The move of becoming a legally recognised entity (creating a formal structure recognised in law) is a critical step for numerous community renewable energy initiatives when trying to progress their project from a mere idea. But how do community energy groups formalise and at what point in their development? How do they become established as organisations capable of raising large sums of money, being accountable to members… Making sense of the various legal structures is often not a straightforward process – this is a point in time where community energy initiatives have to mobilise their knowledge, learning and draw on their contacts. So, how has BEC gone about it?
The Brighton Energy Coop is a ‘community benefit society’ that has taken on board the ‘model rules from ‘The Co-operative’ (consists of a family of business such as ‘The Co-operative Bank and The Co-operative Legal Service – for more details see: www.co-operative.coop) – but how did they get to this stage? This blog will discuss BEC’s legal entity – in particular the various decision-making processes involved. It is based on an interview with Will:
Soon after working out the ‘tail end of financial planning’ i.e. the return to investors, the BEC team realised that they needed a legal structure. Danni, Will and Damian knew that they would become tax liable. A legal structure was therefore essential.
After some long deliberations BEC decided to become a ‘community benefit society’ (CBS) a form of ‘industrial providence society’ (IPS) – both legal entities provide benefits to the community. The choice to become a CBS was mainly based on investor research that the group had found. People (who invest in community owned renewable energy projects) were particularly interested in being part of something that provides social and environmental benefits and not only financial gains. The chosen legal structure allowed BEC to demonstrate that the organisation is keen on giving something back to the community. Will pointed out that a CBS is ‘halfway between a charity and an IPS so there is more of an aspiration towards community benefits… a softer, fluffier version of an IPS’.
Early on in the process the team discarded the idea of creating a ‘community interest company’ (CIC). The legal structures have different implications on how much tax the organisation has to pay and at what point. A CIC gets taxed before it pays its members. This is not the case for a CBS: the organisation has to pay tax after paying the members. A higher percentage of the money therefore goes to the members rather than the taxman – this fact created another substantial reason for deciding to become a CBS rather than a CIC or limited company.
CBSs are structured like any other organisation through their ‘articles of association’. These ‘articles of association’ are based on existing ‘model rules’ in the case of cooperatives. The BEC team could find about twenty different ‘model rules’ from varying ‘sponsoring bodies’ (such as Baywind Energy Co-op, Wessex and The Co-operative) from which they could choose one. These ‘model rules’ outline numerous more ‘fundamental’ aspects of the organisations (such as questions surrounding the return of investments, board of directors, annual general meetings, inclusion of community benefits and asset locks) but also aspects that Will described as more ‘random stuff’.
The team was astonished about the length of some of the ‘model rules’ – some of them were up to fifty pages, the detail of the information provided (for example what would the organisation do if one of their members becomes mentally incapacitated?) and the use of ‘legal jargon’ that made these documents sometimes difficult to comprehend. After reading through ten of the ‘model rules’ that the team had acquired, they tried to make sense of them during numerous team meetings in order to make a decision on which ‘model rules’ they would go for and whether the ‘model rules’ would required any changes.
During these meetings the team sometimes felt that they were ‘going around in circles’, as the decision-making process was far from straight forward. The team had to start visioning how the organisation will be run before even setting up the legal structure. Will illustrated this difficulty when outlining some aspects of future board meetings: ‘what is the difference if two or three directors make decisions? I don’t know really because we have not done it before.’ Danni, Will and Damian had no previous experience in running and setting up such an organisation. Often the team had to go with their own ‘best judgement’. The group even had a go at creating their own ‘model rules’ before deciding to go for the ‘model rules’ from ‘Co-op community assets’ – as they were the most understandable and ‘clearest’. (In order to gain their legal entity, BEC applied to The Co-operative their chosen ‘sponsoring body’. The Co-operative dealt with the Financial Service Authority (FSA), ‘creating an interface between the organisation and the FSA.)
Finding your way through the various legal structures and ‘model rules’ seems to be far from easy. Wessex and The Co-operative provided the team with some help and guidance on how to source and make sense of these documents – explaining some of the implication for the various ‘clauses’. This contact time is however limited. Firstly, BEC was not a member of The Co-operative at the time and officially was not allowed to ask questions. Secondly, the team has to choose wisely for what issues to contact the numerous organisations in particular when these are well known and successful in what they do – they are extremely busy. ‘You want to use the contact to find important stuff out... you don’t really want to ask them very, very, very technical points’.
A lot of the decision-making processes resulted out of their own research, reading through numerous ‘model rules’ and discussing various aspects during team meetings – ‘you start off with one thing and then you hear about something else…’ Danni’s experience as an accountant, being able to read through ‘small print stuff’, understand ‘legal jargon’ and identify numerous financial implications that relate to the underlying legal structures, really helped the group in their decision-making process. She also brought an interest into the subject matter. A solicitor or accountant can assist these developments considerably, as they shed light on various financial and legal aspects that need to be considered when determining a legal structure.
Informal networking processes with other community energy initiatives also took place. The initiatives provided feedback on decisions that had been made, tips on what to look out for and confirmation that one structure seems to be prioritised over another in the field - CBS. It also became apparent whilst talking to Will that even when initiatives were not able to provide any additional information, these informal conversations were often useful. When BEC realised that most of the initiatives were as unsure about some of the implications of the ‘clauses’ outlined in the model rules, they felt relieved.
Will pointed out that there seems to be numerous ‘grey areas’ when thinking about setting up a CBS or an IPS. A lot of the community energy initiatives have encountered these areas. For example, nobody seems to very clear about what a community benefit might be – is it enough for an organisation to have ‘community benefits’ included in their ‘model rules’ or should their provide ‘quantifiable’ evidence that they are benefiting their community? But what would be the measure: carbon, jobs…? The lack of clarity is based on the fact that these are ‘pretty sidelined organisations… this is a real niche area in the FSA and in the governments mind’.
Community energy initiatives that work their way through the labyrinth of organisational structures can do their best to research and reflect on the various issues involved in choosing the legal entity – just like BEC – but a ‘leap of faith’ and an reliance on one’s judgement seems crucial for the initiatives to progress at this stage of the development.