Tretton Review Group minutes: May 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

Items and actions

1. Site visit

The group visited two hydro sites outside Kenmore courtesy of Major James Duncan Millar.  The visits investigated all aspects of plant and machinery (P&M) at each of the two sites.  Acharn was built in 1992 and accredited under the ROC regime.  Remony was built in 2013 and is accredited under the FIT regime.

The Group expresses their gratitude to Major Millar for his hospitality.

2. Remit

The Group agreed to consider wider  issues –such as the application of the the method of rating valuation -  beyond the application of the current Plant and Machinery regulations as set out in the original remit.

Due to the site visit overrunning, the Group agreed that any agenda items not discussed at the meeting be deferred to the next meeting scheduled for 18 June 2018.

3. SAA briefing paper for Small Hydro Plant & Machinery Review 

Alastair Kirkwood introduced the paper and the Group discussed each section in turn.

The Group noted that valuation methodology and rateable value is based upon a hypothetical annual rental value for the property not the turnover or income of the actual occupant.

The Group noted that the  rating method of valuation applied to the land and heritagesdoes not relate directly  to the actual rent that may be paid to occupy and operate on the land f

The Group noted that:

• unlike rates relief, rating valuation methodology  does not lend itself easily to short-term policy shifts
• there are questions as to whether it is appropriate to change the valuation rules with a focus on the outcome for one particular sector or whether small hydro should be considered  within the proposed wider Plant and Machinery Review
• exemption from rate liability  has been applied to other sectors such as micro-hydro and district heating
• state aid considerations remain a critical consideration for any proposals
• consideration may need to be given to the impact of any proposals on harmonisation

The Group agreed that this review is seeking to consider the longer-term outcome and that the current 60% relief is an iterim short-term solution.

The Group generally accepted that the Assessors are applying existing P&M Regulations and the receipts and expenditure  method of valuation in accordance with the current legislation

Action: The Group noted that the current legislation was proving problematic for the economics of hydro generation and agreed to consider this further at a subsequent meeting.

The Group noted that the preference of the hydro sector was for a longer term legislative solution rather than a continued relief. 

The Group discussed the treatment of individual rateable vs non-rateable components of hydro plant and machinery.

Dam or Weir   

If it is designed to be permanent, then it is rateable.

The standard for measuring this is:

• Size
• Weight
• Attached to land

Some turbines may not be a structure - a grey area.

Most tanks are concrete and are therefore designed to be permanent

Pipeline-Penstock

The Group discussed comparisons with pipes which are rateable in other industries (oil).

The hydro sector contend that a pipe in hydro generation means something different to a ‘normal’ pipe in other sectors in that it has a core purpose beyond transporting something from A to B.

The hydro sector contend that defining the penstock/pipe is a key issue of this review.

RV and exemptions and Wood Committee

The Group noted that the Wood Committee deemed that all structures should be rateable. The Wood Committee set out that with ‘Tools of the Trade’, exemptions had a limit, and that limit was ‘ if they were in the nature of a building or structure’.

The Group noted that the Wood Committee may not have specifically considered Hydro

The Group noted that a pure application of the R&E method to hydro via the adopted scheme may result in valuations that may not be  wholly proportionate in all cases.  On this basis, the split of the landlord/tenant’s share of the divisible balance  has been adjusted slightly in favour of the tenant where any doubt existed as to the rateability of the P&M .

The Group noted that the Penstock, Turbine and Connections represent around  90% of the rating valuation. If the Penstock and Turbine are excluded from the valuation, this falls to around 55% of the valuation.

The group discussed:

• whether exclusion of these items on their own would be a sufficient measure to alter the economics of the sector
• why these items might merit exclusion

The Group discussed the valuation methodology and exemption and if they reflect the value of ‘land and water rights’ and whether it is consistent with the considerations that land owner’s make when determining rent.

Action: The group agreed to consider the hypothetical impact of applying a Cost/Contractors test approach to some sample Hydro plants including the two that were visited.

The Group noted that not all hydro schemes are impacted in the same way and not all hydro schemes will be facing the same level of financial difficulty.

Action: Therefore, the group agreed that it may be necessary to identify the parts of the sector worst affected and to consider if a more targeted solution may be worthy of consideration.

The Group discussed whether adjusting the existing P&M regulations (Class 1) in favour of hydro will have impact on the assessments, as a significant  proportion of the P&M is in the nature of a building or structure.

4. Options discussion

The group identified three core options going forward, each with their own pros and cons, and State Aid considerations.  These options will form the basis of future meetings.

1. Reliefs

The Group agreed to explore how a continued relief might work in practice although it was noted that there were questions about how effective this was approach would be from an investor point of view and the impact of state aid – both to the recipients and to other sectors

2. Exemption of plant and machinery

The Group discussed whether such a change would require primary legislation 

The Group discussed the challenges of variation of application and the need for robust grounds to apply any exemptions and the role of State Aid in such an approach.

3. De-rating

The group also discussed the option of ‘De-rating’ - which operates with everything continuing to be rated, however, there is a percentage reduction. This does not

change the application of rules for rating.

The Group discussed whether such a change would require primary legislation 

The Group discussed the challenges of variation of application and the need for robust grounds to apply any exemptions and the role of State Aid in such an approach.

Action: The Group agreed to consider a detailed breakdown of the application of a full R&E method to hydro at a subsequent meeting.

Action: The Group agreed to determine why and how micro-hydro was exempted from rates liability.

Action: The Group agreed to seek clarity on state aid rules for de-rating and exemption

Action: To consider all 3 options and set out the pros and cons of each:

• Benefits
• Risks
• Challenges
• State aid

Action: The group agreed to explore the impact of existing and differential application of P&M regulations on Hydro valuations.

The Group agreed that further work was need to justify any decision which would see the Hydro sector being treated differently.

The Group discussed the impact of tariffs and grants on Hydro generation and how that has evolved over time.

Action: The Group agreed to discuss the principles underpinning the operation of the energy market and renewable energy subsidy regime at a subsequent meeting.

Action: The Group agreed on the need for State Aid experts to provide advice on any evolving recommendations.

Action: The Group agreed that additional SAA colleagues would be invited to the next meeting to share expertise on the valuation of Hydro and other renewables P&M.