purpose.

There was no evidence that the modern substitute plant represented what would be regarded by a hypothetical tenant as "ideal". Even if it was, to allow the substitute approach to go so far as to allow the ideal instead of the existing, without specific evidence of deficiency in the latter, would give an advantage to ratepayers assessed on the contractor's basis. Most valuation for rating is on a comparative basis. The premises occupied by the generality of tenants are rarely ideal for their particular circumstances. Tenants no doubt seek the premises that most closely match their needs. Most ratepayers are assessed on the actual premises even although these may be less efficient for their purposes than they would wish. They are not assessed by reference to notional premises which would meet their needs perfectly. We must avoid extending to ratepayers through the contractor's basis, a benefit which is not available to ratepayers assessed by other means.

In the last analysis, valuation for rating must not lose its pragmatic approach. Valuation is entrusted to assessors with, of course, a right of appeal. An assessor can be expected to consider evidence of identifiable deficiencies in the actual subject with a view to making allowances for them. An assessor could not be expected to put in hand a study of the nature and scope of that presented by the ratepayers. Nor, realistically, could an assessor be expected to be able to mount any challenge of the hypothetical exercise carried out by the team of experts. In the present case the assessor was invited - but declined - to scrutinise 30 boxes of material. He was able in evidence to challenge certain points of detail. For example, reference was made to the fact that the Phase 1 test results, while expressed in terms of percentage accuracy plus or minus were all, in fact, under assessments. He was able to challenge the detail of the assumptions made in the instructions to Costain and to point to the implications of the positive instruction to minimise. There was substance in these points. We do not know what other doubts might have been disclosed by expert scrutiny of the exercise. We mean to cast no doubt on the honesty of all witnesses who gave evidence but the fact remains that the assessor and the Tribunal are almost entirely in the hands of the appellants in relation to such an exercise. Although, of course, there will always be cases where the assessor is likely to require expert evidence to evaluate particular contentions, we think there is a clear contrast between an entirely hypothetical exercise and the problems involved in assessment of identified deficiencies.

There is also force in the criticisms made by Mr Milton that the study proceeded on the basis of estimates. We accept that these estimates might have been perceived as sufficiently accurate for the appellants' purposes in tendering or deciding to go ahead with a project. That does not, however, give them the status of fact. The appellants' submissions sought to use the figures not only as evidence of deficiency compared with the actual figures, but as the measure of that deficiency. This seems to us to be plainly unwarranted.

For these reasons we think there is a clear distinction between deficiencies which can be identified and evaluated in the context of the actual plant, and notional deficiencies which only emerge by overall comparison with a different plant which has not been built and which no one has ever, at any stage, contemplated building.

While we do not exclude the possibility of use of a suitable modern substitute plant study to assist demonstration of appropriate allowances for identifiable redundancy or obsolescent plant, we cannot accept it as presented in this case as, by itself, justifying allowance. We think this clear in relation to the attempt to use the results of the study at Stage 2. We recognise, of course, that the nature of the allowance contemplated at Stage 5 is more flexible. We could, at that stage, exercise a discretion to use the results of the Study if we saw fit. We have in mind Lord Prosser's observations in the Civil Aviation Authority case (at page 392) as to the need to check the results of the basic application of the contractor's basis against "almost any form of outside information". However allowances at all stages require some justification. The NSP Study is not entitled to status as "outside information". It itself was a hypothetical exercise. There was no attempt to use the evidence relating to it to support a claim that allowance should be made in respect of the obsolescence of any particular item.

We recognise that part of the background to the Study included evidence that both Unit 800 and Unit 2600 were not required. We have considered whether it would be appropriate to make some end allowance to reflect this evidence. We can identify the debutaniser C801 and the reboiler F801 as part of Unit 800. The assessor has included these items at a total NAV of £71,126. However, the bulk of the plant in these units appears not to be rateable. We do not know what rateable items are included from these units. In any event the units are, in fact, still in use. They add to the potential scope of the plant. In the whole circumstances, including the absence of specific submission directed to these individual units, we have concluded that no end allowance can be justified under this head.

We find no basis in the evidence, taken as a whole, which could allow us to use the NSP Study in any broad way to justify an end allowance. The plant appears to function as intended and to a high degree of efficiency.

B. Slugcatcher

Two issues arose in respect of the slugcatcher. The first turned on the terms of the 1994 Regulations; the second on the proper approach to valuation.

The relevant parts of the Regulations are as follows:

"Prescribed classes of plant and machinery

2.  The classes of plant and machinery set out in the Schedule to these Regulations are hereby prescrbed for the purposes of the definition of "lands and heritages" in section 42 of the Lands Valuation (Scotland) Act 1854."

CLASS 4

The items specified in Tables 3 and 4 below [subject to certain exceptions which have no relevance to the present issue]

TABLE 4

Accelerators
Acid concentrators
Bins and hoppers
Boilers
Bunkers
Burners, converters, furnaces, kilns, stoves and ovens
Chambers and vessels
Condensers and scrubbers
Coolers, chillers and quenchers
Cupolas
Cyclones
Economisers, heat exchangers, recuperators, regenerators and superheaters
Evaporators
Filters and separators
Gas producers, generators, purifiers, cleansers and holders
Hydraulic accumulators
Precipitators
Reactors
Refuse destructors and incinerators
Retorts
Silos
Stills
Tanks
Towers and columns
Vats
Washeries for coal
Wind tunnels"

The physical nature of the slugcatcher and its method of functioning were not in dispute. The issue between the parties was whether the slugcatcher was properly a "separator" or, failing which, a "vessel" within the meaning of the Regulations.

The slugcatcher is the first major item of equipment entered by feedstock coming down the FLAGS line. It is known as a "finger" or "multi-pipe" slugcatcher. It appears as a large construction of parallel pipes joined at top and bottom. At St Fergus there are 13 pipes most of which are about 275 metres (900 feet) long and 0.91 metres (36 inches) in diameter. The individual pipes are known as "bottles".

The slugcatcher plays no active part in the normal running operations of the plant. The FLAGS gas consists of a mixture of different hydro-carbon components namely methane, ethane, propone, butane and heavier materials. During the summer months conditions are such that the gas arrives at St Fergus in a gaseous or vapour form with no liquids present. During the winter months some liquid droplets come out of the gaseous stream and agglomerate into a continuous liquid phase, condensate. The gas and liquids pass along the pipe in what is known as two-phase mode. They travel at different speeds. The liquid falls through the slugcatcher and goes to the V101 processing unit separate from the gaseous phase.

The liquid which proceeds through the slugcatcher in this two-phase stage could in fact be processed along with the gas flow. We heard some evidence of the possibility of business from other sources which might provide a wetter flow with more winter condensate. Such two phase flow would in fact be separated by the slugcatcher. However, there was no need for an item of the nature of the present slugcatcher to deal with such small amounts of liquid condensate. The real purpose of the slugcatcher was to deal with large accumulations of liquid. Had it not been required for that purpose it would not have been provided. Such accumulations are known as slugs and at St Fergus are very rare. When liquid drops out of suspension in the gas stream it will normally flow along the bottom of the pipe at a much lower speed than the gas. If the wave effect of the liquid phase allows the liquid to fill the pipe, the pressure of gas blocked by the liquid forces the liquid to accelerate. It then travels along the pipe at high speed picking up all other liquid in its path. The resultant unit of water can grow quickly into a unit travelling at high speed and with such momentum that it would overwhelm the controls of the normal primary separators. The slugcatcher is designed to deal with such slugs.

The slugcatcher consists of an inlet header, downcomers, gas outlet headers, a series of pipes or bottles, a gas equalisation header and a liquid outlet header. There are no internal processing elements in the slugcatcher. There are no internal controls. The only control an operator has is, in theory, by changing the pressure within the whole pipeline. We are satisfied that this control is of theoretical significance only.

When the incoming feedstock of gas and liquid flow enters the inlet header it is distributed across the nine downcomers into the pipes. The momentum of the slug is dissipated at the inlet header. The function of the pipes is to hold the slug until it can be dealt with. Both are essential features. The gaseous flow escapes through a manifold at the top and is piped to the V101 unit while the liquid which is heavier falls down the pipes to the bottom. It displaces the gas already there which is driven up to the gas take-off. (This gas allows the V101 unit to continue operating normally while the slug is being taken out of the flow). When a slug enters, the pipes or bottles can become completely full very quickly. Nine of the down pipes run from the inlet header. Another four are connected to these pipes at the bottom end so that they fill from that end. All eventually fill to the same level. All are connected to gas outlet headers. The liquid can be held in the slugcatcher until operators are ready to allow it to proceed to the V101 unit in a controlled fashion. We heard evidence that liquid could be held in the bottles for as long as an hour if the operators were busy. We did not in fact hear evidence as to what limit of holding duration there could be. It would, however, require to be emptied to be able to deal with any further slug. We proceed on the basis that although small accumulations of condensate might be allowed to remain in the bottles for up to an hour, an attempt would be made to deal with slugs without significant delay.

The flow from the bottom of the slugcatcher enters the V101 unit at a different point from the gaseous flow. The V101 units are known as the primary separators. They are large vertical vessels designed to achieve efficient separation of the gas and liquid phases by means of carefully designed internal equipment including an inlet distributor, otherwise known as a schoepentoeter, a mistmat and swirldeck. It has elaborate process control instrumentation including level controls, alarm and trip devices and pressure controls. Within this unit pressure and temperature can be manipulated.

Internal arrangements, at the schoepentoeter stage, for dealing with the liquid flow from the bottom of the slugcatcher and arrangements for dealing with the normal gaseous flow coming from the top of the slugcatcher, are similar but not identical.

Evidence

Various witnesses gave evidence of their understanding of the nature and function of the slugcatcher and of separators in general. We accept that the witnesses gave honest and accurate evidence of their views on these matters.

Mr Rushford did not regard the slugcatcher as a separator. It was not designed to have a processing function. It was, he said, a protective device for an emergency situation. In his view, as plant manager, a separator was a piece of equipment designed to achieve some defined degree of separation. Internal mechanisms are supplied integral to the separator to ensure that this is achieved. Although it appeared that he would not regard it as essential, he would expect a separator to have automatic control systems to ensure the required standard of separation. He stressed that in the slugcatcher there was no design standard of separation and no means of affecting the quality of separation. The two streams leaving the slugcatcher were, or could be, immediately remixed and essentially were processed in the same way in the V101 unit although there were some minor differences at the schoepentoeter stage.

Mr Rushford was asked to comment on several of the documents ultimately spoken to by Mr Milton and tending to show use of terms such as "separator" or "separate" in relation to the slugcatcher. He accepted that they painted a picture of slugcatchers having a function of separation. However he stressed that there were various types of slugcatcher. He saw the St Fergus one as purely designed for protection.

Mr Pentland has a HNC in mechanical engineering. He has long experience in the oil and gas industry. Since 1979 he has been with Shell progressing from operation and maintenance technician to Production Co-ordinator and Development and Training Co-ordinator. He has been actively involved with the operation and maintenance of slugcatchers for over 20 years. He would not regard the slugcatcher as a separator. It is a series of pipes containing slugs of liquid and gas over which the operator has no direct control. It is a safety valve. In his view separation is a precise process in which directly controlled changes in pressure and temperature are used in a specific way to ensure a specific result.

Alan Collins holds a BSc (Honours) in Chemical Engineering and is a Chartered Engineer and Member of the Institute of Chemical Engineers. His working experience has been with Shell, at Stanlow and at Aberdeen. He is current Head of Process Engineering and Development in relation to Gas Systems and Plants.

He considered that the purpose of a separator was physically to induce a controlled and efficient separation of a mixture. In the gas processing industry the term "separator" would refer to pressure vessels with complex internals and control systems designed to achieve highly efficient separation. A multi-pipe slugcatcher was solely a protective device designed to catch large slugs of liquid. It had no internal parts to induce separation. He pointed out that separators are much smaller than the slugcatcher. He accepted that the term "separator" would be used in relation to a simple device to separate oil and water by gravity. It would be supplied with fittings to take off the separate components at different levels.

Mr Collins pointed out that what he would call separators at Shell St Fergus were designed to codes specific to vessels. The slugcatcher was designed to pipe codes. The British Standard Institute distinguishes between vessel slugcatchers and multi-pipe slugcatchers in terms of design specification. He accepted that, in certain circumstances, industrial personnel may refer to these vessel type slugcatchers as separators. Mr Collins also gave a helpful body of evidence dealing with the difference in the gas industry between the term "separator" used as a generic term and as used to refer to a specific item. A wide range of equipment could fall under the general heading of separator but would not be referred to by that term. Under reference to separation he produced a table showing various categories of plant which would be used to effect separation of different combinations of constituent parts. He dealt with gas and solid and with liquid and solid combinations which might both use filters. For gas and liquids and for mixtures of different liquids use would be made of vessels with various internal fittings and controls. Component separation could be by distillation column. He said that, for example, separation occurs at St Fergus in columns and filters but these items are never referred to as separators, always by their specific names. We need not repeat the detail of the methods of separation using these various systems. Essentially, filters are based on a mesh with elaborate controls and cyclones are based on the use of centrifugal force. He stressed that they fell within the generic class of separator but remained known as filters or cyclones. The gas/liquid separation vessels which were known specifically as "separators" were fitted with complex internal arrangements and controls. He described various methods of separation of liquid from liquid and component separation using distillation columns. The latter were always referred to as columns and not separators.

Mr Borthwick gave evidence that he considered the matter first from the point of view of an ordinary man and then as a rating surveyor and valuer. (It may be noted that Mr Rushford and Mr Pentland also gave evidence of their attempts, at the request of Mr Borthwick, to put themselves in the position of an ordinary man. They thought an ordinary man would not think that the slugcatcher was a separator). As an ordinary man, Mr Borthwick said he would look at the item as a series of pipes and, hearing the name, would think it was intended to catch slugs. Shown a typical separator, tank, or vessel, he would think this radically different from the slugcatcher. When told how the slugcatcher worked he would think it performed a different function from a separator tank or vessel. As a rating surveyor, he would consider the terms of the 1994 Regulations. On first impression, visual and functional, he would consider that the slugcatcher was quite different from a separator or vessel. In appearance the volume and length was quite different from other items of plant. Functionally separators have significant internal details, the slugcatcher does not. The slugcatcher had nothing to do with separation. The slug had become separate from the gas before it arrived. Separators and slugcatchers were built to different construction codes. Finally he observed that slugcatchers and separators were not interchangeable.

Mr Milton, for the Assessor, pointed to the fact that a simple schematic diagram such as used by Shell in relation to St Fergus, accurately showed the function of the slugcatcher. A mixed flow entered through one inlet and there were two outlets, one for gas and one for liquid. Plainly the slugcatcher was within the genus of "separator". It was also a "vessel" as it served to hold and store liquid as required by the processing plant further down stream. That plant was not capable of accepting and processing large slugs direct from the pipeline. It required the liquid to be held.

He had carried out a very wide search of published material referring to slugcatchers. This, he thought, showed that slugcatchers were referred to in the oil and gas industry generally, and by Shell in particular, in terms of their function as separating liquid from gas. He produced some 48 references in which mention was made of the slugcatcher as a "separator" or in terms of its function in "separating" liquid from the gas flow and 11 references to slugcatchers as "vessels". Four of his sources combined reference to separation and to vessels. He produced several other documents and photographs describing or illustrating slugcatchers. He admitted that some made no reference to either separation or to vessels. The references were to slugcatchers as a class and not simply to the multi-pipe or finger slugcatcher such as the present subjects and the slugcatcher at Bacton. He accepted that there might be differences at Bacton. The slugcatcher there was required to take glycol out of the flow. He accepted that in most of his references the slugcatcher was not described as a "separator". The most frequent reference was to "separating" the liquid. He accepted that it was clear that slugcatchers were seen as a distinct type of plant. In the course of cross-examination he was asked about some of the items of plant specified in Table 4. He did not know exactly what these were. He said that people in the industries which used such items would know what was meant.

As we do attach importance to this material as showing that slugcatchers can quite naturally be described in terms of a function of separation, it is appropriate to set out some further detail to illustrate the type of context and the nature of the references made.

In relation to use by Shell, Mr Milton founded first on a SEGAL process system booklet which included: "… the feed from FLAGS is delivered to a slug catcher which acts as a buffer to surges of liquid. This separates the liquids from the vapour …" , and, "with the exception of the slug catcher and the desulphurisation plant, the separation processes at the Shell …". He referred to a pamphlet containing a short description of processing units at St Fergus by a Shell employee J C Van t'Hoog. The comment, "Part of the separation is already established in the slugcatcher", was made.

An important source of evidence for Mr Milton came from a paper delivered at a conference in 1985 by Bos and du Chatinier, both employed by the Shell Group. The aim of the paper was optimisation of the design of slugcatchers. It included analysis of the function of a slugcatcher. Specific reference was made to the passage: "A slugcatcher consists essentially of two parts:

When a more or less continuous slug of liquid arrives, the liquid displaces the gas present in the slug catcher, ensuring an uninterrupted supply of gas to the downstream facilities … Gas lines generally operate at velocities of up to 12 m/s and large slugs will take only a matter of minutes to arrive. he holding capacity of the slug catcher must therefore be essentially as great as the volume of the largest slug. Although liquid carry-over must be limited, a slug catcher is not meant to replace a high-efficiency separator".

This last sentence may be thought to reflect the contrast with the type of equipment which other Shell witnesses would regard as a "separator". The paper included a schematic of a multiple pipe slugcatcher marked to show "the separator part" and "the storage part". The text referred to the "bottles" as having a separation and a storage function. A further schematic referred to another slugcatcher "in operation in the UK". This appeared identical to the St Fergus slugcatcher. The secondary bottles were described as having a storage function only.

Mr Milton produced certain documents derived from planning applications in respect of St Fergus. These included descriptive comments: "FLAGS gas enters St Fergus via slugcatcher A-102, where any liquids present are separated from the gas". "The two-phase FLAGS feed is received into a slugcatcher where hydro-carbon condensate is separated from the pipeline gas".

There were several productions from Total Oil Marine referring to condensate being separated from gas in a device called a "slugcatcher". In relation to Total's St Fergus Terminal there was a reference: "Separation is necessary. This takes place, first, in a piece of equipment called a 'slugcatcher'. The liquids separate by gravity into the lowest level of a system of pipework". It is appropriate to stress at this point that we did not hear evidence of the precise nature of the two-phase flow in the Total pipework. This reference may be to a different type of slugcatcher.

It appears that the Shell slugcatcher at Bacton is similar to that at St Fergus. However we could not satisfy ourselves on the evidence that it was identical in operation. Certain elements of incoming flow were different. An excerpt from the Shell Bacton Plant Manual included: "The purpose of the slugcatcher is to separate large slugs of liquid from the gas prior to the gas process streams. It is important that large slugs of liquid are separated from the gas at this stage as otherwise the liquid slugs would quickly fill up the gas process inlet separators". It is apparent that this particular description of the purpose is what we accept as the purpose of the St Fergus item. Mr Milton produced a comment from HM Inspectorate of Pollution in a report on Bacton which included: "the gas is received initially in the primary separator, referred to as the 'slugcatcher', where the free liquids are removed."

There was material from Amoco, Conoco, BP and BP Amoco, referring to gas and condensate being separated in slugcatchers. Material in respect of Mablethorpe Gas Terminal, under reference to a multi-pipe slugcatcher, said "the slow upward velocity of the gas permits a gravity separation between natural gas and condensate". One Amoco application included the expression: "The gas is received in the primary separator, a 'slugcatcher'".

In addition to these and many other works intended to show usage of the terms separator or separating in relation to slugcatchers, Mr Milton referred us to various works of reference. In the Oxford English Dictionary a definition of "separator" includes "an instrument or appliance for separating". He also referred us to various other dictionaries or glossaries. We were unable to determine on the evidence what weight, if any, could be given to each of these various publications. However they covered a wide range and were all intended to deal specifically with usage of terms in the oil and gas industry. We consider that they can properly be accepted as showing the natural usage of a variety of people. No doubt the range of expertise or experience in the industry covered is of varying degree but it is not without significance that the authors must have regarded themselves, or have been regarded by others, as being in a position to offer useful guidance to people who needed or wished to know how terms were used in that industry. We attach no significance to the order or, indeed, to the designation of the various glossaries.

Entries included the following. An oil and gas handbook published by the Bank of Scotland: "A slugcatcher is a large separator for removing the slug at its destination without interrupting the gas flow". Glossary of items, Institute of Petroleum: "Slugcatcher: Arrangement of piping designed to catch a slug of liquid in the gas pipeline to separate it from the gas". Separators and filters - Gas Processors Association Engineer Data Book: "Slugcatcher: a particular separator design able to absorb sustained inflow of large liquid volumes at irregular intervals. Usually found on gas gathering systems or other two-phase pipeline systems. A slugcatcher may be a single large vessel or a manifold system of pipes." Illustrated petroleum reference dictionary: "Slugcatcher - an arrangement of piping at a gas pipeline terminal made to intercept a slug of liquid in the pipeline and separate it out of the gas stream. In gas lines from offshore wells, petroleum liquids (condensate) accumulate by dropping out or condensing and collecting in low places in the line. When enough condensate (and water) collects to block the flow of gas, the pressure build-up forces the liquids forward through the pipe as a slug. At the terminal or processing station the slug is caught by a slugcatcher and diverted to its own tankage". From the internet Mr Milton had found a glossary compiled by Lasmo: "Slugcatcher - a large separator for removing an accumulation of liquid (usually built-up when the flow rate in a pipeline slows) at its destination without disrupting the gas flow".

Mr Milton had also downloaded from the internet copies of various advertisements for company products. Such material must be viewed with considerable caution and we can attach little weight to such items. They appeared to show that slugcatchers were commonly listed under the heading of separation facilities or separators. An advertisement in the Chemical Engineer said: "The common slugcatcher is a large diameter separator connected to the pipeline exit". A new approach to finger storage slugcatcher design by Sarica, Shoam, Brill - OTC said: "A slugcatcher can serve as both a separator and as temporary storage".

In addition to these various materials dealing with a slugcatcher as a form of separator, Mr Milton had regard to various documents which made reference to a slugcatcher as a vessel. In relation to the St Fergus slugcatcher reference had been made by a representative of Shell in course of the planning proceedings that "a slugcatcher was itself a high pressure vessel". A Shell inventory produced for the CIMAH Regulations Safety Report on St Fergus had included the slugcatcher under the heading "Inventory of Vessels". In relation to Hazardous Substances Consent, Shell, at St Fergus, Total Marine, Amoco, British Gas, and Shell, at Bacton, had all included their slugcatchers under the heading "Largest capacity vessel". He accepted that these Regulations had their own definition of "vessel". He produced a range of other references to the slugcatcher as a vessel.

We have considered the detail of the various documentary productions spoken to by Mr Milton. The material is extensive but we accept that it is only a tiny fraction of material published by the oil and gas industry and consider that it is insufficient to paint a conclusive picture of usage. It does, however, satisfy us that slugcatchers can, quite naturally, be described in terms of a function of separation and that reference to slugcatchers as separators occurs across a range of different authors and in different contexts as a natural form of description.

It is clear from perusal of this material that, as the Shell witnesses had stressed, slugcatchers are of different types and function in different ways. The Amoco Bacton one was said to be designed as "a three-phase separator allowing the gas, hydro-carbon condensate, and aqueous MEG to separate by virtue of density differences". Reference to one type of slugcatcher as a separator is not evidence that all types are so regarded or, more important, is not evidence that all types fall under that head. However, as we shall discuss below, we consider that the significance of these various references is to demonstrate that in a natural use of language within the oil and gas industry the term "vessel" and the term "separator" can be applied to slugcatchers in general. It cannot be accepted that there was any uniform understanding in that industry that "slugcatchers are not separators"

In relation to valuation we heard evidence of the origins and certain provisions of the Valuation Office Agency/Scottish Assessors Association's Cost Guide. Before dealing with the Guide in that context, we should observe that we did not hear evidence of how the descriptive material relating to the slugcatcher was prepared for the purposes of the Guide. From an excerpt which was produced by the appellants, it was plain that the authors saw slugcatchers as falling under "Class 4 - Table 4 - separators". A slugcatcher was described as "an arrangement of piping at a gas pipeline terminal made to intercept a slug of liquid in the pipeline and separate it out of the gas stream". There were other similar references. Mr Borthwick challenged the description in the Guide. It is possible that it reflected a bias by the valuation officers concerned. We place no weight on the Guide for the purposes of rateability. We did, however, hear evidence in relation to its origins as a guide to valuation. It had been prepared as a joint exercise involving experts from both England and Scotland. The intention was to help standardise assessments throughout the country by producing a common base for determination of value, namely, the unit cost approach. This provides a means of valuation of a wide range of plant and machinery by applying unit rates of cost to the particular dimensions of each particular piece of equipment in issue. Unit costs are defined as derived from analysis of actual costs.

We were again referred to the Guidance Note. We have set out above many of the provisions of the Guidance Note in the context of modern substitute plant. The following deal more specifically with the question of the use of unit costs as the basis of assessment at Stage 1.

  Guidance Note
3.   The Process of Valuation in Detail
3.1   Stage 1 - Estimated Replacement Cost
3.1.1   The first stage of the contractor's basis is to estimate what it would cost to construct the property, including all the buildings, site works and all rateable plant and machinery within the property, on an undeveloped site.
3.1.2   The estimated cost of replacement should include all the elements which would go to make up an actual cost. Design costs, site works, provision of services and supervision costs (including fees) must all be included in the estimated replacement costs.
3.1.3   Initially, the valuer must decide whether to cost the actual property or a substitute. In most cases costs will relate to the actual property, but there may be exceptional cases where it would be appropriate to cost a modern substitute.
3.1.4   Next, the valuer has to estimate the replacement cost and this can b achieved by:
  (a)   reference to unit costs derived from analysis of actual costs; or
  (b)   reference to the actual costs of providing the subject property.
  The Rating Forum considers that unit costs should be the primary method adopted in order to achieve consistency of approach.
3.1.5   Actual costs of providing the subject property may be used where, for example:
  (a)   full records of actual costs incurred close to the valuation date are available;
  (b)   it is possible to allocate costs clearly between rateable and non-rateable elements within the actual costs; and
  (c)   the property is unique in nature with significant elements which do not readily lend themselves to the unit cost approach.
  If the valuer is using actual costs, care must be taken to exclude un-remunerative expenditure (i.e. that which is not reflected in the value of the premises) and non-rateable items.
3.1.6   The contractor's basis requires an assumption to be made that construction is of the property as a whole based on competitive rates prevailing at the valuation date (see paragraph 3.1.9). Therefore, any actual cost information will need to be adjusted to correspond with that basis.
3.1.7   In adjusting actual costs use may be made of appropriate building contract tender indices although the older the cost information, the less reliable this method will be. Furthermore, care must be taken not to apply a building's index to plant and machinery items which require separate consideration.
3.1.8   The valuer must be aware that in adjusting actual costs, a variation of price tender cost should be adjusted from the tender base date (normally four to eight weeks prior to the contracted start date) to the valuation date.
3.1.9   Firm price tender costs should be adjusted from the mid-point of the contracted construction period (which may not coincide with the actual period) to the valuation date. However, such costs are the least reliable since they incorporate an element of speculation.
3.1.10   Final account figures (which are rarely available) should be adjusted from the mid-point between the tender base date and the date of practical completion, to the valuation date. This is the most reliable form of cost information provided there were no extensions of time.
3.1.11   As stated at paragraph 3.1.4, the unit cost approach should be the primary method adopted since this has the advantage of ensuring uniformity.

In valuing the slugcatcher, Mr Borthwick proceeded on the unit cost approach derived from the Cost Guide. The St Fergus slugcatcher pipes have a diameter of 36 inches, wall thickness of 1.56 inches and a total length of 900 feet. Mr Borthwick said that this was close to the specification in the Guide. The Guide provided a choice, providing a rate per metre of length and a rate per cubic metre. He used both methods. The length measurement did not include the manifolds whereas the cubic measurement did. His figures were £4,260,408 and £4,305,167 respectively and he took the average, namely, £4,282,787. As the contract size was significantly below the total cost of the whole St Fergus development an allowance of 5%, as recommended in the Guide, was made. An addition of 7.5% was made for fees.

Under Stage 2 he made allowance for obsolescence. His physical obsolescence allowance took account of the mix of "plant" and "civils" work required to form the slugcatcher. The appropriate scales suggest an allowance of between 10% (GE for buildings) and 2.5% (VO mixed plant and civils) for 1980. If the item is to be treated as dating from 1978 or 1979 when work started, then an allowance of between 14% (GE 0 to 30 year plant) and 3% (VO mixed plant and civils) should be made. He adopted an allowance of 9% because he thought it was appropriate to have a bias towards a plant item.

The resulting adjusted replacement cost was £3,980,155. Decapitalised at 5.5% this gave an NAV of £218,908 which he rounded to £219,000.

In cross-examination he defended the unit cost approach. He agreed that he did not know whether the unit cost in the Cost Guide had been derived from an analysis of actual slugcatchers. However he believed that the costs were derived from as wide a field of alternative sources as possible. He agreed that he would be influenced if the unit costs were not based on actual cost. However he saw no reason for rejecting the unit cost provided in the Guide. As he put it, "it hadn't come from nowhere". The Cost Guide had been used at Bacton for the agreed valuation of the slugcatcher although, in fairness he pointed out that the valuation officer had not attempted to obtain actual costs. It had been used by the Valuation Office Agency to value other slugcatchers in England and Wales. On a comparative basis it would be reasonable to use it. Although he accepted that the slugcatcher at St Fergus was unique he did not consider that this was a necessary justification for use of actual costs. There were a lot of difficulties in relation to use of actual costs in this case. The figures were old. Indexing was difficult. He accepted that he had used the actual costs in relation to other items but explained the particular circumstances.

Mr McConochie gave evidence that in his view the slugcatcher was unique. In this case we had the actual slugcatcher designed specifically to meet the needs of the site and for which actual costs were available. He considered this was exactly the situation envisaged by the Guidance Note where a unit cost approach would not be appropriate. He further pointed out that Mr Borthwick could not explain the source of the unit cost rate provided in the Cost Guide. Mr McConochie had made telephone investigations and had been advised that the Guide was not based on actual costs derived from consideration of actual slugcatchers but was based on the cost of raw materials and assumed fabrication costs. He did not know how transport and installation costs had been accounted for. He was familiar with Mr Milton's approach which he supported.

In cross-examination he gave further evidence of his understanding that the Cost Guide had been based mainly on information about pipework. The figures did not relate to a slugcatcher "as built". However it was a complex structure not just a matter of joining two ends of pipes together. He accepted that people had looked at the problem and produced the result shown in the Guide. He could not accept the result thus produced because when compared with the actual cost there was plainly a discrepancy. That was why the Assessor had investigated the matter. The Cost Guide was just a guide.

Mr Milton accepted that in the Guidance Note the rating forum expressed the view that unit costs should be the primary method adopted in order to achieve consistency of approach. However he pointed out that the Guidance Note accepted that actual costs could be adopted where there was doubt over the origin of the unit cost or where the subjects were sufficiently unique and not readily comparable with other items in terms of differences of design and configuration. He had rejected the unit cost in respect of the St Fergus slugcatcher because, enquiries having been made about the Cost Guide, he discovered that actual costs had not been used in determining the unit rate proposed. He agreed with Mr McConochie's evidence. Actual costs could be applied where there was doubt about the original of the unit cost or where the subjects were sufficiently unique and not therefore readily capable of direct comparison with other items which differed quite significantly in terms of design and configuration. The St Fergus slugcatcher was a unique tailormade item. There were only eight sites in the UK where finger type slugcatchers were found. It qualified for treatment on the basis of historic cost updated to the tone date of 1 April 1983. He gave details of his analysis of the purchase cost of £2,386,691 as at August 1977 and of his reasons for choice of the B.C.I.S. M. & E. indexation factor to update the historic figure. He adjusted the updated amount downwards by 25% in recognition of the effect of a tendering process. He added to that the estimated cost of erection, of £1,130,596 as at 2nd quarter 1979, using the BCIS tender price index. His calculation of total estimated replacement cost at the tone date was £8,185,707. He made an allowance of 5% deduction for contract size and an addition of 7.5% for fees producing a total figure of £8,359,653. Decapitalised at 5.5% this gave an adjusted replacement cost of £459,781.

He made no allowance for obsolescence because it was built to vessel and pipeline codes and was not subject to wear and tear over the passage of time. He accepted that external maintenance would be required. This was insignificant for his purposes.

He accepted that in his valuation at St Fergus he had, for various items, made use of unit cost rates taken from a number of sources. These included analysis of expenditure on items at the three St Fergus terminals occupied by Shell, Mobil and Total; rates recommended by the Scottish Assessors Association Oil Subjects Committee; rates recommended in the Cost Guide and rates adopted by assessors in other valuation areas in resolving the 1995 revaluation appeals. He justified his use of the B.C.I.S. M. & E. index on the basis that this index had been agreed with Mr Borthwick for use on various other items where a historic cost basis had been accepted.

In cross-examination Mr Milton accepted the direction in the Cost Guide that older costs were less reliable and that he had been prepared to use unit costs for many items. He was not aware of any express provision that use of pre-1985 figures was inappropriate. Any such provision had to be read in context. His position was that pre-1985 figures could be suitable if there was nothing else. He agreed that in respect of construction of the slugcatcher the type was one using a system of pipes of standard construction. He did not know whether the construction of a slugcatcher had special requirements. He agreed that there was no appropriate index for pipes. He expressly accepted that it was appropriate to rely on the Guidance Note even although it had not been in existence at the valuation date.

Submissions

In respect of the question of whether the slugcatcher properly fell within the description "separator" or "vessel" within the meaning of Table 4 of the 1994 Regulations, Mr Haddow submitted that the real issue was to decide who was to answer the question of whether the slugcatcher was a separator or a vessel. This particular problem had not arisen in Scottish practice prior to the 1994 Regulations but was familiar in England. He referred to Armour 7.07 and Watson and Philip v The Assessor for Grampian 1996 SLT 247 for detail of the former Scottish approach. A different approach was now required. The sole issue was whether the item in question was specified in the Regulations. A proper approach had been addressed in England. He referred to Shell-Mex and BP Limited v Holyoak (VO) 1959 1WLR 188; the decision of the Valuation Tribunal in Shell UK Exploration and Production Limited (Bacton); Chesterfield Tube Co Ltd v Thomas (VO) 1970 1WLR 1483 and Whitfield (VO) v National Trans Communications Ltd RA 214/1995.

He submitted that the question posed had to be answered by persons in the industry. He did not accept the test posed in the Bacton case of the "ordinary man". It was not the ordinary man in the street but the person experienced in the industry.

The evidence, he submitted, was clear. Rushford, Collins and Pentland, represented a range of experience within the industry. Each explained what they understood by the terms "slugcatcher" and "separator". None would regard the slugcatcher as a separator or a vessel. It was a well recognised category of plant in its own right. Mr Milton had accepted that the industry does not refer to slugcatchers as "separators", although, of course, his intention was to show that the industry did regard it as functioning as a separator.

Counsel contended that the slugcatcher did not in fact function as a separator. On the evidence, the only purpose was to deal with slugs. These were units of liquid which had become separated from the gas in the pipe. The slugcatcher was there to deal with the problem presented by slugs not to separate them. t was significant that the unit V101 was described as the primary separator. That was where persons in the industry regarded the separation process as starting.

A slugcatcher was not a vessel. It did not look like a vessel. No-one in the industry called it a vessel. It was not intended for storage.

Mr Collins had expressed his view that the term "separator" in Table 4 could not be intended as a generic term because various classes of items which could fall under such a generic term were individually listed in the Table. The Table must therefore intend the term "separator" to refer to items known individually by that term.

In relation to valuation Mr Haddow submitted that it was clear that neither method was perfect. Having due regard to the Guidance Note and the Cost Guide the lesser of two evils was to prefer the approach by way of unit costs. There was a clear warning of the danger of using historic cost in respect of items built before 1985. t was obvious that the historic approach had flaws at various points. An allowance of 25% of the purchase cost element had been agreed by Mr Milton. There was no basis upon which it could be determined whether it was accurate. The index chosen from general construction contracts might be quite inappropriate for the slugcatcher. There was a problem in identifying the proper starting date and a risk - he did not put it any higher - of double counting in determining the actual costs.

It was significant that as far as use of unit cost rates was concerned, Mr Milton had no experience of them being wrong. He did not challenge them apart from in relation to the slugcatcher. While there may be doubts about the basis of a cost rate for the slugcatcher, its use had the benefit of consistency. The rates had been used elsewhere. It was plainly preferable to use the unit cost rate.

In relation to obsolescence he accepted that it was not possible to analyse this too closely. He invited the Tribunal to take a "robust" approach. If Mr Borthwick's general approach was accepted, then his general approach to obsolescence should also be accepted unless the Tribunal was persuaded that it was clearly wrong.

For the assessor, Mr Currie submitted that it was plain that the classes listed in Table 4 were generic. The fact that some types of equipment appear to be listed specifically did not alter that. At the end of the day the question was one for the Tribunal. The decision should be based on a down-to-earth, practical approach. This did not mean that the decision was to be taken by practical men. What the authority showed was that a theoretical or specialist approach should be excluded. He submitted that it was a matter upon which the Tribunal had to form its own impression in light of all the evidence.

He invited us to look at four main chapters of evidence. First, it was plain, as a matter of fact, that the slugcatcher did separate and was designed to do so. The pipeline was not, functionally, a separator. Once the gas and liquid were separated in the slugcatcher they were dealt with separately, albeit that some remixing later occurred. In any event, he submitted that the slugcatcher functioned as a vessel holding the slug separate until it could be dealt with.

Second, Shell's own literature spoken to in detail by Mr Milton, showed clearly that the slugcatcher was regarded as a device which acted as a separator. Various descriptions showed that it was properly regarded as a separator or a vessel within the company or its related companies. Third, literature from the oil and gas industry at large, showed use of these terms in relation to slugcatchers. Fourth, general works of reference showed that the slugcatcher was properly regarded as a separator. It fitted the dictionary definition of that term.

The views of assessors and valuation officers as to usage were relevant. They were expressly included in the Whitfield group of witnesses. They plainly treated the slugcatcher as rateable. For example, slugcatchers were included in the Cost Guide. It was intended to cover rateable plant and machinery.

In relation to valuation Mr Currie accepted that the issue was the choice between unit cost and historic cost. In respect of the latter three questions arose: had the cost been correctly identified; had the correct index been applied; and was the end result sufficiently reliable?

There had been a question of double counting but Mr Milton's evidence could be accepted. There was no double counting. The figures could be treated as reliable. So far as the index was concerned Mr Borthwick had been prepared to agree it for the other items. It should be accepted for the slugcatcher. Admittedly 25% was a very broad allowance. Mr Milton used it to allow for the tendering excess and for any other inaccuracies in the historic cost assessment. The question in relation to the index and discount was not whether it was absolutely accurate but whether it was sufficiently accurate to be used towards establishing a hypothetical rent when taken with the hefty discount. The fact that it had been agreed for other items was significant. Accordingly, in his submission, the historic cost had been correctly identified, an acceptable index had been applied and the end result was sufficiently reliable. The health warning in the Guide had been allowed for.

The unit cost approach carried no specific health warning. However it was important to recognise that it contained an inherent health warning in respect that it was only a "guide". It was a matter of judgement in any case whether it was a reliable guide. Mr McConochie had made enquiries about the origin of the Guide in relation to the slugcatcher. He had satisfied himself that it was not soundly based. No issue of policy arose. It was not suggested that unit costs had to be used to effect harmonisation. The Guidance Note made clear that valuation could proceed either on a unit cost or on analysis of actual cost.

He submitted that Mr Milton's evidence of how he approached actual cost complied with the direction in paragraph 3.1.5 of the Guidance Note. Mr Borthwick had not properly fitted the Guidance in 3.1.4(a). Mr Milton's evidence was to be preferred.

Decision

Rateability

In seeking an answer to the question of whether a slugcatcher falls within the description of "separator" or "vessel" as used in Table 4, it is appropriate to start by reminding ourselves of the well known rules of statutory construction. If a word is not defined in the legislation it is for the Court or Tribunal to determine its natural and ordinary meaning in the context in which it is used. It is not normally permissible to hear evidence as to the meaning of an ordinary English word. Where a word is used in the technical sense it bears in a trade or industry, evidence of persons skilled in the trade or industry is competent: Gloag and Henderson, The Law of Scotland, 10th edition, 1.13.

In our Tribunal procedures where expert evidence is often required, it is recognised that attempts to exclude all evidence on matters of law can give rise to difficulties in presentation. Evidence on legal issues is frequently received and has to be treated, at the end of the day, as equivalent to submission by advocates. It is our practice to attempt to limit such evidence by giving some latitude in chief but restricting cross-examination where possible. It is certainly not unusual for us to hear a mixture of evidence of fact and opinion including opinion on issues of law, such as interpretation of statute. It is necessary, however, to keep clearly in mind what matters are to be decided on evidence and what are matters of law for determination by the Tribunal.

For the purposes of this case we accept that the term "separator" in the context of Table 4 is a technical term which requires to be interpreted in light of the whole evidence of usage available to us. We heard no explicit submission to that effect but it was implicit in what Mr Haddow said. It is clear that the Table is dealing with a range of terms the meanings of at least some of which are beyond the scope of an ordinary dictionary.

The first step in a proper approach to the Regulations is to determine the meaning of the language used in the Regulations. Once that meaning has been established the question is whether the particular plant, in this case the slugcatcher, falls within the scope of the statutory category. This must be determined having regard to the whole evidence as to its construction and function. We accept that there may be cases where the statutory language does not itself appear to cause any difficulty and where the real issue may best be approached by concentrating on the proper description to be applied to the nature and function of the plant in question.

We think, however, that there is a danger in starting by trying to define a slugcatcher. That is to look at matters the wrong way round. There is also a danger of taking dicta from previous decisions out of context. t is clear that we are not concerned with interpretation of the word "slugcatcher". What the St Fergus slugcatcher is, must be ascertained from the evidence. It follows, however, that evidence that a slugcatcher would not, in the industry, be referred to as a "separator", is not directly relevant to the issue we have to determine. When particular trades require specific names for different types of equipment they may rarely use the generic terms: lawyers seldom refer to law reports as "books". An example from the present case, was the "knockout drums" (which we require to consider under Head F below). It was accepted that these drums can properly be regarded as separators although not referred to by that term at any point in the evidence. Slugcatchers are very distinctive and it is not surprising that they are almost invariably referred to by their own particular designation. It is, on the other hand, clearly relevant to know whether the function of the slugcatcher is properly to be seen as involving separation. The whole evidence of function has to be considered.

We were referred to four cases as having a bearing on the proper approach to interpretation of the terms used in Table 4 although the cases did not deal with that Table as such.

The Valuation Tribunal in Shell UK Exploration and Production Ltd (the Bacton case) put the issue in terms of a contrast between the technical man, the physicist and the engineer on one hand, and the ordinary man or rating surveyor on the other. We think this illustrates the need to examine closely the context. It is not hard to see that a distinction might readily be drawn between a "rating surveyor" and "an ordinary man". (Mr Borthwick attempted these two distinct approaches in his evidence and, at his request, Mr Rushford and Mr Pentland also attempted the exercise of viewing the matter in distinct ways.) The Valuation Tribunal went on to say that it was the view of the ordinary man which should be adopted. We consider the choice there expressed to be equivalent to a choice between treating the matter as interpretation of a term with the assistance of skilled evidence or treating it as purely a matter for the Court or Tribunal. If a term is to be interpreted by the ordinary man, this must be a matter for the Tribunal in the normal way. Evidence as to the detail of how the plant in issue might be thought by the ordinary man to work would be relevant as matter of fact. Evidence of what an ordinary man thought was meant by a "separator" would not be relevant.

We accept Mr Haddow's implied criticism of the approach in the Bacton case when he contrasted it with what he described as the "proper approach" of the Chesterfield and Whitfield cases. Technical terms allow suitable evidence of meaning. We have to assess that evidence.

This issue was considered indirectly in Chesterfield Tube Company Ltd. In the Court of Appeal, that case was treated as turning on the question of whether a hydraulic pump was used in connection with the "generation of power" when it was itself driven by electricity. Salmon L.J. said that he could "understand that the true meaning of the generation of power [might] be a fruitful source of academic discussion amongst philosophers and physicists". However in the context of the relevant Plant and Machinery Order, he thought the question was what the words meant to "rating valuers and surveyors, the occupiers of hereditaments and practical technicians concerned with the design and making of the plant and machinery". He followed that observation by a reference to the enabling provisions under which the Order in question was made - section 24(3) of the Rating and Valuation Act 1925 - which showed that it was made "for the purpose of enabling all persons concerned (our emphasis) to have precise information as to what machinery and plant was included". It may be implicit in the dicta in that case that the judges were mindful of that enabling provision. That would explain the reference to a range of persons.

Sachs L.J. said that, in interpreting the Order, the notional dictionary to be used was that of practical men experienced in the field to which the Schedules applied. Phillimore L.J. put the choice as between the language of the physicist and the ordinary man. He preferred the latter.

When considering this case it is to be noted that the expression "generation of power" is not, at first sight, a technical term in the same sense as the listed pieces of equipment in Table 4. The matter was discussed in the Court of Appeal without any direct reference to evidence of witnesses. The evidence of witnesses, as set out by the Lands Tribunal in that case, addressed a related but different issue. The Court seems simply to have been applying its own interpretation of the expression "generation of power" based on how it would appear to practical men rather than to academics. The judgements are not expressed in terms of a preference for the evidence of any particular witness or body of witnesses. The decision was not expressed as a decision on fact.

We consider that this decision does not provide guidance as to the proper approach to words which are accepted as intended to have a technical meaning. However, it is consistent with that decision for us to look at all the evidence we have heard and seek to find a straightforward meaning.

Similarly, although the decision in Shell-Mex and BP v Holyoak (VO) is, of course, a decision of the House of Lords we find nothing in it of direct assistance in this case. The issue was whether an object, admittedly capable of being described as a "tank" which had been built-in below a filling station, was of the nature of a building or structure. The arguments were said to be "nicely balanced". Viscount Simon said: "It has some significance that in the ordinary user of words by persons accustomed to deal with these things, the 'tank' is the metal container". That, however, was not the de quo. The dictum is consistent with the view that in construing technical terms, evidence of persons used to deal with such items is relevant. Lord Reid, however, (at page 198) said that, "It has not been argued that any technical meaning attaches to the word 'tank' in the Order, and it must therefore be taken as an ordinary word of the English language to be construed in light of the context in which it is found".

In Whitfield (VO) v National Transcommunications Ltd, the Lands Tribunal in England had to deal with a 45 metre high structure which functioned as a transmitter of radio waves. It was known technically as an "MF - ie medium frequency - radiator". The question was whether it fell within relevant Regulations in the category: "Masts (including guy ropes) and towers for - … wireless". The ratepayers contended that it was not a mast but an aerial.

The Tribunal took from the decision in the Chesterfield case that a correct approach to the Regulations was a general, ordinary and practical one and not a narrow technical approach. The Tribunal found, on evidence of examples of the use of the word "mast" in connection with the appeal subjects themselves, that to "a rating surveyor, occupier, practical technician or ordinary man", the structure was a mast.

We are not satisfied that a test based on the grouping of "rating surveyor, occupier, practical technician or ordinary man" is a test of general application although, as we have noted, it is a test which can be understood in the context of the enabling provisions of the 1925 Act. If a matter can be assessed by the ordinary man it is, at the end of the day, a matter of impression for the Tribunal. If it requires elucidation by a practical technician, the Tribunal must assess evidence given by such witness or witnesses. There is no indication in the report that the Tribunal proceeded on the basis that the Regulations were to be treated as "technical language".

We think it clear that the various items listed in Table 4 must be seen to be used in a broad or generic sense. The fact that some of the terms might be shown on examination to have a very limited or specific application does not mean that a limited meaning must be sought for other expressions capable of broad application. That this is the intention of the current Regulations is, we think, clear from comparison with the equivalent provisions of the 1989 Regulations. For example, the present grouping "chambers and vessels" may be contrasted with the 1989 provision: "chambers, vessels and containers" followed by a list of some twenty four specified types.

In the present case, we accept that the evidence we heard on behalf of the appellants did not fall to be excluded as academic or philosophical or as turning on a narrow technicality. It was, on the contrary, evidence of practical usage in the oil and gas industry. The difficulty, as it seems to us, is that it is plain that the Regulations were enacted to deal with plant and machinery generally and not to deal with the oil and gas industry alone. Even if we accept "separator" as a technical word, we cannot simply apply the test of persons experienced in that particular business.

The evidence of the appellants' three witnesses was not adequate to deal with the question of how "separator" was viewed by industry at large. There was no evidence that the term was exclusive to the oil and gas industry. Although Mr Haddow stressed that we had heard no evidence that the term was used in other industries and submitted that we should proceed on the basis that it was exclusive to the oil and gas industry, we do not consider that to be a sound basis for our decision. The Regulations do not attempt to define plant by reference to particular industries. There is nothing in the Regulations to say that the term is to be interpreted by the oil and gas industry. If the term is to be treated as a technical term, evidence that it was exclusive to that industry would be essential if we were to assume such restriction.

We are aware that separators are used in other industries. However, we heard no evidence of usage from other industries and we do consider it inappropriate to apply our own imperfect knowledge of such matters. It was, however, accepted by Mr Collins that, in some context, the term "separator" would apply to a settling tank where time and gravity sufficed to bring about separation of different components. We had understood that answer - which came in response to a question from the Tribunal - to be an acceptance of his knowledge of such usage outside the oil and gas industry. This may have been ambiguous. In any event, in light of that answer we do not accept as essential, the proposed requirement of complex internal equipment to effect and control the process. It may well be the case that in the oil and gas industry the term "separator" tends to be restricted to equipment which does provide a high standard of control of the process and the end result. That would not suffice to take out of rating in that industry a piece of equipment which, in another industry would fall to be rateable. We are satisfied that even within the oil and gas industry the term separator is not limited by reference to achievement of high specification end product. Indeed, it may be thought that the 1985 Bos and du Chatinier paper dealt fairly with the point by making the contrast between slugcatcher as a separator and "high efficiency separators". Both types are separators. The kind with which the witnesses were in the habit of dealing were, no doubt, in the latter class.

Viewing the question in light of the whole evidence including the written material collated by Mr Milton, we are satisfied that the term "separator" applies to an item of equipment, the primary function of which is to allow distinct constituents of a mixture to be treated separately.

When we come to consider the function of the slugcatcher we are satisfied on the evidence that it can properly be called a separator in a technical sense. Slugs are part of the feedstock which the whole plant processes. When they form they have to be handled separately from the other component. The slugcatcher is the device which separates the two main elements for handling. We recognise that, as matter of fact, separation has occurred at some point in the pipeline before the slug reaches the shore. The slugcatcher can therefore be described as a device to maintain rather than to effect separation. We consider that this is a narrow technical view. The fact that separation has already occurred in the pipe is of no practical value. The feedstock may be in two parts but these parts require to be separated from each other in order to meet the processing requirements. The slugcatcher is the device which makes effective the separation.

The slugcatcher allows the two components to be handled separately. They could not be handled together. It is true that it is seldom called upon to perform its function and we recognise that if there was evidence that it performed any other function, it is likely that such function would be dominant. However there is no other distinct purpose and we do not consider that the intermittent nature of its role changes its essential nature. It is a piece of plant the function of which is to separate components of the feedstock to enable them to be processed safely. It was not in dispute that, without a means of maintaining separation, the plant as a whole was at risk of being overwhelmed.

When the intermittent nature of the actual need for the slugcatcher is taken into account it is not surprising that the V101 is described as the primary separator. That, however, is consistent with the role of the slugcatcher which might appropriately be described as an emergency separator.

We recognise that both the liquid component and the gaseous component are subjected to very similar treatment after leaving the slugcatcher and that this stage of separation is not an essential element in conversion of the feedstock to the output product. It is, however, essential to the safe handling of the feedstock.

It is clear that the test required by the present Plant and Machinery Regulations is a test of definition and not a test of principle. Salmon L.J. in the Chesterfield case at page 1491H expressed a doubt as to whether it would be possible to find any logical explanation as to why some plant was included in the list and some not. Mr Haddow observed that this was the approach taken by the Wood Committee. We make no attempt to approach interpretation by seeking a thread of principle linking the items listed in the Class. However, in taking a common sense view of the mechanics of the slugcatcher in operation, we note that separators appear in the list bracketed with "filters". A filter typically functions to provide a practical separation of components which are already physically distinct and separate from each other. Although the mere conjunction of the two terms does not allow "separator" to be interpreted as if it was a kind of "filter" the conjunction does give some support for the view that a practical approach should be taken to the functioning of the item in question.

Although we accept that slugcatchers are not normally referred to as "separators" within the oil and gas industry, we have observed that it is not uncommon in any trade or business for general terms to be superseded in use by the specific. It is, however, plain from study of the documentary material spoken to by Mr Milton that it has not been unknown, even within the Shell Group, to describe slugcatchers by use of that generic term. The wider range of material shows that this was not an aberration. We refer to the evidence on this matter which we have summarised above.

We accept that the St Fergus slugcatcher functions solely to allow a mixture of two components in a pipeline to be split into separate components to allow these components to be processed safely. We conclude that, accepting "separator" as a technical term to be interpreted in light of relevant evidence of use, a slugcatcher falls within the definition. For avoidance of doubt, it should be said that if "separator" was simply to be interpreted in the normal sense of the word, we would see no reason to reach any other conclusion.

We heard no direct evidence as to any technical meaning to be attached to a "vessel". Like a "tank" it may be thought to be a word of ordinary English. Mr Milton's view was that some terms in the 1994 Regulations were simple and did not require expert interpretation. There was no attempt to lead expert evidence of interpretation of the word "vessel" as it appeared in the Regulations. There was no express submission that it should be given a technical interpretation. Mr Haddow's implied submission on this matter was based on a contrast between "separators and tanks" and "slugcatchers and tanks" under express reference to the dictum of Lord Reid (in Shell-Mex and BP Limited v Holyoak, above). We were not referred to any dictionary or glossary defining "vessel".

In everyday language the term "vessel" is wide enough to connote some form of receptacle to receive and hold a liquid. We do not accept that the term is limited to receptacles which have a primary purpose of storage or a requirement to hold the contents for any significant period. Having regard to our view that the slugcatcher is properly described as a separator because of its main function, we have some reservations about the application of the term "vessel" to it. If it has an active role, that designation may be inappropriate. However if the slugcatcher is not properly described as a "separator" because separation has already occurred, its function may be described as being to catch the liquid slug and hold it until it can be processed. Viewed in this way the role is entirely consistent with normal usage of the term "vessel". It functions as a container designed to hold the entire slug safely until such time as it can be processed. If operators are not able to deal with the slug immediately it can be held.

Although the slugcatcher is made up of pipes it is clear that the pipes are essentially being used as containers. They hold rather than convey their contents. We consider that whatever the immediate visual impression, they would not properly be described as functioning as a system of pipes.

It is, we think, significant that the pipes are known as "bottles". It is also significant that in the analysis of function which appears in the 1985 Paper by Bos and Du Chatinier, the slugcatcher is described in terms of its essential functions as separation and storage. We accept that inclusion of the slugcatcher under the heading "largest vessel size" in relation to Environmental Protection and Hazard Analysis is potentially misleading because the term "vessel" is given statutory definition for these purposes: Town and Country Planning (Hazardous Substances) (Scotland) Regulations 1993. Mr Milton's reference to description of the slugcatcher as a "high pressure vessel" in course of an application made on behalf of Shell in course of the planning application for St Fergus must also be regarded with caution as it may have had a similar definition in mind. Leaving aside these references, we are, in any event, satisfied that a slugcatcher can properly be regarded as a vessel and if it is not to be categorised as a "separator" we have no reservation in holding that it can be categorised as a "vessel" within the meaning of the 1994 Regulations.

Valuation

The dispute as to valuation turned essentially on the choice between use of historic costs and the unit costs provided in the Cost Guide. Both parties accepted the approach taken by the Guidance Notes and the dispute was presented on the basis that no issue of law or principle was involved. The question was one of fact. Both methods were seen to have imperfections. It was simply necessary to make the best of the material available. We accept this. We accept, also, that the guidance provided by the Guidance Note is a sound starting point although, of course, the Note bears to provide guidance and not to lay down hard rules.

We accept as sound the explicit guidance at paragraph 3.1.4: "The Rating Forum considers that unit costs should be the primary method adopted in order to achieve consistency of approach." We are satisfied that Mr Borthwick, for the appellants, is entitled to take his stand on the figures reached by applying the unit costs from the Cost Guide in the way he described. We do not consider that there is any need for a ratepayer to attempt to set up the figures in that Guide. It is intended to be used as an authoritative tool although it does not purport to be in any sense definitive. The assessor has challenged the figures on two bases: that the unit cost figures were not properly derived and that the slugcatcher is unique.

We are not persuaded that the slugcatcher is unique in any relevant sense. The Cost Guide identifies a category of plant known as slugcatchers. The St Fergus one is a multi-pipe or finger type. The category is well known. There are eight in Great Britain. Versions of it were described in the 1985 paper by Bos and Du Chatinier to which we have referred in relation to function. A similar item exists at Bacton and was there valued on a unit cost basis.

We heard no evidence that the unit costs in the Cost Guide did not have in mind slugcatchers of the St Fergus type. It was observed that the footnote in the Guide giving directions for measurement of length was impossible to fit sensibly to the multi-pipe type but it seemed to be accepted that this could simply be ignored as plainly wrong. Neither party founded on the footnote. Mr Borthwick had checked the calculation by length with one by volume and the results were close. If the unit cost method was to be applied, his figures were not challenged.

The slugcatcher was a very large piece of equipment but the specification matched the figures in the Guide. There was no evidence of any speciality of construction. There were no complex internal parts or controls. It appears to have been built on open land. It was not designed to fit any particular complexity of physical layout.

Mr McConochie gave evidence that: "The slugcatcher was designed specifically to meet the needs of this site. It is the actual slugcatcher at the actual subjects for which the actual costs are available". In his view this was "exactly the situation envisaged by the Forum where a unit cost is not appropriate". We do not share that view. Properly understood his evidence goes little further than saying that the historic cost of the plant in issue is known. As he himself explained, the unit rate approach had been applied in Scotland successfully over the years to a wide range of lands and heritages. There was no suggestion that its use in relation to schools, hospitals, homes, universities and public authority buildings was limited to those which came in standard packages. That the slugcatcher was designed to meet the specific needs of St Fergus does not take it out of the normal run.

Mr Milton gave more detail of his reasons for considering the St Fergus item to be unique. It had to be designed to fit the particular use to be made of it at that site. However we are not satisfied on the whole evidence that this involved any relevant peculiarity of design. The main variable would be size. There was no evidence of any "significant elements which do not readily lend themselves to the unit cost approach." (Guidance Notes para. 3.1.5(c)).

Although we do not accept, on the evidence in this case, that the item in question is unique in any relevant sense, we have had more difficulty in relation to the other reason advanced for resorting to actual costs; the doubt as to the source of the unit costs given in the Cost Guide.

The whole Cost Guide was not produced for us. Parties made copies of the material they relied on. However we heard evidence of the origins of the Guide. It was plainly intended to be relied upon as a Guide to unit costs. For the Assessor it was stressed that it was no more than a Guide. The Guidance Note refers to "unit costs derived from analysis of actual costs." (para. 3.1.4(a)). It must be accepted from Mr McConochie's evidence that the slugcatcher figures were not based on analysis of costs of actual slugcatchers. However we think that it is reading too much into the Guidance Note to conclude that the figures given for slugcatchers in the Cost Guide can be disregarded on that basis. It would of course be wrong to give the Cost Guide figures a definitive status. However, we are entitled to have regard to their agreed status as material disseminated by the Valuation Office Agency and the Scottish Assessors Association and prepared by representatives of these bodies for the very purpose for which the appellants seek to rely on them. It was not suggested that there had been any correction or any admission of error in the course of Mr McConochie's conversations or otherwise. We consider that until the figures are shown to be wrong, they are entitled to be accepted as representing the best efforts of responsible experts to determine an accurate unit figure. It is possible, for example, that the experts took the view that, because of the age of any actual costs of slugcatchers, these costs could not be relied on. Actual costs of construction of similar plant may have been taken into account. The Guidance Note does not limit the analysis of actual costs to the costs of identical items. Mr McConochie's enquiries did not disclose the full detail of analysis underlying the Cost Guide figures. He did not know what allowance, if any, had been made for transport and installation costs. His investigations did not go far enough to allow him to assert that such elements had been omitted. In the whole circumstances we consider that the figure derived by Mr Borthwick from the Cost Guide remains a valid starting point.

It should, perhaps, be added that although we accept as accurate the evidence from Mr McConochie that the figures were not derived from analysis of actual costs of slugcatchers, it must not be assumed that significant weight will be given to evidence of such importance which is given as secondary evidence. No reason was given to explain why this evidence could not have been provided in a way which would have allowed its weight and scope to be assessed. Even written evidence would normally be preferable to evidence which depends entirely on the accuracy of understanding of the listener.

Mr Milton said that it was because he believed the plant to be unique and because he thought that the unit rates were not properly supported, that he decided to seek an estimated replacement cost based on the actual cost updated. As we have explained, we do not consider these to be valid reasons. In terms of the Guidance Note, therefore, there is no justification for going beyond the figure derived from the Cost Guide.

However we must have regard to all the evidence led before us. The real difficulty in this case is that there is such a gap between the figures brought out by the two bases of assessment. It is tempting to assume that one must simply be "wrong" and to assume that as the historic figures are based on fact, however imperfect the conversion to tone date, they are not likely to be positively wrong. Accordingly it may be thought that the fault lies in the figure derived from the unit rate. It seems to us, however, that the Guidance Note is trying to break away from the apparent logic of such an approach. The first condition specified as allowing use of actual costs is that they be "incurred close to the valuation date." (para. 3.1.5(a)). The Cost Guide cautions specifically: "Any pre-1985 costs should be regarded as unsuitable". This comment is made in the context of use of such figures as a starting point for updating by way of indexation. It is clear that Mr McConochie's criticism of the unit cost figure as contrary to common sense and actual evidence is based implicitly on the proposition that the 1979 costs are both suitable and a common sense starting point. We do not accept this.

It is, of course, surprising that there should be such a gap between the results produced by the two bases of assessment. There is inevitably a doubt about the validity of each approach. The aim, however, is to ascertain the most secure basis of assessment of cost. We think it proper to take into account the underlying principle of seeking an approach which provides consistent results and fairness as between ratepayers. This is best achieved by seeking the most accurate figures available as matter of fact. If, however, the available evidence leaves doubt as to the reliability of the competing figures, an approach which tends to promote consistency as between ratepayers should be preferred. We consider that this tips the balance in favour of the unit cost approach in the present case. On the evidence the historic cost figures are not secure. The challenge to the unit cost figure based on information derived in a telephone call by Mr McConochie does give rise to doubt as to the validity of that figure. However no conclusive error was demonstrated and, on balance, we consider the figure derived from that approach should be preferred.

We accept Mr Borthwick's proposed adjustment deducting 5% in respect of contract size and adding ½% in respect of fees. However, we are not satisfied that there is any justification for the physical obsolescence allowance proposed by him. Mr Borthwick's assessment was based on the mix of "plant" and "civils" required to form the slugcatcher. However although those terms may be appropriate to the work of construction we are not persuaded that they have any bearing on the question of deterioration or obsolescence. The item, as constructed, has no internal moving parts. It is not actively used. It cannot be entered. It will require external maintenance by way of painting but such maintenance would, on the evidence, be sufficient to hold deterioration at bay and is a matter for the tenant.

We accordingly determine that the slugcatcher falls to be included in the assessment at an annual value of £ 240,559, rounded to £240,500.

C. Fire protection equipment and
D. Security provisions

The issue in relation to the fire fighting plant and equipment and the site security equipment turned sharply on the proper interpretation of the head provision of Class 2 of the 1994 Regulations. We heard a certain amount of evidence of the nature of the equipment in question and the views of witnesses as to its supposed purpose. Because of the nature of the issue between the parties, we did not have clear evidence distinguishing between that equipment viewed as a service to land or buildings on the one hand, and to trade processes on the other. Mr Borthwick suggested that if our decision did not wholly favour one or the other, the parties would require to review individual elements. He expected no difficulty in agreeing matters in light of any ruling in principle. Whether this confidence was well founded is another matter.

The relevant provisions are in the following terms:

"Plant and machinery specified in Table 2 below (…) which is used or intended to be used mainly or exclusively in connection with services to the land or buildings of which the lands and heritages consist, other than any such plant or machinery which is in or on the lands and heritages and is used or intended to be used in connection with services mainly or exclusively as part of manufacturing operations or trade processes.

In this Class, "services" means heating, cooling, ventilating, lighting, draining or supplying of water and protection from trespass, criminal damage, theft, fire or other hazard."

Table 2 lists various specific types of equipment under the following heads:

“(a) GENERAL;(b) HEATING, COOLING AND VENTILATING;(c) LIGHTING; (d) DRAINING; (e) SUPPLYING WATER and (f) PROTECTION FROM HAZARDS.”

Under the latter head is listed:

“ Tanks; lagoons; reservoirs; pumps, hydrants and monitors; fire alarm systems; fire and explosion protection and suppression system; bunds; blast protection walls; berms; lightning conductors; security and alarm systems; ditches; moats; mounds; barriers, doors; gates; turnstiles; shutters; grilles; fences.”

The appellants accept that the fire pond and the electric and diesel motors supplying power to the pumps are rateable but parties are in dispute over the two water pumps; the sixteen inch main pipe network; the various reduced diameter mains; hydrants, monitors and sprinkler deluge systems; and the whole related alarm and fire and gas detector systems.

The two pumps, driven by electric and diesel motors respectively, operate to draw water from the fire pond and supply it at suitable pressure to the main pipe network. The diesel is the backup system. The sixteen inch pipe is laid under ground in a network which goes round various blocks of land on the site. These include blocks of land containing distinct operational units such as: the main offices and workshops, the contractor's area, the process modules, the inlet facilities, the export facilities and, for example, the separate units known as unit 800 and unit 2600. These blocks are delineated by roadways. The sixteen inch main runs along the side of the roads and main also runs between units 800 and 2600 although there is no road at that point. An extension of the main runs parallel to the slug catcher. The effect of the pumps and 16 inch main is that each block of land has a supply of water round the perimeter for fire fighting purposes.

A network of smaller diameter pipes branches off the sixteen inch main. These pipes supply specific areas within the blocks - for example, some supply buildings such as the utilities building. Others supply areas occupied by process units. The water take-off from these pipes is by hydrant, by monitors or by manifolds leading to the sprinkler deluge systems. Hydrants permit a controlled take-off. Water can be directed wherever it is needed. Monitors and sprinkler systems can function automatically. The automatic sprinkler or deluge systems were all directed at plant and not at buildings. These various facilities will either extinguish, or prevent the spread of, flames or protect plant from damage. The risk of release of further inflammable material is minimised by cooling the plant.

The site is well equipped with gas and fire detection systems. The detail of these was not explored but they have the dual purpose of alarm and triggering an appropriate automatic response such as water deluge or operation of shut down valves. Automatic activation of these valves can isolate specific parts of the process system and permit depressurising of plant by vent or flare systems. There are 586 fixed detectors in the detection system. These are located throughout the site. By far the majority are within buildings which contain process plant. Protection afforded by these systems is not directed solely at prevention of fire. The gas detectors protect people working on site from the risk of exposure to toxic gas as well as detecting the release of inflammable gas.

In the event of damage to the plant there is a risk of release of major environmental pollutant. The extent of this is limited by the automatic shutdown systems. Although the daily throughput is very large, the quantity of hydrocarbons on site, giving rise to risk from fire at any one time, is comparatively low. The emergency shutdown system reduces the risk by dividing the plant into sections which can be isolated. These sections can be depressurised individually.

Mr Rushford described the primary function of the whole fire protection system as being the containment of any incident. By this he meant keeping it under control for long enough to allow local emergency services to be alerted. The aim is to achieve protection of all personnel; prevention of escalation to the neighbouring Total and Mobil sites; protection of the local community and its environmental interests; and prevention of damage to the processing system. He regarded protection of land and buildings as a minimal aspect.

Although we have no difficulty in accepting Mr Rushford's evidence as to the priority of purpose in the terms spoken to by him, we did not have evidence which would allow us to assess priority in terms of degree of risk or extent of hazard. It might be thought, for example, that a system of pipes in the open air was at lower risk than equipment in the confines of a building, even if the consequences of ignition of the contents of the pipe would be potentially more serious. There was no attempt to make that type of hazard analysis in evidence. However, nothing turned on this in the submissions.

Certain submissions as to rateability of the equipment were advanced in the evidence of Mr Milton. He stressed that the pumps serve to ensure an adequate supply of water to each parcel of land. The mains were the method of distributing that water around the site. The smaller mains served specific areas. He contended that these items were all services to the land. He suggested that the underground equipment might be viewed as heritable, being part of the civils in terms of construction and not strictly plant. However, this submission was not repeated by counsel and we did not understand it to be a substantive point of Mr Milton's approach.

Mr Milton faced up to the possibility that, because the monitors and sprinkler deluge systems sprayed fire water directly on to process plant, we might not accept his view that such parts were rateable. However he stressed that they could and should be distinguished from hydrants. The latter were under manual control. Water from them could be used as necessary. It was not limited to protection of plant.

His submission in relation to the detection systems was that, essentially, they provided a safe working environment. That was, admittedly, for the benefit of people and not buildings but he contended that this should properly be described as a service to the buildings. It was, for example, like air conditioning in that respect.

The site security provisions raised the same problems of interpretation as the fire protection equipment. There were two main elements: a high security fence and an advanced intruder detection and alarm system. For security reasons we heard little detail of the latter. All the St Fergus gas sites are classified by the government as National Economic Key Point Installations. The government had, accordingly, installed and paid for a 4 metre high security fence equipped with high specification detection equipment. There are closed circuit cameras and microphonic detectors. The values were agreed and it was not disputed that the fence and the security system could fall within items specified under Table 2, head (f) as "fences" and "security and alarm systems".

Mr Rushford was not challenged on his evidence that the level of security provided was far in excess of anything required for the adequate protection of the land and buildings. In a typical major plant an adequate security fence would be a single 2.5 or 3 metre high chain link barrier. There might be some limited TV surveillance. In his opinion the prime purpose of the St Fergus security is to protect and serve the national interest in the nationwide supply of gas. He accepted that the immediate purpose of the fence was to prevent unauthorised access to the site. Although it protected the control block and other buildings including the administration building, it was usual to have administration buildings outside such a fence. He accepted that it was desirable to have the control block inside.

Mr Milton submitted that this fence, like a wall, was part of the land and not a piece of plant. It was, accordingly, heritable without regard to the 1994 Regulations. However it was, in any event, covered by the Regulations in that it protected the entire site from trespass or, ultimately, that it protected the buildings on site and in particular the main control block from trespass or criminal damage. Similarly the security system, taken as a whole, protected the entire site.

He contended that the issue was not what was actually protected but whether the security systems were services to the site. He asserted that it was not as easy as it seemed in James Bond films to create explosions. An intruder would need to be skilled and know what he was doing. Terrorists could achieve more by taking over the control room. That was the nerve centre. They could hold the country to ransom. He admitted that if their aim was to attack and escape, they might be more likely to go for plant. If there was no fence they could slip in and out undetected. However the fence protected the land. It made it secure. It did not matter for rating purposes whether it was to protect a gas terminal or a yard full of expensive cars. It was a secure site.

Submissions

For the appellants, Mr Haddow submitted that it was clear on the evidence that the disputed fire equipment was not within the scope of Class 2 because it was directed mainly to protection of non-rateable items. The reason for it was protection of personnel on site, neighbours, and the public at large. This had been spoken to by Mr Rushford and his evidence was to be preferred to that of Mr Milton.

Having established that as a fact, the next stage was to look at the 1994 Regulations and the various other Regulations, Scottish and English. Mr Haddow submitted that the Regulations were straightforward. There was no need to consider the exception in the second part of the head provision because the fire equipment was not caught under the first part. His submission was that as the expression "services" was expressly defined to mean various things including "protection from … fire" the opening part of the head provision of Class 2 should be read as if the words "protection from fire" were substituted for the word "services". In other words the statutory test was whether the fire protection was truly to be described as mainly or exclusively "to the land or buildings". He referred to the decision of the English Tribunal in Monsanto plc v Farris 1998 RA 107 and in particular to the argument at page 194 and the decision at page 198. This was based on the Valuation for Rating (Plant and Machinery) Regulations 1989 (SI 1989 No. 441) (hereinafter the "1989 Regulations") but the reasoning applied to the 1994 Regulations. He submitted that it would be unfortunate if a different approach was to be taken north and south of the Border. There was no reason for such difference. He also referred to the decision in Hays Business Services Limited v Raley 1986 1 EG LR 226. That case dealt with fire fighting equipment in relation to the business of storage of sensitive materials and looked at both parts of the similar head provision in the Plant and Machinery Rating Order 1960. He was only concerned with the first part. He submitted that it was plain that the Tribunal had not accepted that the fire equipment was caught by the first part although it had gone on to exclude it under the second part.

For completeness, he also referred us to the decision in Shell v Assessor for Fife 1990 SLT (Lands Tr) 90 at 98K. That case turned on the Valuation (Plant and Machinery) (Scotland) Order 1983 (SI 1983 No. 120) (hereinafter the "1983 Regulations"). It had been a matter of concession that the fire protection equipment in that case fell under a provision which might be taken to be similar to the first part of Class 2 in the 1994 Regulations. The issue related to the terms of the second part as expressed in the 1983 Regulations. He submitted that the case had no direct bearing on the present. In any event the relevant part of the Regulation had been changed.

In relation to the security he submitted that we should take the same approach. Mr Rushford's evidence was clear. The prime purpose was to protect the national interest. We should prefer that evidence to Mr Milton's theories of terrorists' preferences.

In response, Mr Currie submitted that the question was essentially one of the proper interpretation of the Regulations. They were not happily expressed and it had to be doubted whether they had attained the clarity expected by the Wood Committee. They had to be read as a whole. The appellants' attempt simply to substitute "protection from fire" for the word "services" was misleading. Various items were described as "services". Some of them simply did not fit in that way. Plainly the scheme of the provisions of Class 2 was to contrast protection of land and buildings on the one hand and protection as part of the manufacturing or trade processes on the other. Mr Haddow had not attempted to do so. His whole argument was fallacious.

The fire pumps, mains, hydrants and monitors brought a supply of water to each parcel of land. This was a service to the land. Thereafter, use of the service could be made for plant and indeed persons. Monitors and sprinklers were directed at manufacturing or trade processes. t was perhaps more difficult to say that these were for land or buildings. On the other hand the vast majority of detectors were in buildings. They could not be described as part of the manufacturing operations or trade processes. He did not resist Mr Haddow's assessment of the facts and the priority to human life. However the construction of the Regulations under which that was relevant, was simply wrong. This also applied to the site security equipment. The fence was plainly a service to the land. It prevented access to the land.

Decision

The key phrase in the head provision of Class 2 of the 1994 Regulations is the test expressed as "used or intended to be used mainly or exclusively in connection with". In Mr Haddow's submission that test is applied to the question of whether the particular service is a service to land or buildings. His approach has the support of the decision in Monsanto plc v Farris and is consistent with certain observations in Hays Business Services Limited v Raley. However, we accept Mr Currie's submission that this interpretation is inconsistent with the obvious scheme of the two parts of the head provision and that it is difficult to apply to all the various services. The alternative interpretation is that the test is directed simply at the question of whether particular plant is service plant; the reference to land and buildings being simply part of the description of the service.

The head provision takes as its starting point individual pieces of equipment as specified in Table 2. The first question to be asked is whether a piece of equipment falls within the list of items specified in the Table. It seems to us that the next question is whether that piece of equipment is used or intended to be used mainly or exclusively in connection with any of the services as defined. The answer to this question will, in most cases, be straightforward because of the nature of the description in the Table. However, the question is posed and, in our view, must be answered expressly or implicitly.

If the question is explicitly posed and answered at the stage of establishing that the particular plant is service plant, it can be seen that there is nothing in the terms of the head provision which positively requires it to be posed again as a test of the relationship between the service and the land. If it is accepted that one function of the test is to determine the connection of the plant with the service, the real issue of interpretation is whether it has a further role to play as a test of the relationship between the service and the land and buildings. The distinction can be seen in the second part of the head provision where the connection of the plant and machinery with the service is expressly subject to a "used in connection" test and a variation of that test is repeated in determining the relationship of the service with the object.

The first matter to consider is the natural use of language and order of the words. The express question posed is not whether the service is mainly or exclusively to land or buildings. The question is whether a particular piece of equipment is used in connection with specified services. The services are referred to as "services to the land or buildings". It appears to us to be a perfectly normal use of language to say that services are provided to a building when, on examination, the building can be seen to have these services. The fact that the primary purpose of having a service of protection from fire was established on the evidence in the present case as being to protect people rather than land or buildings is not, in our view, inconsistent with a description of that service as a service to the land.

Implicit in Mr Haddow's submission is a proposition, either that there is no specific test of connection with the service for listed pieces of plant, or that, having determined that a particular piece is used mainly or exclusively in connection with, the service, the same test of use "mainly or exclusively" is again to be applied to determine whether the particular service is "to" land or buildings. However the Regulations do not expressly provide a distinct second question of this nature. There is only one question to be used in connection with the test. It is, no doubt, a composite question but we find no clear requirement to treat the descriptive part of it as if it stood alone.

The scheme of the Regulations does require that any particular piece of plant has first to be identified as "specified in Table 2". The Table does not simply list types of equipment, it lists them by categories which correspond in name to the categories of services set out in the head provision. By giving the listed items headings categorising each list as a specific type of service, the Regulations undoubtedly tend to encourage an approach to the first part of the head provision which omits any test of connection with services. If individual pieces of equipment have to be tested as to their relationship with the category name before applying the test under the head provision, it is certainly arguable that the function of the head provision cannot be to determine whether a particular piece of equipment is connected with services. That connection has already been made by use of the category description. Accordingly the function of the test must be solely to deal with whether the service is mainly or exclusively "to" the lands or buildings.

However, although the use of such categories in the lists does open this argument, the category names do not in themselves provide a test of the connection between the particular equipment and the service. We consider that on plain reading of the head provision there is a test applied in it. We see no practical difficulty in proceeding by way of preliminary view that a particular piece of equipment falls within the list in its appropriate category and then going on to apply the substantive test set out in the head provision. The category names provide no more than a preliminary classification.

It may not be not easy to find examples of pieces of equipment which would be "specified" in the sense of being listed under a heading without it being fairly clear that they were intended to be used mainly, if not exclusively, in connection with the named service. However that does not, in our view, change the head provision. The fact that there is a straightforward answer to an apparently straightforward question does not justify an inference that the question itself must be intended to have some different meaning.

It may have to be accepted that, in Mr Currie's words, the Regulations are not "happily" expressed. It may be somewhat pointless to have to identify an item in a list according to its connection with a service because of the categories under which items are listed, and then go on to apply a separate test of that same connection. However, it can be done and it does not lead to any absurd result. The listing is simply indicative.

It is, of course, necessary to determine whether the service fits the description of a service "to land or buildings". If this is regarded as an aspect of identification of the services, the question envisaged can be a comparatively straightforward one. "To what is the service supplied?" or "where is the service supplied?" are questions which would produce the same answer. In relation to St Fergus, the various plots of land are provided with a high pressure water supply from the 16 inch main which can be used as necessary from time to time for whatever purpose the land itself is used for. It is clear that it is intended to be used solely in connection with the service of protection from fire. That is a service which can properly be described as a service "to the land". Nothing in the choice of the word "to" covering all the services, seems to us to be clearly indicative of an intention to require a test based on some more elaborate investigation of ultimate purpose or benefit. The head provision can be read as providing a straightforward and, normally, easily answered test to be determined by regard primarily to the physical facts. A service can be described as a service to land or buildings if it is a service installed or available in, on, or at, the land or buildings.

This approach is consistent with the provisions of the second part of the head provision. If the primary question is whether a particular piece of equipment is mainly used in connection with "fire protection" (or "heating" or "cooling" etc), no difficulty arises in recognising the need for the second test excluding such equipment when it is mainly or exclusively part of a "manufacturing operation or trade process". On the other hand if the first part is to be answered posing a test based on the ultimate purpose of the service, the need for the second part is hard to identify. It is difficult, though perhaps not impossible, to figure a case where the purpose of a service could be found to be mainly in connection with buildings in the sense contended for by Mr Haddow and also to be mainly part of a manufacturing operation or trade process.

This interpretation is also consistent with the usual approach to the various other services specified. For example, we do not understand it to have been suggested that the question of whether a particular piece of equipment is used in connection with the water supply to a building requires consideration of the beneficial use of the water within the building. The same can be said of heating, cooling, lighting, drainage and, protection from theft. In relation to most, if not all, of the services listed, a test based on whether the main purpose was to benefit the buildings as opposed to some wider purposes such as health, comfort or safety of human beings, might have the effect of taking all such services out of rating. We cannot accept that this was the intention and nothing in the language compels such a construction. An interpretation which fits all the services is preferable to one which puts protection from hazard in a separate category.

There is no doubt that the interpretation on which Mr Haddow based his submission is fully supported by the authorities to which he referred. The decision in Monsanto plc v Farris (VO) shows a clear acceptance of the test of connection being applied to a provision equivalent to the 1994 provision. The case involved the English 1989 Regulations which can be seen to combine elements of the 1983 and 1994 Regulations. The head provision followed the 1983 Regulations in making specific reference to each of the services and its particular relationship with the heritage but followed the established English practice of identifying the individual pieces of plant or machinery by reference to a list. It is clear that the case cannot be distinguished on the basis of any differences in the Regulations. It is therefore necessary to look closely at the reasons for the decision.

It may be observed that it is not clear from the report exactly which items of equipment were there in issue. The main witness is said to have accepted that there were "external hydrants and underground mains on site". The context of that reference suggests that no issue arose in respect of these items. If so, the result of the case may have been broadly similar to that which we propose. Be that as it may, we are of course concerned simply with the approach taken to the Regulations.

It seems clear that resolution of the conflicting positions in the Monsanto case did not require the Tribunal to carry out any analysis of the 1989 Regulations (beyond that necessary to accept that under the Regulations the question was a matter of fact to be determined on the evidence without assistance of any presumptions). The summary of evidence shows that the witnesses for the appellants stressed the primary purpose of the fire protection equipment as being safety of the public and avoidance of the potential consequences of fire to human life, health and property on and off site. They did give positive evidence that the equipment was to protect against fire consequent upon a manufacturing process but nothing in the decision was said to turn on this. The summary of the Valuation Officer's evidence does not disclose any direct reliance on the words of the Regulation. The evidence was, however, described as "lengthy" and it is obvious that the summary could not reflect it all. His main argument was summarised as follows: "As he concluded that the system at the works was to be regarded as " landlord's plant" he said it followed that it was installed for the protection of the hereditament" .It is narrated that in cross- examination it was put to him that "protecting non-rateable plant, personnel, raw materials and others off site [all of which he had accepted as purposes] was not mainly using the system to protect the hereditament, because the predominant use was protecting things which were not part of the hereditament. His reply was that this was correct in money and people terms but not correct in rating terms".

From the summary of submissions we can see that counsel for the Valuation Officer put the question posed by the Regulations as, "is its use or intended use mainly or exclusively in connection with protecting the hereditament?" He contended that protection of the hereditament from fire was the main or exclusive use albeit with the wider protection to persons or property which was a consequence of that use. This submission does not attempt a distinction between a test of connection of particular plant with the service and a test of the relationship of that service with the heriditament. Counsel for the appellants did not require to consider any such distinction. He said that it had been accepted that the fire equipment was to protect the entire works and everything and everybody within it and property and persons nearby. He posed the relevant question as " is the protection of the hereditament the predominant purpose of those purposes".

The decision was expressed to be a matter of fact based on preference of the evidence of one of the ratepayers' witnesses who had said that the primary purpose was to ensure the safety of the public. That was accepted by the Tribunal as the answer to the question posed on behalf of the Valuation Officer. It is accordingly clear, that the case was not seen by the Tribunal as raising an issue of interpretation. The conclusion was based on assessment of the competing evidence presented. The decision clearly shows acceptance of an approach which required assessment of purpose on a broad basis, but it does not represent a considered view on a disputed issue of construction.

Mr Haddow also sought support from the decision of the Lands Tribunal in Hays Business Services Limited v Raley. That case turned on the provisions of the Plant and Machinery (Rating) Order 1960, which for present purposes can be accepted as raising the same issues as the 1994 Regulations. In that case the relevant part of the judgment of the Tribunal Member was in the following terms: "In my judgment, the fire fighting equipment, like the heating plant and the dehumidifiers, is on the hereditament primarily to protect the material that is stored there. Even if it were to be found that this could only be done by protection of the building and therefore that that was the main use of the equipment, it would nevertheless not be included within the Schedule because it was there expressly for the purpose of the trade process being carried on".

The Tribunal found it unnecessary to deal with the first part of the head provision having regard to the conclusion reached on the basis of the second part. If a clear answer to the first part had been required, the Tribunal might well have taken a practical approach. If protection of the material required protection of the building, the latter would be the main use of the equipment albeit that the ultimate purpose was to protect material. This case does not goes as far as the Monsanto decision. The Tribunal was looking at the use of the service not purpose. We accept that it does appear to apply the "used in connection" test to the relationship between the protection and the item being protected. However, it is reasonably clear that the real issue in that case was whether protection from fire could be described as a trade process.

Neither Monsanto nor Hays provides authoritative analysis of the possible approaches to interpretation of the relevant provision. Accordingly, although we would be reluctant to differ in any way from an established English approach and do not lightly reject an interpretation which has been accepted without apparent concern by the Lands Tribunal, we conclude that the question of proper interpretation of the Regulations remains open for us.

Assistance in interpretation may properly be sought in the history of the Regulations. As has been said, the 1994 Regulations replaced the 1983 Regulations. It appears that the intention behind the change from the 1983 Regulations was harmonisation and it is, therefore, also relevant to note that the Scottish Regulations of 1994 are in terms similar to the English Valuation for Rating (Plant and Machinery) Regulations 1994 (hereinafter the "1994 English Regulations"). We are aware, of course, that the 1994 Regulations followed the Wood Committee Report referred to above. That is stated in the Explanatory Note to the Regulations and reference to the Wood Report was made by counsel and by various witnesses. The intention of harmonisation is clear from the Explanatory Note. We are aware from the Report itself that the Committee proposed no change to the substantive effect of the 1983 Regulations. However, we heard no submission that the Report should be used as a direct aid to interpretation of the 1994 Regulations and we have not attempted to use it in that way.

There are various differences between the layout of the 1983 and 1994 Regulations, explained in part by the amendment of section 42 of the 1854 Act by the Local Government Etc (Scotland) Act 1994 but mainly due to adoption in 1994 of the approach of setting out lists of items of plant in place of the broad approach of the 1983 Regulations. This seems to have been taken from the 1989 Regulations but was, in any event, well established in English practice.

Regulation 3 of the 1983 Regulations provided, in effect, that "lands and heritages" included "all machinery, machines, tools, appliances or plant in or on the lands and heritages used or intended to be used wholly or mainly in connection with the heating, cooling, ventilating, lighting or draining of, or the supplying of water to, the lands and heritages, or the protection of the lands and heritages from fire". The inclusion was expressly subject to a further provision that such items were not included "if used wholly or mainly in connection with heating, cooling, ventilating, lighting, draining, supplying water, or protecting from fire is so used in an industrial or trade process". The two part scheme of the Regulation is similar to that of Class 2 of the 1994 Regulations

We consider it clear that the thrust of the test under Regulation 3(1)(b) of the 1983 Regulations was to see whether the particular piece of equipment in question was used or intended to be used wholly or mainly in connection with services. The relationship of the various services was expressed by use of prepositions naturally appropriate to each. There was no specific test of connection with the heritage. The provision left little room for doubt. For example, if the equipment specified was mainly used for heating and the lands and heritages were heated, no question would be likely to arise as to whether the service was mainly "to" or "for" the lands and heritages as opposed to personnel. We think it untenable to suggest that the references to the supply of water "to" and protection "of" the lands and heritages from fire, warranted any different approach under that Regulation.

Of course, equipment used in connection with a service would not be rateable under the 1983 Regulations if it was used in an industrial or trade process. This would be a straightforward test in relation to the heating, cooling, ventilating, lighting and draining and the supply of water. Where these functioned as part of the process it would normally be on a regular basis and the absence of any reference to "intended to be used" would be unlikely to have any significance. In Shell v Assessor for Fife the Tribunal held that the omission of such a reference was fatal in respect of protection from fire. There is, of course, no such omission in the 1994 Regulations and we accept Mr Haddow's submission that this case takes us no further. It does seem to us that the concession that equipment intended for protection from fire fell within the first part of provisions of Regulation 3 (1) of the 1983 Regulations could hardly have been withheld.

The very fact of a change of Regulations is indicative of an intention to change. In interpreting the 1994 Regulations we cannot derive direct guidance from the 1983 Regulations. Normally an intention to make a substantive change in effect can be implied from any change in wording. In the present case, however, we consider it appropriate to have in mind the reference to harmonisation which we find in the Explanatory Note. It need not be assumed that such change in wording is necessarily indicative of intention to produce significant change in substance. However, it is appropriate to look closely at the differences in the first part to see whether any apparent contrast throws light on proper interpretation of the 1994 Regulations.

An obvious change is that the broad reference to "all machinery etc" has been replaced by the detailed lists of specific items of equipment set out in Table 2. This reflects the approach taken in the English Regulations. As we have said, an argument is open that as the various headings in Table 2 show that the purpose of the itemised pieces of equipment must first be identified before the head provision is addressed, it is at this stage that the connection with the service is defined. We have expressed our conclusion that, as the headings themselves provide no positive test of connection, a further test is not unreasonable. We do not accept that the use of category headings in the list is indicative of a positive intention to change the substantive effect of the first part of the provision.

Another change is the use of the expression "services to" with the term "services" separately defined in place of the explicit listing of services with prepositions appropriate to their particular relationship with the land. This does have the effect of placing an emphasis and perhaps a strain on the word "to". However, it does not appear to us that this change in layout of the substantive provision is indicative of an intention to create a new test of purpose.

There is also a change in that the 1983 Regulations refer to protection of the "lands and heritages" from fire whereas the reference in 1994 is to the "land or buildings of which the lands and heritages consist". This change suggests that a distinction is to be drawn between lands and buildings on the one hand and plant on the other. That was not the argument advanced in this case which was directed at comparison between protection of lands and buildings and any other purposes. We think that the distinction must be recognised although the intention behind the reference to "consists" is not free from doubt. The land and heritages would normally consist not only of land and buildings but of land, buildings, and rateable plant.

In summary, we do not find that the comparison gives any indication of a change in meaning. In particular, by comparison with the 1983 Regulations, there is insufficient indication of intention to change to justify an inference that the role of the question posed by the first part has changed from determining whether a particular piece of equipment was mainly used in connection with a service to determining whether such service was truly to land or buildings. The order of words has not changed.

Comparison of the provisions of the English 1989 Regulations and the two sets of 1994 Regulations appears to show an intention to change the Scottish Regulations to match the English. Regard must be had to the 1989 Regulations. However, it was submitted that the 1994 Regulations had not changed the 1989 Regulations in any relevant respect. We have discussed the approach taken in the Monsanto case which turned on the 1989 Regulations and in which the test of connection was applied in relation to the relationship of the service with the hereditament. As we have explained, we do not find that persuasive. It is unnecessary to analyse these Regulations further.

When considering possible alternative statutory interpretations it is appropriate to consider the practical implications. In our society the saving of life will always be a matter of supreme importance. We doubt whether the priority of saving life could have been intended to be used as an adequate test for rating purposes and we would be slow to accept that a statutory provision led to that result. The 1994 Regulations are not limited to lands and heritages occupied for industrial or manufacturing process. Fire protection equipment in, say, a school or hospital is commonly described in terms of being a service to the building. It would, however, be difficult to argue that the primary purpose was protection of the bricks and mortar and not pupils or patients. There is nothing in the Regulations to compel assessment for rating purposes by reference to the ultimate benefit to be derived from the service. We do not accept that the reference to service "to land or buildings" necessitates comparative assessment of ultimate purpose on the wide basis adopted in Monsanto and attempted in the present case.

A particular example of the difficulties which arise in a rating context from attempts to examine the ultimate beneficial purpose of particular services arose in connection with the security fence. It was tacitly accepted by both parties that the main purpose of the fence was to prevent access not by casual trespassers but by seriously motivated intruders. We were invited to consider whether terrorists would be more likely to focus their attention on the control room, a building, or on some other part of the plant. It was suggested that their main motive would be to hold the country to ransom and not simply to put the plant out of action or create a major incident. Beyond being urged not to allow our assumed knowledge of James Bond films to influence our decision we heard no evidence on this matter. We think it unlikely that the legislators intended the assessor to require to place himself in the shoes of an international terrorist in order to determine whether or not a particular piece of plant or equipment was to be included as rateable. The approach we prefer avoids this problem. It is plain, of course, that difficult questions may remain as to the application of both the first and the second parts of the head provision. These ought to be determined by reference to practical circumstances.

For all these reasons we prefer Mr Currie's approach to this matter. In particular we accept the assessor's submission that the pump, mains and hydrants are part of a service supplied to land or buildings. However, although we are not confident as to the intention of the draughtsmen in their reference to "lands and buildings" as opposed to "lands and heritages", we have to conclude that parts of equipment which provide a service which is physically limited to items of plant - rateable or not in themselves - are not included by the terms of the first part of the head provision. There was little direct evidence on this point and if the items in issue had seemed to be of major significance in monetary terms we would have been attracted by Mr Borthwick's suggestion of giving parties a further opportunity to agree. However, Mr Milton did expressly address the matter. He thought a distinction could be drawn in relation to the sprinklers and the monitors. We confirmed for ourselves at inspection that this was, broadly speaking, a justifiable distinction. It may not be entirely accurate but we accept it as sufficient for present purposes. There was, of course, no attempt on behalf of the appellants to contend that any part of the fire protection equipment fell under the provisions of the second part of the head provision and we do not require to consider that matter.

On the construction we prefer, the site security equipment also falls to be included in the assessment. The fence is obviously used in connection with protection from hazard. It has no decorative function. It stops potential intruders from getting on to the site. It keeps the subjects secure. The "security and alarm" equipment is in the same position. We find no warrant in the words of the Regulation for a test which requires us to substitute for this direct approach, any further test than that specifically provided in the second part. We conclude without difficulty that the security service is not part of the operations or processes carried on at this site.

In terms of the agreement of parties, effect of our decision in relation to the security fence and associated alarm equipment is that the agreed N.A.V. of £71,000 falls to be added to the assessment. In relation to the fire protection system £130,360 was agreed as a total figure. The figures shown for "Fire monitors" and "sprinklers" in the appellants production 30A were £2,095 and £6,700 respectively. There was no dispute about the figures as such and the effect of our decision is that these sums should be deducted from the total leaving a sum of £121,565, called £121,500, to be reflected in the total NAV in respect of fire protection equipment.

F. Skirts

It was not disputed that the knock-out drums V6002 A-D were high pressure vessels which would fall to be rated under Class 4 of the 1994 Regulations if the cubic capacity of each exceeded 400 cubic metres. It was agreed that if the "skirt" attached to the base of each vessel was to be excluded from measurement, the unit would not exceed that figure (the vessels were in the region of 320 cubic metres each). The sole question for our determination was whether the skirts were covered by the express exclusion from measurement of "foundations, settings, supports and anything which is not an integral part of the item" in terms of the provisions of Class 4(d).

The vessels in question were high pressure steel containers designed to work as separators. They were cylindrical with a semi-ellipsoidal head and base. The base rested upon the top rim of the skirt which was described as being like an open-ended steel drum. The vessels were fitted with various nossels or inlet and outlet ports, and flanges.

Each could be described as sitting in the drum supported by the top rim. That rim was attached to the vessel by a weld. We were referred to a number of documents showing details of the specification, supply, and purchase of the knock-out drums. For the assessor, Mr Milton founded strongly on those documents as demonstrating that the specification showed the whole item as a unit which included the vessel, nossels and flanges and the supporting skirt. The whole required to meet certain test specifications. It required to be stiffened or braced for transport and testing. The skirt was attached to the vessel as part of the manufacturing process. Detailed specification of the weld was part of the specification of the whole item. In terms of the specification, testing of the pressure vessel could only be carried out once fabrication of the whole had been completed.

On site, the whole item was supported by mass concrete and piling. The skirt was surrounded by a brick shield for fireproofing. This shield was not part of the support system.

The purpose of the skirt was to hold the pressure vessel securely and at a suitable height. There was no evidence that the skirt contributed in any way to the functional strength of the vessel as a high pressure container. It played no part in the function of the vessel as part of the gas processing. It could have been replaced by a system of girders or by legs or a cradle of some sort.

The appellants' contention was that the skirt was simply a support. It was not conceptually different from a system of girders. On a proper construction of the 1994 Regulations it was unnecessary to go on to consider whether it was an integral part of the substantive item. It was covered by the exception relating to "supports". It was pointed out that in the 1983 Regulations (SI 1983 No. 120) the exclusion provided "foundations, settings, supports, and any other things not integral to it". The omission of the word "other" from the 1994 Regulations supported the submission that if a piece of plant was a support it was excluded without any need to consider whether it could also be described as an integral part of the substantive item.

In any event the skirt was in no sense integral to the function of the knock-out drum. The method of attachment was not important. It could easily have been a bolted flange. It could have been a system of steel girders.

Mr Currie submitted that the skirt was not simply a support, it was an integral part. He submitted that there was no significance in the omission of the word "other" from the 1994 Regulations. The relevant provision ought to be read as it stood and on the ejusdem generis principle. It was in a sense a reverse ejusdem generis. It was covered by the brocard, noscitur a sociis. In any event the drums and skirts were ordered, manufactured, tested and delivered as one. They were plainly integral within the meaning of the Regulation.

Decision

We are satisfied that the skirt functioned solely as a support for the vessels. This was not in dispute. We are also satisfied that there is no reason to read the list "foundations, settings, supports and anything which is not an integral part of the item" other than disjunctively: so that, if an item is properly to be regarded as a foundation, setting, or support, there is no warrant for going on to consider whether it could also be described as an integral part. We consider that this construction gains support from comparison with the provisions of the 1983 Regulations. The omission of the word "other" must have been intended to clarify or change the meaning. The 1983 provision might have been susceptible to the construction that "foundations, settings, and supports" were excluded only because they were not an integral part and would be included if they could be described as being integral. However the omission of "other" points clearly to the items as intended to stand alone in the list.

In any event we consider that the provision can appropriately be read as treating the listed items as an illustration of items which are not to be regarded as "integral". If an item is clearly distinguishable as a support it should not be regarded as integral for the purposes of the Regulations even if it might be described as "integral" in visual or constructional terms. If a particular part which provides support is an essential part of the function, difficult questions might arise as to whether it can properly be said to have a separate identity as a "support". .If, say, the drum had required flanges for strength such flanges would not properly be "supports" even if the drum was able to sit on them. Questions of degree might arise. No such questions arose here. The items under discussion were freely referred to as "skirts". There was no suggestion that they had a significant function other than as supports.

We are satisfied that the skirts are not to be included for measurement purposes and, accordingly, the knock-out drums do not fall to be included for rating purposes. Mr Milton pointed out that the skirts themselves would fall to be rated under the provisions of Table 3 which covers "foundations, settings, and supports". Mr Currie properly accepted that it was too late to deal with skirts generally in light of the formal agreement of parties. The skirts supporting V6002 A-D might not be covered by that agreement. However we heard no specific submission on the status of such skirts. The figures involved are comparatively insignificant. In the whole circumstances we consider it appropriate to exclude them from our consideration of value.

CONCLUSION

For all of the foregoing reasons we uphold the appeal and determine that the Net Annual Value and Rateable Value of the subjects is £2,723,000 arrived at as follows:

  £
Valuation excluding items in dispute: 2,250,000
Add
  Slugcatcher 240,500  
  Fire protection system 121,500  
  Lighting on steelwork 40,000  
  Security and alarm system 71,000  
  Units V6002 A-D nil 473,000
    NAV/RV = 2,723,000