Treasury loses key case
The US Treasury lost a significant case in the US claims court.
The decision could eventually lead to more lawsuits against the Treasury by renewable energy companies that feel shortchanged by the cash grants they received under the section 1603 program. There is a six-year statute of limitations on filing suit.
Roughly 28% of the 107,433 section 1603 payments made by the Treasury have been for less than the companies expected.
More than 30 lawsuits have been filed. The government has now won two and lost two of the cases that went to trial. A fifth case ended in a draw. A number of cases have been dismissed or withdrawn by the taxpayers. The government has been filing counterclaims this year against some companies that sue to discourage anyone else from suing.
Three cases were decided since late October.
In the most significant of the three, the US Court of Federal Claims ordered the US Treasury in late October to pay the owners of six Alta wind farms in California another $206.8 million in cash grants. The case is Alta Wind I Owner v. United States.
The government has not decided whether to appeal.
The court reached two significant conclusions. First, it said a power contract that requires electricity to be supplied from a particular power plant has no value independently of the power plant. Therefore, any amount paid for the PPA is basis in the power plant and goes into the calculation of tax benefits.
Second, the court implicitly rejected the approach the Treasury has been using of determining the tax basis in a project by starting with the actual cost to construct the project and then adding a markup. It said the tax equity investors in the Alta projects were entitled to use the prices they actually paid for the projects, absent proof that the prices were not arm’s-length prices.
The case involved six Alta wind farms in California. Five of the wind farms were financed in sale-leasebacks. One was sold to EverPower.
The owners of the projects— mostly tax equity investors — applied for grants based on what they paid for the projects rather than what the developer, Terra-Gen, spent to build them.
The court said the bases that the parties used to claim Treasury cash grants were correct. It ordered the Treasury to pay the project owners a total of $206.8 million, which is the amount by which the owners said they had been shortchanged.
The judge rejected the testimony of the government’s sole expert witness — a senior lecturer at the Massachusetts Institute of Technology — because the witness failed to disclose a full list of articles he published in the last 10 years, as required by the claims court rules. The witness gave the court a list running longer than 10 years, but omitted several articles he wrote for Marxist and East German publications in the 1980’s and failed to disclose that he had been an editorial board member for two years in the 1990’s of a company that published “A Journal of Marxist Thought and Analysis.”
The Alta owners had unusually strong evidence to support the prices they paid for the projects. Terra-Gen, the sponsor, had put the projects out for sale in an auction.
The prices paid by the tax equity investors were at most 2% above the bids received in the auction.
The investors claimed 93.1% to 96.9% of their bases in the projects were in eligible assets for the cash grants. Cash grants can only be claimed on equipment and not on land or contracts, goodwill, going concern value and similar intangibles. Edward Settle, the public face of the Treasury cash grant review team at the National Renewable Energy Laboratory, testified that NREL had a rule of thumb that 95% of the cost of the average wind farm is basis in eligible equipment.
The court said the “transactions were negotiated by sophisticated parties at arm’s length.”
It rejected the government’s view that the tax equity investors had to assign part of the value in the projects to intangibles by first adding up the value of the equipment and treating what remained as basis in intangibles like customer goodwill or going concern value. (Going concern value is the notion that there is an extra intangible value in a group of assets that someone has already assembled as a going business.) The court said the approach of assigning a value to each of the hard assets and then treating the rest as value in intangibles only applies to the sale of the kind of business that has customer goodwill. There is no customer goodwill in a power plant that is not yet operating and that has only a single utility as a customer under a long-term PPA, the court said.
The court also said there is no going concern value to which part of the purchase price has to be allocated. It said a power plant that is not yet operating has none.
However, the court said there is “turn-key value.” A power plant is worth more at the end of construction because it is “ready to use.” It said this premium goes into basis in the power plant itself as opposed to an intangible.
The court said the government failed to prove there were any peculiar circumstances that cast doubt on whether the prices paid by the tax equity investors in the sale-leaseback transactions are not arm’s-length prices. “[T]he Court should disregard the purchase price as basis only if the evidence shows that peculiar circumstances have highly inflated the purchase price,” it said. A sale-leaseback transaction is not automatically peculiar, it said.
The evidence of market value was better in this case than most, the court said, because the price was established in an auction.
Terra-Gen prepaid part of the rent under the lease back of each project. The court declined to view the real purchase price paid by each lessor as the net purchase price after subtracting the rent prepayment each lessor was immediately repaid at closing. “[T]here is simply no evidence that these prepayments inflated the purchase price in any way,” it said.
Of the remaining two cases, the government largely won one and the other was a draw.
One involved a biomass power plant. The government believes such a plant must be split between the parts that produce steam and electricity. A grant – and, by extension, an investment tax credit — can only be claimed on the part that generates electricity.
GUSC Energy completed a new power plant in November 2013 at an industrial park in Rome, New York, that uses wood chips to produce steam and electricity. The plant ran for only one winter in late 2013 and early 2014 and has been largely shut down since then due to low natural gas prices. During the one season it operated, it supplied 46.7% of the steam heating needs of the industrial park but only 2.8% of the electricity.
The owner applied for a grant of $5,469,028, but was paid only $316,609 (after a 7.2% haircut due to budget sequestration).
GUSC Energy argued that the entire project is used to generate electricity. The court disagreed. It also disagreed with how the Treasury decided the share of the project cost that was for generating electricity. Treasury treated only 6.6% of the cost as eligible because only 6.6% of the steam was converted into electricity.
The government witness said this approach was flawed. The court was not happy with his approach either, but had nothing else to fall back on. He suggested dividing the electricity the plant generated by the electricity that a plant using fuel with the same energy content would generate if all the energy went to electricity generation. This led to 15.24%.
The court applied this fraction to give the plant owner an additional grant of $456,860. The Treasury had removed costs related to site cleanup, landscaping, ornamental iron work and paving. The court put them back into the basis used to calculate the grant.
The case is GUSC Energy v. United States. The court released its decision in early November.
Finally, the Treasury ended up with a draw in a case involving a solar company in Dallas called RCIAC that two individuals formed to install LED lighting and capacitor banks for businesses. They shifted to solar at the urging of their electrical materials supplier.
The company installed 18 solar panel systems in 2010 and 2011. The two individuals asked Treasury a number of questions. They got back answers that might have been useful to a tax lawyer, but not to an electrical contractor with a high school education. RCIAC was led to believe from the answers that it could claim a basis in the solar systems of $10.50 a watt. The Treasury paid a grant at that level on the first system. The company then moved to install others.
Its actual cost to install was $4.79 a watt, but it claimed grants on a “retail” price that was 1.8 times higher. It expected a Treasury cash grant for 66% of the actual system cost and a rebate from the local utility, Oncor, for another 47% of the cost. (Oncor paid rebates to installers as a reward for installing solar.)
RCIAC never really collected the retail price from anyone. The systems were leased to customers, but the company was lax about collecting rent. The leases ran five years, after which the customers had options to buy the systems. At some point, RCIAC understood the IRS to say that the same company could not be both the installer and the owner, so it formed a separate company, LCM Energy, to own the systems.
The Treasury paid grants on a basis of $4.79 a watt plus 20%, for $5.70. The two contractors sued for the difference. The government then accused them of fraud and asked for the money back.
The US claims court said they were not sophisticated people trying to defraud the government, but were merely trying to understand the program based on what they thought they were told by Treasury. The Treasury contributed to the confusion by paying the first grant. The court let them keep what they were already paid, but declined to pay them more.
The case is LCM Energy v. United States. The decision was released in late October.
Treasury cash grants remain subject to budget sequestration, an effort by Congress to control the federal budget by cutting spending across the board. Grants approved for payment through September 30, 2017 will suffer a 6.9% haircut.
The new Congress that takes office in January could junk or revise the sequestration statute. Some Republicans want to eliminate sequestration for the defense budget. Democrats would resist without also dropping it for domestic spending. Any change in the sequestration statute would affect grants paid after the effective date.