In earlier postings we introduced the UK’s Carbon Reduction Commitment (Energy Efficiency) Scheme (“CRC”). From 1 April 2010 the CRC Regulations will apply and many franchisors will be responsible for the carbon emissions of their franchisees. Franchisors will need information from their franchisees and may incur costs under the CRC that may not be easily recovered from franchisees.  

The final draft of the CRC Regulations provides that where a franchisee

  • carries out it franchise business under the franchisor’s name,
  • using premises exclusively for that business,
  • and the franchisor ‘agrees’ the internal or external appearance of the premises which is similar to other premises covered by other franchise agreements

then the fuel supplies to the franchisee for each compliance year for CRC will be the franchisor’s fuel supply. So when it comes to reporting and buying allowances to cover the franchisor group’s carbon emissions under CRC the franchisor must include the franchisee’s CRC fuel consumption.

For a franchisor to assess its CRC compliance requirements for phase 1 (which starts on 1 April 2010) the franchisor must determine:

  • which companies in its group were operating in the UK on 31 December 2008 ;
  • which franchise agreements were in existence for franchise businesses in the UK on 31 December 2008;
  • whether any of those group companies and franchisees had a half hourly electricity meter in the qualification year being the calendar year 2008; and
  • locate records of its own group companies and its franchisees electricity consumption through half hourly meters in 2008.

If 2008’s electricity consumption was above 6,000 MWh it will have to comply with CRC in full. Between 3,000 and 6,000 MWh of electricity consumed in 2008 will give it reporting obligations under CRC but not the full compliance obligations applying from 1 April 2011 requiring it to buy carbon allowances, etc. It’s worth noting that even the existence of one half hourly meter in 2008 gives companies the obligation to provide contact details online.

Where landlords supplied 2008’s electricity either to companies in the franchisor’s group or to the franchisees themselves then the landlords will be responsible for any CRC compliance obligations and not their tenants.

By the way, some franchisor groups may be able to take advantage of the new provisions in the CRC Regulations enabling them to split large groups of companies into separate groups for compliance purposes. But note: it is not possible to do so in a way that leaves part of the group outside the CRC! If the groups cannot be split for compliance purposes then the group will have extra reporting requirements for any subsidiaries that are high enough consumers of electricity that would have to comply if they were a single entity without a group structure.

The use of “franchise” in the CRC Regulations means that many vertical distribution agreements would be caught as well as true franchise arrangements. Many pre-existing contracts may not provide for the costs of CRC to be recovered by the franchisor. Companies involved may want to review these provisions.

Also, groups with parent companies outside the UK will have to nominate a UK subsidiary company to comply with the CRC.

When does this information first need to be made available? By the deadline for registration for the CRC which is 30 September 2010.

What's next? Full CRC compliance including reporting on fuels consumed, keeping records, buying allowances, surrendering allowances following the end of each CRC compliance year and reviewing their franchise agreements to see whether any CRC costs can be passed on to the franchisees.

This posting is short and has been simplified somewhat compared to the CRC Regulations; it is based on the final draft of the Regulations laid before Parliament. To address and discuss CRC issues, Reed Smith is hosting a series of client workshops and seminars. Please contact your usual Reed Smith attorney or the author if you would like details on upcoming events or further advice related to CRC.