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In Ampersand Chowchilla Biomass, LLC v. United States, No. 14-841C (Fed. Cl. Nov. 9, 2020), the Court of Federal Claims (court) found that two open-loop biomass facilities were not entitled to certain energy grants under the American Recovery and Reinvestment Act of 2009 (Recovery Act) because the facilities were placed into service before the time specified by the statute.

In so finding, the court said the facilities were placed into service when they "were ready and available to perform their specifically assigned function."

Background

Chowchilla Biomass, LLC and Merced Power, LLC (the facilities) each applied for grants (energy grants) of approximately $12 million under Section 1603 of the Recovery Act, which allows taxpayers to apply for a grant equal to 30% of the amount invested in certain costs of placing specified energy property into service in 2009, 2010 or 2011. The government denied most of the grants on the grounds the facilities had been placed into service in 2008. The facilities claimed they were placed into service in 2011.

In 2005, a previous owner of the facilities entered into a Master Power Purchase and Sale Agreement (PPA) with Pacific Gas & Electric Company (PG&E) under which PG&E agreed to purchase electricity produced by the facilities. The PPAs were amended several times from 2005 to 2011. CalBio acquired the facilities in 2007 and refurbished them. In 2008, CalBio entered into interconnection agreements with PG&E with respect to the facilities and PG&E cleared the facilities to generate and sell electricity at their full rated output. According to testimony, the facilities were fully operational in 2008. After environmental violations and financial problems, the facilities ceased operating in 2010. In December 2010, Akeida Onshore acquired CalBio. After investing in the facilities, they passed testing in 2011. Akeida then applied for Section 1603 grants in 2011.

In denying most of the grants, the government said the property was placed into service in 2008 because "the prior owners of the project company treated the project, for federal tax purposes, as having been placed in service in 2008" and "[t]he Section 1603 program is not in a position to revisit that treatment."

When were the facilities placed into service?

Under Treas. Reg. Section 1.46-3(d)(1)(ii), facilities are placed in service in the year when they are "placed in a condition or state of readiness and availability for [their] specifically assigned function." The facilities' "specifically assigned functions" was to produce and sell electricity, according to the court. The court rejected the facilities' argument that their function was to generate electricity at the capacity levels stated in their PPAs for sale to PG&E.

Whether the facilities were "in a condition or state of readiness and availability" to produce and sell electricity is determined by the five-factor test set forth in Oglethorpe Power Corp., et al. v. Commissioner, T.C. Memo. 1990-505 and IRS Revenue Rulings, the court said.

The Oglethorpe factors for determining when property is placed in service are:

1. The necessary permits and licenses for operating have been obtained
2. All critical tests necessary for proper operation have been performed
3. The unit has been placed in the control of the taxpayer by the construction contractor
4. The unit has been synchronized with the transmission grid
5. Daily operation of the unit has begun

The facilities said they fulfilled factors 1, 2 and 5, and thus were entitled to the energy grants because they were placed into service in 2011 when they "had passed all required testing, installed all necessary equipment, were compliant with environmental laws, and were selling baseload electricity at amounts required by their [PPAs] with [PG&E]."

The government said the facilities were placed in service in 2008, "when the Facilities' prior owners substantially completed their refurbishment, acquired permits from the San Joaquin Valley Air Pollution Control District, and were producing and selling power and generating revenue."

Court finds facilities placed into service in 2008

The court found all five Ogelthorpe factors favored the government. The court found that the facilities "were ready and available to perform their specifically assigned function — to produce and sell electricity — in 2008, when the [f]acilities had synchronized to the transmission grid, began selling electricity, operated under their PPAs, and generated approximately $2.26 million in revenue." As a result, the facilities were not entitled to the Section 1603 grants.

Implications

The date an electric-generation facility is placed in service is often difficult to determine. In the renewable-energy space, a couple days can make a huge difference in the tax attributes generated by the project. This difficulty stems from the fact that the Oglethorpe five-factor-test is subject to interpretation, as seen in this case.

The most interesting part of the case is that the IRS took a view, with which the court agreed, that narrowly defined factors 1, 2 and 5.

• First factor, obtaining necessary permits: The facilities received an Authority to Construct (ATC) permit in 2008, allowing them to construct and operate the facility subject to the conditions included in the permit. The facilities took the position that the ATC was not valid until they complied with its requirements in 2011. The court agreed with the IRS's position that receipt of the ATC was sufficient to operate even though the facilities had not complied with its terms.
• Second factor, all critical tests necessary for proper operations have been performed: The facilities argued that they had not passed all the critical tests because they did not meet the standards required by environmental testing. The court found that failing to meet the environmental requirements was akin to "undergoing testing to eliminate defects," which is specifically allowed for assets placed in service under Treasury regulations.
• Fifth factor, daily operation of the facility has begun: This has always been tricky, as "daily" is not well defined. If a facility runs every day for a week and then stops, is that daily? If it runs for a month and then stops for a month, is that daily? Regarding the fifth factor, the court found that the unit's daily operations began when the facilities "first generated and sold electricity," even though the amount generated was well below what was planned and initially contracted for. The wording in the opinion could be read to mean that a certain number of consecutive days of operation are not required to be considered daily operation.

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