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CRC: Environment Agency issues guidance on how the scheme applies to PFIs
Practical Law UK Legal Update 3-503-2527 (Approx. 6 pages)
CRC: Environment Agency issues guidance on how the scheme applies to PFIs
by PLC Environment
| Published on 07 Sep 2010 • UK |
The Environment Agency published guidance, on 6 September 2010, on how the CRC Energy Efficiency Scheme (CRC) applies to private finance initiatives (PFIs).
Speedread
The Environment Agency published guidance, on 6 September 2010, on how the CRC Energy Efficiency Scheme (CRC) applies to private finance initiatives (PFIs).
Background: the CRC
Terms that appear with capital letters in this update are defined in Practice note, CRC Energy Efficiency Scheme: PLC glossary and abbreviations.
The CRC Energy Efficiency Scheme (CRC) is a new emissions trading scheme for the private and public sector in the UK.
The deadline for registering as a Participant in Phase 1 of the CRC or making an Information Disclosure is 30 September 2010. Failure to register or to make an Information Disclosure is subject to civil penalties.
For more information about:
- The CRC in general, see the CRC Survival Kit.
- How the CRC applies to private sector organisations, see Practice note, CRC Energy Efficiency Scheme: impact on corporate structures.
- How the CRC applies to public sector organisations, see Practice note, CRC Energy Efficiency Scheme: impact on public sector organisations and Practice note, CRC Energy Efficiency Scheme: impact on universities.
Environment Agency guidance on PFIs
On 6 September 2010, the Environment Agency (EA) published guidance on how the CRC applies to private finance initiatives (PFIs). In particular, the guidance is intended to explain how to determine the organisational structure, and assess responsibility for energy supplies, in order to decide how the PFI should register for the CRC.
How should a PFI participate in the CRC?
In a PFI arrangement, a dedicated company is usually set up to deliver the services that are the subject of the PFI. This is a special purpose vehicle (SPV). The EA guidance says that a primary consideration in determining how a PFI will participate in the CRC is whether the SPV will participate:
- As part of the Group of one of the private sector organisations that form part of the PFI consortium; or
- Individually.
In order to decide whether the SPV forms part of one of the consortium members' Groups, you need to apply the definition of "Parent Undertaking" and "Subsidiary Undertaking" in section 1162 of the Companies Act 2006 (CA 2006). These tests set out in section 1162 of the CA 2006 are sometimes known as the "control tests". The most common way of meeting the control tests is where a Parent Undertaking holds a majority of the voting rights (usually because it owns over 50% of the shares) in the Subsidiary Undertaking. There are, however, other ways to meet the control tests, so not holding the majority of voting rights is not conclusive that an organisation is not the Parent Undertaking. For more information, about the control tests, see Practice note, CRC Energy Efficiency Scheme: impact on corporate structures: Groups of Undertakings.
If none of the control tests are met (so that the SPV does not have any Parent Undertaking) then, the SPV will have to participate in the CRC as a standalone organisation, provided it meets the Qualification Criteria in the Qualification Year of the relevant Phase of the CRC. For more information about the Qualification Criteria, see Practice note, CRC Energy Efficiency Scheme: overview: Qualification Criteria.
Responsibility for energy supplies
The EA guidance says that another primary consideration in determining how a PFI will participate in the CRC, is whether the SPV is responsible for energy supplies.
For more information about when an organisation will be responsible for an energy supply under the CRC, see:
Application of the supply rules to PFI projects
The EA guidance says that energy supply arrangements differ significantly between PFI projects. In some PFI projects:
- The SPV procures the supply of energy and "supplies" that energy to the public authority that is running services from the asset (for example, a school) that is the subject of the PFI arrangement.
- A facilities manager (FM) (either a hard FM that is responsible for building fabric and energy management systems or a soft FM that is responsible for procuring services such as cleaning, waste management and catering) procures the supply of energy and "supplies" that energy via the SPV to the public authority.
- The public authority procures the supply of energy to the assets delivered by the PFI.
The EA guidance also says that the land ownership arrangements in PFI projects vary widely and that it is aware of the following types of arrangements:
- The SPV owns the land and buildings that are the subject of the PFI and the public authority is granted a lease to occupy the buildings for the duration of the PFI contract. The SPV could either have purchased the land from the public authority or have been required under the terms of the PFI contract, to source and acquire suitable land itself.
- The public authority is the freehold owner of the land and grants the SPV a leasehold interest in the land in order to allow the SPV (and third parties) to carry out its responsibilities under the PFI contract. The SPV then grants a sub-lease back to the public authority to allow it to occupy the building and carry out its statutory functions.
- The public authority is the freehold owner of the land and buildings and it grants the SPV (and others such as an FM) a licence to enter the premises in order to carry out their contractual obligations.
The EA guidance says that in most PFI arrangements an obligation to procure energy supplies to premises occupied by the public authority is placed on a private sector entity. Often, this obligation is passed on to other private sector entities. For example, an SPV is obliged by the PFI contract to procure a supply of electricity to a hospital and the SPV passes this obligation to a soft FM that the SPV contracts to procure a variety of services to the hospital.
The EA guidance says that despite the existence of a chain of contractual obligations to procure energy supplies, the energy will still be supplied direct to the premises. For the purposes of the CRC, the chain of reimbursement of the energy supplies will be used as a suitable proxy for the use of the underlying physical energy supply.
For example, if a public authority reimburses a private sector organisation in the PFI consortium in respect of 100% of the energy supply, the public authority will be deemed to have received 100% of the energy supply. The EA guidance says that where the public authority reimburses a private sector organisation for a percentage of the energy supplies, the public authority will only be responsible for the percentage of the energy supplies that are reimbursed. Therefore, if a public authority were to reimburse a private sector organisation that procured the energy supplies (whether that is the SPV or an FM,) for 90% of the energy supplies, the private sector organisation that procured the energy supplies would be responsible for the remaining 10% unless there was some other form of onward supply to a third party. In which case the 10% would be treated as an Unconsumed Supply in relation to the private sector organisation.
The EA guidance says that the reimbursement does not need to be a discrete reimbursement by the public authority in relation to the energy supplies in order for the public authority to be deemed to have received the energy supplies. So, if the PFI project documents provide for a less overt form of reimbursement (for example, the costs relating to the energy supplies are included in the unitary charge that the public authority pays to the SPV to cover the use of the PFI assets and provision of services over the life of the PFI contract), the public authority will still be deemed to be responsible for the energy supplies covered by the reimbursement.
PFI contracts often incorporate mechanisms for sharing risk in relating to energy price, energy volume fluctuations or energy efficiency targets. The EA guidance says that, for reasons of administrative simplicity, any such mechanisms should be ignored when determining responsibility for energy supplies under the CRC.
The EA guidance sets out three examples to illustrate how the supply rules will be applied to the PFI sector.
Example 1: A builder/soft FM receives and pays a utility company for energy supplies
The EA guidance describes this as the default scenario.
In PFI projects, usually the builder will enter energy supply contracts with the utility company and pay for the resulting energy supplies during the build phase and the soft FM will enter energy supply contracts with the utility company and pay for the resulting energy supplies during the services phase. (Sometimes it is the hard FM who is responsible under the PFI documents for energy procurement; in those cases the references to soft FM and hard FM in this example can be swapped round.)
In the build phase the builder will consume the energy supplies for its own use (that is, to construct the facility that is the subject of the PFI arrangement). Therefore, during the build phase, the builder will be responsible for those supplies under the CRC (assuming the builder or its Group as relevant, meets the Qualification Criteria in the Qualification Year of the relevant Phase of the CRC).
In the services phase, the soft FM will be required to procure and pay for energy supplies to the public authority. Some of these energy supplies may be used by the SPV, the soft FM and the hard FM.
The public authority will usually reimburse the soft FM for 100% of these supplies (whether as part of the unitary charge or as a separate payment) with the payment flows usually passing through the SPV and the SPV passing the payment on to the soft FM.
Where the public authority reimburses the SPV for 100% of the energy supplies, the EA guidance says that 100% of the energy supplies will be deemed to be the energy supplies of the public authority and the public authority should account for them under the CRC even where the SPV and soft and hard FMs are using some of the energy supplies to fulfil their contractual obligations to the public authority. The SPV and the soft and hard FMs, can claim these energy supplies are an Unconsumed Supply in relation to themselves, even though they are actually using some of the energy supplies to fulfil their contractual obligations to the public authority.
Paragraph 13 of schedule 1 to the CRC Order (SI 2010/768) relates to Unconsumed Supplies. It does not specifically deal with PFI situations. It is assumed that the rationale for the EA guidance fixing the public authority with responsibility for energy supplies that are actually consumed by the SPV or soft or hard FM is that this approach reflects the fact that the consumption of energy supplies by these parties is for the purposes of the PFI arrangement even if the various organisations to the PFI arrangement are separate organisations.
Example 2: An SPV receives and pays a utility company for energy supplies
More unusually, the SPV may be required under the PFI contract to enter a contract with a utility company for the supply of energy to the public authority and to pay for those supplies. Some of these supplies may also be used by the SPV itself and the soft and hard FMs.
The SPV occupies land and buildings under a licence from the public authority
The EA guidance says that the public authority will usually reimburse the SPV for 100% of the energy supplies whether as part of the unitary charge or as a separate payment.
Where the PFI documents provide for reimbursement of 100% of the metered energy supplies, the public authority will be responsible for those supplies and should account for them under the CRC (assuming it meets the Qualification Criteria in the Qualification Year of the relevant Phase of the CRC).
In relation to the SPV, the energy supplies will be Unconsumed Supplies and it will not be responsible for them under the CRC.
If the PFI documents provide for reimbursement of less than 100% of the energy supplies (whether because the SPV is deemed to be using some of the energy supplies or otherwise) the public authority will be responsible under the CRC only for the percentage of the energy supplies that is reimbursed. The SPV will be responsible under the CRC for the residual percentage.
The SPV has granted a lease or sub-lease to the public authority to occupy the land
Where the SPV has granted a lease or sub-lease to the public authority to occupy the land or buildings, the SPV will be the public authority's landlord. Landlords cannot claim that energy supplies that they procure on behalf of their tenants are Unconsumed Supplies, so the SPV will be responsible for the energy supplies regardless of the reimbursement by the public authority tenant for such supplies. For more information about this exception to the Unconsumed Supply rule, see Practice note, CRC Energy Efficiency Scheme: overview: Landlords and tenants.
Other types of public private partnership other than PFI
Other types of public private partnership (PPP) (including build design finance and operate (BDFO) agreements) are not specifically mentioned in the EA guidance. Presumably, the approach for these other types of PPPs will be the same as for PFI arrangements.