The Section 1603 Program

The Section 1603 Program

August 15, 2013 | By Keith Martin in Washington, DC

The Section 1603 Program is attracting more litigation.

Three new lawsuits have been filed in the last two months. Eight suits are now pending. All the cases have been filed in the US Court of Federal Claims.

A ninth lawsuit was withdrawn earlier this year “with prejudice” after the US Treasury filed a counter-claim charging the company that brought the suit with fraud.

The oldest pending suit has been pending since July 2012. No dates have been set for trials. The government has filed motions to dismiss four of the cases.

In one of the new lawsuits, Blue Heron Properties, LLC complained in late July that it was shortchanged on grants paid on two solar systems installed on the roofs of apartment buildings. This is the second suit involving a Dallas electrical contractor, RCIAC, that installs solar systems. Bret Heron, the managing member of the LLC that brought suit, paid RCIAC $10.50 a watt in 2010 for a solar system installed at an apartment complex and applied for a grant on the full amount, which Treasury paid the same year.

Heron then bought three more systems installed on other apartment buildings in 2011 at prices ranging from $9.52 to $10.50 a watt and applied for grants on them at the full prices after the systems went into service in the first half of 2012.

Treasury paid the full grant requested on the first system ($9.52 a watt), but accepted bases of only $5.56 and $5.43 a watt on the next two. The Treasury posted benchmarks on its website in late June 2011 suggesting that it thought the market value of systems put in service in the first quarter 2011 ranged from $4 to $7 a watt, depending on the size of the system. The two systems on which Heron feels shortchanged were 205 kilowatts and 294 kilowatts. The June 2011 benchmark for such systems was $5 a watt. Heron argues that Treasury had no discretion but to honor what he had in fact paid RCIAC for the systems.

In the most recent suit, filed in early August, Anaergia, a fuel cell company, complained that it was shortchanged on grants on two fuel cells that it installed at municipal wastewater treatment plants in Ontario and San Jose, California. Treasury paid $1.6 million less in total than the grants for which the company applied on the two fuel cells, mainly by excluding the cost of gas conditioning equipment. The fuel cells use methane gas that the municipalities produce by putting sewage sludge through anaerobic digesters, but the gas must be cleaned before use in the fuel cells. The Treasury’s position is that only the fuel cell qualifies for a grant, and not equipment used in “the production or refining” of the gas.

The company argues that the fuel cells qualify independently for grants as “trash facilities” that use “municipal solid waste” to generate electricity. Treasury allows grants to be claimed on fuel processing equipment at the front end of such facilities. However, the Treasury cash grant rules are supposed to mimic what the IRS does for tax credits, and the IRS treats a power plant as a trash facility only if it uses municipal solid waste directly and not gas that an unrelated fuel supplier has made by running the waste through a digester.

There are rumors that another suit may be in the works challenging whether the US government has authority to reduce grants by the 8.7% sequestration percentage. Grants approved for payment on or after March 1 this year have been subject to a haircut of 8.7% under across-the-board spending cuts ordered by Congress. The percentage is expected to drop for grants approved after September 30. The Office of Management and Budget estimated in May that the new percentage will be 7.3%. However, it said it would update the estimate in August.

Treasury is allowing companies that are unhappy with the grants they were paid to pay back the money and claim tax credits instead. There does not appear to be a hard deadline to do so.