After ten years of dispute with the Scottish Assessor, the appeal of Old Faskally & Others against the rateable valuations (RVs) imposed on hydro sites by the Assessor, has received a third and final verdict from the Tayside Appeal Committee.
Business Rates
Small Hydro vs the Assessor
In an attempt to resolve the problem of excessive business rates for small hydroelectric schemes, there have been three separate committee decisions – because the Assessor has twice appealed the committee’s verdicts at the high court in Edinburgh (the Lands Valuation Appeal Court).
In each case, the Assessor’s appeals were referred back to the Tayside Committee for a decision. Last year, a four-day hearing took place in Perth, resulting in a verdict, which found that key components of a hydro scheme – turbine, generator and penstock – were not rateable for the purposes of valuation.
If applied to the hydro sector as a whole, these so-called “three zeroes” would result in a correction of rateable values, which have hitherto seen small hydro sites hit by RVs at an average 240% those of small wind power (ie wind sites financed by the same Feed-in-Tariff scheme).
The Assessor will not seek to appeal the Old Faskally decision, leaving the way clear for the more-than 200 appeals still outstanding over the 2017 valuations to be heard at the Lands Tribunal for Scotland.
This is the court that will settle the business rates dispute on behalf of the Small Hydro sector in Scotland, where 80% of British hydro schemes are located, while also setting “highly persuasive precedent” for the rest of the UK.
Alba Energy, which represents independent hydro operators in Scotland, has represented the case since 2013 and is currently selecting which test cases should be heard at the Lands Tribunal.
The court will dictate the date of the hearing, the result of which will set down terms of valuation for small hydro in law, not open to reinterpretation by either assessors or ratepayers.
While this will apply to all future valuations, the 2023 valuations have already been set, and only those sites which have submitted appeals will be eligible for rebates.
With new and complex regulations in place to make the appeals process more difficult, Alba Energy is offering advice to scheme operators who wish to submit appeals (now known as “Proposals”) against the 2023 valuation.
Current legal advice is that a hearing at the Lands Tribunal is feasible before the end of the year.
Small Hydro takes the Assessor to court
What is the legal case?
2017 was the crisis year for the Small Hydro sector, when the Assessor increased Rateable Valuations (RVs) for Small Hydro at an exorbitant rate, producing valuations that were an average 240% those of wind power – and out of all proportion to any normal business.
Most, but not all, hydro schemes currently benefit from reliefs, which the hydro sector won from Scottish Government at precisely the rate hydro was being disadvantaged by comparison to wind power: namely, 60 per cent. These reliefs are set to run until 2032, though there is no certainty that a new Scottish Government will adhere to commitments made by Kate Forbes, the previous finance secretary.
More problematically still, as the Feed-in-Tariffs comes to an end, hydro will be exposed to the full impact of exorbitant RVs, rendering many schemes economically unviable.
These are the RVs that Alba Energy is seeking to correct in court. The aim is simple: for hydro schemes to pay business rates at a fair and proportionate level, rather than an absurd and excessive one. Small Hydro requires a secure economic base in both the short and long term, so that the industry continues to be viable after the ROC and FiT support schemes have come to an end.
The dispute with the Assessor over the 2010 “Old Faskally” case has been protracted and arduous, but it resulted in a hearing, last year, at which the Assessor was held to forensic account. Out of this process, Alba has developed a robust case, sufficient to bring to the Lands Tribunal over 2017 (and, hence, all subsequent valuation years).
Ratings legislation and valuation methodologies are complex, but the argument ultimately comes down to a simple dispute over the percentage of a hydro scheme that is rateable for the purposes of valuation.
Alba has long argued – supported by the findings of the committee – that it should be 25%. As a result of last year’s committee hearing, concessions were made which brought that figure up to 29%, which still produces fair RVs.
The Assessor continues to insist on a 55% rate, which produces extreme and destructive RVs, out of all proportion to other renewable energy generators. In an attempt to intimidate the hydro sector, the Assessor threatened further increases, suggesting that it is in his power to bring that percentage up to 80% or more.
The question is: which parts of a hydro scheme are rateable?
Setting aside matters of more minor detail, the key components (and costs) of the hydro “machine” are the turbine, generator and penstock.
The argument developed by the hydro sector, and backed up by ratings legislation, has always been that these are not rateable.
It is an extraordinary irony of the case is that – for both the 2010 and 2017 valuations – the Assessor also deemed them “not rated” for his valuations.
He said as much in both the high court and to the Scottish Government’s “Tretton Review” of hydro RVs.
Subsequently, however, the Tayside Assessor sought to deny this, changing his position and claiming that almost all of a hydro scheme may be rated.
The hydro case developed by Alba is based on principle and law. A straightforward and credible interpretation of Plant & Machinery legislation establishes that turbine, generator and penstock are not rateable.
These have come to be known as “the three zeroes”.
If these components continue to be excluded as a matter of principle, the fundamentals of the case will have been established in law in favour of the hydro sector as a whole.
If it can be further established before the court that installation of the penstock does not include additional structural components (other than thrust blocks), a successful outcome of the case would ensure that most of the civil works are non-rateable, too.
This way, rateable valuations for a hydro – using the Assessor’s own methodology – come out at a sensible and proportionate rate.
Schemes that have submitted appeals for 2017 and 2023 valuations will be reimbursed accordingly and RVs for future valuations will be determined by the same methodology.
The committee’s decision
The Tayside Committee, which has been considering the case of “Old Faskally & Others” for the last ten years, has consistently supported this position.
They continued to do so in principle after Lady Dorrian at the high court (LVAC) instructed them to determine “which, if any, parts of the plant and machinery from the end of the intake chamber to the end of the tailrace are rateable in terms of Class 4” of the plant and machinery order (PMO).
The committee’s final decision, as contained in the attached table, is a breakdown of rateable or non-rateable components of a hydro scheme, with associated percentages.
For the third time in ten years, the committee has decided that penstock (or “pipeline”) and turbine and generator are all non-rateable.
In other words, the committee has maintained “the three zeroes”.
In this third decision, however, they made one curious change. Without explanation, they have decided that 60% of the “installation costs” of the pipeline are rateable.
This is curious, because class 4 of the PMO states that only those elements that are “in the nature of a building or a structure” should be rated.
Alba Energy agrees with the committee that thrust blocks are structures, but does not agree with them that “beds” are rateable, or that there are any other kinds of structural supports in the installation of a pipeline. This is a matter of fact. Aside from thrust blocks, designed as supports not intrinsic structural components, penstocks are laid in a trench in the ground and covered over with the same material that has been excavated to create that trench, leaving no other structure that could be deemed rateable.
This will be the argument taken to the Lands Tribunal.
Alongside the “three zeroes”, James Findlay KC, counsel for the hydro sector, will demonstrate, as simple matters of engineering fact, that – thrust blocks aside – there are no other structures in the installation of a pipeline (in a typical hydro) which would fall to be rated.
If both the penstock and its installation costs are exempted from valuation, the rateable percentage of a hydro scheme comes out at 29%, which produces reasonable RVs at an average 10% turnover in line with the 2017 RVs for wind power.
This is how Small Hydro will take the case – developed through the “Old Faskally” hearings – to the Lands Tribunal.
Proceeding to court
There are currently around 200 appeals “sisted” (suspended pending a hearing) at the Lands Tribunal. In other words, more than a third of all small hydro schemes in Scotland have appealed the 2017 valuation.
Test cases are currently under consideration. When selected, these will then be “unsisted” and Small Hydro will take its place in the queue for court proceedings.
It is possible that a hearing will take place before the end of the year.
Getting the correct RVs
The end result being sought may be summarised as follows:
- Small Hydro RVs averaging 10% of turnover (equivalent to wind in 2017).
- 2017 RVs to be corrected for all hydro schemes under appeal.
- 2023 RVs to follow suit.
- Terms of valuation for Small Hydro established by court ruling for the long term.
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