Tretton Review Group minutes: 9 August 2018

Attendees and apologies

Attendees

Membership

• David Tretton, Meeting Chair
• Kenny Hunter, Hunter Hydro
• Alastair Kirkwood, Scottish Assessors Association
• Fiona Grant, Heriot-Watt University

Secretariat

• Ian Storrie, Scottish Government
• James Messis, Scottish Government

Also in attendance

• Stephen Hutt, Green Highland
• Bill Gillies, Scottish Assessors Association

Items and actions

1. House-keeping and previous conversations

The group discussed recent updates that Ms Forbes would be taking over responsibility for non-domestic rates.

The group agreed that any case made in the report must have regard for fairness of the system – it should also set out any special case for Hydro.

The Hydro sector clarified their case that the mechanistic process of rates has an adverse effect on them.

The group discussed whether ‘de-rating’ was a viable option, given that it is no longer a practicable method of reducing liability. The group agreed that it may not be a realistic option.

The group considered the rating system more broadly and the potential case to be made for Hydro to be treated exceptionally:

• If the high rateable values are not addressed then Hydro will form no part of any green energy strategy going forward
• Would investors decide to invest in other renewables, rather than Hydro

2. Comparisons with other sectors

The group considered whether there were comparable cases with other sectors from an outcomes perspective.

The group discussed other sectors. While other sectors might not pay 25% of turnover in rates, it is high in other sectors. However, it was pointed out that rating is not based on revenue and is in fact a tax on property; the Receipts and Expenditures approach merely uses this information to work back to a hypothetical rental value.

The group agreed that FITs are requiring action and discussed whether ROCs may not need a relief.

The group discussed the inherent difficulties in making a broader comparison with other sectors, which can introduce extraneous variables for comparisons. That said, an exceptional case is necessary from the Hydro sector to evidence why they deserve special treatment over other sectors (booksellers, retail, schools, hospitals etc...).

The group discussed relief and whether there was a stronger case for a relief on the basis that any legislative change would require consideration of the broader consequences and a broader comparison between Hydro and other sectors to justify that exceptional case.

3. Reliefs and exemption

The group discussed some of the challenges associated with a relief and highlighted that state aid de-minimis caps the relief for larger schemes. It was pointed out that the larger schemes are the only ones earning higher incomes.

The group discussed whether a relief can capture the nuisance between the different treatment of ROCs and FITs and the years of the schemes.

The group discussed some of the finances of a typical Hydro scheme:

• The lease period is typically 40 years
• Funding works over a 17 year period – 20 years
• The first 5 – 7 years are not most challenging

The group discussed whether rates were not set at the right level because of a lack of information provision by the sector. They questioned whether or not the sector should be treated as a homogenous group and if any relief should explore different outcomes.

Action: SG to explain whether state aid extends to shareholders

Action: To work with the Hydro sector using valuation data and certain relief examples and taking that information to SG state aid colleagues to see if varying examples of ownership are in breach.

The group agree the need to discuss reliefs and the combinations of reliefs to show what percentage of the problem it solves.

Action: To find or create a spreadsheet which broadly represents the sector in order to construct analysis

The group discussed some of the supporting agreement for relief. A relief is more easily flexible to changing economic circumstances.

The group agree that the aim is to help those in need of help, and not those that are not struggling.

4. Treatment of buildings in ‘Lands and Heritages’ and ‘Plant and Machinery’

The group discussed Land and Heritages valuation and the extent that exclusion from Plant and Machinery would mean that subjects are rateable as Lands and Heritages. They considered whether a buried penstock would be rateable in this circumstance.

The group discussed whether or not formal QC advice would be required if exemption became the final conclusion of the group.

The Scottish Government inform the group that it is the intention that the status quo relief will continue until the outcome of the review group.

Action: Ian to seek advice from SGLD on exemption and valuation under Lands and Heritages

The group agreed to move on from the discussion of valuation and consider how a relief might work.

The group looked at the anonymised spreadsheet of 92 Hydro schemes with reliefs applied, factoring in the de-minimis cap.

The group agreed the need to factor in other reliefs (subject to de-minimis) and shared ownership.

The group agree to consider the maths of Kenny’s spreadsheet, and the varying scenarios in the logic of the spreadsheet.

The group agree to have another spreadsheet representing, capacity, load factor and FIT date, in order to find optimal application.

Action: The Hydro sector to provide specific schemes that have different ownership structures.

5. Impact of changes to valuation methodology

The group discussed the importance of considering the investors perspective based on profitability in the planning any relief.

The group looked at Bill’s comparison of RVs, across sector, and generating capacity, which shows that for the most part RVs are higher for Hydro.

The group considered the various reasons why an investor would invest and highlighted that Hydro may be a greater investment after 20 years and in the long-run.

It was pointed out that in this instance rates is really a tax on the capital cost. The group highlighted the jump in rateable value from 500kW to 1000kW on Hydro FITs.

The group agree that if a relief were to be applied then it would need to give a level playing field in the sector.

The group considered how much rental evidence would be required for a valuation methodology change. It was pointed out that it would require more than 30 plus arm’ length rentals. However, the change in methodology might not be useful.

The group agreed to meet again later in the month.