Australia: NGERS Amendments – Property Industry Overlooked In New Emissions Transfer

Contents

• NGERS Amendments – property industry overlooked in new emissions transfer regime

• Reporting Transfer Certificates – How to transfer liability for reporting energy and emissions

NGERS Amendments – Property Industry Overlooked In New Emissions Transfer Regime

Owners of facilities will now have the ability in certain circumstances to take on responsibility for reporting emissions and energy data in lieu of their contractors, who would otherwise be required to report under the National Greenhouse and Energy Reporting Act 2007 (NGER Act).

The National Greenhouse and Energy Reporting Amendment Act 2009 (NGER Amendment Act), introduces a new concept of Reporting Transfer Certificates (RTCs) and a new legal test for 'financial control' in addition to 'operational control'.

The NGER Act has now caught up to the Carbon Pollution Reduction Scheme Bill 2009 (CPRS Bill) which includes the ability to transfer liability for acquiring and surrendering permits via Liability Transfer Certificates (LTCs). Importantly, however, the flexibility regimes under the NGER Act are not restricted to entities liable under the CPRS (such as mine operators and owners) and are available to entities in all industry sectors.

Since its inception, the 'operational control' test has come under intense scrutiny for its ambiguity and the fact that it commonly leaves contractors and facility operators with the regulatory burden of reporting. This outcome is not always appropriate given the propensity of many large owners and industry leaders to actively manage the energy performance of their own facilities, particularly in the commercial property sector.

While some owners and operators may now have some welcome relief, there are significant limitations in the proposed regime which are likely to prevent widespread uptake by a number industry sectors, particularly the commercial property sector.

How does the flexibility regime work?

In the following article ( read more here), Gadens Lawyers discuss in detail the mechanics and eligibility requirements of the RTC regime. In summary though, RTCs:

• are not limited to specific industry sectors or CPRS liable entities
• are temporary – the expiry date is 30 June 2011 (prior to the expected start date of the CPRS when the LTC regime takes over)
• can apply retrospectively from the date of issue
• only apply to facilities which exceed the 25kt emissions or 100TJ energy threshold under the NGER Act (Single Facility Threshold)
• only allow a transfer from operator (entity with 'operational control') to owner (entity with 'financial control') of a facility and not vice versa
• introduce a new test for 'financial control' to complement the existing 'operational control' test
• only apply to corporations and not individuals caught under the NGER Act
• require mutual consent from controlling corporations of both entities
• require the owner to be in a position to comply with the reporting requirements of the NGER Act and be able to access emissions and energy data from the operator (e.g. via contractual arrangements).

Flexibility for all NGER Scheme participants

In the Second Reading of the NGER Amendment Bill, the Hon Greg Combet, Minister Assisting the Minister for Climate Change said:

The approach in the Government's amendment requires the consent of both parties to the transaction, such as the mine owner and the operator, and this will become increasingly important as taking on the reporting obligation will be a precursor to taking on the CPRS liability. In addition, and importantly, the Government amendment is not industry specific to the mining sector. The bill provides other industry sectors with this increased flexibility, such as the commercial building sector.

While the LTC (and now the RTC) regimes were borne out of concerns from the mining industry in relation to CPRS liabilities, the Minister's comments highlight that the RTC regime is intended to benefit all industries (including property) and not just the mining and other CPRS industries.

Unfortunately, the RTC regime (in its current form) contains two significant limitations which will make it unlikely to provide the same level of flexibility to non-CPRS entities as will be available for CPRS entities. These limitations are explained below.

1. "Small" facilities excluded

Given the restriction of the flexibility provisions to 'large facilities' which meet the Single Facility Threshold, the Minister's statement that "the bill provides other industry sectors with this increased flexibility, such as the commercial building sector" is unlikely to be realised. This is because participants in many of these "other industry sectors", including the commercial property sector, are liable under the NGER Act due to the aggregating of emissions and energy consumption from their portfolio of small to medium facilities under the Corporate Group Threshold rather than the Single Facility Threshold.

For owners who wish to take on responsibility for reporting small to medium facilities in lieu of their contracted facility operators/managers, the new flexibility provisions remain out of reach.

In the commentary to the exposure draft of the CPRS Bill, the Government foreshadowed that a facility that is transferred under an LTC will count towards the Transferee's aggregate data for the purposes of Corporate Group Threshold in the NGER Act, when amendments to the NGER Act are introduced. The Government has retracted from this position in the NGER Amendment Act without explanation.

While there may be a policy reason for this new approach, the restriction to large facilities is surprising given that the 'operational control' test (and its focus on contractors and operators) applies equally to all facilities irrespective of their emissions totals.

The Government (intentionally or otherwise) seems to have created a two-tiered system between entities caught by the Corporate Group Threshold (that do not have access to flexibility provisions) and entities caught by the Single Facility Threshold (that do have access to flexibility provisions).

2. Uncertainty post-2011

While a changeover in 2011 from RTCs to LTCs may be appropriate for CPRS entities, this does not account for entities that are liable under the NGER Act, but not covered by the CPRS Bill, which will include many participants in the commercial property sector.

The characterisation of RTCs as a temporary tool to be used in 'interim financial years' and their expiry upon the expected commencement of the CPRS, leaves industries such as the commercial property sector with an uncertain future in relation to reporting liabilities beyond 2011.

Establishing internal and contractual systems for NGERS reporting compliance is a significant and labour intensive task. Most entities would rightly be cautious of voluntarily taking on obligations under an RTC with the knowledge that the cost and effort may be redundant within three years (i.e. if contractors are again liable upon expiry of the RTC in 2011).

This uncertainty post-2011 may seriously undermine the attractiveness of the NGER flexibility provisions to participants (many of whom have been pressing for such amendments since last year).

A simpler and more effective approach would be to have only one transfer certificate regime (without expiry) under the NGER Act applying to both non-CPRS entities and CPRS entities. Only minor amendments to the CPRS Bill would then be required to ensure that holders of an RTC over a facility with direct emissions covered by the CPRS are required to comply with additional requirements such as permit acquittal.

Support for a strict legal compliance approach

Owners and operators who have determined or agreed 'operational control' in respect of facilities they own or manage should consider the appropriateness of engaging the new flexibility regime to ensure compliance with the NGER Act.

The flexibility regime and in particular the introduction of the concept of 'financial control' (as opposed to 'operational control'), also reinforces the need to carefully consider where reporting obligations sit between owners and operators in the context of relevant contractual arrangements.

Where to from here?

The new flexibility regime may be seen as a meaningful concession from the Government that the 'operational control' test as a one-size-fits-all test can lead to impractical results. However, for the reasons identified in this article, if the new flexibility regime in the NGER Act is to provide effective and widespread assistance to non-CPRS entities, it requires further consideration and amendment.

The creation of a two-tiered system is not consistent with the objectives of the Government to reduce the reporting burden on industry and streamline greenhouse and energy reporting requirements (see the NGER Streamlining Protocol which can be found here).

For the commercial property industry in particular, the desire for owners to take responsibility and liability for the emissions and energy performance of their own facilities is clear. Energy efficiency in commercial buildings is receiving a great deal of attention from owners and other industry participants alike. One only needs to consider the new emissions trading scheme for energy efficient buildings that has recently been tabled by Greens Senator, Christine Milne, and the Federal Government's proposed mandatory disclosure of energy efficiency ratings for commercial buildings and tenancies (both of which are designed to apply to building owners).

The NGER Act should provide both legal certainly and appropriate flexibility to participants to allow for the emerging regulatory landscape regarding energy efficiency in the commercial building sector and to reflect current and projected market practices and trends.

A better and more effective flexibility regime would go a long way to resolving the issue without the need for substantial overhaul of the 'operational control' test under the NGER Act. It would also allow commercial entities to determine between themselves who is best placed to report without jeopardising the consistency and integrity of data collection and reporting.

Reporting Transfer Certificates – How to transfer liability for reporting energy and emissions

The National Greenhouse and Energy Reporting Amendment Act 2009 (NGER Amendment Act), introduces a new concept of Reporting Transfer Certificates (RTCs) and a new reporting transfer test that includes 'financial control' in addition to 'operational control'.

RTCs are limited in many respects and the practical implications of this are explained in the previous article (" read more here). This article explains the features of an RTC in more detail and the prerequisites for making an application.

Reporting Transfer Test

Eligibility for an RTC is limited to certain situations and can only be applied in relation to individual facilities on a case-by-case basis.

If the reporting transfer test is satisfied and the application is accepted by the Greenhouse and Energy Data Officer (GEDO) then the company that acquires the RTC (Transferee) must report the energy and emissions from the operation of the facility in lieu of the company with operational control of the facility (Transferor).

A Transferee may satisfy the reporting transfer test if:

1. the Transferor has 'operational control' of the facility
2. the Transferee has 'financial control' over the facility
3. the Transferee is a constitutional corporation and is registered under Part 2A.2 of the Corporations Act 2001
4. the Transferee and Transferor are not members of the same corporate group.

Financial control – how the new test works

The reporting transfer test introduces the new concept of 'financial control' into the NGER Act. The definition of financial control under s 22R is multi-faceted and can be met in a number of ways.

A transferee company will have financial control if any of the following conditions are met:

1. the Transferor operates the facility under a contract on behalf of the Transferee or on behalf of a joint venture or partnership which includes the Transferee
2. the Transferee is able to control the trading or financial relationships of the Transferor in relation to the facility
3. the Transferee has the economic benefits from the facility
4. the Transferee shares the economic benefits of the facility with one or more JV participants or partners in a partnership, but no other participant or partner has a share that exceeds the Transferee's share

The Bill also provides that when applying the financial control test 'regard must be had to the economic and commercial substance' of those matters set out above.

While the new 'financial control' test is designed to have broad application and most facility owners who contract out managerial and operational services to third parties should be able to take advantage of it, applying the test may involve fairly complex questions of corporate law. Entities with complicated ownership structures (such as trusts and joint ventures) should consider the test carefully.

Prerequisites for RTC eligibility

In addition to satisfying the financial control and reporting transfer test, eligibility for an RTC also depends upon satisfaction of the following criteria:

1. the Transferee must obtain the written consent of its controlling corporation and the Transferor's controlling corporation
2. the GEDO must be satisfied that the Transferee has the capacity and access to the information necessary for it to comply with its reporting obligations, if the RTC is approved. The Transferee must obtain a written statement from the CEO of the Transferor that such access and information will be provided
3. the facility must pass the Single Facility Threshold of 25 kt of carbon dioxide equivalent emissions or 100 TJ of energy consumed or produced.

Given the uncertainty surrounding the operational control test, many owners are already including clauses in contracts that require contractors to collect and collate relevant NGERs emissions and energy data. Such contractual arrangements should assist Transferees in satisfying some of the above requirements.

Special features of RTCs

The NGER Act only provides for RTCs to be issued during the 'financial interim years' (ending 30 June 2009, 2010 and 2011) however they can apply retrospectively over the previous financial year.

It is therefore open to parties to apply now for an RTC to transfer liability for reporting on the financial year ending June 2009 (even though the deadline for registration has already passed and the deadline for submitting reports is less than three weeks away).

RTCs should be issued within 90 days after application.

An RTC holder in relation to a facility must report the greenhouse gas emissions, energy consumption and energy production from that facility in the same way as the reporting provisions apply to entities with operational control over facilities. Similarly, records regarding the facility to which the RTC relates must be kept for 7 years.

The same civil penalties (including cumulative daily penalties for ongoing non-compliance) apply for RTC holders as for reporting entities that have operational control.

The Regulator will separately publish scope 1 and scope 2 GHG emissions and the energy consumption of the facility, unless the RTC holder establishes that such material contains trade secrets or is otherwise commercially sensitive. This should enable easy identification of potential CPRS liabilities (if any) arising from a facility under an RTC.

Decisions of the GEDO in relation to RTCs will be capable of review by the Administrative Appeals Tribunal upon application.

An RTC holder will not be able to transfer the RTC to any other entity. RTCs can be surrendered if both parties agree or they can be cancelled if particular criteria are no longer met. All RTCs (unless cancelled or surrendered) will remain in force until 30 June 2011.

Importantly, RTCs will be disregarded for the purpose of determining whether the Corporate Group Threshold has been met.

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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.