In late January the Court of Appeal in London ruled that the attempt to reduce the rate of return available to solar generators under the Feed In Tariff (FIT) regime was unlawful. As well as hampering efforts to ration the FIT subsidies available to small generators, has the Court also raised a wider question mark over the ability of UK economic regulators to 're-open' long-term regulatory incentives?
The Court of Appeal ruling
Power was conferred on the Secretary of State by s.41 of the Energy Act 2008 to establish, via licence conditions and regulations, a FIT subsidy scheme. The Court of Appeal accepted that s.41 also authorised to Secretary of State to modify the terms of any such scheme from time to time. The scheme established under s.41 allocated a fixed rate of return for a period of up to 25 years on those generators whose plants became eligible for FIT subsidy during the year ended 31 March 2012. In order to correct the perceived over-generosity of the FIT scheme, the Secretary of State proposed on 31 October 2011 to modify it so as to:
- allocate a lower rate of return for those generators who might become eligible in subsequent years; and
- reduce the rate of return available to generators who were due to become eligible in the closing months of the year ended 31 March 2012.
In holding that the Secretary of State had no power under s.41 to reduce the rate of return on plants becoming eligible prior to 31 March 2012, Moses LJ, who delivered the leading opinion of the Court of Appeal, pointed out that the "concept of a rate of payment fixed during the period of generation by reference to the date the installation became eligible for payment is fundamental to the [FIT scheme]. It provides an assurance as to the rate of return to an owner who has paid a capital sum prior to the installation coming into operation, subject to an adjustment in accordance with RPI". He agreed with counsel for one of the claimants that the fixed return assured by the scheme was analogous to the fixed rate of return on a Government bond. This was not, as Moses LJ saw it, a scheme, "in which the tariffs may vary, without regard to the date when the installation became eligible and without any indication within the scheme of what amount the owner of the installation might receive, or as to how it is to be calculated. The scheme provides for a pre-determined rate, not such rate as from time to time may be determined".
The question which, as Moses LJ saw it, arose in such circumstances was whether (bearing in mind it contained no express wording to this effect) s.41 could be construed as conferring power on the Secretary of State to modify the FIT scheme with retroactive effect so as to reduce the rate of return which could be earned on plant which had already become eligible for subsidy. He was not prepared to interpret s.41 in that way and instead applied the presumption that Parliament is only to be taken to have conferred retroactive powers where it uses express language to that effect.
As he put it, "it would be curious to contemplate a statutory provision which envisages a scheme for financial incentives to capital investment to encourage small-scale electricity generation in which the return could be varied once the capital expenditure had been incurred. It is in that context that the presumption against retrospective operation is so important. Were there to be a power to introduce, by modification, such a scheme one would expect it to be clearly shown. On the contrary, there is no reference to that possibility".
Since the Government has indicated it will appeal the ruling to the Supreme Court, it may be premature to consider its wider implications. As matters stand, however, the Court of Appeal has articulated a position which - particularly if the ruling is applicable more broadly - could present economic regulators with something of a dilemma.
If a regulator does not provide expressly for the 're-opening' of the rate of return or other key parameters contained in a long-term regulatory settlement when that settlement is first drawn up, it risks violating the principle of legality / presumption of non-retroactivity if it seeks to rely on its general powers of modification to do so at a later point. However, by choosing to make such express provision do they not risk undermining investor confidence?