The NGERS - Defining a 'facility': Update July 2009

The National Greenhouse and Energy Reporting Act 2007 (Cth) (NGERA) establishes a single national framework for corporations to report emissions, energy consumption and energy production. The scheme established by the NGERA (NGERS), which commenced on 1 July 2008, entails compulsory registration and annual reporting for corporations whose emissions, energy production or energy consumption exceed specified thresholds. It will form a fundamental part of the Carbon Pollution Reduction Scheme (CPRS) when that scheme is introduced, which is scheduled for 1 July 2011.

A recent article in the Sydney Morning Herald reported on research by KPMG and the Australian Industry Group that suggests that only 15% of Australian construction industry participants have taken steps to measure carbon emissions (see http://tiny.cc/UVX9R). This statistic, if accurate, demonstrates how unprepared those in the Australian construction
industry may be for the implementation of the CPRS, and the need for them to quickly come to terms with the application of NGERS.

Ascertaining whether NGERS applies may be a complex task, and may differ from project to project.

NGERS will apply to a ‘facility’, as defined under the NGERA. Application of this definition may be particularly complex for infrastructure or other construction projects where there are multiple distinct activities being undertaken on a site (or off-site, but still relating to the project), a number of which generate emissions or produce and/or consume energy. In such
cases, it will be necessary to determine whether:

• all these activities constitute a single facility for the purposes of NGERS;
• the various activities should be regarded as separate facilities; or
• all/some of these activities should not be considered as a facility or part of a facility for the purposes of NGERS at all.

In this Update, we complement our previous NGERS Update by providing further guidance on how the definition of ‘facility’ is likely to be applied in practice.

Single Undertaking or Enterprise

To qualify as a ‘facility’ under NGERS, there needs to be an activity or a series of activities, including ancillary activities, that form part of a ‘single undertaking or enterprise’, and that produce greenhouse gases or produce or consume energy.

A ‘single undertaking or enterprise’ may comprise:

• activities that produce 1 or more products or services (the ‘primary production process’), provided that the activities occur on a ‘single site’;
• activities that produce 1 or more products or services that are used for the primary production process, but not only for the primary production process (the ‘other production process’ ), provided that such activities occur at the same site as the primary production process and both processes are under the ‘overall control’ of the same corporation; and
• any ‘ancillary activities’.

To illustrate the complexity associated with ascertaining what constitutes a ‘single undertaking or enterprise’, take the practical example of a residential or commercial development project. In this case, a number of activities or processes will be carried out on a particular site which, together, will produce one or more products (that is, residential or commercial assets) for sale on the market. From a developer’s perspective, such activities may form part of a larger project (for example, a golf course or marina development, or an integrated residential/commercial/transport hub development) – so careful consideration will need to be given to whether the entire project could constitute a single undertaking or enterprise, or whether the discrete commercial or residential construction activities can be separated so as to themselves constitute a
single undertaking or enterprise that is separate from the remainder of the project.

The 'Primary Production Process'

Principal activity

Generally speaking, the ‘primary production process’ at a facility that involves a number of activities will consist of the principal productive activity – that is:

• the activity for which the value added exceeds that of any other activity carried out at the facility; and
• the output from the principal activity consists of goods and services that are delivered for use outside the facility.

Single site

The activities that comprise the primary production process must occur at a ‘single site’. A ‘single site’ is defined as ‘a single physical area that can include a series of geographical locations in close proximity to one another’.

This definition suggests that a single facility may consist of par ts that are physically separated, provided that they are in ‘close proximity’. While the term ‘close proximity’ is not defined, because its interpretation will depend upon the practical context, this term is likely to be interpreted to mean that the parts of the facility must be physically near to each other and will usually correspond to a single address or physical location.

For example, an infrastructure project may involve numerous construction activities on areas of land (or stratum of land) which are physically separated but, nonetheless, in close proximity to each other – for example a tunnel project consisting of both above-ground and under-ground works, or a waste water treatment project consisting of a centralised treatment facility and associated (but physically separate) pumping stations, containment facilities or settlement facilities. It is possible that, despite the physical separation of the various activities, such activities will be considered to be carried out on a single site.

The 'Other Production Process'

Secondary activity

The ‘other production process’ at a facility will consist of secondary productive activities – that is:

• activities that are carried out at the facility but are additional or supplementary to the principal activity; and
• the output from the secondary activity consists of goods and services that are used in the facility but can also be used outside the facility.

Take the example of a concrete batching plant established ‘on-site’ to supply concrete to a large-scale infrastructure project. The activity of batching and producing concrete is somewhat supplementary to the principal activity of constructing the relevant infrastructure (because concrete could presumably be sourced externally), but is nonetheless one which could (at least conceivably, in the case of over-production) be used to supply concrete externally to the project. The output of the batching plant would, however, clearly be something used in the ‘facility’.

Consider also the example of a co-generation facility established to produce and supply electricity to a particular building or buildings within a development or project . The activity of producing electricity is somewhat supplementary to the operation of the relevant building(s) (because excess electricity could potentially be sourced directly from the grid, and in fact may need to be in the case of a shut-down of the co-generation facility) but is, nonetheless, one which could be used to supply electricity back to the grid (that is, in the case of over-production, or under use by the relevant building(s)). The electricity from the co-generation plant would, however, be something used in the ‘facility’.

Same site as primary production process

The facility will include the ‘other production process’, provided it is undertaken on the same site as the primary production process. In other words, the secondary activity must occur within the same site as the primary production process. As explained above, the physical separation of the primary and secondary activities may not be determinative of this issue. In the example of the concrete batching plant or co-generation facility referred to above, the batching plant or co-generation facility itself may be physically located on a particular part of the overall ‘site’, but may be used and operated to supply parts of the project that are physically located elsewhere.

Overall control

In order for the ‘other production process’ to form part of the facility, the same corporation must have ‘overall control’ over the primary production process and the other production process.

In essence, an entity will have ‘overall control’ if it has the authority to introduce and implement operating policies, health and safety policies and environmental policies for both the ‘primary production process’ and the ‘other production process’.

This concept adds a further layer of complexity to the application of NGERS to secondary production activities.

On the one hand, a project sponsor (such as a developer) may be taken to have the authority to introduce and implement operating policies, health and safety policies and environmental policies for both the ‘primary production process’ and the ‘other production process’ – by virtue of the contractual arrangements between the sponsor and primary construction contractor, and the associated obligations these contractual arrangements may impose on the primary construction contractor. On the other hand (particularly in those States (such as NSW, Victoria and Queensland) that have in place ‘principal contractor’ regimes relating to health and safety for construction projects) it is possible that practical (that is, day-to-day) control rests with the primary construction contractor for the project (although control over health and safety policies may be less important than control over operating policies and environmental policies in determining who
has ‘overall control’).

It may not, therefore, be entirely clear who has the requisite degree of ‘overall control’ necessary for the ‘other production process’ to form part of the facility.

Ancillary Activities

‘Ancillary activities’ include those activities that are:

• undertaken to create the conditions in which the principal activities can be carried out; and
• not intended for use outside the facility.

Ancillary activities may occur at the same location as the activities that they are supporting or at a separate location. Off-site ancillary activities are defined as ‘listed activities’ that occur at a different site to the principal activities.

A ‘listed activity’ is defined as one of the following types of activity:

• record keeping;
• communication;
• purchasing materials or equipment;
• managing the employment, training and payment of employees;
• storage (including warehousing) of materials or equipment;
• transport of persons or goods (provided that the primary production process is not attributable to the transport sector);
• sales promotion;
• cleaning and maintaining buildings and other structures;
• maintenance of equipment; and
• security and surveillance.

The above listed activities will be considered to form part of a facility, even if they are not undertaken at the same site as the primary production process, provided that:

• the listed activities were undertaken in the same State or Territory as the primary production process; and
• the same corporation has overall control over the primary production process and the listed activity.

Clearly, such a concept may be broad enough to capture ‘external’ project-specific activities – such as head office management and procurement activities, the transport of materials from manufacturer to site, and the off-site warehousing of materials and equipment prior to use or installation.