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INTRODUCTION
21. The Environment Act 1995 sets the legal framework for SEPA to make charging schemes to recover the costs incurred in carrying out its regulatory functions. The Act makes clear that the charges should be sufficient to meet the revenue and capital costs incurred by the Agency and that within that constraint the amount of the charge is at the discretion of Scottish Ministers.
22. To ensure that value for money is maintained across all of its activities, SEPA has an overall business efficiency target which is set out in its annual Corporate Plan. SEPA currently envisages year-on-year efficiency savings of 3% of its total running costs.
23. A long term charging scheme for the new IPPC regime will take a couple of years to develop and require more detailed consultation; it is not likely to be in place before March 2001. At this stage, therefore, this consultation paper invites comments on the principles which should underpin the scheme, considers briefly the broad format it might take and outlines the process for its development. Later in the summer, SEPA will be consulting on the detail of a transitional scheme to cover the period from 31 October 1999 to March 2001.
CHARGEABLE COSTS
24. Charges are set in accordance with the principles set out in the Treasury’s Fees and Charges Guide, which include the following:
a. Charges should normally be set to recover the full cost of the service.
b. Charges should not be set deliberately to recover more than the cost of the service.
c. Charges must reasonably be related to the costs of providing the service.
d. The amount recovered should include the total cost of all the resources used in supplying the service including the sum of direct and overhead costs such as superannuation, insurance, depreciation and cost of capital.
25. In accordance with these principles, the costs recovered by SEPA’s charging schemes include:
SEPA does not charge for the following aspects of its operations, the costs of which are met by the taxpayer:
PRINCIPLES UNDERPINNING THE SCHEME
26. The Scottish Executive would welcome views on the key principles and criteria which should underpin the cost recovery charging scheme, their relative importance and the balance between them. It is almost impossible to develop a scheme which meets in full all the desirable attributes. However, establishing some priority for these principles will help in developing the structure of the scheme and assessing the possible options based on the extent to which they meet each criterion. At the end of this section, there are some examples to help illustrate the extent to which the principles would be reflected under different, basic charging scheme formats.
27. Below is a list, in no particular order, of some of the attributes which a cost recovery scheme must or might include and particular issues which they raise.
a. Reflecting regulatory effort: establishing a link between the charge and the resources used in regulating an installation.
b. Recovery of all relevant costs: the charging scheme should recover the total cost of all the resources used in the process of regulation i.e. the sum of direct and overhead costs including superannuation, insurance, depreciation and cost of capital, and the cost of policy work, planning, research and technical guidance where it is related specifically to the regulatory effort.
c. Incentives to operators: the charging scheme could include an incentive element to encourage best practice.
SEPA’s Operator Pollution Risk Assessment (OPRA) scheme is an example of how an incentive might be provided. Such a system would provide the potential for charges to be lowered as operators lower their OPRA score.
Incentive charges would not lead to an overall increase in the total amount collected by SEPA, nor would the Scottish Executive want incentive charges to drive operators beyond what was justified on a cost/benefit basis.
d. Predictability: ensuring that operators are able to calculate in advance what they are likely to be charged and that adequate advance warning is given of changes in charges for the year ahead.
e. Transparency: providing a clear and visible route from the regulator’s costs to the calculation of charges for a specific installation, which will be understood by operators.
Transparency is important. Charge payers need to be clear about which costs will be recovered. When increases or reductions in charges are proposed there should be a clear explanation of the reasons. The Scottish Executive and SEPA are developing measures, separately from this consultation exercise, to improve the level of transparency and accountability across all of the Agency’s charging regimes to satisfy charge-payers’ requirements. Consultees are, nevertheless, invited to comment on the kind of information that they would like to see provided in addition to that already included in SEPA’s Corporate Plan and Annual Accounts and in the consultation papers on charging.
The Scottish Executive and SEPA’s proposals include:
f. Consistency: avoiding competitive distortions by ensuring that charges are consistent between sectors in the new regime and between those sectors phased in early and those phased in later and that the charge is consistent in the scope of its recovery with other environmental licence charges.
g. Equity: ensuring there is a correlation between the level of charge and the size, complexity and amount of pollution from an installation, including the possibility for lower charges where there is a reduced regulatory burden from the adoption of standard permit conditions.
h. Value and efficiency: ensuring that charges represent good value for money through a high standard of service from the regulator and that savings from improvements in efficiency are passed on to operators.
i. Simplicity: keeping administrative procedures on the part of the regulator and operator simple in order to reduce the cost of administration. For example, charges grouped into bands would be easier to administer than those levied to reflect the precise cost of regulating each authorisation.
j. Clarity: ensuring schemes are expressed in such a way as to be readily understood and interpreted equally by regulator and operator.
Examples of charging scheme formats
Example A: Flat rate
28. At its simplest, the charging scheme could consist of a flat rate for each regulatory process, that is, permit application, subsistence and monitoring, major permit variations, permit transfers and permit surrenders. The same rate for each process would apply regardless of installation size or the complexity of operations. Such a scheme would be similar to the current LAPC charging scheme and so may be useful as part of a more equitable scheme for installations under a certain size or complexity.
strengths: clear, simple, consistent, predictable for operator, small administrative cost
weaknesses: very inequitable, subsidisation of one operator by another, no reflection of regulator’s effort, little scope for incentives, less predictable for regulator.
Example B: Use of existing formats
29. The various installations which will be regulated under IPPC may currently be regulated under one or more different regimes, each with its own charging scheme. These are most likely to be the Integrated Pollution Control system (IPC), Local Air Pollution Control system (LAPC), Waste Management Licensing scheme (WML) or Water Discharge Consents scheme (WDC).
30. One option for IPPC charging, therefore, would be to develop a scheme with separate elements based on existing scheme formats but with some modification to take account of the new requirements of IPPC such as energy efficiency and site restoration. Operators’ charges would be derived from current scheme structures, determined by the type of installation which they operated. Installations which are not currently charged under any of the existing schemes, such as pig and poultry farming or food production, would be charged under the format which offered the best fit: for example, farming under WML format and food production under IPC format.
31. As an example, in determining the charge for a waste installation, the permitted activity, types of waste, and volumes, would be cross referenced to the waste management licensing charging scheme to assign a charge rate under that scheme; the rate would be adjusted by a factor to reflect the new requirements of IPPC and the result would be the charge to the permit holder. If the installation also had a process or activity which could be equated to IPC, the equivalent IPC components would be identified and adjusted in the same way as that for the waste activity. The total charge would be the aggregate of the WML and IPC type charges.
strengths: consistency and familiarity with current system on part of regulator and operator, quicker implementation, less disruption during transitional period, more equitable for early applicants.
weaknesses: complex, imperfect fit for those installations which do not fit clearly into one scheme, current schemes not necessarily suited to tagging on additional requirements efficiently.
Example C: Banding by complexity
32. Most of the current schemes include an element of banding which takes account of the complexity of the installation in question. Under a new IPPC scheme, charges could be calculated by reference to certain factors including any or all of the following: size and complexity of installation, volume of emission, discharge medium, sensitivity of receptor and risk to the environment.
33. The methodology might be similar to that currently for the water discharge consents scheme whereby each of the factors which add to the complexity of an installation is assigned a value. The values would be combined and then multiplied by a financial factor to determine the total charge. Under such a scheme, an oil refinery would probably be charged more than a power generation plant of similar thermal capacity, because of the refinery’s more complex nature.
34. Factors for volumes and types of emissions could reflect the permitted emissions into the environment, as these dictate regulatory effort and therefore cost. Any application of OPRA principles to monitoring and inspections could also be reflected in the charges, introducing an incentive, within the constraints of cost recovery, for permit-holders to reduce the most damaging pollutants and volume of emissions.
35. In any such scheme, it is likely that a balance would need to be struck between a complex scheme, which is more equitable and better reflects regulatory effort but is costly to administer, and a cheaper, clearer and more easily predictable scheme but which is less representative of the real cost.
strengths: easy to build in incentive based on risk, more equitable with proper modelling reducing inequity over time, reflects regulators effort, flexible, largely predictable for operator.
weaknesses: more time to develop, requires compromise between equity and clarity.
Example D: Time and materials
36. Installations could be charged on the basis of the actual expenditure incurred in regulating each one. The charge would be calculated by multiplying the time expended by inspectors on the chargeable activity by a charge rate which took account of all the regulator’s chargeable costs. The cost of special services, materials and expenses would be added to the charge.
strengths: transparent, equitable, reflects regulatory effort, quick to develop, consistency between sectors, rewards good applications
weaknesses: unpredictable, high administrative costs, internal inconsistency, charges may be higher to begin with due to regulator’s learning curve, some operators may experience significant change from current charge, no scope for incentive charges, discourages dialogue with the regulator
Example E: Hybrid scheme
37. The charging scheme might involve combining certain elements of the above formats. For example, the application process could be based on a banded scheme with an element of incentive charging and subsistence and monitoring could be on a time and materials basis.
strengths: best elements of each option could be incorporated where they are most effective.
weaknesses: complex, high administrative costs, internal inconsistency, unpredictability.
Have all the key principles and criteria which should underpin the charging scheme been correctly identified?
How important is each one, what issues does it raise and how could these be addressed?
Where might they come into conflict with each other and what balance should be struck?
What sort of charging scheme format would reflect the best balance of principles and what would be its strengths and weaknesses? Please note that the Scottish Executive is not seeking a critique of the particular charging scheme formats which are given in the examples, which are for illustrative purposes only.
NEED FOR A TRANSITIONAL SCHEME
38. To develop a new bespoke charging scheme will require practical experience, the collection and analysis of empirical data, a substantial exercise in development and consultation and the establishment of a new IT system, all of which will prevent its establishment by the 31 October deadline for implementing the new regime.
39. In the short term only a time and materials scheme or the use of existing formats can provide a system which will enable accurate cost recovery. A transitional scheme, based on time and materials or existing formats will, therefore, be needed for new installations or those phased in early. It is envisaged that such a transitional scheme would need to remain in place until 31 March 2001 to give time for the long term scheme to be properly developed. A timetable is set out below.
40. SEPA intends to consult in more detail on proposals for the transitional scheme with a view to applying it to Part A installations, as an interim measure, by 31 October.
41. The use of a transitional scheme raises the prospect of some installations being charged under as many as three different regimes within as many years, causing uncertainty, additional administrative burdens and the possibility of significant year on year variations in charges. The Scottish Executive and SEPA will be considering ways of easing this transitional disruption and would welcome views. It is estimated that up to 50 installations could be affected by a transitional scheme, of which around 20 would be installations brought into the IPPC regime in the early part of the transitional period with the remainder arising from variations to existing authorisations.
TIMETABLE FOR DEVELOPING THE CHARGING SCHEME
42. Key milestones for the development of the new schemes are outlined below.
Fourth IPPC consultation period ends — 8 October 1999
SEPA consults in more detail on the transitional scheme for Part A installations - September 1999
Transitional schemes in place - 31 October 1999
Undertake study to inform development of long term schemes - Summer 2000
Consult on detail of long term schemes - Autumn 2000
New long term schemes in place - April 2001
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