RP1 Fuel Cell, LLC v. United States

In the United States Court of Federal Claims

No. 13-552C

Filed: March 31, 2015

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RP1 FUEL CELL, LLC and UTS SJ-1, *

LLC, * American Recovery and

* Reinvestment Tax Act; Section 1603;

Plaintiffs, * Internal Revenue Code §§ 45, 48;

v. * Fuel Cell Power Plant; Gas

* Conditioning Equipment; Trash

UNITED STATES, * Facility; Municipal Solid Waste.

Defendant. *

*

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Timothy L. Jacobs, Hunton & Williams LLP, for plaintiffs. With him were David

S. Lowman, Jr., and Hilary B. Lefko, Hunton & Williams LLP.

Michael J. Ronickher, Trial Attorney, Court of Federal Claims Section, Tax

Division, United States Department of Justice, Washington, D.C., for defendant. With

him were Caroline D. Ciraolo, Acting Assistant Attorney General, Tax Division, David I.

Pincus, Chief, Court of Federal Claims Section, Tax Division, and G. Robson Stewart,

Assistant Chief, Court of Federal Claims Section, Tax Division.

OPINION

HORN, J.

Plaintiffs RP1 Fuel Cell, LLC (RP1), and UTS SJ-1, LLC (SJ-1) have brought suit

against the United States alleging they are entitled to “payment of the cash grant

amounts mandated by section 1603 of the American Recovery and Reinvestment Tax

Act of 2009,” Pub. L. No. 111-5, Div. B, tit. I, § 1603, 123 Stat. 115, 364–66 (2009)

(ARRTA, § 1603, or Section 1603). Under the Section 1603 program, the Secretary of

the Treasury, upon application, “shall, subject to the requirements of this section,

provide a grant to each person who places in service specified energy property to

reimburse such person for a portion of the expense of such property.” Section 1603(a).

In plaintiffs’ case, the grant is equal to thirty percent of the allowed cost basis of the

qualifying energy property. See Section 1603 (b)(2)(A). The parties have stipulated that

“[t]he Section 1603 program is administered by the Office of the Fiscal Assistant

Secretary at the Department of Treasury (‘Treasury’).”

Plaintiffs allege that they “placed in service two fuel cell power plants,” one by

RP1, and the other by SJ-1, and that each of the plaintiffs “filed an application for a

grant for the eligible costs of constructing the Fuel Cells” pursuant to Section 1603.

Plaintiffs allege that they included in the cost basis for the grants “the Fuel Cells and

their associated gas conditioning equipment,” 1 but that the United States Department of

the Treasury did not allow as part of the cost basis “all direct and indirect costs relating

to the associated gas conditioning equipment.” Plaintiffs contend that the government

“was required to make payment of the applied-for amounts to RP1 and SJ-1 because

the associated gas conditioning equipment is ‘specified energy property’ under Section

1603,” and that including the gas conditioning equipment as part of the cost basis for

the grant is “permitted under Section 1603, the Treasury Guidance, and the cost basis

rules under the [Internal Revenue] Code.” Plaintiffs seek the amount of additional cash

grant that they allege should have been awarded if the gas conditioning equipment had

been included as part of the grant’s cost basis, $1,515,020.00 between the two

facilities, 2 as well as request that the decision by the Secretary of the Treasury be

vacated. 3

1 The parties jointly define “[g]as conditioning equipment” to mean “[e]quipment used to

clean, treat, and process contaminants (e.g., sulfur, hydrogen sulfide, VOC [volatile

organic compounds], and siloxanes) from a fuel,” such as the biogas from an aerobic

digester that is to be used as fuel for a fuel cell.

2 The parties jointly stipulated that RP1 requested in its Section 1603 application “a

payment of $4,959,896 or 30 percent of SJ-1’s reported cost basis of $16,532,985.” The

parties also stipulated that, “[o]n January 14, 2013, Treasury issued a ‘Section 1603

Award Letter’ to RP1 in which it approved a payment of $4,026,253 for the RP1 Project”

based on a reduced basis amount of $13,420,843. The parties further stipulated that

SJ-1 “requested a payment of $2,784,734 or 30 percent of its reported cost basis of

$9,282,447,” “voluntarily removed $216,320” from its reported cost basis during

Treasury’s review process, reducing it to $9,066,127. Moreover, according to the

parties’ stipulation, “[o]n March 1, 2013, Treasury issued a ‘Section 1603 Award Letter’

to SJ-1 in which it approved a payment of $2,085,055 for the SJ-1 Project” based on a

reduced basis amount of $6,950,182.

3 The parties jointly stipulated that “[f]uel cells convert a fuel into electricity through an

electrochemical process, without combustion. Fuel cells can operate on various fuels,

including biogas, if the inherent contaminants are removed to meet the fuel cell

manufacturer’s fuel specifications.” Throughout the trial and briefs, however, the parties

refer to the various components and systems involved differently. Except when quoting

from the parties, the court adopts the following terminology for purposes of this opinion:

• “Fuel cell,” “fuel cell stack,” or “fuel cell module” refers, as stipulated by the

parties, to “the individual piece of equipment that actually performs the

electrochemical conversion of the fuel into DC [direct current] electric power,”

using an anode and a cathode. The parties state that the three terms are

interchangeable, but also indicate that, alternatively, a “fuel cell stack” can refer

to “[a] combination or ‘stack’ of individual fuel cells,” and a “fuel cell module” can

refer to a set of “four separate fuel cell stacks and housing.” The terms “fuel cell,”

“fuel cell stack,” or “fuel cell module” do not include the gas conditioning

2

FINDINGS OF FACT

According to the parties’ joint stipulation, RP1 and SJ-1 are Delaware, limited

liability companies with their principal places of business in California, and both are

wholly-owned subsidiaries of UTS BioEnergy, LLC. The parties further stipulated that

UTS BioEnergy is more than eighty-percent owned by Anaergia, a Canadian

corporation “engaged in the generation of renewable energy from organic waste.”

Plaintiffs’ witness, Arun Sharma, who, at the time of trial, testified he was “president of

Anaergia North America,” explained that Anaergia “is in the business of resource

recovery. Our projects typically include recovery of renewable energy, water, nutrients,

and fertilizer from waste streams.” Regarding the RP1 and SJ-1 projects, Mr. Sharma

stated he was “vice president of development at the time of the projects,” in 2010 and

2011, but also indicated that he may have been promoted to “president of UTS

BioEnergy,” before completion of the projects. Mr. Sharma indicated that these projects

were Anaergia’s and UTS BioEnergy’s first fuel cell projects. Mr. Sharma testified that

Anaergia has performed a number of projects in the United States and abroad that

create natural gas or electrical power from the digestion of organic waste, whether at a

wastewater treatment facility or at another source of organic waste, such as a farm.

Mr. Sharma testified that Anaergia’s interest in the fuel cell projects at issue

developed because “they had some component of wastewater treatment where the

digester gas was available and could be converted into electrical energy.” Mr. Sharma

further testified that the company’s interest in these projects was because, “at the time,

section 1603 grant and self-generation incentive program was available, and after

discounting or reducing the project costs by that particular incentive, the projects

penciled out very well for the municipality, and we were able to offer a low rate for

electrical energy to the customers.” 4 According to Mr. Sharma, the RP1 and SJ-1

equipment at issue in this case, or any other items the parties generally referred

to as “balance of plant,” such as the natural gas desulfurizer, foundations, water

treatment unit, and adjoining electrical equipment and piping.

• “Fuel cell assembly” refers to the set of “fuel cell equipment” supplied by FuelCell

Energy and what the government admits is “balance of plant” for a fuel cell, such

as the natural gas desulfurizer, foundations, water treatment unit, and adjoining

electrical equipment and piping. “Fuel cell assembly” does not include the gas

conditioning equipment at issue in this case.

• “Fuel cell facility” or “fuel cell project” refers broadly to all the equipment installed

at either the RP1 or SJ-1 sites by plaintiffs, and includes the “fuel cell assembly”

as well as the gas conditioning equipment at issue in this case.

4 Mr. Sharma testified at trial that outside of the Section 1603 grant, neither UTS

BioEnergy nor Anaergia received other federal tax credits. The court notes that the

parties sometimes refer to the Section 1603 grant as the “ITC grant,” or Investment Tax

Credit grant.

3

projects were infeasible without the “grants and incentives,” including incentives that Mr.

Sharma understood covered the gas conditioning equipment. Mr. Sharma also testified

that the projects using digester gas were of interest, because, while the digester gas

was free, “it’s not economic to work on natural gas alone because then you have to pay

for natural gas.”

The RP1 Fuel Cell Project

The parties have stipulated that the RP1 fuel cell system is located at the

Ontario, California, Inland Empire Utilities Agency (or IEUA) Regional Plant No. 1,

wastewater, treatment plant. The parties further stipulated that the Regional Plant No. 1

“collects and treats municipal wastewater and biosolids and supplies drinking water.”

The parties further stipulated that the plant “includes anaerobic digesters, owned and

operated by IEUA, that utilize microorganisms to break down the solids portion of the

wastewater sludge.” According to the parties’ joint stipulation, “[t]hese digesters produce

both ‘biosolids’ and ‘biogas,’ consisting of methane, other gaseous elements, and

various contaminants. Biosolids are used to produce compost. Biogas may be

discarded by burning it (in a process called ‘flaring’) or may be used as a fuel source.”

According to the parties, prior to the installation of the RP1 fuel cell system, the biogas

from Regional Plant No. 1 was used as a fuel source for “two 1.4 MW cogeneration

engines.” The parties stipulated that “[d]ue to concerns with cost, reliability, and

regulatory and environmental factors, IEUA desired to replace these engines with a fuel

cell system.” Mr. Sharma testified at trial:

At the time, the Air Quality Management District, this[,] which is the South

Coast Air Quality Management District, was not satisfied with the

emissions profile [of the combustion engines] going forward, and they

wanted them to have an alternative use for the gas or this fuel. And the

only technology that was available to convert this fuel cleanly into

electricity far better than internal combustion engine was fuel cell

technology.

Mr. Sharma indicated at trial that the IEUA did not have “any interest in a fuel cell that

would operate on natural gas alone.” A February 17, 2012 press release issued by

IEUA, provided as a joint exhibit, stated that “IEUA is also adding fuel cells to its

renewable energy portfolio. Installation of 2.8 megawatts powered by fuel cells

operating on bio-gas and natural gas is underway and will be operational this spring.”

Mr. Sharma testified at trial that part of the financial incentive for the RP1 project

came from the California Self-Generation Incentive Program (or SGIP). Mr. Sharma

explained:

SGIP is called the Self-Generation Incentive Program, which is

administered in the state of California by the utilities, and that is to

promote cogeneration and fuel cell-type projects. And that basically

provides a grant to make these projects happen.

4

And this grant was fairly significant for our projects. And it was

included as part of the economics for the entire project to provide a rate of

electricity to the customer that would be palatable and would be in line

with what the customer would have to pay to the utility.

Mr. Sharma explained that, to be eligible for the Self-Generation Incentive Program

grant, “at least 75 percent of the fuel has to be renewable fuel, like biogas, and 25

percent could be substituted with natural gas.” The June 25, 2012 “Self-Generation

Incentive Program Handbook,” (emphasis in original), issued by the administrators5 of

the Self-Generation Incentive Program, and provided as a joint exhibit, also explains

that “[i]f it is determined that Directed Biogas Renewable Fuel deliveries fell below 75%

of the generator’s fuel demand during any 1 year period within the warranty period, a

refund of a portion of the incentive will be required.”

The request from IEUA for proposals for the Regional Plant No. 1 fuel cell

project, which was submitted as a joint exhibit, stated: “[t]he purpose of the proposed

fuel cell construction is to replace the current power generation system at RP1

[Regional Plant No. 1] and utilize digester gas as the primary fuel supply.” The request

for proposal’s “SCOPE OF WORK,” (emphasis and capitalization in original), stated:

The Agency seeks a Vendor to provide turnkey engineering, design,

materials, delivery, installation, testing, and commissioning of a cost-

effective and energy efficient fuel cell system that will maximize the use of

digester gas and increase the renewable energy resource potential at

IEUA. The Vendor shall include in the proposed scope of work all

necessary work, labor, taxes, services, equipment, appurtenances, and

incidentals necessary to produce a fully functional and operational fuel cell

system, including a fuel cleaning system for the available quality of

digester gas, a heat recovery system for use by the Agency, and include

the interconnection to the main utility service.

The request for proposals stated that “[a]ll proposals should be based upon the

available digester gas and be designed to utilize 100% of this fuel supply without

exceeding the SGIP limitations on natural gas.” Mr. Sharma testified that “[t]he

requirement was that all the biogas that was available had to be used for the fuel cell,

and if there was insufficient biogas available, then you could blend natural gas or use up

to 25 percent natural gas.” The utility agency also asked vendors to include information

on “[g]as cleaning system performance,” “[m]aintenence requirements and frequency of

all major components including the gas cleaning system.” Mr. Sharma testified that the

gas conditioning system was required by the IEUA and the Self-Generation Incentive

Program as part of project. According to Mr. Sharma, “[t]hey were explicit about having

5The administrators of the Self Generation Incentive Program included Pacific Gas and

Electric, Southern California Edison, the Southern California Gas Company, and the

California Center for Sustainable Energy.

5

the gas conditioning equipment at this plant, but by design, if the fuel was supposed to

be biogas, the gas conditioning system de facto would have been part of the power

plant.”

Mr. Sharma indicated at trial that the burden of supplying sufficient biogas for

operation of the RP1 project lay with the IEUA, and that “[i]f Inland Empire fails to

provide sufficient digester gas, they have to make up with natural gas.” The record

indicates that the power purchase agreement for the RP1 project stated that

“PURCHASER [IEUA] shall provide Seller [RP1], at no cost to Seller, the fuel required

to operate the fuel cell at the maximum designed capacity of 2.8 MWac. The fuel will

consist primarily of digester gas (a minimum annual average of 612,000 cft [cubic

feet]/day).” (capitalization in original). The power purchase agreement further specified

quality limits for the digester gas, for example, stating: “Purchaser agrees to control

hydrogen sulfide at an annual average of 180 parts per million by volume.” Mr. Sharma

also indicated, however, that assuming sufficient biogas was available, UTS BioEnergy

was at risk if the gas conditioning equipment did not work: “[I]f the gas conditioning

equipment is not available, then we track it separately and we pay for that fuel, we as

RP1 or UTS pays for that fuel . . . .” The RP1 power purchase agreement states that the

gas conditioning equipment for the project is to be able to operate, if needed, “at full

load with 100% digester gas flow to the fuel cell (approximately 830,000 cft/day).” The

record also states that “Seller [RP1] shall provide any necessary future gas cleaning

system upgrades to meet the requirements of the fuel cell system at no cost to the

Purchaser.”

It appears from the record that RP1 or its parent, UTS BioEnergy, submitted a

successful bid and was awarded the contract for Regional Plant No. 1. Mr. Sharma

explained at trial that “[t]here was an RFP [request for proposal] released by Inland

Empire Utilities Agency, and UTS responded to that RFP. We were one of the many

respondents. And we negotiated a power purchase agreement later with the utility.” Mr.

Sharma added that “there was an interview. There were several interviews. There was a

lot of negotiations, finally led to an award . . . .” Mr. Sharma also stated that there was

no prior business relationship between the agency and UTS BioEnergy or Anaergia.

The record contains the “FUEL CELL POWER PURCHASE AGREEMENT,”

(capitalization in original), between RP1 Fuel Cell, LLC, and the IEUA. The power

purchase agreement was for a “fuel cell facility” consisting of a “Fuel Cell power plant

and ancillary equipment, as further described in the body of this Agreement and Exhibit

B and Exhibit D, providing a total gross electrical generating capacity of approximately

2.8 megawatts.” (emphasis in original). Exhibit B, “FACILITY EQUIPMENT

SPECIFICATIONS,” discussed the fuel cell system’s technical requirements, including

that of the “Gas Cleaning System.” (emphasis and capitalization in original). Under

Exhibit D, Part B, “SCOPE OF WORK,” (capitalization in original), the following was

included:

The Seller shall provide turnkey engineering, design, materials, delivery,

installation, testing, commissioning, and operation and maintenance of a

6

cost-effective and energy efficient fuel cell system that will maximize the

use of digester gas and increase the renewable energy resource potential

at the delivery point. The Seller shall include in the scope of work all

necessary work, labor, taxes, services, equipment, appurtenances, and

incidentals necessary to produce a fully functional and operational 2.8

MWac fuel cell system, including a fuel cleaning system for the available

quality of digester gas, 4.1 million BTH heat recovery system for use by

the Purchaser, and include the interconnection to the main utility service.

Mr. Sharma testified that there was also an “[u]ptime requirement” for the RP1

project under the power purchase agreement, which is “a requirement so that the fuel

cell is functioning some certain number of hours in a year.” Mr. Sharma explained that,

according to his understanding, the uptime requirement was in place because “if the fuel

cell equipment was not up and running, then this renewable fuel [the anaerobic digester

biogas] would have to be flared.” Mr. Sharma indicated that the uptime requirement is in

place regardless of whether the digester gas conditioning equipment was operational,

and the RP1 project could run on natural gas in the interim, because the natural gas

“runs through a different gas conditioning equipment,” discussed below as a fuel

desulfurizer.

The parties also stipulated that, additionally, “RP1 and IEUA entered into a Fuel

Cell Site Lease and Easement, dated October 1, 2010, providing for RP1’s lease of an

area consisting of approximately four thousand (4,000) square feet on property owned

by IEUA at its Regional Plant No. 1 for purposes of locating and operating the RP1

Project.” Mr. Sharma explained at trial that “typically when you have a service contract

you also have a site lease or an easement where you have rights to access the site to

build your power plant and service the contract.” A number of easement documents are

also included in the record, such as an “Access easement,” and a “gas pipeline

easement.”

A review of the record indicates that RP1 contracted with multiple other parties to

complete construction of the fuel cell system. The parties stipulated that RP1 and HDR

Design-Build, Inc. entered into a contract “with respect to the design and build of the

RP1 Project.” 6 Mr. Sharma stated at trial that HDR Design-Build, is “a large engineering

and construction company that undertake [sic] tasks like that, and they’re very well-

known in the wastewater treatment industry.” It appears that HDR Design Build did not

actually manufacture the key components, but, instead, was responsible for unloading

6 The parties alternate between describing the contractor responsible for overseeing the

overall project assembly as a “design-build” contractor, versus an engineering,

procurement, and construction (EPC) contractor. Mr. Markell, defendant’s expert

witness, testified as to his understanding of the difference between the two types of

contractors: “The relevant difference is, in an EPC contract, the contractor usually does

everything. They will design, buy and procure, and then build the plant. And in addition

to that, typically they’ll provide what they call a wrap guarantee, so they’ll guarantee the

entire project.”

7

and installing the “fuel cell module, water treatment, main process, exhaust stack, and

fuel desulfurization skids,” as well as unloading the “PCU [power conditioning unit],

Transformer, switchgear, heat exchanger, gas conditioning equipment and 1500 KVA

load leveler,” among other tasks. The contract also indicates that HDR Design Build

was to install the project’s piping and electrical equipment.

The parties stipulated that “RP1 and FuelCell Energy, Inc. (‘FuelCell Energy’)

entered into a Sales Contract for Direct FuelCell (DFC) Power Plants, dated October 29,

2010, for RP1’s purchase of a 2.8 MW DFC-3000 fuel cell power plant from FuelCell

Energy for the RP1 Project.” Plaintiffs’ witness, Anthony Leo, Vice President of

applications and Advanced Technologies for FuelCell Energy, testified that “FuelCell

Energy is in the business of manufacturing, developing, in some cases installing,

servicing fuel cell power plants,” and that its “main commercial product line is a specific

type of fuel cell called the molten carbonate fuel cell.” Mr. Leo testified that the sales

contract was their standard form agreement. The sales contract, provided to the court

as a joint exhibit, specified that the fuel cell would be a “carbonate-based fuel cell power

plant utilizing Seller's Direct FuelCell® technology.” An article in FuelCellToday about

the RP1 project, also submitted as a joint exhibit, stated that the fuel cell built was of the

“molten carbonate” type. The parties further stipulated that RP1 entered into a “Service

Agreement for Direct FuelCell (DFC) Power Plants dated October 29, 2010, in

connection with the RP1 Project,” with FuelCell Energy. Mr. Sharma testified at trial that

FuelCell Energy was chosen because “FuelCell Energy makes the only large fuel cell

that can work on biogas,” and also stated that “at that scale, they are the only

manufacturer in -- actually globally.” Mr. Sharma testified at trial that the warranty

provided by FuelCell Energy for its equipment only covered the equipment the company

provided, and not the equipment supplied by other contractors, such as the gas

conditioning equipment. Mr. Leo also indicated at trial that if the gas conditioning

equipment failed and, therefore, incompatible fuel entered and damaged the fuel cell,

UTS BioEnergy would have to pay for repairs to the fuel cell assembly, not FuelCell

Energy. FuelCell Energy was not responsible for the operation of the gas conditioning

equipment.

The parties stipulated that, for the gas conditioning equipment, “RP1 and ESC

Corp. [Environmental Systems and Composites Corporation] entered into a UTS

Equipment Purchase Agreement dated March 2, 2011, for the purchase by RP1 of a

digester gas fuel conditioning system for the RP1 Project.” The scope of work for the

purchase contract with ESC Corporation stated that “ESC Corporation is responsible for

process design and Original Equipment Manufacturing procurement required for the

ESC Digester Gas Fuel Conditioning System.” Mr. Sharma answered in the affirmative

at trial that ESC Corporation was chosen “in part based on the fuel specifications from

FuelCell Energy,” and stated that the equipment “was designed to meet the

specification of the fuel that would enter the stack.” Sarwan Wason, plaintiffs’ expert

witness, stated that: “There are two main suppliers, ESC and AFT,” and that “[t]hese

two companies have provided gas conditioning equipment on all of our projects.”

8

The parties additionally stipulated that “[t]he heat recovery system for the RP1

Project was supplied by Cain Industries, pursuant to a contract with RP1.” As for other

suppliers, Mr. Sharma stated at trial that “there was equipment supplied. Concrete and

pipes and transformers and inverters, you know, were supplied by different contractors,

and they were all integrated by HDR [Design-Build].” The parties stipulated that

“[a]dditional property in the RP1 Project includes the concrete foundations[ 7] for the

equipment, mechanical piping and interconnection lines, a second transformer, a

second switchgear, and electrical instrumentation provided by HDR [Design-Build].”

The parties dispute the specific commercial operation date of the RP1 project.

According to the parties’ joint stipulation, “[t]he RP1 Project began commercial

operations on September 11, 2012, utilizing natural gas to produce power for delivery to

the IEUA grid and using the heat recovery system to capture excess heat from the fuel

cell.” On November 9, 2012, according to the parties, “[t]he RP1 Project achieved the

required 75% digester gas blend.” 8 A November 9, 2012 letter from Joseph C. Fuller,

Project Manager for FuelCell Energy, the supplier of the fuel cell, to Scott Warfield, Vice

President of Operation for UTS BioEnergy, stated that “[d]ata has been collected

showing that the Fuel Cell Power Plant was running at 76% anaerobic digester gas at

2800kW for one hour duration.” At trial, Mr. Sharma discussed his understanding of the

“commercial operation date” within the power purchase agreement between RP1 and

UTS BioEnergy. At trial, Mr. Sharma stated “the commercial operation date occurs

when all the systems and subsystems of the entire power plant are running and

functioning properly as intended. And that includes the gas conditioning equipment that

would be required to clean the biogas as well. And the commercial operation date is the

beginning of the term of the contract.”

Mr. Leo from FuelCell Energy testified at trial that FuelCell Energy was involved

in commissioning 9 the RP1 project. He stated that the commissioning process involves

“the initial turn-on of all the various subsystems, the initial heat-up of the complete

system, and the initial power ramp to full power.” Mr. Leo testified that “[i]f we provided

the [gas conditioning] equipment, we would commission it at the same time. If it was

provided by a third person, then that third person has to commission the equipment

before we can commission our equipment.” Mr. Leo further testified that a third-party

7 The parties jointly explain that the terms “foundation,” “base,” “pad,” and “platform,”

have “been used interchangeably in this case,” but all similarly refer to “a general

description of the concrete floor structure of a facility or the underlying concrete

structure for specific pieces of equipment,” upon which the pieces of equipment stand.

8 The RP1 power purchase agreement with the IEUA stated: “Seller [RP1] requires a

regular minimum operating ratio of 75% digester gas and 25% natural gas.”

9 The parties switch between using the word and phrase “commissioning” and “placed in

service” in their briefs and at trial. Donald Edward Settle, defendant’s witness and

“senior project leader 4” at the National Renewable Energy Laboratory (NREL),

indicated at trial that the two terms have interchangeable meanings, but “for tax

purposes, ‘placed in service’ is the expression that’s used.”

9

gas conditioning equipment would have to be commissioned before the FuelCell Energy

fuel cell could be commissioned: “The electrical connection is through us because it’s

part of our balance of plant, so we have to at least be electrically all connected, and

then they can commission it. And then when it’s up and running and making fuel, we

can start our power ramp.” Mr. Leo affirmed at trial, however, that natural gas is “used to

heat up and begin the process of generating electricity,” during commissioning. Mr. Leo

testified that during the commissioning of the system the fuel cell “can be switched over

to the digester gas anytime during the power ramp.” Mr. Leo also testified that the

commissioning of the plants separately is done “just so that you can verify the dual-fuel

operation,” but that they are separate commissioning events. Nonetheless according to

Mr. Leo, “it’s all one commissioning from a commercial standpoint, but there are

separate sort of subprocesses.” Mr. Leo further testified that the commissioning process

by FuelCell Energy is structured, in part, for convenience concerns, and

is configured to operate with natural gas because that’s the fuel that we

are most confident will be available when we need it, so for the initial heat-

up, that’s why it's configured for natural gas. It could be configured for

digester gas, but it’s more common to configure it for natural gas.

Mr. Wason, plaintiffs’ expert witness also admitted that although the RP1 and SJ-1

projects started on natural gas “as a matter of practice,” the choice to start a fuel cell on

natural gas or digester gas was not technical, but procedural in nature. Mr. Wason

testified: “They have to test their equipment, okay, on digester gas as well as natural

gas, so whether you first test on natural gas and then on digester gas or you first test on

digester gas and then natural gas, it doesn’t make any difference . . . .” Mr. Wason

indicated it was easier to test on natural gas because it is a simpler pipeline connection

to FuelCell Energy’s fuel cell.

At trial, Mr. Sharma also discussed the monthly operations reports of the “fuel

cell power plant.” The reports showed both “Fuel Cell Availability” and “DG [Digester

Gas] Treatment Availability” as a percentage of operating time per month. Mr. Sharma

explained that separate statistics were kept for both fuel cell assembly operation and

gas conditioning equipment operation, because:

for the purpose of SGIP [Self-Generation Incentive Program] tracking, we

are required to ensure that we run 75 percent on biogas and no more than

25 percent on natural gas. . . . Because of these two reasons, we are

supposed to -- we have to track natural gas usage as well as the gas

conditioning uptime and the fuel cell uptime separately.

Mr. Sharma testified that the reasons for tracking the statistics was not only to make

sure the project was meeting the Self-Generation Incentive Program requirements, but

also because “it’s your responsibility. If the gas conditioning system is down for some

reason, then you have to pay for it.”

10

Contained in the record is a press release from the IEUA, dated October 15,

2012, which states in part:

A 2.8 megawatt fuel cell power plant, owned and operated by Anaergia

Services – a division of Anaergia Inc. recently came on-line at the Inland

Empire Utilities Agency’s (IEUA) Water Recycling Plant located in Ontario

California. Installation of the fuel cell plant assists IEUA with implementing

its renewable energy program and removes a significant risk factor

regarding compliance with any future changes to clean air regulations.

Digester gas has historically been used at IEUA’s treatment plant to

provide a fuel for cogeneration engines that provided energy to other

processes within the facility. However, since regulatory requirements

regarding power generation emissions continue to become more stringent,

IEUA entered into a private-public partnership with Anaergia to efficiently

convert the waste biogas into ultra-clean electricity.

A press release from FuelCell Energy, also submitted as a joint exhibit, noted that the

RP1 fuel cell project was the “LARGEST RENEWABLE BIOGAS FUEL CELL

INSTALLATION OPERATING IN THE USA,” (emphasis in original), and that it “meets

almost all of IEUA’s baseload power needs at the Regional Plant 1,” “assists IEUA with

implementing its renewable energy program and removes a significant risk factor

regarding compliance with any future changes to clean air regulations.”

Below is an aerial picture of the RP1 project, provided as a joint exhibit

containing both the fuel cell system and the gas conditioning equipment; as situated

within the wastewater treatment plant area. The court has identified the location of the

RP1 project within the picture:

11

Moreover, the parties provided a close-up picture of the RP1 project. Mr. Sharma

explained at trial that the fuel cell assembly was in the foreground and the gas

conditioning equipment in the background.

13

RP1 Project Costs

Item Estimated Cost

“Construction & Equipment”

$2,640,122.00

(from HDR Design-Build)

“Fuel Cell Equipment”

$8,944,489.00

(from FuelCell Energy)

“Gas Conditioning Equipment”

$2,315,973.00 10

(from ESC Corporation)

“Other Equipment,

Supplies & Materials” $290,196.00

(primarily the Heat Recovery

Unit from Cain Industries)

“Soft Costs”

$2,425,540.00

(primarily tax, interest, and labor)

TOTAL: $16,616,320.00

The SJ-1 Fuel Cell Project

The parties have stipulated that:

SJ-1 owns and operates 1.4 MW fuel cell facility consisting of a fuel cell

power plant and ancillary equipment (the “SJ-1 Project”) located at the

City of San Jose (“San Jose”) Water Pollution Control Plant (“WPCP”) in

County of Santa Clara, California. . . . San Jose’s WPCP collects and

treats wastewater and biosolids from domestic, commercial, and industrial

sources.

The court notes that the basic facts behind the installation of the RP1 and SJ-1

projects are largely similar. Mr. Sharma testified that, compared to the RP1 project,

“[t]here are subtle differences, but they’re very similar.” He explained that, primarily, “SJ-

1 is about half the size of RP1.” The parties also stipulated that, as with the IEUA

facility, “San Jose’s WPCP also includes anaerobic digesters, owned and operated by

San Jose, which produce biosolids and biogas from the processing of WPCP’s

wastewater sludge.” According to the parties:

Prior to the installation of the SJ-1 Project, this biogas was used, along

with purchased natural gas and landfill gas, to fuel on-site engine

generators that produced an average of 5.2 MW of electricity. When the

10 Plaintiffs also state in their complaint that the “direct costs of the gas conditioning

equipment were $2,315,973 and the indirect costs included a pro rata portion

(approximately 21 percent) of the build-design contract costs, sales taxes, and other

costs.”

15

generators needed to be replaced due to age, San Jose decided to

replace them with a fuel cell system.

As stipulated to by the parties, “San Jose issued a ‘Request for Proposal,’ RFP

09-10-32, Power Purchase & Site Lease Agreement for Fuel Cell Power Production

System, dated June 29, 2010, for the purchase of electricity from a fuel cell system to

be constructed, owned, and operated by the successful party.” The request for

proposals for the San Jose Water Pollution Control Plant fuel cell system was provided

as a joint exhibit. The request for proposals stated under “BACKGROUND

INFORMATION” that pursuant to the California Energy Commission Self Generation

Incentive Program, “the Water Pollution Control Plant (WPCP) has been approved for

an amount to be determined for Fuel Cell Power generation of 2.8 MW. [San Jose] City

intends to take this unique opportunity to move WPCP towards higher efficiency and

achieving a renewable energy goal of 100 percent.” (capitalization and emphasis in

original). The request for proposals also stated that “[t]his project is a part of the City’s

‘Green Vision’” and “a part of [San Jose Water Pollution Control] Plant’s goal of

achieving overall higher energy efficiency and 20% reduction of energy consumption by

the end of year 2012.”

According to Mr. Sharma, although the RP1 project required only 75% biogas

and could run on 25% natural gas, the San Jose request for proposals preferred that the

SJ-1 fuel cell facility operate 100% on anaerobic digester biogas. Mr. Sharma testified

at trial that this increased minimum biogas use requirement was possible because “in

this case, they [San Jose] had sufficient biogas fuel to supply hundred percent for this

biogas power plant, so the 75/25 question did not arise at that point in time.” Under the

San Jose request for proposals’ “SCOPE OF SERVICES,” (capitalization and emphasis

in original), the contract awardee would be required to “provide all materials and

equipment including the digester gas clean-up skid,[ 11] to condition the methane gas for

use, labor, including consumables except listed under City Responsibilities, required for

maintenance and operation of the Fuel Cell System Power Plant on a seven (7) day a

week, twenty four hour (24) per day basis . . . .” The request for proposals also stated

that the plant was “to be operated on plant digester gas, with the resulting electrical

output to be sold to the City for an agreement term of 20 years. All the generated

electrical power will only be used onsite.”

As with the RP1 project, it appears that SJ-1, or its parent UTS BioEnergy,

submitted a successful bid and was awarded the San Jose fuel cell system contract. 12

11The parties define “[s]kid or skid-mounted” as “[p]re-fabricated, assembled, and

mounted equipment delivered to the project site as one unit.”

12 Mr. Sharma indicated at trial:

So City of San Jose actually had gone through multiple RFP processes, or

they had issued the RFP a few times before the final RFP was issued

which UTS bid on and succeeded. But prior to that, UTS had had some

conversations with the City of San Jose wastewater treatment plant in

16

Mr. Sharma testified at trial that the agreements involved in constructing the SJ-1 fuel

cell facility were “materially similar” to the agreements involved in constructing the RP1

facility, except for the requirement to operate on 100% biogas. The parties stipulated

that “SJ-1 and San Jose entered into a Power Purchase Agreement, dated October 27,

2010, providing for the sale to San Jose of the electricity generated by the SJ-1 Project,”

and that “SJ-1 and San Jose entered into a Fuel Cell Services Site Lease Agreement,

dated November 11, 2010, providing for SJ-1’s lease of an area on property owned by

San Jose at its WPCP for purposes of locating and operating the SJ-1 Project.”

The power purchase agreement required SJ-1 to provide and install all the

equipment for the project, including the gas conditioning equipment. The power

purchase agreement on the first page stated that “WHEREAS, Customer [San Jose]

desires that Provider [SJ-1] install, maintain, operate and own and Provider desires to

install, maintain, operate and own Systems (as hereinafter defined) to be located on the

Sites . . . .” Later in the power purchase agreement, “Systems” was defined to “mean

each of the fuel cell systems installed pursuant to this Agreement at the Site and more

fully described in Exhibit B hereto; provided, however, that the term Systems shall only

include equipment and materials up to but not including the Interconnection Point of any

such System.” (emphasis in original). 13 Under Exhibit B, “SPECIAL CONSTRUCTION

PROVISIONS,” the term “System” was not further defined, but in “GENERAL DESIGN

CRITERIA,” it was stated: “The Fuel Cell System shall be fed digester gas. The Fuel

Cell System shall include fuel conditioning and cleaning system.” (capitalization and

emphasis in original). Moreover, the power purchase agreement’s Exhibit F, “SCOPE

OF SERVICES,” as in the request for proposals, also stated that the contractor, SJ-1,

would be responsible for all project materials, “including the digester gas clean-up skid,

to condition the methane gas for use.” Mr. Sharma explained that the SJ-1 contract also

specified that the purchaser of the power, San Jose, was to provide the biogas “for free.

And if biogas was not available, then the city was obligated to providing us natural gas

for that period.” As opposed to the RP1 project, which was to operate with some natural

gas always, for the SJ-1 project, Mr. Wason, plaintiffs’ expert, testified that “SJ-1 is not

designed to run on natural gas for any length of time because of the limitation of the

contract between Anaergia and City of San Jose. . . . it’s only for emergencies when you

can run on natural gas for the San Jose plant.”

It appears from the record that SJ-1, like RP1, contracted with many different

entities to build the fuel cell system. The parties stipulated that “SJ-1 and Otto H.

Rosentreter Co. entered into a Design-Build Contract, dated January 17, 2011, with

respect to the design and build of the SJ-1 Project at WPCP. Otto H. Rosentreter Co.

retained Carollo Engineers, Inc. (‘Carollo’), to provide design and engineering services

terms of what essential elements should be present in an RFP for that to

be successful, so even before the RFP was issued, there were some

communications between UTS and City of San Jose.

13Mr. Sharma testified at trial that “systems” in the SJ-1 power purchase agreement

was defined similarly to “facility” in the RP1 power purchase agreement.

17

for the SJ-1 Project under the Design-Build Contract.” From a review of the design-build

contract contained in the record as a joint exhibit, Otto H. Rosentreter was to be

responsible for installation and maintenance services, including unloading and

installation of the “fuel cell module, water treatment, main process, exhaust stack, and

fuel desulfurization skids,” unloading of the “PCU, Transformer, switchgear, heat

exchanger, gas conditioning equipment and 1500 KVA load leveler,” and installation of

the electrical and piping work. Mr. Sharma testified that O.H. Rosentreter was

responsible for integrating the various components, similar in nature to the work

performed by HDR Design-Build for the RP1 project.

The parties stipulated that, as with the RP1 project, “SJ-1 and FuelCell Energy

entered into a Sales Contract for Direct FuelCell (DFC) Power Plants dated October 29,

2010, for SJ-1’s purchase of a 1.4 MW DFC-1500B fuel cell power plant from FuelCell

Energy for the SJ-1 Project.” The sales contract, provided as a joint exhibit, specified

that the fuel cell would be a “carbonate-based fuel cell power plant utilizing Service

Provider's Direct FuelCell® technology.” The parties also stipulated that “SJ-1 and

FuelCell Energy entered into a Service Agreement for Direct FuelCell (DFC) Power

Plants dated October 29, 2010, in connection with the SJ-1 Project.” Plaintiffs’ witness,

Mr. Leo, indicated at trial that the sales and service contracts between the RP1 and

SJ-1 contracts were “essentially the same” and both were based on a “standard form”

sales and service contract template. Regarding the gas conditioning equipment, the

parties stipulated that “SJ-1 and ESC Corp. entered into a UTS Equipment Purchase

Agreement dated February 11, 2011, for the purchase by SJ-1 of a digester gas fuel

conditioning system for the SJ-1 Project.” The “SCOPE OF WORK,” (capitalization and

emphasis in original), in the gas conditioning equipment purchase contract, submitted

as a joint exhibit, stated that the “Supplier [ESC] is responsible for process design and

Original Equipment Manufacturing procurement required for the ESC Digester Gas Fuel

Conditioning System.” Finally, the parties also stipulated that “[t]he heat recovery

system for the SJ-1 Project was supplied by Cain Industries, pursuant to a contract with

the design-builder Otto H. Rosentreter Co.” Although the suppliers for the fuel cell

assembly, gas conditioning equipment, and heat recovery unit were the same between

the RP1 and SJ-1 projects, Mr. Sharma testified at trial that the “suppliers for nuts, bolts,

fittings, pipes, transformers, switchgears might have been different.”

As jointly stipulated to by the parties, “[t]he SJ-1 Project began commercial

operations on June 15, 2012, utilizing natural gas to produce power for delivery to the

San Jose grid and using the heat recovery system to capture excess heat from the fuel

cell.” Mr. Sharma testified at trial that the gas conditioning equipment had to be installed

prior to the “commercial operation date” of the SJ-1 facility. The parties also stipulated

that the project “achieved the required 75% digester gas blend on June 15, 2012.” 14

Another letter from Mr. Fuller, from FuelCell Energy, to Mr. Warfield, of UTS BioEnergy,

contained in the record as a joint exhibit, stated that “the Fuel Cell Power Plant has

14The SJ-1 power purchase agreement stated that the City of San Jose could terminate

the agreement “if expected production of digester gas does not support at least 75% of

the System’s rated capacity of 1.4MW . . . .”

18

operated at the shown power level on greater than 75% anaerobic digester gas.” At trial,

Mr. Sharma testified that SJ-1 operates on almost one hundred percent biogas,

although he admitted that “there might be some blending with natural gas.” The parties

jointly provided exhibits of visuals of the SJ-1 fuel cell project. Shown below is an

overhead view of the project area, with additional explanation of the location of the

various facilities provided by SJ-1:

Additionally provided as a joint exhibit by the parties is an engineering drawing of the

SJ-1 project, with the various components identified by the parties:

19

chain link fence around it.” Mr. Sharma testified that most of the electrical and

mechanical equipment “was supplied by FuelCell Energy.”

Plaintiffs allege that “SJ-1 incurred $9,440,141 in total costs to construct the Fuel

Cell,” although the breakdown of the costs has not been stipulated to by the parties.

Based on a review of the various construction and sales contracts discussed above

related to the SJ-1 project, the court has provided an estimated breakdown of a portion

of the costs associated with the SJ-1 project:

SJ-1 Project Costs

Item Estimated Cost

Construction $1,627,500.00

(from Otto H. Rosentreter)

Fuel Cell Equipment $4,750,000.00

(from FuelCell Energy)

Gas Conditioning Equipment $1,525,000.00 15

(from ESC Corporation)

Heat Recovery Unit $66,581.00

(from Cain Industries)

TOTAL: $7,969,081.00

This breakdown, however, represents only approximately 84.4% of the “total costs”

plaintiffs allege were spent on the SJ-1 project.

Application for Section 1603 Grant

The parties stipulated that “RP1 and SJ-1 each submitted applications to U.S.

Department of the Treasury (‘Treasury’) for payment in lieu of a tax credit under Section

1603 with respect to the costs for constructing the RP1 and SJ-1 Projects at the IEUA

Regional Plant No. 1 and San Jose’s WPCP, respectively.” The parties provided as a

joint exhibit the RP1 final “Application for Section 1603: Payments for Specified

Renewable Energy Property in Lieu of Tax Credits.” (emphasis in original). Under

the final, amended “Narrative Description of Property,” (emphasis in original), the

applicant, RP1, stated: “The Inland Empire Project will purify and compress the

biomethane gas generated by the Inland Empire Utilities Agency Regional Plant 1. The

purified and compressed gas will be fed directly to the fuel cells placed into use at the

Regional Plant 1 Facility to generate electricity and heat for delivery to and purchase by

the Inland Empire Utilities Agency.” The application listed the “Qualified cost basis” of

the project as $16,532,985.00. Plaintiffs state in their complaint that this value is

15 Plaintiffs also state in their complaint that the “direct costs of the gas conditioning

equipment were $1,492,698 and the indirect costs included a pro rata portion

(approximately 23 percent) of the build-design contract costs, sales taxes, and other

costs.”

21

equivalent to the total cost of the RP1 project, $16,616,320.00 “less certain ineligible

costs.” 16 According to the parties, RP1 applied for a grant of 30% of the reported cost

basis, equivalent to $4,959,896.00. The “Property Placed in Service” date for the RP1

project, according to the application, was September 11, 2012. (emphasis in original).

The parties have stipulated that the RP1 Section 1603 application was received by

Treasury on October 17, 2012.

The parties also provided as a joint exhibit, the SJ-1 final “Application for

Section 1603: Payments for Specified Renewable Energy Property in Lieu of Tax

Credits.” (emphasis in original). Under the “Narrative Description of Property,”

(emphasis in original), the applicant, SJ-1, stated: “The San Jose Project will purify the

biomethane gas generated by the San Jose Water Pollution Control Plant. The purified

gas will be fed directly to the fuel cell placed into use as [sic] the San Jose Facility to

generate electricity and heat for delivery to and purchase by the City of San Jose.” The

application listed the “Qualified cost basis” of the project as $9,282,447.00. Plaintiffs

also state in their complaint that this value is equivalent to the total cost of the SJ-1

project, $9,440,141.00, “less certain ineligible costs.” According to the parties, SJ-1

applied for a grant of 30% of the cost basis, equivalent to $2,784,734.00. The “Property

Placed in Service” date for the SJ-1 project, according to the application, was June 15,

2012. (emphasis in original). The parties stipulated that the SJ-1 application was

received by Treasury on September 27, 2012.

Under section four of the RP1 and SJ-1 grant applications, the applicants were

asked to state which “Specified Energy Property” the Section 1603 grant is for, as well

as to “indicate which choice best describes the type of specified energy property.”

(emphasis in original). Both RP1 and SJ-1 stipulated that they “indicated that the ‘best

choice’ describing the” projects was “‘Fuel cell property’ and checked that item on” the

Section 1603 grant applications. The “Fuel cell property” choice on the application was

under the selection of properties available for selection as “Specified properties

eligible under section 48 of Internal Revenue Code.” (emphasis in original). The

description accompanying the “Fuel cell property” option was: “Fuel cell property — fuel

cell power plant that has a nameplate capacity of at least 0.5 kW of electricity using an

electrochemical process and an electricity-only generation efficiency greater than 30%.”

(emphasis in original). A separate set of energy property options was available under a

list of “Specified properties eligible under section 45 of Internal Revenue Code.”

(emphasis in original). Of relevance to this dispute, another option the plaintiffs could

have selected under this list was “Trash facility — uses municipal solid waste to

produce electricity and is not a landfill gas facility.” Plaintiffs allege in their complaint that

“Treasury’s application allows only one choice to be indicated as the ‘best’ choice,” and,

16 A “REPORT OF MANAGEMENT ON ELIGIBLE COST BASIS,” created by UTS

BioEnergy, and provided in the record, states that the ineligible costs for the two

projects consisted primarily of an “Asset Retirement Obligation,” which is “the cost of

returning the site to its original state as is required under the terms of the power

purchase agreement.” (capitalization and emphasis in original).

22

similarly, the parties jointly stipulated “Treasury’s application allows only one choice to

be indicated.”

The parties stipulated that the “overarching” issue before this court is:

whether plaintiff is entitled to additional payments under § 1603 of the

American Recovery and Reinvestment Tax Act (“ARRTA”), P.L. 111-5

(2009), as amended by § 707 of the Tax Relief, Unemployment Insurance

Reauthorization, and Job Creation Act of 2010, P.L. 111-312 (2010),

beyond those awarded to it by the Department of Treasury. Specifically,

plaintiffs applied for § 1603 payments for two projects utilizing fuel cells

that it placed in service. Plaintiffs contend that they are entitled to include

in the cost basis used to calculate their § 1603 payments costs associated

with gas conditioning equipment, while defendant contends that those

costs do not qualify.

The parties stipulated that “Treasury engaged the National Renewable Energy

Laboratory (‘NREL’), a Government-sponsored laboratory, to review applications for

Section 1603 payments. NREL reviewed the applications submitted by RP1 and SJ-1

and made recommendations to Treasury concerning those applications.” Donald

Edward Settle, “senior project leader 4” at the NREL, testified for the defendant and

explained at trial that, although contractually, the Department of Energy is partnering

with the Department of the Treasury related to analysis of Section 1603 grant

applications, “DOE is actually relying on us to provide the advice to Treasury in this

matter.” At trial, Mr. Settle further explained that he was not a member of the

Department of the Treasury or a government employee, but “an employee of the

Alliance for Sustainable Energy, and that’s the contractor that manages the federal lab

which is NREL.” Mr. Settle testified that he has an engineering degree and engineering

work background and that from “2009 to present, I’ve been at NREL and serving mostly

as the senior advisor to the U.S. Department of Treasury on the 1603 program.” Mr.

Settle explained at trial that he initially served “as an advisor to U.S. Treasury, and I

would lead the due diligence aspect of the program. And that was when we first started

receiving applications the end of July in 2009.” He added that “[s]ince then, I’ve been

more a project leader role.”

According to Mr. Settle, regarding the Section 1603 grant program, “NREL

worked with Treasury to set up an online system” and application process, which, at the

date of the trial, had received over 200,000 applications, with about 100,000 reviewed.

Regarding the review process for applications, Mr. Settle testified that, after an

electronic application came in, “we essentially assign two reviewers from our team to

conduct the review.” He described the two reviewers:

There’s a primary reviewer, and their role is really to delve into the

documentation and go back and forth with the applicant, asking clarifying

questions, if that’s appropriate.

23

And then there’s a secondary reviewer which still conducts a

considerable review, but they’re limited to either concurring or not

concurring with the primary reviewer.

Mr. Settle stated at trial that for many projects he had served as a primary or secondary

reviewer, as well as helped “other team members basically with their due diligence

process.” With regards to the RP1 and SJ-1 projects, Mr. Settle explained that he was

not a primary or secondary reviewer, “but I was made aware of the application issues,

by the primary and secondary reviewers, regarding the gas conditioning equipment and

came in at that point to work with them to try to find the right solution.”

Mr. Settle indicated at trial that the evaluators for the Section 1603 program

mostly are employees of the Alliance for Sustainable Energy, the organization that

manages NREL, with some temporary contractors. Mr. Settle explained that the Section

1603 evaluation team’s skill levels were composed of a variety of different areas, both

technical and non-technical:

So the -- the team actually we’ve probably had almost fifty people come

through the program to serve as reviewer. Some of them brought different

skills to the table, so we actually had a mix of people. Most people had

advanced degrees from college. Some of them were from the legal side,

law degrees. There were some engineers. There were people that had so-

called tax experience, if you will.

Regarding tax experience, Mr. Settle stated at trial that “people who were brought into

the program to do the due diligence were not retained specifically because they had tax

experience.” He added, however, that “[w]e do have certain employees within NREL

who understand fairly well incentive programs that help with the deployment of

renewable energy, so that does include taxes as they relate to renewable energy

property.” Mr. Settle testified that he would not describe any of the NREL employees to

be tax experts, although Mr. Settle testified that for multiple applications, the NREL

team, acting through the Department of the Treasury, consulted with the IRS for legal

analysis related to certain Section 1603 applications. Mr. Settle stated at trial that, when

doing reviews, a reviewer’s analysis covered a “unique mix of understanding some of

the technical aspects, understanding, you know, the tax laws or regulations . . . .” Mr.

Settle indicated that, to arrive at their determinations, their team would look at

engineering drawings, the project “engineering, procurement, and construction

contract,” as well as other contracts and documents.

The NREL evaluators examined whether the gas conditioning equipment fell

within Section 1603’s definition of a “QUALIFIED FUEL CELL PROPERTY,” in order to

be eligible for a grant. See Section 1603(d)(2). With regards to the gas conditioning

equipment, Mr. Settle testified:

[W]e also looked at the definition of “fuel cell power plant.” And we had

worked through a fair number of fuel cell power plants within the system

24

and had not seen one that had this type of property with it, so in looking at

the statutory definition, what we understood was that a fuel cell power

plant was essentially within a certain definition and would not have

included the gas conditioning equipment.

Despite the unique legal and technical questions posed by the RP1 and SJ-1 grant

applications, in particular surrounding the gas conditioning equipment, Mr. Settle stated

at trial that he could not recall if the IRS, or Treasury’s Tax Policy section, was ever

contacted with regards to the RP1 and SJ-1 applications. He also testified that he never

himself contacted the IRS to clarify the tax issues related to the RP1 and SJ-1

applications. Mr. Settle also was asked at trial if NREL reached out to other technology

laboratories regarding the issues raised. Mr. Settle testified that he did not reach out to

the National Energy Technology Laboratory, which is another Department of Energy

laboratory 17 or the Department of Energy about questions related to the RP1 or SJ-1

applications, generally, or regarding whether fuel cell power plants include gas

conditioning equipment as part of the eligible cost basis. Mr. Settle stated that “I also

don't know if in fact other players on my team did not go and visit with the fuel cell

experts within NREL . . . .” When asked, Mr. Settle acknowledged that he did not look at

any industry standards with respect to fuel cells to answer the questions posted in the

RP1 and SJ-1 applications, but “did look at various fuel cell providers and what they do

provide as part of their customary fuel cell package.”

Mr. Settle indicated at trial that, as opposed to reaching out to other agencies or

outside resources, instead, NREL relied, in significant part, on what was customary in

fuel cell projects their review team had encountered beforehand, to determine whether

or not the RP1 and SJ-1 project gas conditioning equipment was eligible for a Section

1603 grant. Mr. Settle testified that of “250 to 300” funded fuel cell power plant grant

applications, “less than half a dozen” of the projects contained gas conditioning systems

for operation on biogas, because, for the remaining projects, “[t]hey’re mostly natural

gas and some methanol in the transportation.” Mr. Settle added, in response to

questions:

Q. But you based that determination [that gas conditioning equipment was

not part of the fuel cell power plant] on looking to outside sources of

information to determine what was customary or not to define effectively

the fuel cell power plant under the code; isn't that right?

A. By “outside sources” do you mean those not provided by the applicant?

Because we did look --

17 The website of the National Energy Technology Laboratory explains that “NETL

[National Energy Technology Laboratory] has expertise in coal, natural gas, and oil

technologies; contract and project management; analysis of energy systems; and

international energy issues.” About, Nat’l Energy Tech. Lab., Dept. of Energy,

http://www.netl.doe.gov/about (last visited March 31, 2015).

25

Q. Independent of the statute.

A. So independent of the statute, we did -- yeah. We looked at what it

seems to be customary for the industry.

Mr. Settle expanded upon his response and stated that, for example, it was “customary”

for fuel cells to run on natural gas, and, therefore, a natural gas desulfurization system

would be allowable for a Section 1603 grant, as it is “a set of equipment that you can

expect to find when you purchase a package fuel cell power plant.” Mr. Settle explained

that the interconnection equipment, pads, and wiring were similarly allowed because

they were typical of fuel cell projects. Mr. Settle also created an analogy to cars in

discussing what is “customary” for a project:

You know, if I was going to go buy a pickup truck from a dealer across the

country, what would be customary would be to get a pickup truck that runs

on gasoline. I could get it to run on natural gas, but it would be an

extraordinary expense to get it to run on the natural gas, so the customary

approach in that perspective is a truck that runs on gasoline.

Mr. Settle acknowledged that the plaintiffs claimed that the gas conditioning

system was necessary for the RP1 and SJ-1 fuel cell projects to operate off of

anaerobic digester biogas, and admitted that this “was a good point,” but, regardless,

“the way we read the tax code, we didn’t see that it was a definitive point. It was not

relevant, frankly, to basis.” According to Mr. Settle, NREL considered what consisted of

a fuel cell power plant as “what was customarily supplied by a fuel cell manufacturer,”

and found significant that “a separate vendor was providing gas conditioning

equipment.” Mr. Settle further testified that “[w]e obviously had the experience of all the

other applications that we had seen, and we were not familiar with, to my knowledge,

that there was no other projects that included special gas conditioning equipment for

cleaning up biogas, digester gas” in the Section 1603 grant application. Mr. Settle,

nonetheless, also stated that “I think ultimately we came down to the tax code in trying

to figure out what was actually meant by the term ‘fuel cell power plant’ in the tax code,”

and indicated that reliance on what was “customary” in the industry was only a part of

the overall analysis.

According to Mr. Settle at trial, he viewed the RP1 and SJ-1 contracts and

concluded that they do not require the use of anaerobic digester biogas: “As I

understand it, they had a contractual obligation to use either natural gas or biogas. But

the principal purpose was probably the use of biogas.” Mr. Settle later noted that

“natural gas can be used, and I think there’s a specified limit of 25 percent, if I recall

correctly.” He also added:

And in particular in this case, the applicant [RP1] placed the equipment in

service two months prior I believe to the gas conditioning equipment even

being operational, and so therefore, you’d have to ask the question how

integral is it if in fact they started up the power plant, under the tax

26

definition of placed in service, without the biogas conditioning equipment

actually in operation.

He continued:

So from our perspective, you know, just as one point would be how

can you start up a facility and place it in service without something that is

integral to its operation being there in place.

If you went to look at a biomass plant, for example, and you didn’t

have your conveyors and fuel yard, and so forth, available, you wouldn’t

be able to start up that biomass plant.

Mr. Settle also stated that, under the NREL review, contracts are relevant to the

analysis, but “not the sole aspect.”

Although Mr. Settle stated that some, “less than half a dozen,” of the projects he

had reviewed contained gas conditioning systems for operation on biogas, he initially

testified that he was unaware of any application that chose, then, to include the gas

conditioning equipment as part of the cost basis for the Section 1603 grant, except for

RP1 and SJ-1. Mr. Settle later stepped back from those statements and admitted he did

not know:

Q. Do you know, based on that testimony, whether Treasury or NREL

allowed costs for gas conditioning equipment --

A. I don’t.

Q. -- in particular applications?

A. I don’t.

Q. Okay. Or disallowed.

A. Outside of these two, I’m not aware of any that were disallowed --

Q. Okay.

Mr. Settle testified that NREL did not initially consider whether or not RP1 or SJ-1

could qualify as trash facilities, because they did not designate this option on their

online applications. Mr. Settle later stated that, although he did not remember when, “at

some point we did evaluate” whether RP1 or SJ-1 could qualify as trash facilities. Mr.

Settle stated that

We’d concluded that it was not qualified as a trash facility. It was not

consuming, from our perspective, municipal solid waste. It was actually

27

taking digester gas into the plant. And we looked basically back to the

definition of a trash facility as outlined in [I.R.C.] section 45 and did not

find that it was compatible.

Mr. Settle further testified:

I think there was a letter from them at some point that basically said, you

know, we’re taking in municipal liquid waste, but we didn’t find that they

were actually taking in waste at all. They were taking digester gas.

And we didn’t -- we analyzed the wastewater treatment plant, and

the wastewater treatment plant was not subject to the municipal solid

waste regulations, and based on our review did not feel that this was a

trash facility as defined in the code.

In determining that the RP1 and SJ-1 projects were not using municipal solid waste, Mr.

Settle testified, speaking about the evaluation team, “we just felt, based on what the

actual facility[ies, referring to the RP1 and SJ-1 plants, are] being regulated as, not

being regulated as a municipal solid waste treatment facility, therefore, it’s not a trash

facility.” Mr. Settle testified he never formally communicated with the Environmental

Protection Agency, the agency that oversees regulation of solid waste, 42 U.S.C § 6901

et seq., about this question, but that he had a conversation with an unidentified person

from the Environmental Protection Agency Region 8, and that “the conclusion out of that

was that this was not a trash facility.”

In cross-examination, Mr. Settle reemphasized that the distinguishing factor as to

whether or not plaintiffs’ facilities qualified as trash facilities was due to NREL’s

conclusion that the anaerobic digesters feeding the RP1 and SJ-1 projects were not

running off of municipal solid waste. Mr. Settle responded to a hypothetical question

proposed by plaintiffs’ counsel:

Q. . . . If we had an anaerobic digester that digested municipal solid

waste, let’s say, and let’s just say that’s -- we have food waste from

maybe local restaurants, and you put that into an anaerobic digester. And

that is not a wastewater treatment facility. And then you produce biogas

from that; right?

A. Yes.

Q. And then you run that biogas through gas conditioning

equipment and then put it in – let’s just say it’s a combustion generator --

A. Sure.

Q. -- to make contract electricity. Would you call that a trash

facility?

28

A. Yes. It sounds like a trash facility.

...

Q. Okay. The same facts, but instead of a combustion generator,

we have a fuel cell and we put a fuel cell in that same train. Would you say

that’s a trash facility?

A. Yes.

...

Q. So the real dispute is whether -- is the difference between a

wastewater treatment facility and what would be otherwise an anaerobic

digester gas -- anaerobic digester that’s operating on what you’re terming

municipal solid waste.

A. Yes. That’s how we looked at it, is essentially that, you know, the

municipal wastewater treatment plant was not processing solid waste, the

fuel cell itself was not using municipal solid waste, and therefore, it did not

qualify as a trash facility.

The record indicates that during the application review period, the agency also

excluded from the cost basis for the RP1 and SJ-1 grants the cost of the heat recovery

units supplied by Cain Industries. Mr. Settle explained that he and the NREL examiners:

[W]e looked at the definition of a fuel cell plant power plant [sic] in the

statute or in the tax code, if you will, and the definition of “fuel cell power

plant” referred to the production of electricity, did not refer to the

production of thermal energy, and so we deemed the -- that the thermal

equipment to be noneligible, nonqualifying.

Mr. Settle stated that there “was some back-and-forth on that” with the parties, “but at

some point they agreed to remove the hot water or the thermal aspects of the project,”

although he admitted he could not recall the details. 18

Mr. Settle further testified that, after the review by NREL, the application “goes

18At trial, plaintiffs disputed that the plaintiffs had agreed that the heat recovery unit was

an ineligible cost. Plaintiffs’ counsel stated: “The agreement was to remove it as part of

a concession to Treasury in order to move the process forward and resolve it

administratively.” In the record, and discussed more below, is a letter from UTS

BioEnergy to a “Treasury 1603 Reviewer,” which states: “Therefore, we now understand

that the HW [Hot Water] pump system costs and HRU [Heat Recovery Unit] costs are

ineligible costs.”

29

electronically to the U.S. Department of Treasury with a recommendation. And all

decisions rest with Treasury in terms of eligibility and cost basis, and so forth, so if they

agree with our recommendation, then they’ll move forward with the award and funding.”

Mr. Settle emphasized that the Department of the Treasury makes the final Section

1603 determinations: “Ultimately it’s Treasury’s decision how to look at the application

and make the decisions,” and that NREL relies “on Treasury where there’s an issue of

legality.” Mr. Settle indicated that his contact at Treasury was Ellen Neubauer. Mr. Settle

further testified at trial that he believed the “fiscal assistant secretary” is responsible for

the Section 1603 program. Mr. Settle testified that he would not necessarily be aware of

any deliberations at Treasury regarding legal questions related to the RP1 and SJ-1

applications. No witnesses from Treasury testified at trial to describe the final steps of

the evaluation process before the final award decision was made.

The record indicates that staff from Treasury and/or NREL communicated back

and forth with plaintiffs during the selection process. Although the record does not

appear to contain a complete collection of the conversations at the administrative level

between the government and plaintiffs, it does contain what appears to be a portion of a

November 12, 2012 response from a David Allen, on UTS BioEnergy letterhead, to an

unnamed “Treasury 1603 Reviewer,” regarding questions asked by the government

about plaintiffs’ Section 1603 applications. This response letter provides additional,

general information about the RP1 project, and also addresses a question posed by the

government, which asked:

Question: 5. Ineligible costs: All costs associated with the gas conditioning

equipment/installation and heat capturing equipment/installation are

ineligible for a fuel cell project under Treasury 1603. Please remove all

ineligible costs and provide a revised cost basis.

(emphasis in original). Mr. Allen responded:

Answer: The biogas conditioning equipment, the heat recovery unit and

the HW pump system are all tangible personal property and integral to the

fuel cell installation. The fuel supply for the fuel cell project is digester

biogas from a wastewater treatment plant and it is therefore a renewable

energy source. Digester gas must be treated, cleaned and scrubbed to

meet the fuel supply specifications. This would be true of any renewable

biogas utilized for the production of electrical power. The gas treatment

and conditioning system (ESC contract) is therefore integral to the fuel cell

and the project does not work without it.

In order to produce the digester biogas, heat is required in the process.

The heat recovery/recapture system including the heat exchanger, hot

water pumps, valves and piping are integral to the fuel cell system to

recover otherwise wasted renewable energy utilized in the production of

the renewable biogas fuel source for the fuel cell.

30

We do not believe any of these costs to be ineligible as the equipment is

integral to the fuel cell operation. Accordingly we have not provided a

revised eligible cost basis.

A similar exchange occurred between SJ-1 and a “Treasury 1603 Reviewer,” in

the form of a December 21, 2012 response to questions from the government,

contained in the record. The government reviewer asked:

Question 5A. Ineligible Costs: The Program Guidance indicates that

eligible property is only tangible personal property as defined in 1.48-1(c)

and (d) of the Income Tax Regulations and is an integral part of the

facility. It appears that the cost breakdown includes costs that are not

eligible for payment under the Treasury 1603 program, including all hard

and soft costs associated with the biogas conditioning equipment (ESC

contract), HRU [heat recovery unit], and HW [hot water] pump systems.

The review team has reaffirmed that these costs are not integral to the

energy property and are therefore not eligible for Treasury 1603 funding.

Please submit a revised cost basis in spreadsheet format which excludes

these ineligible costs and clearly identifies how all the ineligible costs were

removed.

Mr. Allen, again using UTS BioEnergy letterhead, gave a detailed, five page response,

emphasizing that the gas conditioning equipment is “Contractually Required,”

“Integrated and Contiguous,” and “Integral” to the project, as well as that the equipment

falls within the definition of “Balance of Plant.” (emphasis in original). He argued that the

biogas conditioning equipment was contractually required because the “City of San

Jose Request for Proposal, RFP 09-10-15, Power Purchase & Site Lease Agreement

for Fuel Cell Power Production (‘RFP’) . . . state[d] the essential requirements of the

Project including the use of digester gas.” (footnote omitted). Further, based on a

physical description of the project site, he contended that “the biogas conditioning

equipment is tangible personal property squarely located at the site of the energy

property that is contiguous and integrated to the fuel cell system.” Moreover, Mr. Allen

argued the gas conditioning equipment is integral because “[t]he unconditioned digester

biogas that is available on the WPCP [Water Pollution Control Plant] site does not meet

the fuel cell manufacturer’s fuel specification so it cannot be used in the Project without

conditioning it first. In other words, the fuel cell cannot operate using unconditioned

biogas.” Thus, according to Mr. Allen, “without biogas conditioning equipment, this

Project cannot generate electricity from the digester biogas,” and, thus, the equipment is

“integral and essential to the generation of electricity from digester biogas by this

Project.” Mr. Allen also stated, “technically, operationally and contractually the biogas

conditioning equipment is an integral balance of plant component of the Project.”

Mr. Allen further analogized the role of the gas conditioning equipment in a fuel

cell system to that in a landfill gas facility, stating:

In a landfill gas facility (generating electricity from biogas produced by the

31

biodegradation of municipal solid waste) biogas conditioning equipment is

considered an integral part of the facility and an eligible cost under the

1603 program.

...

Here, the Project’s gas conditioning equipment performs the same integral

process as it would in a landfill gas facility. The biogas produced by the

biodegradation of biosolids in the wastewater treatment process is

captured to generate electricity at the WPCP. This captured digester

biogas must be processed by the gas conditioning equipment to remove

the high level of siloxanes, hydrogen sulfide and other contaminants

contained in it before it can be used in the fuel cell.

(emphasis in original). Mr. Allen added that “[w]hile the biogas conditioning equipment

could condition digester biogas without the fuel cell equipment, the fuel cell equipment

could not generate electricity from the digester biogas without the biogas conditioning

equipment.” (emphasis in original). He stated:

While Treasury may have encountered other fuel cell projects where

biogas conditioning equipment was not necessary to generate electricity

because those fuel cells run on pipeline natural gas (which by pipeline

standards must meet the fuel cell manufacturer's fuel quality

specifications), here we believe that we have clearly demonstrated that for

this Project the biogas conditioning equipment is a balance of plant

component that is contiguous, essential, necessary and integral to the

ability of this Project to generate electricity using digester biogas derived

from municipal liquid waste at a wastewater treatment plant.

(emphasis in original). In the letter, however, Mr. Allen suggested that the costs related

to the heat recovery system were ineligible: “The fuel cell equipment will generate

electricity without the HW [hot water] pump system or the HRU [heat recovery unit], just

less efficiently. Therefore, we now understand that the HW pump system costs and

HRU costs are ineligible costs.”

According to the parties, “[o]n January 14, 2013, Treasury issued a ‘Section 1603

Award Letter’ to RP1 in which it approved a payment of $4,026,253 for the RP1

Project,” which was $933,603.00 less than requested by RP1 in their grant application.

The parties stipulated that “Treasury based its payment on a reduced basis amount of

$13,420,843.” In the award letter, submitted as a joint exhibit, Treasury stated: “We

have reduced the payment to match the adjusted cost basis by removing costs

associated with the gas conditioning equipment and hot water system, which are

ineligible,” but the award letter provided no additional discussion on the issue.

After receipt of the award letter, the record indicates that on January 17, 2013,

Mr. Allen, this time using an Anaergia e-mail account, sent an e-mail to the “1603

32

Awards” mailbox, asking:

While [sic] are pleased to receive the 1603 award we are disappointed

that the gas conditioning equipment that makes it a truly renewable energy

project has been disallowed as an eligible expenditure.

Can we get an explanation of why the gas conditioning equipment is not

considered integral to the project?

Also, is it possible to get a break down of how the final award was arrived

at?

A couple of months later, on March 29, 2013, a response was provided from the

“1603Awards@treasury.gov” e-mail address to Mr. Allen, stating in relevant part:

The term “fuel cell power plant” means an integrated system comprised of

a fuel cell stack assembly and associated balance of plant components

which converts a fuel into electricity using electrochemical means. This

does not allow for the production or refining of the fuel source used to feed

the fuel cell. Therefore the costs associated with conditioning the gas and

collecting the waste heat are not eligible and were removed from the cost

basis.

Cost Basis:

Equipment

Fuel Cell $8,858,000.00

Hot Water System $0

Gas Treatment $0

BD [Build & Design] Contract $2,272,417.81 (79% of total contract, based

on 79% of the equipment costs were eligible)

Sales Tax

Fuel Cell $670,995.00

Heat Exchanger $0

Gas Conditioning $0

Other Costs $1,619,430.37

Total Costs $13,420,843 (revised cost basis) (equipment + Eligible portion

of BD contract + eligible sales tax + other costs) New Payment $4,026,253

(revised award amount).

The parties have jointly stipulated that “RP1 is not challenging the costs associated with

the heat recovery system described in Treasury’s Section 1603 Award Letter.”

Regarding the SJ-1 project, the parties further stipulated that, “[o]n March 1,

2013, Treasury issued a ‘Section 1603 Award Letter’ to SJ-1 in which it approved a

33

payment of $2,085,055 for the SJ-1 Project,” $699,679.00 less than the amount that

SJ-1 applied for under the program. According to the parties, Treasury “based its

payment on a reduced basis amount of $6,950,182.” The award letter from Treasury,

provided as a joint exhibit, states similarly as with the RP1 letter that, “[w]e have

reduced the payment to match the adjusted cost basis by removing costs associated

with the gas conditioning equipment, which are ineligible.” The SJ-1 project

preemptively acted, prior to award, to remove from its application the costs related to

the heat recovery system. The parties stipulated that “[d]uring Treasury’s review

process, SJ-1 voluntarily removed $216,320 representing the costs associated with a

heat recovery system and certain other costs reducing its reported cost basis to

$9,066,127. SJ-1, therefore, is not challenging those costs in this proceeding.”

The plaintiffs RP1 and SJ-1 together approached Treasury about the removal of

the cost of the gas conditioning equipment from their awards. The record contains, as a

joint exhibit, a May 23, 2013 letter from David Lowman of Hunton & Williams, the law

firm representing plaintiffs in the above captioned case, to Ellen Neubauer, who the

parties stipulated is “the program manager for the Section 1603 program.” The letter

stated that “I [Mr. Lowman] would appreciate the opportunity to discuss with you the

above applications in which Treasury reduced the grants for two fuel cell projects on the

ground that the associated gas conditioning equipment does not qualify.” The letter

provided arguments as to why the gas conditioning equipment should have been

included in the grant. In the letter, Mr. Lowman restated that, “the Section 1603

guidance defines a qualifying ‘fuel cell power plant’ as ‘an integrated system

compromised of a fuel stack assembly and associated balance of plant components.’”

Mr. Lowman also stated: “It is indisputable that, one, the gas conditioning equipment

and the fuel cells are part of an ‘integrated system,’ and, two, the gas conditioning

equipment represents ‘associated balance of plant components.’” (quoting Section

1603). In support, Mr. Lowman pointed to a number of alleged factors indicating the

importance of the gas conditioning equipment to the overall project, including that the

biogas, if not conditioned, would damage the fuel cells, as well as that “[u]nder the

contracts with the site hosts, UTS must supply the gas conditioning equipment itself,”

and “[t]he fuel cells and the gas conditioning equipment were placed in service at the

same time, and operate together.” Plaintiffs also formally raised the argument that the

gas conditioning equipment and fuel cells also could be awarded the full desired Section

1603 grant if they were instead classified as trash facilities. Mr. Lowman stated in the

letter that “these projects, in fact, satisfy the definition of a qualified ‘trash facility’ and

could have filed their applications as that type of facility.” The letter stated in addition:

The biogas at these projects is produced from anaerobic digesters that

digest and gasify the sludge from the wastewater treatment plants. That

wastewater treatment sludge is solid waste per the Solid Waste Disposal

Act and, therefore, is municipal waste for purposes of Section 45 and the

1603 Grant. Because the biogas is produced from municipal waste and

the fuel cells convert that biogas to electricity, the plants are “trash

facilities” as that term is defined in the Treasury Guidance.

34

Mr. Lowman concluded by raising policy arguments in support of covering gas

conditioning equipment under the Section 1603 grant program, stating:

It should be noted that the fuel cell projects here are exactly the kind of

renewable energy projects that Congress sought to encourage when it

enacted Section 1603. Indeed, DOE’s Office of Energy Efficiency &

Renewable Energy (EERE), working through DOE's Fuel Cell Technology

Program in coordination with DOE's Biomass Program and NREL, have

made the use of fuel cells at waste water treatment plants and landfills a

priority. These sources create over 30% of U.S. methane emissions and

represent an enormous source of potential energy.

According to the parties, “[o]n June 1, 2013, Ms. Neubauer responded by email”

to the e-mail from Mr. Lowman. Ms. Neubauer initially stated in her response that “I

have consulted with my IRS colleagues and am informed that the IRS has not had

occasion to rule on the issues presented by these applications.” She responded first to

Mr. Lowman’s claim that the gas conditioning equipment should be included under the

“fuel cell property” designation as part of an “integrated system” with the fuel cell

assembly:

Based on the plain and straightforward definition of a fuel cell property, as

defined in the Section 1603 Program Guidance, we do not believe such

property to include gas conditioning equipment. The definition of fuel cell

property refers to specific equipment that converts a fuel into electricity

using electrochemical means. The definition does not include equipment

associated with producing/conditioning/delivering the fuel. Whether or not

a property qualifies as a fuel cell property is not dependent on the type of

fuel used. In sharp contrast, whether or not a facility qualifies as an open-

loop biomass facility, closed-loop biomass facility, or trash facility is

completely dependent on the resource from which the electricity is

generated. Thus certain equipment necessary in using that resource to

produce electricity can be considered part of the facility. That the

properties at issue are co-located at a wastewater treatment plant, are

contractually obligated to use biogas that is produced from the wastewater

treatment plant, and are designed such that the biogas must be treated

before it can be used in the fuel cell property, does not change our view.

While a fuel cell property is an integrated system, one need not look to

what may or may not constitute an “integrated unit” in other contexts

because the definition of fuel cell property precisely delineates what that

integrated system is comprised of - a fuel cell stack assembly and

associated balance of plant components. We are aware of no authority

that would define “balance of plant components” for a fuel cell property to

encompass gas conditioning equipment. The definition of fuel cell property

includes the balance of system equipment to convert a fuel into electricity,

not to extract or manufacture the fuel, clean it, deliver it, etc.

35

Ms. Neubauer dismissed Mr. Lowman’s argument that the RP1 and SJ-1 fuel cell

systems could alternatively qualify as a “trash facility,” stating: “Whether or not the

facilities would qualify as trash facilities is not relevant as the applicant did not apply for

a trash facility. Ms. Neubauer stated that: “[i]n light of the above, the determinations on

these applications are final.”

On August 6, 2013, plaintiffs filed suit in the United States Court of Federal

Claims, seeking “payment of the cash grant amounts mandated by section 1603 of the

American Recovery and Reinvestment Tax Act of 2009.” Plaintiffs claim that the

Department of the “Treasury was required to make payment of the applied-for amounts

to RP1 and SJ-1 because the associated gas conditioning equipment is ‘specified

energy property’ under Section 1603,” and that “Treasury’s notifications to RP1 and

SJ-1 do not provide the reasons for Treasury’s determination to remove the costs

associated with the gas conditioning equipment.”

In this court, plaintiffs bring two separate arguments. First, plaintiffs claim that the

gas conditioning equipment is part of the “associated balance of plant components”

related to the grant available to “QUALIFIED FUEL CELL PROPERTY” under Section

1603. (capitalization in original). Plaintiffs explain:

Section 1603(d)(2) defines the term “specified energy property” to include

any “qualified fuel cell property” which is further defined, by reference, in

section 48(c)(1) of the Internal Revenue Code of 1986, as amended (the

“Code” or “I.R.C.”). . . . Section 48(c)(1) of the Code defines “qualified fuel

cell property” as a “fuel cell power plant” that is defined as follows:

an integrated system comprised of a fuel cell stack assembly

and associated balance of plant components which converts

a fuel into electricity using electrochemical means.

Plaintiffs contend that the RP1 and SJ-1 fuel cells systems are contractually obligated to

use the biogas from the waste treatment sites for environmental and economic

purposes, and, therefore, these facilities require gas conditioning equipment. Plaintiffs

further contend that the fuel cell assemblies and gas conditioning equipment were

placed into service at the same time and at the same place, and are completely under

the control of RP1 and SJ-1, not the IEUA or San Jose respectively. Plaintiffs conclude

by stating:

The definition of “fuel cell power plant” is broadly worded to include the

“integrated system” that is comprised of the fuel stack assembly and the

“associated balance of plant components.” In the case of fuel cell property,

the “balance of plant” includes all supporting and/or auxiliary components

based on the power source or site-specific requirements which are

integrated into a comprehensive power system package. The “balance of

36

plant” for a fuel cell power plant includes the associated gas cleaning,

processing, and conditioning equipment.

Plaintiffs in their alternative claim argue that the gas conditioning equipment,

either individually or as part of the RP1 and SJ-1 fuel cell systems, also qualifies for a

Section 1603 grant as “trash facilit[ies].” Plaintiffs state “Treasury’s application allows

only one choice to be indicated as the ‘best’ choice. Accordingly, RP1 checked the box

for fuel cell property even though the Fuel Cell property could also be described as a

trash facility.” According to plaintiffs, “Treasury’s application contemplates that property

may qualify under multiple categories of ‘specified energy property.’ The applicant’s

selecting the ‘choice’ that ‘best describes’ its property does not foreclose any other

‘choice.’”

According to the parties’ joint stipulation of facts, “Defendant does not contend

that plaintiffs may not assert their alternative ‘trash facility’ argument on the procedural

ground that RP1’s and SJ-1’s applications checked the box for ‘Fuel cell property’ and

not the box for ‘Trash facility,’” and the government has not sought to bar plaintiffs’

alternative grounds in this court. Plaintiffs argue:

Section 1603(d)(1) defines the term “specified energy property” to include

“any qualified property” (defined, by reference, in section 48(a)(5)(D) of

the Code) which is part of a “trash facility” described in section 45(d)(7). A

“trash facility” is a facility which uses municipal solid waste to produce

electricity. Under section 45(c)(6) of the Code, the term “municipal solid

waste” has the meaning given the term “solid waste” under section 2(27)

of the Solid Waste Disposal Act, 42 U.S.C. 6903, which specifically

includes “sludge from a waste treatment plant.”

Plaintiffs offer in support that “[t]he biogas utilized in both Fuel Cells is produced through

an anaerobic digestion process,” and that “[t]he anaerobic digestion process at both the

IEUA and San Jose sites involves the anaerobic digestion of the ‘sludge’ – i.e., the solid

portions – from the wastewater treated at the two plants.”

Plaintiffs seek $880,237.00 in additional Section 1603 grant money related to the

gas conditioning equipment for the RP1 project, because according to plaintiffs “RP1 is

entitled to a total grant of $4,910,086, which includes the costs relating to the

associated gas conditioning equipment,” and which is more than the grant of

$4,026,253.00 that RP1 did receive. 19 With respect to the SJ-1 plant, plaintiffs seek

19 In the parties’ joint stipulations of fact, plaintiffs claim only $880,237.00 as owed to

them by the government for the RP1 gas conditioning equipment, $3,596.00 less than

what was alleged in the complaint, $883,833.00. In their final brief to the court, plaintiffs

asked for a total award of $1,515,020.00, also reduced regarding the RP1 requested

amount by $3,596.00 from the amount listed in plaintiffs’ complaint. This difference of

$3,596.00 has not been fully explained by the parties, but may be due to a revision by

the parties of the costs of the Heat Recovery Units, which are part of the overall RP1

37

$634,783.00 in additional Section 1603 grant money related to the gas conditioning

equipment for the SJ-1 project, because “SJ-1 is entitled to a total grant of $2,719,838,

which includes the costs relating to the associated gas conditioning equipment,” and

which is more than the grant of $2,085,055.00 that SJ-1 did receive. This appears to

result in a total, cumulative request for $1,515,020.00. Plaintiffs also seek to “[v]acate

Treasury’s final determinations regarding the RP1 and SJ-1 applications under Section

1603,” as well as any other relief the court deems proper.

DISCUSSION

According to plaintiffs, “[t]his Court has jurisdiction over the subject matter of this

action pursuant to the Tucker Act, 28 U.S.C. § 1491 because Section 1603 is a money-

mandating source of law that requires the payment of the costs applied for by RP1 and

SJ-1,” citing ARRA Energy Co. I v. United States, 97 Fed. Cl. 12 (2011). Defendant

does not contest jurisdiction. Section 1603(a) of the American Recovery and

Reinvestment Act states:

(a) IN GENERAL.—Upon application, the Secretary of the Treasury shall,

subject to the requirements of this section, provide a grant to each person

who places in service specified energy property to reimburse such person

for a portion of the expense of such property as provided in subsection (b).

Section 1603(a) (capitalization in original). A judge of this court has held that the

language of Section 1603(a) “compels the government to provide a grant to any person

who places specified energy property into service, subject only to the express

requirements set forth in the statute.” ARRA Energy Co. I v. United States, 97 Fed. Cl.

at 20–22; see also Clean Fuel LLC v. United States, 110 Fed. Cl. 415, 419 (2013)

(agreeing with the court in ARRA Energy Co. I that Section 1603 is money-mandating

insofar as the suit is for “‘a grant . . . to reimburse’ the cost of certain ‘energy property.’”

(quoting Section 1603(a)) (modification in original)); LCM Energy Solutions v. United

States, 107 Fed. Cl. 770, 774 (2012) (affirming ARRA Energy Co. I). The United States

Court of Appeals for the Federal Circuit has “‘repeatedly recognized that the use of the

word “shall” generally makes a statute money-mandating.’” Greenlee Cnty., Ariz. v.

United States, 487 F.3d 871, 877 (Fed. Cir.) (quoting Agwiak v. United States, 347 F.3d

1375, 1380 (Fed. Cir. 2003)), reh’g and reh’g en banc denied (Fed. Cir. 2007), cert.

denied, 552 U.S. 1142 (2008); DeKalb Cnty., Ga. v. United States, 108 Fed. Cl. 681,

695 (2013); Lummi Tribe of Lummi Reservation v. United States, 99 Fed. Cl. 584, 594

(2011).

Plaintiffs presented three witnesses at trial, introduced above, Arun Sharma,

President of Anaergia North America, Anthony Leo, Vice President of Applications and

Advanced Technologies for FuelCell Energy, and Sarwan Wason, Senior Vice President

and SJ-1 projects. The parties have stipulated that the parties are not seeking recovery

related to the cost basis of the Heat Recovery Units used in the RP1 and SJ-1 projects.

38

of Carollo Engineers. 20 Defendant presented two witnesses at trial, Donald Edward

Settle, Senior Project Leader 4 at NREL, and defendant’s expert, Trent Markell,

professional mechanical engineer and founder and Principal of PF Engineer, LLC,

which he indicated provides engineering consulting for energy projects. Sarwan Wason,

plaintiffs’ expert, was admitted as an expert witness in the “[d]esign and engineering of

fuel cell power plants using anaerobic digester gas as a fuel source.” Defendant’s

expert, Trent Markell was admitted as “an independent engineering expert in the energy

industry.” 21

20 Mr. Wason stated at trial that he was a “senior vice president of Carollo Engineers,”

and that Carollo Engineers “specialize[s] in designing water and wastewater plants.” He

testified that he has been with Carollo Engineers for forty two years. Mr. Wason stated

in his report that “I am a registered mechanical engineer with over 40 years of

experience in design of cogeneration (combined heat and power or CHP [Combined

Heat and Power]) plants using digester gas as fuel including fuel cells, gas turbines,

internal combustion engines and micro turbines power generation technologies.” He

added: “I have been involved in the design of over 20 digester gas cogeneration

projects during the last 40 years,” “was project manager for the San Jose fuel cell power

plant project,” and was involved in multiple other fuel cell projects in the California area.

Mr. Wason testified that his specialization “is designing cogeneration plants and pump

stations and large mechanical, complicated mechanical systems in wastewater plants

and water plants.” He was admitted as an expert witness in the “[d]esign and

engineering of fuel cell power plants using anaerobic digester gas as a fuel source.”

Both Mr. Sharma, from Anaergia, and Mr. Leo, from FuelCell Energy, testified that Mr.

Wason was involved in the development of the SJ-1 project, through his work with

Carollo Engineers.

21 In his expert report, Mr. Markell stated that “I am the founder and Principal of PF

Engineer, LLC, which provides independent engineering consulting for energy projects.

I have over 22 years of engineering experience with approximately 20 years working

with energy projects,” including energy facilities “with a combined capacity in excess of

37,000 Megawatts, (‘MW’) and biofuels projects with a combined production capacity in

excess of 2 billion gallons per year.” Mr. Markell indicated at trial that his primary

background is in design turbines and engines, but that this has been supplemented

through work as an independent engineer, in which “you look at the projects from a

much higher level, so you have a better understanding of the technical aspects of the

project as well as the economic and legal.” In coming to his opinion, Mr. Markell

indicated he looked at the actual project site, “all of the contracts,” how the projects will

be “operated and maintained,” “environmental aspects,” “technical inputs,” and “the

financial model.” Although he testified at trial that he worked on “around 300 projects” in

the energy industry, including projects involving anaerobic digester biogas and

wastewater treatment facilities, he admitted that “I have actually not worked on a fuel

cell [project] where I’ve been paid.” He testified he performed two reviews of multi-

kilowatt non-stationary fuel cell systems, although acknowledging that the RP1 and SJ-1

projects are stationary systems, each multiple megawatts in size. He testified that his

two prior informal reviews were conducted three to five years prior to this trial, and

lasted “[e]ach one probably a couple of hours.” Mr. Markell testified that he performed

39

The parties dispute the extent to which non-expert witnesses could be used to

provide opinion testimony. Plaintiffs note that although Mr. Leo, from FuelCell Energy,

was not offered as an expert witness, “[a]t trial, the Court noted Mr. Leo’s ‘great

qualifications,’” and, thus, plaintiffs contend, “Mr. Leo has a deep technical knowledge in

fuel cells and would be qualified to offer expert opinions.” Plaintiffs assert that, regarding

defendant’s expert witness, “Mr. Markell’s almost non-existent experience with fuel cell

power plants provides no substitute for Mr. Leo’s 30 years of experience in the fuel cell

industry,” even though Mr. Leo was not qualified as an expert witness. Plaintiffs contend

that “[w]here opinion testimony bears a ‘rational connection’ to those facts, the Court

has also held that a lay witness may ‘under certain circumstances express an opinion

even on matters appropriate for expert testimony,’” quoting in support Global Computer

Enter., Inc. v. United States, 88 Fed. Cl. 52, 67 (2009), and Union Pac. Res. Co. v.

Chesapeake Energy Corp., 236 F.3d 684, 692 (Fed. Cir. 2001). Regarding Mr. Sharma,

from Anaergia, plaintiffs also contend that “Arun Sharma likewise is a fuel cell industry

insider” and in certain areas his testimony should be given more weight than

defendant’s expert witness, “to opine on what the industry views as a fuel cell power

plant.”

Defendant responds that “[t]he Court should not rely on opinion statements from

Mr. Leo [of FuelCell Energy], because he was not offered or qualified as an expert,”

citing Rule 701 of the United States Federal Rules of Evidence. Defendant further states

that

While much of Mr. Leo’s testimony was permissible, F.R.E. 701 affects

how the testimony is accepted by the Court. Plaintiffs may not rely on the

statements they describe as being made from “his industry perch” or any

opinions he might have “as an experienced industry insider.” The Court

may take such testimony as statements of his personal belief, but it cannot

accept it as the opinion of an expert or as evidence of industry practice.

(internal citation omitted). Defendant also contends that Mr. Leo “cannot testify as to the

proper interpretation of the terms in the statute, whether from an industry or engineering

perspective, as Mr. Markell does (or as Mr. Wason could have done, had he been

asked to look at the statute).” Defendant further alleges that Mr. Sharma, from Anaergia,

is not a “‘fuel cell industry insider,’” and notes that “Mr. Sharma testified that the projects

were the first fuel cell projects for his company.” Defendant claims that the case

plaintiffs cite to “merely reiterates the basic standards that lay opinion testimony ‘“must

additional research in preparation of this case, but also admitted at trial that he did not

consult with any fuel cell manufacturers or contact FuelCell Energy as part of his

preparation, nor did he consult with anyone from the Department of Energy or the

National Energy Technology Laboratory, although he did review the documents offered

by the parties in this case. The government offered Mr. Markell, without objection from

plaintiffs, and the court admitted Mr. Markell as “an independent engineering expert in

the energy industry.”

40

have a rational connection,” to “facts within [the witness’s] range of generalized

knowledge, experience, and perception,” and such testimony may not be based upon

scientific, technical, or other specialized knowledge,’” quoting Global Computer Enter.,

Inc. v. United States, 88 Fed. Cl. at 67. (internal citations omitted in original).

Defendant alleges that plaintiffs’ witnesses are biased, stating “Mr. Markell was

the only truly independent witness to testify at the trial. Every other witness was

involved in the projects in some capacity and has either a direct or indirect financial

interest at stake in this litigation.” Defendant adds that plaintiffs’ descriptions of Mr.

Sharma, from Anaergia, and Mr. Leo, from FuelCell Energy, as “industry insider[s]” “just

highlights their inherent bias: they or their companies all stand to benefit from a broad

definition of fuel cell power plant.” Plaintiffs deny any incidence of bias and further

respond that defendant’s allegations of bias on the part of Mr. Leo are “cheap and not

reflective of the balanced and credible testimony that Mr. Leo provided.” Plaintiffs add

that “[t]he Government’s further assertion that Mr. Leo is not entitled to give fact and

opinion testimony on industry practice superior to their expert, who has no experience in

the fuel cell industry and who relied on Mr. Leo’s publications, is out of touch with this

Court’s position on lay witness opinion testimony.” (internal citation omitted).

Rule 701 of the 2015 Federal Rules of Evidence states:

If a witness is not testifying as an expert, testimony in the form of an

opinion is limited to one that is:

(a) rationally based on the witness’s perception;

(b) helpful to clearly understanding the witness’s testimony or to

determining a fact in issue; and

(c) not based on scientific, technical, or other specialized

knowledge within the scope of Rule 702.

Fed. R. Evid. 701 (2015) (FRE). The Federal Rules of Evidence have recognized

exceptions to the Rule 701(c) limitation on lay witness testimony “based on scientific,

technical, or other specialized knowledge.” See id. For example, a business owner or

executive, such as Mr. Sharma, President of Anaergia North America, could be allowed

to testify as to items he would be aware of as a result of his position. See Fed. R. Evid.

701, Advisory Committee Notes ¶ 4 (Dec. 2000) (“Such opinion testimony is admitted

not because of experience, training or specialized knowledge within the realm of an

expert, but because of the particularized knowledge that the witness has by virtue of his

or her position in the business.”). Similarly, Mr. Leo could be allowed to testify as to the

operations of FuelCell Energy, as well as their products and contractual relationships,

given his position as Vice President of Applications and Advanced Technologies for

FuelCell Energy.

The 2000 Advisory Committee Notes to FRE 701 state: “[T]he distinction

between lay and expert witness testimony is that lay testimony ‘results from a process

of reasoning familiar in everyday life,’ while expert testimony ‘results from a process of

reasoning which can be mastered only by specialists in the field.’” (internal citation

41

omitted). A judge of this court appropriately recognized that “‘the difficulty in

administering the 2000 amendment [is] drawing the line between lay and expert

testimony.’” DataMill, Inc. v. United States, 91 Fed. Cl. 722, 735 (2010) (quoting 1

McCormick On Evid. § 11 (Kenneth S. Broun et al. eds., 2006)); see also 1 McCormick

On Evid. § 11 (7th ed. 2013) (noting that “[t]estimony by physicians in civil cases can

pose the same line-drawing problems”). In DataMill, the judge concluded:

“The general application of Rule 701 indicates that a lay witness may

testify about facts within his or her range of generalized knowledge,

experience, and perception.” [United States v. ]Espino, 317 F.3d [788,

]797 [(8th Cir. 2003)]. The opinion “must have a rational connection to

those facts.” Miss. Chem. Corp. v. Dresser–Rand Co., 287 F.3d 359, 373

(5th Cir. 2002); accord Union Pac. Res. Co. [v. Chesapeake Energy

Corp.], 236 F.3d at 693 (sustaining the district court’s decision to admit

testimony from eight witnesses with “extensive personal experience” in the

oil drilling industry); Burlington N. R.R. Co. [v. State of Neb.], 802 F.2d

[994,] 1005 [(8th Cir. 1986)] (“A lay witness’ testimony in the form of

opinions or inferences need only be rationally based on perception . . . .”).

Where the testimony is based upon personal knowledge of the facts

underlying the opinion and the opinion is rationally related to the facts, a

lay witness may, “under certain circumstances[,] express an opinion even

on matters appropriate for expert testimony.” Soden v. Freightliner Corp.,

714 F.2d 498, 511 (5th Cir. 1983) (citing cases from the Eighth Circuit and

the United States Courts of Appeals for the Tenth Circuit).

Id. at 736.

In the above captioned, highly technical case, all the witnesses put forward by

the parties demonstrated they have significant knowledge of fuel cells and the fuel cell

industry, gained not through specialized study, but through their day-to-day experiences

in the field. In Global Computer Enterprises, Inc. v. United States, a decision by the

United States Court of Federal Claims cited to by both parties, the court discussed

whether or not lay witness opinion testimony “‘from individuals with decades of

experience’” working in information technology would be acceptable. See Global

Computer Enter., Inc. v. United States, 88 Fed. Cl. at 65. The judge concluded that,

“[a]s the Federal Circuit recognized in Union Pacific Resources Co., lay opinion

testimony based upon extensive experience in an industry is admissible under Rule

701.” Id. at 67 (citing Union Pac. Res. Co. v. Chesapeake Energy Corp., 236 F.3d at

693). The Global Computer Enterprises court allowed lay opinion testimony from the

experienced professionals, noting that “[a]ll of the proffered opinions of Messrs.

Muslimani, Lucas, and Winslow are based upon circumstances they have observed or

encountered within the industry and reflect a general knowledge of their work.” Id. In

BPLW Architects & Engineers v. United States, another judge of this court reiterated

that a lay witness can testify on his or her “perception,” as long as it is connected to

their personal knowledge. See BPLW Architects & Eng’rs, Inc. v. United States, 106

Fed. Cl. 521, 545 (2012) (citing DataMill, Inc. v. United States, 91 Fed. Cl. at 734; and 1

42

McCormick on Evidence § 10 (6th ed. 2006) (“[A] witness may testify to an event or

occurrence that he has seen himself, but not one that he knows only from the

description of others.”)).

A review of the testimony leads the court to conclude that plaintiffs’ witnesses did

not testify outside the range of their personal knowledge, based on what they learned

from their positions within Anaergia (Mr. Sharma) and FuelCell Energy (Mr. Leo). As

stated by the parties, the “overarching” question before the court is whether or not gas

conditioning equipment should be included in the cost basis used to calculate a grant

under Section 1603 of the American Recovery and Reinvestment Tax Act of 2009, Pub.

L. No. 111-5, Div. B, tit. I, § 1603, 123 Stat. 115, 364–66 (2009). The court references

the testimony of these fact witnesses insofar as it provides useful, specific, factual

background, based on their personal and work experience. In addition, the court notes

that defendant’s challenge to the admissibility of plaintiffs’ lay witness testimony is

complicated by the fact that defendant does not specify the responses from Mr. Sharma

and Mr. Leo with which it takes issue. Defendant’s counsel never objected to Mr.

Sharma’s testimony at trial. Regarding Mr. Leo’s direct testimony, defendant’s counsel

objected only once, when Mr. Leo was giving his interpretation of the Internal Revenue

Code in response to Mr. Markell’s expert report. Defendant’s objection was sustained at

that time and Mr. Leo’s responses on direct examination that were related to the topic

were struck. In its brief, however, defendant tries to cast a more general shadow over

plaintiffs’ witnesses without providing the specific statements that defendant considers

objectionable. Defendant’s belated discomfort is insufficient to disqualify the testimony

admitted into the record.

Regarding defendant’s allegation of bias on the part of plaintiffs’ witnesses,

determination of a witness’ bias and credibility based on the evidence before the court is

a factual question for the trial judge. The allegation appears to the court not to be one of

improper bias, but rather one of credibility with respect to choosing between plaintiffs’

and defendant’s witnesses. In that regard, the trier of fact has significant discretion. See

Anderson v. City of Bessemer City, N.C., 470 U.S. 564, 575 (1985) (“[W]hen a trial

judge’s finding is based on his decision to credit the testimony of one of two or more

witnesses, each of whom has told a coherent and facially plausible story that is not

contradicted by extrinsic evidence, that finding, if not internally inconsistent, can virtually

never be clear error.”); Honeywell Int’l, Inc. v. Hamilton Sundstrand Corp., 523 F.3d

1304, 1314 (Fed. Cir.) (citing Anderson v. City of Bessemer City, N.C., 470 U.S. at 575),

reh’g en banc denied (Fed. Cir.), cert. denied, 555 U.S. 939 (2008); Green v. United

States, 222 Ct. Cl. 600, 603, 650 F.2d 285 (1980) (“We adhere to the well-established

rule that the findings of the trier of the facts whose responsibility it was to weigh the

evidence, to hear and see the witnesses and to judge their credibility, and to observe

their demeanor and responses under oath and on cross-examination should be

sustained, absent serious prejudicial abuse of discretion, where there is substantial

credible evidence and a rational basis to support the findings”); see also Univ. of Colo.

Found., Inc. v. Am. Cyanamid Co., 342 F.3d 1298, 1304 (Fed. Cir.) (“‘Where there are

two permissible views of the evidence, the factfinder's choice between them cannot be

clearly erroneous.’” (quoting Am. Original Corp. v. Jenkins Food Corp., 774 F.2d 459,

43

462 (Fed. Cir. 1985))), reh’g and reh’g en banc denied (Fed. Cir. 2003), cert. denied,

541 U.S. 988 (2004).

After a review of the trial testimony and the record before the court, the court

finds no grounds in which to discount the testimony of plaintiffs’ witnesses due to bias. It

is true that the witnesses’ employers and partners stand to gain if plaintiffs win this

case. Mr. Sharma is the President of the indirect owner of RP1 and SJ-1, Anaergia. Mr.

Leo admitted at trial that “FuelCell Energy is the only company that’s selling fuel cells

that can be installed on digester gas.” Mr. Leo indicated that federal and state

“subsidies are important to encouraging the purchase and installation of fuel cells.” Mr.

Wason also confirmed that FuelCell Energy, Mr. Leo’s employer, is the only company

“supplying the equipment for the fuel cell power plants for anaerobic digester gas.” Mr.

Wason, plaintiffs’ expert, testified that he does work with fuel cell projects over

wastewater treatment plants, through his work with Carollo Engineers. Mr. Wason

assisted his client SJ-1 in securing California state Self-Generation Incentive Program

funding by sending a letter to the state government in support of the SJ-1 project’s

application. Mr. Wason emphasized at trial that his entire career of forty years has been

“working on wastewater treatment plants that are generating energy.” Nonetheless, all

the witnesses took oaths to tell the truth, and their credibility was reviewed by this court

during trial. Mr. Leo repeated at trial that his testimony was truthful and not impaired by

the indirect benefit FuelCell Energy may receive from the outcome of the case. Mr.

Wason also testified that his prior role in the SJ-1 project would not impair his ability to

give truthful expert testimony. Mr. Wason further stated that his team does not

traditionally become involved with the Section 1603 grant process as part of their

standard scope of services, although sometimes they get involved with the state-level

Self-Generation Incentive Program grants. Regarding the letter sent to the government

of California, Mr. Wason stated that “it’s very simple thing, so it’s not something I have

to go research it out, only spend one or two hours and I wrote that letter,” and he re-

clarified that the letter was to the state grant agency, not the federal Section 1603 grant

program. To the same extent as plaintiffs’ witnesses may indirectly stand to gain from a

favorable outcome, defendant’s expert witness could be said to gain from a favorable

outcome in the above captioned case. Defendant’s expert, Mr. Markell, also testified

that he is acting as an expert witness on behalf of the government in another case

related to the Section 1603 grant program in the United States Court of Federal Claims.

See, e.g., Furstenberg v. United States, 219 Ct. Cl. 473, 475–77, 595 F.2d 603, 604–05

(1979) (finding, with regards to the “possible bias” of an expert witness who was

testifying at trial on the valuation of a piece of art, yet also participating in an Art

Advisory Panel, an expert body which values works of art for the IRS, that “[t]here is no

reason to assume that, because an expert has expressed an opinion during confidential

deliberations of a particular panel and has heard the views of the other experts, he will

give anything other than his best independent expert judgment if called as a witness on

the question of valuation. . . . Furthermore, viewing an expert’s participation on the Art

Advisory Panel as creating personal bias might unnecessarily discourage distinguished

experts from participation on the panel, to the ultimate detriment of the Internal Revenue

Service and the tax system, or might reduce the availability of expert witnesses at

trial.”). Outside of defendant’s inferences in its briefs, defendant provides no compelling

44

evidence that plaintiffs’ witnesses were unduly biased in their testimony regarding the

RP1 and SJ-1 projects.

How Fuel Cells Operate

As explained by plaintiffs’ expert witness, Mr. Wason, “Fuel cells are relatively

recent” innovations that came to market in the past “about six to eight years. Before

that, most of the technology in the wastewater industry” for burning biogas “had been

internal combustion engines, microturbines and gas turbine[s].” Mr. Markell, defendant’s

expert witness, also stated: “Utilizing fuel cell power plants in conjunction with Biogas

from anaerobic digesters is a relatively recent application,” starting in 1997, and “[t]he

most recent installations of fuel cell power plants in conjunction with anaerobic digesters

started in 2008, with FCE [FuelCell Energy] taking the lead in providing larger fuel cell

power plants.”

Defendant’s expert witness, Mr. Markell, a professional engineer, offered an

introduction to how fuel cell systems operate in his expert report. According to Mr.

Markell, fuel cells systems installed at wastewater treatment plants utilize “four primary

systems: anaerobic digestion to produce Biogas, gas conditioning equipment to treat

the Biogas, a fuel cell power plant to generate electricity, and a heat recovery system.”

Mr. Markell offered a diagram in his report of how the alleged “four primary systems”

interact:

MARKELL DIAGRAM

Plaintiffs’ expert witness, Mr. Wason, offered an alternative diagram of how a fuel

cell facility interacts in his expert report, but avoided using the term “Gas Conditioning

Equipment” used by Mr. Markell. The plaintiffs’ expert report included a diagram,

reproduced below, which appears to have been modified from a diagram found in the

record related to an Anaergia “Case Study” regarding the SJ-1 project in San Jose.

(emphasis in original).

45

pounds is reduced, and as a part of the side thing it produces anaerobic

digester gas.

A website image, dated March 13, 2014, from the IEUA website, provided as a joint

exhibit, also explained that anaerobic digesters are “treatment units that reduce[] the

volume of organic matter by decomposition of the biosolids into relatively stable organic

and inorganic compounds from which water will separate more readily. In several ways,

anaerobic digestion functions similarly to the human stomach when it digests food.”

Mr. Sharma, from Anaergia, testified at trial that, from his experience, anaerobic

digesters are present at some wastewater treatment plants:

Some wastewater treatment plants have anaerobic digesters. Some

wastewater treatment plants might not have anaerobic digesters and they

might have aerobic digesters where biogas is not made. And some

wastewater treatment plants may not even have aerobic digesters. They

might just dry the biosolids or dewater it and get rid of them.

Mr. Sharma added that one of the reasons to install an anaerobic digester is to produce

and capture biogas that comes from the digestion process, which can be processed to

create electricity, as well as to “reduce the amount of solids that have to be disposed.”

Mr. Leo, from FuelCell Energy, testified that anaerobic digester biogas has about sixty

percent methane, and “that’s where most wastewater treatment plants are,” while

natural gas has about one hundred percent methane. Mr. Wason, plaintiffs’ expert

witness, further explained in his expert report that the anaerobic digestion “process

produces ADG [anaerobic digester biogas], which is approximately 60 to 65 percent

methane, 35 to 40 percent Carbon Dioxide and about 1 percent of other gasses and

contaminants,” which can be used by a fuel cell after it is treated.

According to the parties’ joint stipulation, the anaerobic digesters located at the

IEUA and at the San Jose Water Pollution Control Plant “produce both ‘biosolids’ and

‘biogas,’ consisting of methane, other gaseous elements, and various contaminants.

Biosolids are used to produce compost. Biogas may be discarded by burning it (in a

process called ‘flaring’) or may be used as a fuel source.” In the above captioned case,

the IEUA and San Jose Water Pollution Control Plant operated the anaerobic digesters,

which produced anaerobic digester biogas, prior to the installation of the RP1 and SJ-1

projects. Defendant’s expert, Mr. Markell, explained in his report that, prior to the

installation of the RP1 and SJ-1 fuel cell facilities, the IEUA and San Jose sites used

“reciprocating engines” to burn the biogas created by the anaerobic digesters, for

electricity. Mr. Markell added that a “reciprocating engine would simply replace the fuel

cell power plant in the diagram [diagram is above, offered by Mr. Markell]. Reciprocating

engines, which are similar to large automotive engines, are more tolerant of gas

impurities, but still require some level of gas conditioning.”

47

(2) Gas Conditioning Equipment

The trial testimony indicates that fuel cell systems can and do operate on

anaerobic digester biogas. Mr. Leo from FuelCell Energy explained that “[j]ust under

half of our projects in California are running on digester gas,” and that about twenty

percent of the company’s projects worldwide operate on digester gas, with the majority

of the remaining projects operating on natural gas. Mr. Wason, plaintiffs’ expert witness,

explained in his expert report that, significantly, “[r]aw ADG [anaerobic digester biogas]

is not a clean gas like natural gas,” and can damage a fuel cell if used directly without

treatment. Mr. Wason emphasized at trial that “[t]he gas coming from the anaerobic

digester does not meet the fuel specifications of FuelCell Energy equipment,” it could

“poison” a fuel cell module in under a day. Mr. Wason indicated that in terms of

contaminants in the anaerobic digester gas, “the most important one is the hydrogen

sulfide [sulfur], the second one is siloxane, the third one is water.” His report added that

“Fuel cells can’t operate properly without removing hydrogen sulfide and siloxanes

contaminants from ADG.” Mr. Leo, from FuelCell Energy, also testified that in its fuel

cell, “[t]he electrodes are acting like catalysts. And if you were to send a bunch of sulfur

over those electrodes, the sulfur molecules would occupy the normal catalytic reaction

sites and the fuel cell would stop working.”

Mr. Wason testified that due to the contaminants in anaerobic digester biogas, it

is generally standard to have gas conditioning equipment when working with biogas:

“Some kind of gas conditioning has always been necessary on anaerobic digester gas

because it comes out of the anaerobic digester as saturated gas. It’s saturated with

water, so at a minimum you must remove water.” Mr. Wason also added that “many of

the plants fall in jurisdiction of [California] Air Quality Management District, and many of

those have introduced legislation or regulations to minimize the amount of hydrogen

sulfide . . . .”

The parties jointly define “[g]as conditioning equipment,” to mean “[e]quipment

used to clean, treat, and process contaminants (e.g., sulfur, hydrogen sulfide, VOC

[volatile organic compounds], and siloxanes) from a fuel.” Mr. Wason, plaintiffs’ expert

witness, stated that “gas conditioning equipment takes in the raw anaerobic digester

gas coming from the digesters and cleans it up to a quality where it is required by

FuelCell Energy fuel specifications.” Mr. Markell, defendant’s expert witness, in his

expert report, stated that “[t]he gas conditioning system conditions the Biogas to meet

the gas specifications for the fuel cell power plant as defined by FCE’s fuel

specification.” Defendant’s expert report further explained: “H2S and siloxanes are

removed from the Biogas stream prior to use in a fuel cell power plant or a combustion

engine. Failure to remove such contaminants will result in serious damage to the

electricity generating equipment. As a result, utilizing gas conditioning equipment is an

industry standard.” Mr. Settle, from NREL, also testified that gas conditioning equipment

is necessary for a fuel cell to operate on biogas, and added: “I would suggest that if

you’re going to take raw digester gas and you’re going to put it into a fuel cell that you

have to clean it up with some sort of equipment in order for the fuel cell to maintain

48

good operation.” Mr. Markell added at trial that gas “conditioning systems are generally

complicated, expensive, and difficult to maintain.”

The parties have jointly stipulated that “[t]he ‘gas conditioning equipment’

supplied by ESC for the RP1 Project consists of the following equipment, corresponding

to ESC’s scope of supply, which are used to condition the digester gas from Inland

Empire prior to use in the fuel cells:” “Iron Sponge System,” “Compheet Gas Treatment

skid,” “Glycol Chiller skid,” “Hydrogen Sulfide Removal Vessels,” “Compheet Siloxane

Removal Vessels,” “Sil-X Conventional Siloxane Removal Vessels and Guard Bed

Removal Vessels,” “Sulfr Tri-X and Halogen Guard Vessels,” “ESC Control Panel,” and

“Skid-mounted wiring, piping and instrumentation.” The parties stipulated that similar

“gas conditioning equipment” was installed at the SJ-1 site, and was also supplied by

ESC Corporation.

Diving deeper into the specific components, Mr. Wason, plaintiffs’ expert witness,

explained that the “iron sponge,” one of the components of the RP1 and SJ-1 gas

conditioning systems mentioned above, is designed “to remove hydrogen sulfide.” Mr.

Wason’s testimony indicated that the siloxanes are removed through “two tanks full of

activated carbon filters,” which appears from a review of the record to refer to the

“Compheet Siloxane Removal Vessels,” mentioned above. Mr. Wason’s testimony also

indicated that the “chiller,” which appears from the record to refer to the “Glycol Chiller

skid,” “cools the anaerobic digester gas . . . and that takes most of the water out,” as

well as some siloxane and hydrogen sulfide. Mr. Wason testified that a gas conditioning

equipment also can have a compressor to prepare the gas for insertion into the fuel cell:

“If the pressure of the gas coming from the anaerobic digester -- if that’s not high

enough . . . so some of the plants will have a compressor or a blower to boost the gas

pressure up.” Mr. Wason stated, however, that for the SJ-1 plant, no compressor was

installed, because the “City of San Jose had compressors in their wastewater plant

which compressed all of their digester gas to about 50 psi,” a statement with which Mr.

Markell agreed. Mr. Wason added that although gas conditioning equipment is

purchased, installation is still customized to the local project: “[T]here’s more than one

way to do those things and we want it done a certain way, the way we have seen it

successful in other plants.” Mr. Wason testified that gas conditioning equipment

generally “comes on multiple skids, and then it’s piped and wired to wherever in the

field.”

Mr. Sharma, from Anaergia, testified that responsibility for the gas conditioning

equipment’s proper function lay with RP1 and SJ-1. Plaintiffs’ expert witness, Mr.

Wason, explained in his expert report that the “City of San Jose and IEUA municipal

agencies are not responsible for treating ADG [anaerobic digester gas]. UTS SJ-1 and

RP1 must supply the gas conditioning equipment and clean ADG to make it suitable for

fuel cell CHP [combined heat and power] plant use.”

49

(3) Natural Gas Desulfurizer

As indicated above, most FuelCell Energy fuel cells use natural gas as the sole

or primary fuel source. Mr. Leo, from FuelCell Energy, testified that all of FuelCell

Energy’s fuel cells are capable of running on natural gas. Defendant’s expert witness,

Mr. Markell, added that “[t]he standard equipment provided with an FCE fuel cell power

plant assumes operation on natural gas.” In addition, both the FuelCell Energy fuel cell

sales contracts to RP1 and SJ-1 stated that the fuel cells delivered are “typically fueled

with natural gas.” Mr. Sharma testified at trial that the RP1 and SJ-1 fuel cell facilities

can run on natural gas, for example, when the gas conditioning equipment does not

function and biogas is not available. Mr. Leo also testified that, even for fuel cell projects

that are designed to operate on anaerobic digester biogas:

the preferred approach to biogas these days is to have a dual-fuel

application where you’re using natural gas at least as a backup fuel in the

event that the biogas goes away.

So when you’re doing that, you’re dedicating the natural gas cleanup

system to natural gas, and so you need another cleanup system to

provide the biogas cleanup.

Nonetheless, according to the record, even natural gas needs pre-treatment

before use in a fuel cell. Mr. Settle, from NREL, stated that, in his understanding, natural

gas, when pulled from the field and sent in a natural gas pipeline, is conditioned to a

certain extent to create “pipeline quality natural gas.” Mr. Wason, plaintiffs’ expert

witness, added that natural gas from a pipeline is pre-treated to a certain specification

by the utility: “there’s the natural gas quality specs for natural gas coming through the

pipeline’s natural gas which it supplies to customers.” Mr. Wason testified that pipeline

quality natural gas is still insufficiently clean to be directly usable by a fuel cell:

“sometimes the content of hydrogen sulfide could be a little bit higher, and if it happens,

because it’s so critical to the fuel cell that it could damage it, that’s why they have the

desulfurization equipment as a standard to protect the fuel cell.” Mr. Leo, from FuelCell

Energy, testified at trial that: “[e]ven natural gas fuels require different approaches for

cleaning up.” Mr. Wason testified that it is not FuelCell Energy’s responsibility to operate

on natural gas straight from the pipeline, therefore, the developer of the fuel cell facility

itself has to clean the natural gas to meet the requirements set by FuelCell Energy.

The parties jointly define “desulfurizers” as “[e]quipment used to remove any

sulfur contaminants from fuel prior to its injection into the fuel cell modules.” At trial, the

witnesses went into further detail about how a natural gas desulfurizer operates. Mr.

Leo, from FuelCell Energy, described the natural gas desulfurizer that comes with a

FuelCell Energy fuel cell assembly:

So in our natural gas fuel treatment train we have gas conditioning

equipment that takes pipeline quality natural gas, which in the U.S. is

usually very dry, so you don’t have to worry about moisture. It has a little

50

bit of sulfur in it just to make it smell bad so that you know when it’s

leaking. We have to clean that out. And that’s the main part of our natural

gas cleanup system . . . .

Mr. Leo testified that gas conditioning equipment for anaerobic digester biogas, and

natural gas desulfurizers, are both similar “[a]t a very high level in terms of stripping out

the impurities.” 22 Mr. Leo described the biggest difference between the two systems as

being:

Biogas is typically made available out of the digester with a lot of moisture

that we would like to get rid of and a lot more sulfur than natural gas

typically has, so -- and at very low pressure. Natural gas is usually

available at pressure.

So a typical biogas conditioning system would both increase the pressure

of the gas, remove the water from the gas, usually by chilling, and remove

all that sulfur, in addition to some other things like siloxanes.

Mr. Markell, defendant’s expert witness, also testified that the natural gas desulfurizers

perform similar work as biogas gas conditioning equipment “[i]n the sense that they do

provide some cleaning of the gas, yes, but not to the same level.”

(4a) Fuel Cell Module

The parties have stipulated that “[f]uel cells convert a fuel into electricity through

an electrochemical process, without combustion. Fuel cells can operate on various

fuels, including biogas, if the inherent contaminants are removed to meet the fuel cell

manufacturer’s fuel specifications.” Mr. Leo, from FuelCell Energy, explained the basics

of fuel cell operation at trial:

[A]ll fuel cells work by reacting a fuel and oxygen, but they react it

differently than fuel and oxygen are usually reacted. Usually you take fuel,

you mix it with oxygen or air, and you ignite them and you make heat and

use that heat to spin a turbine or to boil water to make steam to spin

another kind of turbine.

And that is generally true, that if you take a fuel, a fuel that wants to

react with air, and mix it with air and ignite them, you will get heat.

But what fuel cells do is they react the fuel and the air in separate

compartments that are separated by an electrolyte. And when you do that,

if you connect a wire between those two compartments, instead of getting

22 In his testimony, Mr. Leo, from FuelCell Energy, did not distinguish between the

natural gas desulfurizers and biogas gas conditioning equipment, but instead often

referred to both as “gas conditioning equipment.”

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heat, you’ll get electricity. And it’s a more direct way to convert the energy

content of the fuel to electricity than in the thermomechanical means that

are usually used.

Mr. Leo compared fuel cells to batteries at the trial:

If you look at a battery, inside a battery, say a nickel cadmium battery that

you might buy at the store, there’s nickel and there’s cadmium. And if you

were to mix those together, it would get hot. But because they’re

separated by an electrolyte layer, if you connect a circuit to them, instead

of getting heat, you’ll react them electrochemically, is the term, and you’ll

get electricity instead of heat.

Now, the difference between a battery and a fuel cell is that when

you stick batteries in your flashlight, eventually the battery died because

all the chemicals to support the electrochemical reaction are inside each

battery. In a fuel cell, the chemicals are continually pumped in. Instead of

nickel and cadmium, it’s fuel and air. And you just keep pumping them in,

and you’ll keep getting electricity out.

Q. And what happens to the gas in that process?

A. The fuel is -- in the case of our fuel cell specifically, methane is

sent into the fuel cell stacks where it’s converted to hydrogen, so the

hydrogens in the methane get stripped off and you end up with hydrogen

and CO2.

That hydrogen reacts in one of the compartments of the fuel cell,

which we call the anode, to produce electrons. And those electrons go out

into the circuit and they get consumed at the cathode. And the cathode is

where the air is reacted in a reaction that involves consumption of oxygen

and consumption of those electrons that the anode made.

Mr. Leo also testified that fuel cells are less polluting sources of fuel: “Because there’s

no combustion, that’s the – that’s one of the reasons why they’re so clean. A lot of the

pollution that comes from combusting a fuel is the result of the high flame temperature

that makes soot-type particulates. It makes nitrogen oxides that are smog precursors.”

Mr. Leo stated that what exits a fuel cell module “would be a little bit of CO2, water, and

what’s left of the oxygen in the air and the nitrogen that was in the air.”

Turning specifically to the fuel cells used in this case, the fuel cells supplied by

FuelCell Energy for the RP1 and SJ-1 facilities were molten carbonate-type fuel cells.

As testified to by Mr. Leo, from FuelCell Energy, “[o]ur main commercial product line is a

specific type of fuel cell called the molten carbonate fuel cell, which we call the Direct

FuelCell because it has a feature that allows fuel to be sent directly to the stacks

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instead of going through a separate reforming[ 23] system. And that’s our main

commercial line.” Mr. Markell, defendant’s expert witness, stated in his report that

“[m]olten carbonate fuel cells operate at relatively high temperatures (sometimes in

excess of 1,200 degrees Fahrenheit) and can operate as high as 60 percent efficiency.”

Mr. Markell inserted into his report, which was provided to the court, a functional

diagram of a molten carbonate fuel cell, taken from a report by FuelCell Energy:

(HRU stands for Heat Recovery Unit). Mr. Markell explained in his report: “The fuel cell

takes in fuel and air, which react with a specifically designed anode and cathode, with

an electrolyte (a molten carbonate solution) in between to develop an electrical current

(DC power) similar to a battery.”

The FuelCell Energy report, referenced by Mr. Markell in his expert report and

above, is titled “Stationary Fuel Cell Power Systems with Direct FuelCell

Technology Tackle Growing Distributed Baseload Power Challenge,” (emphasis in

original), and goes into further detail about how molten carbonate fuel cells generate

electricity through the anode and cathode, including the following:

Fuel and air reactions for the molten carbonate Direct FuelCell occur at

the anode and cathode, which are porous nickel (Ni) catalysts. The

cathode side receives oxygen from the surrounding air. As can be seen in

Figure 1 [the below figure], hydrogen is created in the fuel cell stack

through a reforming process, which produces hydrogen from the reforming

reaction between the hydrocarbon fuel and water. The gas is then

23Mr. Leo later explained that “reforming” “is that process where we convert methane to

hydrogen,” because “almost all fuel cells want to consume hydrogen in their anode to

make electricity.” Mr. Leo added that “what’s unique about our version of the fuel cell

technology is that process occurs inside the fuel cell stack . . . . When you do it inside

the fuel cell stack, the heat [required] comes from waste heat from the fuel cell reaction,

so it’s a much more efficient way to do it.” Mr. Leo added that this is why the model sold

by FuelCell Energy is called “Direct FuelCell.”

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consumed electrochemically in a reaction with carbonate electrolyte ions

that produces water and electrons.

The electrons flow through an external circuit to provide the power to the

fuel cell load, and then return to be consumed in the cathode

electrochemical reaction. The O2 supplied to the cathode, along with CO2

recycled from the anode side, reacts with the electrons to produce

carbonate ions that pass through the electrolyte to support the anode

reaction. The electron flow through the external circuit produces the

desired power (DC current). An inverter[ 24] is used to convert the DC

output to AC.

Mr. Markell added in his report:

The electricity generated by a single fuel cell is generally in the range of

0.5 volts to 1.0 volts, which is too small to be a power source. In order to

increase the voltage of the output of the fuel cell, a number of individual

fuel cells are combined or “stacked” to create a fuel cell stack.

Mr. Markell stated in his expert report that for the fuel cells operated by RP1 and SJ-1,

“[e]ach fuel cell module consists of four separate fuel cell stacks. FCE specifies four fuel

cell stacks per fuel cell module.”

24 Mr. Leo stated that since fuel cells produce direct current power, and the electricity

grid operates on alternating current, the power is converted from direct current to

alternating current “in a device that’s called an inverter.”

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(4b) Fuel Cell Assembly

Mr. Leo, from FuelCell Energy, discussed at trial the other components that can

go into a fuel cell assembly, particularly those supplied by FuelCell Energy, as part of its

“standard scope of supply.” Mr. Leo explained that FuelCell energy delivered “one

DFC3000 to RP1 and the DFC1500 to San Jose.” The parties have stipulated that “[t]he

pieces of equipment provided by FuelCell Energy as part of its standard scope of supply

for the DFC3000,” delivered to RP1, “are shown in the figure below:”

The parties further stipulated that the “standard scope of supply” for the DFC3000 fuel

cell assembly, as shown above, includes the following “fuel cell equipment:”

• “Two fuel cell modules. . . The fuel cell module is the individual piece of

equipment that actually performs the electrochemical conversion of the fuel

into DC electric power for the DFC3000.”

• “Desulfurization skid [natural gas desulfurizers] . . . In the RP1 Project, the

natural gas supply feeds into the desulfurizers, which are used to remove any

sulfur contaminants in natural gas that do not meet the fuel specification.” Mr.

Leo from FuelCell Energy added at trial that “they’re not mounted on the main

process skid. They’re separate,” although they are part of the standard scope

of supply.

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• “Main Process skid. The Main Process skid is the internal heat recovery unit

(not the waste heat recovery equipment . . .) that heats up the fuel and water

used in the fuel cell modules”

• “Water Treatment System (‘WTS’) skid. The WTS skid treats the water used

in the fuel cells and removes contaminants and impurities. The WTS skid

includes the control panel for the fuel cells”

• “Two Power Conditioning Units (‘PCUs’). The PCUs convert the DC power

produced in the fuel cell modules into utility grade AC power. There is one

PCU for each fuel cell module in the RP1 Project.”

• “Transformer. The transformer is used to increase the voltage of the AC

current.”

(all internal citations omitted). The parties jointly stipulated that “FuelCell Energy also

supplied the following additional equipment for the RP1 Project as part of its scope of

supply,” although these components do not appear to be part of the “standard” scope of

supply for the DFC3000: “Customer Data Interface Option,” “High Ambient (120F)

Package,” “Customer Critical Bus,” “Load Leveler,” “Fuel Blending and Switching

System,” “Inter-skid Cable Kit,” and “Switchgear.”

According to the parties, identical equipment was installed by FuelCell Energy at

the SJ-1 site, although in a different configuration, and, in particular, with only one fuel

cell module and power conditioning unit as opposed to two. The parties also stipulated

that the “Switchgear” was part of the standard scope of supply for the DFC1500, while it

was additional equipment for the DFC3000. Mr. Leo, from FuelCell Energy, confirmed at

trial that the pieces of equipment for the DFC1500, installed at SJ-1, were “[e]ssentially

the same” as the pieces of equipment for the DFC3000 installed at the RP1 site, and

that his testimony as related to the RP1 site pertained to the SJ-1 site as well. Mr.

Wason, plaintiffs’ expert witness, also stated that the RP1 and SJ-1 projects were

identical except “there’s two of those [fuel cell] modules instead of one, so instead of

one 1400 [kilowatt module], it’s two 1400 [kilowatt modules] put together.”

Mr. Leo, from FuelCell Energy, explained that the company’s fuel cell projects

are generally “turnkey projects,” which means that the company provides “the

equipment, the installation services, a complete wrap of a project for a customer, so the

customer doesn’t have to install it.” Mr. Leo also explained that in a turnkey project

FuelCell Energy offers maintenance services that involve “complete operation services

of the power plant. The customer literally has to do nothing. We monitor the power

plants remotely. If the power plants need attention, we can adjust their output remotely

or send technicians to the site. We completely operate the power plant.” Although Mr.

Leo testified at trial that “[a]ny fuel cell power plant project would be a turnkey project,”

Mr. Leo also testified that FuelCell Energy has never been involved in a turnkey project

involving anaerobic digester gas, indicating that they did not perform the turnkey

projects for the RP1 and SJ-1 projects. A review of the record indicates that although

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San Jose and the IEUA sought “turnkey” projects in their solicitations, in the case

currently before the court, HDR Design-Build and Otto H. Rosentreter Co. acted as the

EPC contractors, 25 not FuelCell Energy. 26

Section 1603

The genesis of this suit lies in Section 1603 of the American Recovery and

Reinvestment Act of 2009, Pub. L. No. 111-5, 123 Stat 115. Division B, Title 1 of the Act

is titled the “American Recovery and Reinvestment Tax Act of 2009.” See ARRTA §

1000. Section 1603 of the ARRTA, as amended by section 707 of the Tax Relief,

Unemployment Insurance Reauthorization, and Job Creation Act of 2010, Pub. L. No.

111-312, § 707, 124 Stat 3296, 3312, 27 states in relevant part:

(a) IN GENERAL.—Upon application, the Secretary of the Treasury shall,

subject to the requirements of this section, provide a grant to each person

who places in service specified energy property to reimburse such person

for a portion of the expense of such property as provided in subsection (b).

No grant shall be made under this section with respect to any property

unless such property—

(1) is placed in service during 2009, 2010, or 2011, or

25 The parties jointly defined EPC Contractor as “[t]he contractor providing EPC

services” and EPC as “[e]ngineering, procurement, and construction (a standard type of

contract).”

26 Mr. Markell, defendant’s expert witness, stated in his report that the “final component

utilized by the Projects is a heat recovery system. A molten carbonate fuel cell as

utilized in the DFC1500 [used by SJ-1] and DFC3000 [used by RP1] fuel cell power

plant will give off excess heat that can be captured by a heat recovery system and then

used to generate steam or hot water.” Mr. Sharma explained at trial that a heat recovery

unit can “increase the efficiency of the entire power plant.” Plaintiffs’ expert report did

not discuss the heat recovery unit, however, the heat recovery unit is not at issue in this

case.

27 Section 707 of the Tax Relief, Unemployment Insurance Reauthorization, and Job

Creation Act of 2010 amended Section 1603 by extending the grants available under

the section to projects “placed in service” through 2011, whereas the original American

Recovery and Reinvestment Tax Act of 2009 only covered projects “placed in service”

up through 2010. See Tax Relief, Unemployment Insurance Reauthorization, and Job

Creation Act of 2010, Pub. L. No. 111-312, § 707, 124 Stat. 3296, 3312. Section

407(c)(2) of the American Taxpayer Relief Act of 2012 also amended Section 1603 by

striking “placed in service” from paragraphs (1) and (2) of subsection (a) and inserting

“originally placed in service by such person.” See American Taxpayer Relief Act of

2012, Pub. L. No. 112-240, § 407(c)(2), 126 Stat. 2313, 2342.

57

(2) is placed in service after 2011 and before the credit termination

date with respect to such property, but only if the construction of

such property began during 2009, 2010, or 2011.

(b) GRANT AMOUNT.—

(1) IN GENERAL.—The amount of the grant under subsection (a)

with respect to any specified energy property shall be the

applicable percentage of the basis of such property.

(2) APPLICABLE PERCENTAGE.—For purposes of paragraph (1),

the term “applicable percentage” means—

(A) 30 percent in the case of any property described in

paragraphs (1) through (4) of subsection (d), and

(B) 10 percent in the case of any other property.

(3) DOLLAR LIMITATIONS.—In the case of property described in

paragraph (2), (6), or (7) of subsection (d), the amount of any grant

under this section with respect to such property shall not exceed

the limitation described in section 48(c)(1)(B), 48(c)(2)(B), or

48(c)(3)(B) of the Internal Revenue Code of 1986, respectively, with

respect to such property.

(c) TIME FOR PAYMENT OF GRANT.—The Secretary of the Treasury

shall make payment of any grant under subsection (a) during the 60-day

period beginning on the later of—

(1) the date of the application for such grant, or

(2) the date the specified energy property for which the grant is

being made is placed in service.

(d) SPECIFIED ENERGY PROPERTY.—For purposes of this section, the

term “specified energy property” means any of the following:

(1) QUALIFIED FACILITIES.—Any qualified property (as defined in

section 48(a)(5)(D) of the Internal Revenue Code of 1986) which is

part of a qualified facility (within the meaning of section 45 of such

Code) described in paragraph (1), (2), (3), (4), (6), (7), (9), or (11)

of section 45(d) of such Code.[ 28]

28 Mr. Settle from NREL added at trial that the Section 1603 grant program references

“two specific sections in the tax code, [I.R.C.] section 45, production tax credit, and

section 48, investment tax credit.” Mr. Settle added:

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(2) QUALIFIED FUEL CELL PROPERTY.—Any qualified fuel cell

property (as defined in section 48(c)(1) of such Code).

(3) SOLAR PROPERTY.—Any property described in clause (i) or

(ii) of section 48(a)(3)(A) of such Code.

(4) QUALIFIED SMALL WIND ENERGY PROPERTY.—Any

qualified small wind energy property (as defined in section 48(c)(4)

of such Code).

(5) GEOTHERMAL PROPERTY.—Any property described in

clause (iii) of section 48(a)(3)(A) of such Code.

(6) QUALIFIED MICROTURBINE PROPERTY.—Any qualified

microturbine property (as defined in section 48(c)(2) of such Code).

(7) COMBINED HEAT AND POWER SYSTEM PROPERTY.—Any

combined heat and power system property (as defined in section

48(c)(3) of such Code).

(8

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