Eversheds comments on legal issues in the CRC

The Carbon Reduction Commitment (CRC) is just one of a range of issues relating to climate change that will affect Local Government in the long run.

But it may well provide the 'burning platform' required to make local authorities act now in relation to environmental projects.

In climate change, the government has taken a strong policy lead and introduced legally binding targets for cuts in 'green house gases' emissions under the Climate Change Act 2008 (the target of 80 per cent cuts by 2050). The Act is a world leader in setting legal targets for a country for the first time.

It also introduces the infrastructure on which a low carbon economy will be based - carbon accounts, carbon budgets, limits on the amount of carbon that can be credited to the carbon account etc. There are also duties on the Secretary Of State, such as to report to Parliament, to bring forward policies to help deliver the programme and so on.

So that is the primary legislation in relation to climate change but below that there need to be provisions to implement this new system - hence the introduction of the CRC.

At best, the CRC will be confirmation of your local authority's 'green' credentials and may bring you financial gain too; at worst, it could be a PR disaster with criticism of poor use of scarce resources due to bad planning and substantial financial cost. Which will it be for your authority?
Coverage

There are a number of basic principles on which CRC is based. These are:

  • it is an 'organisation based' scheme


  • qualification depends on use of electricity during 2008


  • the qualification level is 6,000 MWH


  • it applies to the bill payer ie the counter-party to the energy contract


  • that must be a separate legal entity (subject to rules on groupings)


  • As mentioned above, it is primarily an organisation based scheme. Accordingly, local authorities will be covered if they pass the threshold of 6,000 MWH of half hourly electricity during 2008.

    If you use between 3,000 MWH and 6,000 MWH then you need to register with the scheme. There is, of course, a chance that the limits will be changed later to include smaller users of energy in the full regime.

    Local Authorities and similar bodies

    So major councils will be covered by the scheme but not the smaller districts - it generally equates to an energy bill of roughly £500,000 per annum.

    The rules are based on separate legal entity and, of course, local authorities are statutory corporations since the Local Government Act 1972 led to the reorganisation of Local Government in 1974.

    Police authorities are independent bodies too, whose members are individuals (where they are councillors, independent members, magistrates, or whatever). So if a police authority is a counter-party to the energy bill, it will be covered by the CRC.

    In relation to fire authorities, different provisions apply. County fire authorities are part of the local authority and so are covered as a county council (where that county council itself qualifies). Fire and rescue authorities and metropolitan fire and rescue authorities have separate legal status and so are covered in their own right, where they qualify.

    Companies

    Local authorities can have interests in companies and this causes a problem - on the one hand a local authority owned company has separate legal status (and therefore should be subject to a CRC in its own right under the basic principles), but on the other, it is wholly owned by a local authority (which will also be covered under the regime). So special rules apply.

    The consultation paper Consultation on the Draft Order to Implement the Carbon Reduction Commitment (DECC March 2009) discusses the issue of 'parents and subsidiaries'. Companies in the same group are generally grouped together for the purpose of the scheme and under the highest parent organisation.

    To look at this we need to see s1162 of the Companies Act 2006, which includes a definition and for these purposes; for example a party that holds the majority of the voting rights or a majority share holding.

    It is important to note that these tests will be applied in CRC to 'both public and private sector organisations' not just those required to report under the Companies Acts.

    So a local authority wholly owned Teckal company will be covered with the local authority. It will not be considered separately and will appear in the performance table as part of its parent's local authority.

    The situation may differ in special arrangements such as PFI deals (see below ) or joint ventures.

    Other situations

    There are one or two other exemptions to the rule - where entities are grouped together for policy reasons. The best example of this is in relation to schools.

    So far as contractors and subcontractors working for local authority are concerned, they are counted under their own auspices and not as part of the local authority or the body for whom they are working.

    Schools

    Originally the position was that schools will be separate from their local authority. However, Hilary Benn MP announced in July 2008 that they would be added in with their parent local authorities. The reason that he gave in relation to this is that the public sector should show 'leadership' in carbon reduction and schools have an important role to play in this.

    So local authorities are now responsible for emissions in schools in their area, including Academies and City Technology Colleges.

    The way it does this is by the mechanism of 'responsible person' and 'associated person'. The responsible person is the local authority and the associated person is the school. Essentially, responsible persons have to include the emissions of their associated persons in their footprint and subsequent participation in the regime.

    This gives some local authorities a problem as it all comes down to relationship - or a lack of it - with the schools in some areas.

    On a recent LGA event, one contributor in the workshop on schools run by the Department for Children Schools and Families indicated that there were no problems at all in their authority; whereas another indicated that schools would not allow access to their local authority in relation to arrangements for DECs, which are themselves a legal requirement!

    The government is trying to alleviate fears with the 'reasonable assistance duty' ie the duty applicable to associated persons in relation to data that they hold. This means that government expects associated persons to give the data to the responsible person in a timely manner. It is worth looking at the definition of reasonable assistance in the draft regulations (part 2 of schedule 15). This says:

    "A person must provide the responsible person with all such assistance, including the provision of information or records, as it is necessary to enable the responsible person to identify fully and discharge, the requirements imposed on the combined participant".

    Worryingly, this is interpreted as giving the information as a minimum once a year, which is woefully inadequate.

    Software available in relation to automatic meter reading can provide data ranging from real time (ie where you can actually see the clock ticking) down to meter reading periodically eg monthly or quarterly. Annual readings are really no good to anyone.

    The school rules do not cover independent schools. They will be covered on their own account if the school uses sufficient energy or the school is grouped with a parent organisation that qualifies in its own right.

    PFI Arrangements

    Special rules apply in relation to PFI too. Of course, many PFI projects involve the creation of an SPV (Special Purpose Vehicle) exclusively to deliver the project e.g. highways, waste management or housing projects.

    So we have another company in which the council has an interest. If it does not have an interest in the SPV, then the company is a private company like any other and may be covered on its own account.

    If the council does have an interest in the SPV, then the level of ownership needs to be ascertained. Where nobody owns more than 50 per cent of the company, its emissions will not be aggregated with the parent organisation and the company stands on its own.

    So if a local authority owns 75 per cent to the PFI or joint venture company, then it counts as the local authority's emissions. If the company is 50 per cent owned by the local authority it does not. Anything less than 50 per cent and it does not count either.
    Exclusions from CRC

    A number of different situations need to be covered here. No doubt more will come out of the woodwork as the scheme develops.

    Joint Purchasing Organisations

    The position here is that where you are procuring on behalf of someone else, your role is not covered. So the YPO or ESPO is procuring energy supplies for local authority members this is not counted. But their own footprint is covered e.g. warehouse operation, running their own offices etc.

    Purchasing organisations are separate legal entities and so they would be covered for those latter matters under their own account, rather than as part of the local authority.

    Households and Tied Accommodation

    The proposal is that energy use emissions from households are not covered. The reason for this is that other policy areas apply e.g. the Carbon Emissions Reduction Target, whereby energy companies subsidise works to households, such as cavity wall insulation and loft insulation.

    However, there is a distinction between ordinary households and those emissions resulting from the provision of accommodation for work, education, religious, medical or recreational purposes.

    So a park cottage or a school caretaker's house would be covered, according to the Government as that accommodation is given exclusively for work purposes. This is so, even though it is used exclusively for domestic living i.e. no work is actually done on the premises as such.

    This is where the local authority is the counter-party to the energy contract (i.e. it pays the bill) in order to meet the qualification. This raises an issue as to whether putting the bill in the caretaker's name would bring that scenario outside of the CRC?
    Energy Generation by the Local Authority

    This one is a little complicated but basically the position is as follows. If a local authority is generating electricity from renewable sources, it depends whether ROCs are being claimed or not.

    If the Council does have a renewable energy facility, then one of three situations will apply:

  • no ROCs are claimed and the Council uses the energy for its own purposes;

    If so, there are no emissions associated with this energy

  • no ROCs are claimed but the energy is exported to the national grid.>/li>

    Then the Council can claim energy credits at the grid average emission rate.


  • ROCs are claimed by the Council.


  • Here it must be reported as electricity consumption by the local authority using the grid average emission rate, which is calculated by the government.

    This means that each local authority with such a facility needs to do a financial analysis to see which of the options is the most beneficial to the authority before deciding whether to claim ROCs or not.
    Landlord and Tenant Issues

    Again, landlord and tenant issues gave the government policy choices. Generally, energy used is influenced or controlled by the person using the property and so they should be covered by the regime.

    But the Government decided in the basic principles to apply the rule of who is the counter-party to the energy contract. This means:

  • where the landlord is part of the CRC organisation and is counter-party to the contract, then the landlord will be responsible under the CRC for the emissions of its tenants


  • where the tenant is a counter-party to the contract and is a CRC organisation, it will be responsible for its own emissions.


  • In practice, in multi let offices, it will be the landlord and so no administrative burden will be created for small businesses. In the retail sector, occupiers of large stores are likely to be the counter party to the energy contract themselves and so would be covered.

    In legal terms, this raises a number of issues. If the lease is an old one, there will not be clauses included which require the tenant to play ball and cooperate (same position as schools).

    So where the local authority is the landlord eg Sheffield City Council which owns numerous buildings in its city centre, it will need to seek amendment of those leases. Where the local authority is the tenant, it is likely that the landlord will seek to amend the lease in relation to its occupation.

    Eversheds has produced a green lease tool kit together with other lawyers under the auspices of the Mayor of London to help with this situation.
    The League Table

    This gives the whole process further spice!

    It was intended to introduce both financial and reputational incentives to perform under the CRC. Financial incentives are via penalties/bonuses; reputational incentives are via press and PR reporting of performance.

    There will be a single league table for all 5,000 organisations in the scheme. The proposals are based on a number of key objectives, such as simplicity, auditability and transparency.

    There are three metrics that support the league table:

  • the absolute metric


  • the early action metric


  • the growth metric.


  • 1. The Absolute Metric

    The absolute metric is the key one the annual emissions relative to average emissions performance achieved over the previous five years.

    2. The Early Action Metric

    This is relevant to the early action phase and requires an authority to get the Carbon Trust Standard and install AMR (Automatic Meter Reading) equipment.

    3. The Growth Metric

    This is different from the public sector compared to the private sector. For the public sector the indicator is revenue expenditure and this should cover circumstances such as reorganisation of authorities.

    Different weightings apply in relation to the metrics:

  • year one of the scheme it is 50/50 between AMR and the Carbon Trust Standard


  • year two it is 60/20/20 for the absolute metric, early action metric and growth metric


  • year three, the ratio is 60/20/20 again.


  • Then after the completion of the introductory phase, the ratio changes from 75/25 for the absolute metric and the growth metric and the early action metric falls away.

    Bonuses or penalties are available at plus/minus 10 per cent, per year for the first five years, giving a total of plus/minus 50 per cent. These have been set for a five year period but it has already been mentioned that they will be 'reviewed' thereafter and may go up further. The publication of the league table will take place in October each year.
    Risks

    There are number of risks involved in the CRC. The obvious ones are the local authority does not appreciate the importance of the regime and does not do its preparatory work. Secondly, the local authority leaves it too late to do the work and then the preparatory work is too onerous (for example data collection cannot be undertaken in time or it is not possible to procure AMR). If so, the legal compliance nature of CRC which comes to the forefront.

    There is too much detail to go into here but some highlights emphasise the issues. An example is the failure to register for the CRC incurs a £5,000 fine, and then £500 per day thereafter. Failure to provide the footprint report and incurred a £5,000 fine and £0.05 per ton of carbon per day after that. Incorrect reporting incurs a £40 fine for each tonne of CO2 emissions incorrectly reported. All of these are civil penalties.

    However there are also criminal penalties in operation eg falsifying statements for which the penalty is up to three years imprison and up to a £50,000 fine.

    The system will be operated by the Environment Agency, which is itself, of course, a public body which is subject to duties to act properly and in accordance with public law.

    If the Environment Agency does not operate the system properly, then it can be judicially reviewed.

    There will also be an appeal process, including the right of appeal in relation to your league table position.
    Miscellaneous Issues

    Awareness is obviously key. Very few people in local government seem to have woken up to this yet.

    Energy managers and carbon directors may have, but what about the leaders and chief executives?

    The early action phase is easy it is like an examination where you know how the marking system works! Why you would not want to go for the Carbon Trust Standard or insert automatic meter reading?

    But that is just the start. What you need then is a five year rolling plan:

  • early stages include "low hanging fruit" e.g. insulation


  • mid stages include projects passing the Marginal Abatement Curve test ie is it cost effective as opposed to the effects of the CRC regime


  • longer term projects where the costs of implementing them may be higher than £12 per tonne, such as those involving renewable energy generation.


  • If you get that right, the benefits could be substantial.

    At a recent event by the Local Government Association the energy manager from the LEP gave an example of two hypothetical London boroughs

  • London Borough A - paid £779,000 for allowances and received back £1.254m


  • London Borough B - paid £1.38m for its allowances and received back just £705,000.


  • Moreover, local authority A gets £48,000 from the sale of surpluses allowances it did not need; but local authority B has to pay £236,000 more for extra allowances it had not predicted. So the first council is up by over £0.5m in CRC whilst the second council is down by over a £1m. This emphasises how important financially CRC will be and brings it into sharp focus.
    Conclusions

    The regime is a bit complex but gets clearer over time. Now is the time to influence it as the government is consulting on its final terms.

    It is the traditional 'glass half empty/glass half full' argument. Whilst complying with CRC and will be onerous, it could also bring substantial savings in energy use. It could also help the local authority sector prioritise renewable energy projects.

    Finally, it will help save the planet! Now that is got to be worth it, hasn't it?

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