Treasury cash grants lead to more litigation.

A partnership of NextEra and JPMorgan filed two lawsuits in September over shortfalls in so-called section 1603 payments the US Treasury paid the partnership last year on wind farms in California.

The partnership bought three wind farms from Western Wind in December 2011 for $502 million. It allocated $210 million of the purchase price, or $2.69 million an installed megawatt, to the 78.2-megawatt Vasco wind farm in Contra Costa, California, and approximately $115 million, or about $2.3 million an installed megawatt, to the 49.5-megawatt WPP 93 wind farm near Riverside, California. Both projects were put in service within days after the purchase.

The partnership applied for grants in March 2012 for 30% of what it paid for the projects. The Treasury informed the partnership in October 2012 that it was paying the grants, but the amounts were $5.86 million or 9.6% short on the Vasco project and $2.9 million or 8.8% short on the WPP 93 project.

The complaints filed in the lawsuits said Western Wind earned a 28.6% profit on the sale of the Vasco project and, in what may have been a typo, a 68.6% profit on the WPP 93 project.

The Treasury said a share of the purchase price in each case should have been allocated to the power contracts that came with the projects. Grants are paid only on equipment and not also on intangible assets like power contracts.

The partnership treated roughly 96% of the purchase price for each project as eligible basis for calculating its grants. It argues that nothing had to be allocated to the power contracts because the contracts are not separate assets. Each contract can only be performed by delivering electricity from the particular project. This makes the contracts encumbrances on ownership of the wind farms rather than separate assets in the same way that someone buying an office building with space leased out to tenants would not allocate part of the purchase price for the building to the leases. The leases are an encumbrance on the owner’s unfettered use of the building.

The IRS accepted this approach in a private letter ruling involving another wind farm that the agency made public in April 2012, but then withdrew the ruling a few months later after having second thoughts about the conclusion.

The partnership says that even if the power contracts were separate assets, they had no value because the electricity prices the contracts require the utilities to pay are not above market.

The suits were filed in the US Court of Federal Claims. There are now 10 lawsuits pending against the Treasury under the section 1603 program. An 11th suit by a solar company was withdrawn “with prejudice,” meaning the solar company agreed never to re-file the suit, after the US government filed a counterclaim accusing the solar company of filing fraudulent grant applications.

Not counting the suit that was withdrawn, the oldest remaining suit has been pending since July 2012. No dates have been set yet for trials. The Treasury has moved to dismiss, at least in part, four of the cases, but the government has not succeeded to date in having any of the cases dismissed. The government lawyer came poorly prepared to argue the motion to dismiss one of the suits in late September. Grant applicants who believe they were shortchanged have up to six years after a grant was paid to file suit.

Cash grants approved for payment on or after October 1 will be subject to haircuts of 7.2%, the Treasury said in a posting to its website.