PPAs and developer fees

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Publication February 20, 2018

Two closely-watched lawsuits are moving forward.

One is an appeal of a decision by the US Court of Federal Claims in late October 2016 that the purchaser of a power project does not have to allocate part of the purchase price to a long-term power purchase agreement if the power contract can only be used to supply electricity from a particular project. The case is Alta Wind I Owner v. United States.

The claims court said the contract 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. (For earlier coverage, see “Treasury Loses Key Case” in the December 2016 NewsWire.)

The US government appealed. Oral arguments were heard on January 12 in the US appeals court for the federal circuit in Washington. A decision is expected later this year.

The other case is a test of whether developer fees paid under a development services agreement by a project company to the developer go into basis in the project.

The case has been set for trial in the US claims court starting on July 23.

A project company paid the developer a developer fee of $50 million, or 12.3% of the project cost, on a wind farm in Illinois and put the amount in basis for a Treasury cash grant. The Treasury paid the developer $9.2 million less in Treasury cash grant proceeds than the developer thought it was entitled to receive. The developer sued for the difference. The Treasury filed a counterclaim asserting that it overpaid the developer by $5.2 million.

The government says the developer fee should not count toward the cash grant because it is circled cash: the developer made a capital contribution to the project company to pay itself the fee. The government also argues that the fee is not a real “fee” because it was a function of what the developer could have earned on a sale of the project rather than the actual services performed.

In late December, the court declined to decide the case at “summary judgment,” meaning solely on the basis of legal briefs filed by the parties, and ordered a trial.

The court said “the record contains suggestions that a markup or premium or profit may be appropriate in certain circumstances when considering total costs.” Whether such a fee is appropriate in this case, and how much, will turn on the facts.

In an earlier skirmish, the developer, Invenergy, tried to get the court to order the US Treasury to reveal data about the developer fees it accepted on 108 other wind farms. The court declined on grounds that such information “has generally been considered irrelevant.” The case is California Ridge Energy LLC v. US. A companion case that will be heard at the same time involving a second wind farm with the same issues is called Bishop Hill Energy LLC v. US. (For earlier coverage, see “Treasury Cash Grant Update” in the February 2016 NewsWire.)

A third Treasury cash grant case that revolves around when two biomass power plants were placed in service is headed to trial on May 14.

The biomass case could also raise issues about how to apply a so-called 80-20 test for determining whether a power plant was so extensively rebuilt as to be considered a different facility.

The owner says the two plants were not in service as early as when the Treasury believes. The Treasury believes they were in service in 2008, which would have been too early to qualify for a Treasury cash grant. The program did not start until 2009.

The plants — in Chowchilla and Merced, California — were originally built in the late 1980s, but shut down in 1995 and then restarted in 2008. Soon after they restarted, the San Joaquin Valley Unified Air Pollution Control District and the US Environmental Protection Agency issued notices for violation of permits. Both facilities stopped operating in 2010.

The current owner bought both plants in 2010 and spent money on improvements. The prior owner claimed production tax credits on the electricity output during the period 2008 through 2010.

The current owner applied for cash grants of $12.3 million on each plant. The Treasury paid $1.13 million on each.

Meanwhile, a solar developer filed suit in the US claims court at the end of January seeking an additional section 1603 payment on the McCoy solar project, a 250-MW solar thermal project in California that was put in service in 11 phases. Separate grant applications were submitted on each phase over the period October 2015 through June 2016. The cumulative grant received was about $11 million short of the amount the owner expected.

The issues in the case center around whether particular spending belongs in basis in the power plant as opposed to some other asset. The cash grant is calculated only on the basis in the power plant.

The Treasury decided that a $4.3 million fee the project paid to the California Department of Fish and Wildlife, in place of buying land as a mitigation measure for potential harm to the desert tortoise and burrowing owl, did not belong in the power plant basis. It had the same issue with another $712,500 the project spent on mitigation land to compensate for harm to the Mojave fringe-toed lizard.

The Treasury reduced the basis in the power plant by another $32.7 million that it said is not a cost of the McCoy power plant. Eight months after the McCoy project company signed a construction contract to have First Solar build the project, Silver State, another project under common control with McCoy, signed its own construction contract with First Solar for a contract price that could be reduced if the McCoy project met specified progress targets. The final amount payable by Silver State to First Solar was $32.7 million less than the maximum amount First Solar could have earned on the Silver State contract.

Finally, in a harsh result, the government won a summary judgment (on the basis of legal briefs rather than a trial) against WestRock, a paper company, that was seeking an additional section 1603 payment on a biomass power plant it completed in 2013 in Covington, Virginia to supply steam and electricity to a paper mill.

The Treasury’s position is that any power plant that produces both steam and electricity must allocate the cost between the two functions. A grant is paid only on the electric generating equipment.

Two other cases have upheld this principle. (See discussion of W.E. Partners in “Treasury Cash Grants” in the February 2013 NewsWire and February 2015 NewsWire and of GUSC Energy in “Treasury Loses Key Case” in the December 2016 NewsWire.)

WestRock applied in December 2013 for a grant of $85.9 million. Treasury paid only $38.9 million, after concluding that only 49.1% of the plant costs were tied to electricity production as opposed to steam. It reduced the basis by another 0.22% because the plant uses fossil fuel for startup and flame stabilization.

WestRock offered five approaches for allocating costs between steam and electricity. The court said the company had the burden of proof to show its method was better than the method used by the Treasury. It found none of the WestRock proposals compelling and decided the case for the government. The case is WestRock Virginia Corp. v. United States. The court released its decision in early February.

The day before the decision was released, Nippon Paper Industries USA Co., Ltd. agreed to a dismissal of its case involving a grant paid on a biomass power plant at a paper mill in Port Angeles, Washington. The Treasury paid a grant on 82.8% of the project cost after allocating part of the cost to steam put to industrial use. When it filed suit, Nippon said it was aware of seven other biomass power plants that received full grants on similar facts. (For earlier coverage, see “Treasury Cash Grant Update” in the February 2016 NewsWire.) The case has been withdrawn “with prejudice,” meaning it cannot be refiled.


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