Petition for Writ of Certiorari — Ampersand Chowchilla Biomass, LLC, et al., Petitioners v. United States
Supreme Court briefJul 22, 2022
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QUESTION PRESENTED
Congress has incentivized the use of renewable,
alternative energy sources by providing tax benefits to
taxpayers who produce electricity at or invest in qualifying energy property. Eligibility for these benefits
often turns in part on the year the energy property is
“placed in service,” which the Treasury Department
has construed to include when the property is “placed
in a condition or state of readiness and availability for
a specifically assigned function.” In fact, the availability of over a dozen federal tax benefits is dictated by
placed-in-service date, as are other tax consequences.
Petitioners here own two biomass electrical generation facilities that qualify for tax incentive payments
under Section 1603 of the American Recovery and Reinvestment Act of 2009 if they were “placed in service”
between 2009 and 2011. The Government claims the
facilities were “placed in service” in 2008 because they
produced and sold some electricity that year. But in
2008, they undisputedly were producing far less electricity than their contracts set as capacity thresholds
and were incapable of operating without very significant noncompliance with environmental laws. Yet the
Federal Circuit held that such a facility could still be
considered “placed in service” under federal law.
The question presented is:
Whether an energy facility is “placed in service”
within the meaning of federal law whenever it can produce and sell some electricity without regard for the
level of operation and compliance with laws, as held
by the court below in joining the Fifth Circuit, or only
after it can produce and sell electricity as intended on
a fairly consistent basis, as held by the Eighth Circuit.
ii
PARTIES TO THE PROCEEDING
Petitioners are Ampersand Chowchilla Biomass,
LLC and Merced Power, LLC. Petitioners were plaintiffs in the United States Court of Federal Claims and
appellants in the United States Court of Appeals for
the Federal Circuit.
Respondent is the United States. Respondent was
defendant in the trial court and appellee in the court
of appeals.
CORPORATE DISCLOSURE STATEMENT
Pursuant to this Court’s Rule 29.6, petitioners
state as follows:
The parent companies of petitioners are Global
Ampersand, LLC; ACM California, LLC; and Akeida
Environmental Fund LP. There are no publicly held
companies that hold any stock of the petitioners.
STATEMENT OF RELATED PROCEEDINGS
This petition arises from:
Ampersand Chowchilla Biomass, LLC v. United
States, 26 F.4th 1306 (Fed. Cir. 2022) (opinion and
judgment issued February 24, 2022)
Ampersand Chowchilla Biomass, LLC v. United
States, 150 Fed. Cl. 620 (2020) (opinion issued under seal and judgment issued October 30, 2020,
and opinion reissued November 9, 2020)
Petitioners are not aware of any other proceedings
in state or federal courts directly related to this case
within the meaning of Rule 14.1(b)(iii).
iii
TABLE OF CONTENTS
PAGE
QUESTION PRESENTED ......................................... i
PARTIES TO THE PROCEEDING ..........................ii
CORPORATE DISCLOSURE STATEMENT ...........ii
STATEMENT OF RELATED PROCEEDINGS .......ii
PETITION FOR A WRIT OF CERTIORARI ............ 1
OPINIONS BELOW .................................................. 1
JURISDICTION......................................................... 1
STATUTORY AND REGULATORY
PROVISIONS INVOLVED ........................................ 1
INTRODUCTION ...................................................... 1
STATEMENT OF THE CASE................................... 4
I.
Factual Background ................................. 4
A.
Petitioners’ refurbishment of two
energy facilities .................................. 4
B.
The Government’s denial of
grants based on its “placed in
service” determination for the
facilities .............................................. 8
II.
Proceedings Below .................................. 10
A.
Proceedings in Court of Federal
Claims ............................................... 10
B.
The court of appeals’ decision .......... 12
iv
TABLE OF CONTENTS
(continued)
PAGE
REASONS FOR GRANTING THE PETITION ...... 14
I.
The Circuits Apply Conflicting Legal
Standards, And There Is Broader
Confusion,
On
A
Significant
Question Under The Tax Code. .............. 14
A.
The circuits disagree on the
proper legal standard for when
an energy facility is “placed in
service.” ............................................. 14
B.
The standard adopted below is
also at odds with the bodies
tasked with interpreting and
adjudicating disputes under the
Tax Code. .......................................... 21
II.
The
Question
Presented
Is
Important And Warrants Review In
This Case................................................. 24
A.
This question impacts multiple
federal laws and has significant
consequences. ................................... 24
B.
This case squarely presents the
question. ........................................... 30
C.
The judgment below is wrong. ......... 33
CONCLUSION......................................................... 36
v
TABLE OF CONTENTS
(continued)
PAGE
APPENDIX
Appendix A
Opinion, United States Court of Appeals for the
Federal Circuit, Ampersand Chowchilla
Biomass, LLC v. United States, No. 20211385 (Feb. 24, 2022) ....................................... 1a
Appendix B
Opinion and Order, United States Court of Federal Claims, Ampersand Chowchilla Biomass, LLC v. United States, No. 14-841C
(reissued Nov. 9, 2020) ................................. 17a
Appendix C
Judgment, United States Court of Federal
Claims, Ampersand Chowchilla Biomass,
LLC v. United States, No. 14-841C
(Oct. 30, 2020) .............................................. 91a
Appendix D
Statutory and Regulatory Provisions
American Recovery and Reinvestment Act
of 2009, Pub. L. No. 111-5, Div. B, tit. I,
§ 1603(a), 123 Stat. 115, 364 (2009) ............ 92a
Treas. Reg. § 1.46-3(d)(1)-(2) ....................... 93a
vi
TABLE OF AUTHORITIES
PAGE
Cases
Armstrong World Indus., Inc. v.
Commissioner,
974 F.2d 422 (3d Cir. 1992) ............... 19, 20, 24, 32
Brown v. Commissioner,
106 T.C.M. (CCH) 630 (2013) ........................ 22, 23
Consumers Power Co. v. Commissioner,
89 T.C. 710 (1987).......................................... 20, 22
Green Gas Del. Statutory Tr. v.
Commissioner,
147 T.C. 1 (2016), aff’d, 903 F.3d 138
(D.C. Cir. 2018) .................................................... 23
IBP, Inc. v. Alvarez,
546 U.S. 21 (2005) ......................................... 27, 28
Mid-Con Freight Sys., Inc. v. Mich. Pub.
Serv. Comm’n,
545 U.S. 440 (2005) ............................................. 31
Monasky v. Taglieri,
140 S. Ct. 719 (2020) ........................................... 31
N. States Power Co. v. United States,
151 F.3d 876 (8th Cir. 1998) ............................... 15
Oglethorpe Power Corp. v. Commissioner,
60 T.C.M. (CCH) 850 (1990) .................... 11, 22, 23
Sealy Power, Ltd. v. Commissioner,
46 F.3d 382 (5th Cir. 1995) .......................... passim
vii
TABLE OF AUTHORITIES
(continued)
PAGE
United States v. Hemme,
476 U.S. 558 (1986) ....................................... 24, 27
United States v. RaPower-3, LLC,
960 F.3d 1240 (10th Cir. 2020) ........................... 21
United States v. Singer Mfg. Co.,
374 U.S. 174 (1963) ............................................. 31
United States v. Tierney,
947 F.2d 854 (8th Cir. 1991) ........................ passim
Visser v. Commissioner,
19 F.3d 32, 1994 WL 96395
(9th Cir. 1994)...................................................... 20
West Virginia v. EPA,
142 S. Ct. 2587 (2022) ........................................... 3
Statutes
26 U.S.C. § 25 ............................................................ 26
26 U.S.C. § 38 ........................................................ 9, 27
26 U.S.C. § 42 ...................................................... 26, 27
26 U.S.C. § 44 ...................................................... 26, 27
26 U.S.C. § 45 ............................................ 9, 25, 26, 27
26 U.S.C. § 46 ........................................................ 9, 27
26 U.S.C. § 47 ...................................................... 26, 27
26 U.S.C. § 48 .................................................. 9, 26, 27
26 U.S.C. § 167 .......................................................... 27
viii
TABLE OF AUTHORITIES
(continued)
PAGE
28 U.S.C. § 1254 .......................................................... 1
28 U.S.C. § 1295 .......................................................... 1
American Recovery and Reinvestment Act
of 2009, Pub. L. No. 111-5,
123 Stat. 115 (2009)...................................... passim
Energy Policy Act of 2005, Pub. L. No. 10958, § 1331, 119 Stat. 594, 1020, 1023
(2005) .................................................................. 28
Infrastructure Investment and Jobs Act,
Pub. L. No. 117-58, 135 Stat. 429 (2021) ........ 2, 28
Other Authorities
I.R.S. Tech. Adv. Mem. 2011-13-025,
2011 WL 1210325 (Apr. 1, 2011)................... 23, 24
Operational, MERRIAM-WEBSTER ONLINE
DICTIONARY, https://www.merriamwebster.com/dictionary/operational .................... 17
Rev. Rul. 84-85, 1984-1 C.B. 10, 1984 WL
262650 (June 18, 1984) ....................................... 24
Treas. Reg. § 1-167.................................................... 27
Treas. Reg. § 1.46-3............................................ passim
PETITION FOR A WRIT OF CERTIORARI
Petitioners Ampersand Chowchilla Biomass, LLC
and Merced Power, LLC respectfully petition for a
writ of certiorari to review the judgment of the United
States Court of Appeals for the Federal Circuit in this
case.
OPINIONS BELOW
The opinion of the United States Court of Appeals
for the Federal Circuit is reported at 26 F.4th 1306
(Fed. Cir. 2022), and reproduced at App.1a-16a. The
opinion of the United States Court of Federal Claims
is reported at 150 Fed. Cl. 620 (2020), and reproduced
at App.17a-90a.
JURISDICTION
The court of appeals issued its opinion and judgment on February 24, 2022, and had jurisdiction under 28 U.S.C. § 1295(a)(3). On May 16, 2022, Chief
Justice Roberts extended the time to file a petition for
a writ of certiorari to July 22, 2022. This Court has
jurisdiction under 28 U.S.C. § 1254(1).
STATUTORY AND REGULATORY
PROVISIONS INVOLVED
This case involves the American Recovery and Reinvestment Act of 2009, Pub. L. No. 111-5, Div. B, tit.
I, § 1603(a), 123 Stat. 115, 364 (2009) and Treasury
Regulation § 1.46-3(d)(1)-(2). Those provisions are reproduced at App.92a-95a.
INTRODUCTION
Congress has often conditioned tax benefits on
the year property is “placed in service,” among other
2
qualifying criteria. The test for determining when
property is “placed in service” thus has significant consequences for a wide range of federal benefits, including whether taxpayers are entitled to depreciation deductions, tax credits, and other tax incentives like
grants. These consequences are particularly evident
in the renewable-energy sector, where Congress incentivizes clean energy use by awarding tax benefits
based on the year renewable, alternative energy facilities are “placed in service.” Indeed, Congress enacted
a new program like this last year in the Infrastructure
Investment and Jobs Act, authorizing incentive payments for certain property on this basis.
This case involves another such benefit, arising
under the American Recovery and Reinvestment Act
of 2009 (ARRA). Section 1603 of the ARRA provides
grants to persons who “placed in service” qualifying
energy properties between 2009 and 2011. Petitioners
contend they met this requirement by placing two
open-loop biomass facilities into service in 2011, when
the facilities were able to consistently operate at or
near their capacities and they could comply with federal and state environmental laws.
But the Government rejected petitioners’ grant requests, determining the facilities were placed in service in 2008 (outside of Section 1603’s eligibility period) when the facilities were first able to generate and
sell some electricity. The Government ignored that
the facilities were unable to produce electricity at or
near the capacity thresholds set forth in petitioners’
contracts with the local utility company. The Government also disregarded that the facilities were incapable of operating without significant noncompliance
3
with environmental laws—an unusual position, given
the ARRA’s stated purpose of investing in environmental protection and the Government’s aggressive
stance to protect the environment and enforce the
Clean Air Act, see generally West Virginia v. EPA, 142
S. Ct. 2587 (2022).
The courts below nonetheless affirmed the Government’s denial of the grants. In doing so, the Federal Circuit widened disagreement over the proper legal standard for determining when property has been
“placed in service” under federal law. The Federal
Circuit joined the Fifth Circuit, which earlier had embraced legislative history to hold that only some generation and sale of electricity is required, without regard to the facility’s intended level of production.
The Eighth Circuit, however, has stated a different legal standard, requiring property to function on a
fairly consistent basis and as intended to be “placed in
service.” This—unlike the Federal Circuit’s rule—is
properly grounded in the statutory text as well as a
Treasury Regulation that defines the term as “placed
in a condition or state of readiness and availability for
a specifically assigned function.” Treas. Reg. § 1.463(d)(1)(ii). As the Eighth Circuit correctly recognized,
this language requires more than some functionality,
as property that cannot function consistently as the
taxpayer intended cannot be “ready” and “available”
for its specifically assigned function. Further, here,
this position is the only one that effectuates the
ARRA’s textual aim and purpose to promote clean energy use. The Federal Circuit’s holding perversely
pinned the facilities’ eligibility for federal tax incen-
4
tives at a time when their operations were significantly violating federal environmental laws, undermining the statutory goal to incentivize activity that
protects the environment.
The existence of this conflict and broader confusion among courts and the Internal Revenue Service
(explained below), coupled with the issue’s widereaching and meaningful tax consequences, make resolution of the proper legal standard important. This
Court’s review is warranted.
STATEMENT OF THE CASE
I.
Factual Background
A. Petitioners’ refurbishment of two energy
facilities
This case arises from petitioners purchasing two
mothballed energy facilities and making them operational and environmentally compliant between 2007
and 2011. The facilities at issue, the Chowchilla and
Merced facilities, are open-loop biomass facilities located in California that each have nameplate capacities of 12.5 megawatts. App.20a. The facilities produce electricity using renewable biomass in the form
of agricultural and urban wood waste. App.20a.
The facilities began operations in the late 1980s,
but were shut down in 1995. App.23a. Global Ampersand, LLC (“Global”) purchased the facilities in 2007,
seeking to use them for commercial operations. See
App.23a-24a. Because the facilities had in place
power purchase agreements with Pacific Gas & Electric Company (“PGE,” the local utility company and
electric transmission grid operator, App.20a) when
5
Global acquired them, Global’s intended commercial
operations largely turned on the facilities’ ability to
produce their contractual quota of electricity. See
App.28a-32a.
Given the facilities’ disrepair, a significant refurbishment and upgrade program preceded any possibility of meeting the quotas. App.24a, 38a; JA.100. 1 A
preliminary step in the refurbishment and upgrade
program was securing Authorities to Construct
(“ATCs”) from the San Joaquin Valley Air Pollution
Control District (the “District”), the California state
agency charged with regulating the facilities.
App.39a. Global applied for and secured these permits in 2007. App.42a; JA.3178-95, 3236-46. These
“initial” permits allowed Global to construct the facilities in accordance with state and federal emissions
standards, and to generate and sell electricity on a
conditional basis. App.39a. To operate on a more permanent basis, Global needed to secure a state Permit
to Operate and a federal Title V permit, which were
available only after passing a series of tests. 2 See
App.39a-41a.
After receiving the ATCs, Global began the necessary testing and produced and sold some electricity,
but problems arose. In 2008, for instance, the District
noted the facilities “operated sporadically with emissions in excess of those allowed under” the ATCs, and
1 “JA” citations refer to the joint appendix filed in the U.S.
Court of Appeals for the Federal Circuit.
2 The Chowchilla and Merced Facilities would not secure
their Title V permits until 2009 and 2011, respectively. App.50a.
6
also lacked mandatory equipment, including pollution
control equipment. E.g., JA.7967, 8080-83. This resulted in a series of Notices of Violation from the District subjecting Global to penalties for its noncompliance with the state’s emission standards and failure
to install mandatory equipment. App.43a-44a.
Although the facilities generated roughly $2.2 million in revenue in 2008 from the production and sale
of limited amounts of electricity, it is undisputed they
did not operate at or near capacity or generate sufficient electricity to satisfy the capacity thresholds specified in the contracts with PGE. See App.36a-37a,
44a-46a, 88a. For example, while the facilities needed
to operate around 80 to 90 percent capacity under the
contractual specifications, see App.28a-30a, 49a, they
were operating on average at less than 50 percent,
JA.3515-16.
The facilities also could not operate without significant noncompliance with environmental laws. See
App.43a-45a. To the contrary, according to the findings below, “[s]oon after” the facilities restarted in
mid-2008, the District and the U.S. Environmental
Protection Agency (“EPA”) began issuing Notices of
Violation. App.43a. There were a total of 7 notices for
Chowchilla and 3 for Merced in 2008 alone, 3 with the
Chowchilla Facility operating under a variance that
“required [it] to operate at a reduced capacity” because
3 Between 2008 and 2010, the facilities received a com-
bined 42 Notices of Violation from the District and the EPA. See
JA.8007-23, 8034, 8080-107, 8118.
7
of its emissions problems, and both facilities still lacking the necessary equipment to properly operate.
App.43a-45a; see also JA.8007-14, 8080-83. And in
2009, the EPA issued notices to the facilities for their
failure to comply with federal emissions standards
and to install necessary equipment. App.51a; see
JA.8023-33, 8107-17. Failed tests and irregular operations (averaging around 50 percent of capacity) likewise continued to plague the facilities. App.51a-52a.
These problems continued into 2010. The EPA issued another round of Notices of Violation. JA.803445, 8118-29. The U.S. Department of Justice (“DOJ”)
also got involved, at the request of the EPA and the
District, informing Global that its continued violations of emissions levels, plus its failure to install necessary equipment, warranted significant monetary
penalties. App.56a. The DOJ proposed $1.6 million
in penalties to settle the alleged Clean Air Act violations, which ultimately were resolved for $835,000 in
penalties. App.56a. Operations at the facilities were
suspended later that year due to funding issues. 4
App.57a.
In February 2011, the facilities’ problems culminated in the DOJ and the District jointly filing multicount Complaints against petitioners. App.60a. They
sought an injunction to stop the facilities’ operations
entirely. App.60a; JA.7974-8005, 8046-78. Consistent
with the prior Notices of Violation, they asserted that
4 Several months after the suspension of operations, com-
panies related to petitioners acquired Global, and petitioners
took ownership of the facilities. JA.7570-661; App.59a-60a.
8
the facilities had failed to pass (or even conduct) required testing, were missing mandatory equipment,
and were exceeding emissions limits. App.60a; see
also, e.g., JA.7993-99, 8067-74.
Petitioners entered consent decrees with the District and EPA, requiring the facilities to remedy equipment problems, pass emissions testing, provide notice
of potential violations in the future, and pay the penalties noted above. App.61a; JA.7873-906, 7907-40.
The facilities made the required changes and certified
compliance by August 2011. App.61a. Only then—for
the first time—did the facilities have all the required
permits to operate, comply with major federal and
state laws, and produce sufficient electricity to fulfill
their contracts with PGE. See App.50a, 61a-62a, 88a;
JA.615-16.
B. The Government’s denial of grants based
on its “placed in service” determination
for the facilities
While Global and petitioners were in the process
of repairing the facilities, Congress passed the ARRA.
The ARRA was designed to “invest in … environmental protection … and other infrastructure that w[ould]
provide long-term economic benefits.” Pub. L. No.
111-5, § 3(a)(4), 123 Stat. 115, 115-16 (2009). To effectuate this purpose, a tax portion of the ARRA created
benefits for persons who “placed in service” renewable
energy property in certain years. See, e.g., id. § 1603.
Relevant here, the ARRA directed that the Government “shall … provide a grant to each person who
places in service specified energy property” (like the
facilities here) in order “to reimburse such person for
9
a portion of the expense of such property.” Id.
§ 1603(a). To qualify, the property needed to be
“placed in service” between 2009 and 2011. See id.
§ 1603(a), (j).
The ARRA did not define “placed in service.” But
for purposes of another federal tax benefit, the U.S.
Treasury Department has interpreted the term to include when the property “is placed in a condition or
state of readiness and availability for a specifically assigned function.” Treas. Reg. § 1.46-3(d)(1)(ii). 5
Petitioners (through Global) applied for the Section 1603 grants in 2011. App.62a-63a. Petitioners
believed the facilities were “placed in service” that
year because the facilities were, for the first time, consistently producing the intended, contractually specified amount of electricity and doing so in compliance
with major federal and state regulations.
See
App.50a, 61a-62a, 88a; JA.615-16. The Government
disagreed, informing petitioners the facilities had
been “placed in service” in 2008, making them “ineligible for payment.” App.64a-65a.
5 The ARRA adopts the definitions of terms used in Sec-
tions 45 and 48 of the Internal Revenue Code. ARRA § 1603(h).
Those sections refer back to Section 38 of the Internal Revenue
Code. 26 U.S.C. §§ 45(a) (referencing Section 38), 48(a)(1) (referencing Section 46, which references Section 38). The Internal
Revenue Service (“IRS”), in turn, has interpreted the meaning of
terms used in Section 38, including “placed in service,” in Treasury Regulation § 1.46-3.
10
II. Proceedings Below
A. Proceedings in Court of Federal Claims
Petitioners challenged the Government’s denial of
the Section 1603 grants. App.18a. After an 11-day
trial, the trial court found the facilities were “placed
in service” in 2008 and thus ineligible for the grants.
App.19a, 89a-91a.
Relying heavily on Sealy Power, Ltd. v. Commissioner, 46 F.3d 382 (5th Cir. 1995), the trial court concluded that the facilities’ “specifically assigned function” was “to produce and sell electricity,” “regardless
of the level of production attained.” App.75a-77a.
Consequently, the facilities were “placed in a condition or state of readiness and availability for [that]
specifically assigned function,” i.e., “placed in service,”
Treas. Reg. § 1.46-3(d)(1)(ii), as soon as they produced
and sold any electricity, without regard to whether the
facilities were operating at their intended levels or in
significant noncompliance with environmental laws.
App.74a-77a, 79a-81a, 87a-90a. In analyzing this issue, the trial court squarely relied on the legal standard enunciated in Sealy. E.g., App.76a-77a.
The trial court next analyzed a five-factor test
from IRS Revenue Rulings, which represent the IRS’s
official interpretations of the Internal Revenue Code
and related statutes and regulations, to decide when
11
the facilities met the specifically assigned function. 6
App.81a-90a. The trial court’s analysis of these factors was necessarily grounded in its prior conclusions
that “regular achievement of anticipated production
levels,” “achieving ideal or near ideal production levels,” and complying with environmental laws were
“not required for a facility to achieve its specifically
assigned function.” See App.76a-77a, 79a-81a (citing
Sealy, 46 F.3d at 393-94). Analysis of each factor relied on the “specifically assigned function” of producing and selling electricity—some electricity, regardless of amount or legal compliance. See App.76a-81a.
For example, the trial court found the facilities
had all the “necessary permits and licenses” to operate
because they had secured ATCs in 2007, which the
court found rendered the facilities ready and available
for their specifically assigned function of “produc[ing]
and sell[ing]” any amount of electricity. See App.83a85a. Based on the trial court’s prior legal conclusion,
the court overlooked that the ATCs permitted operations only on a temporary (not regular) basis, and
downplayed that the facilities were not in compliance
with the conditions in the ATCs, including because of
environmental law violations and missing equipment.
6 This test was recognized in Oglethorpe Power Corp. v. Com-
missioner, 60 T.C.M. (CCH) 850, 860 (1990), which stated the factors as whether: (1) the necessary permits and licenses for operation have been obtained; (2) critical tests necessary for proper
operations have been performed; (3) the taxpayer has control of
the facility; (4) the facility has been synchronized with the transmission grid; and (5) daily (or regular) operation has begun.
See id.
12
App.83a-85a; see also JA.8003, 8076 (District and
EPA seeking to enjoin the facilities’ operations).
The same was true when analyzing critical tests
necessary for operations, as the trial court discounted
the environmental law violations and other points in
finding additional tests were not necessary for the facilities “to generate and sell electricity.” App.85a-87a.
The court found that the only critical tests were those
needed to ensure compatibility with the grid and
“those specified in the” contracts with PGE, see
App.85a-86a, despite the court’s finding that the facilities’ “specifically assigned function” was not tied to
their ability to comply with those contracts, App.75a.
The trial court’s legal conclusion also dictated its
finding that the facilities began “daily or normal operations” in 2008. See App.87a-89a. The court reasoned
that the facilities “were generating and selling” some
electricity (and generating revenue) in 2008 and that
this was enough, even though the facilities’ capacity
levels were “below the range stated to be required” by
their contracts with PGE and the facilities’ “repeated
shutdowns and environmental compliance issues”
were not largely resolved until 2011. App.87a-89a.
B. The court of appeals’ decision
The Federal Circuit affirmed. App.2a. First, as a
legal matter, for a facility to be “placed in service,” it
expressly “agree[d] with the trial court’s decision and
the Fifth Circuit’s Sealy opinion” that “a facility need
not achieve ideal or near-ideal production levels,” as it
characterized petitioners’ proposed standard to be.
App.8a. The Federal Circuit claimed to make this legal determination based on the text of Section 1603
13
and the Treasury Regulation defining “placed in service” (§ 1.46-3(d)(1)(ii)), observing that the “plain language” of “neither the statute nor the regulation
‘states []or implies that the property must produce an
anticipated or projected amount before it may be considered ready and available for a specifically assigned
function.’” App.8a-9a (quoting Sealy, 46 F.3d at 394).
The Federal Circuit performed little other textual
analysis. It relied almost exclusively on Sealy, which
expressly relied on legislative history. 46 F.3d at 39394. The Federal Circuit disclaimed “rel[iance] on legislative history” in reaching its decision, yet quoted
the legislative-history discussion favorably. App.10a.
The court then adopted Sealy’s rationale that reading
Section 1603’s placed-in-service requirement to require “ideal or near ideal production” would “undermine[]” the statute’s purpose of incentivizing “initial
investment decision[s]” and getting facilities online.
App.10a-11a (quoting Sealy, 46 F.3d at 394).
Second, having legally ruled that production in an
“anticipated or projected amount,” or “ideal or nearideal production,” was unnecessary for energy facilities to be “placed in service,” App.8a-9a, the Federal
Circuit turned to reviewing and upholding the trial
court’s finding that the facilities’ “specifically assigned
function” is merely to produce and sell some electricity, App.11a-13a. The court of appeals reviewed that
finding only for clear error, but upholding it necessarily rested on the prior legal ruling that the facilities
did not need to produce electricity “near [their] expected” or “anticipated” levels to be “placed in service.”
App.9a-13a.
14
Third, the Federal Circuit also upheld as not
clearly erroneous the findings that the five-factor Revenue Ruling test favored a determination that the specifically assigned function was achieved in 2008, again
resting the analysis on the same foundational legal
conclusions as the trial court. App.13a-16a. For example, the court of appeals agreed with the trial court
that the ATCs were the only necessary permit for the
facilities to begin generating some power; that as to
both permits and testing, environmental “violations
were [simply] a fact of life for biomass plants at that
time,” making significant noncompliance with environmental laws unrelated to the placed-in-service
analysis; and that the facilities’ generation and sale of
some electricity in 2008, regardless of the level of production and compliance issues, constituted “regular[]”
operations. App.13a-16a.
REASONS FOR GRANTING THE PETITION
I.
The Circuits Apply Conflicting Legal Standards, And There Is Broader Confusion, On A
Significant Question Under The Tax Code.
A. The circuits disagree on the proper legal
standard for when an energy facility is
“placed in service.”
Multiple statutes premise federal tax benefits on
the year that qualifying property is “placed in service.”
Infra Part II.A.1. But the circuits disagree on what
“placed in service” means, particularly for energy facilities. The question boils down to what degree of production is required: “fairly consistent” production at
intended levels, as stated in one circuit, or any produc-
15
tion, as stated in two others? The conflicting standards have generated confusion that has impacted and
will impact many taxpayers.
1. Focusing on the language’s plain text as well
as a straightforward reading of Treasury Regulation
§ 1.46-3(d)(1)(ii), the Eighth Circuit has correctly held
that facilities must be producing as intended on a
“fairly consistent basis” to be “placed in service.” See
United States v. Tierney, 947 F.2d 854, 866 (8th Cir.
1991); see also N. States Power Co. v. United States,
151 F.3d 876, 880 (8th Cir. 1998) (in distinct context
of replacement equipment, acknowledging Tierney’s
holding). In Tierney, the Eighth Circuit held that an
ethanol plant had to meet this standard before it could
be “placed in service” for tax-credit purposes. 947 F.2d
at 866. Part of meeting the standard, the court analyzed, was functioning as anticipated. Id.
This conclusion was based on the tax-credit statute as well as Treasury Regulation § 1.46-3(d), which
is the regulation relied on by the court of appeals here.
Id. The Eighth Circuit reasoned that an ill-functioning plant is no more ready and available for its specifically assigned function than a car that “can be driven
at only 10 miles an hour for only 3 miles at a time.”
See id. Put simply, the court ruled, it is not.
Under this standard, the ability to operate consistently enough to meet intended contractual specifications, not to mention avoid significant noncompliance
with environmental regulations, is a prerequisite to
being “placed in service.” Concluding otherwise not
only contravenes the plain language of “placed in service” and Treasury Regulation § 1.46-3(d)(1)(ii), but
also perversely bases these facilities’ federal placed-
16
in-service point on a date where they were unable to
operate without violating federal emissions standards—an inconsistency that is especially puzzling because the tax incentives were designed in part to protect against environmental harm.
2. The Fifth and Federal Circuits, on the other
hand, have held that energy facilities are “placed in
service” when they produce any amount of electricity,
regardless of the level of production or any major noncompliance with applicable environmental laws.
In Sealy, the Fifth Circuit held that an energy facility is “placed in service” for purposes of federal law
(there, energy and investment tax credits and depreciation deductions) when it is “ready and available to
play its role in an operating facility, regardless of the
level of production attained.” 46 F.3d at 388, 397. Under this low legal threshold, an energy facility need
not “achiev[e] ideal or near ideal production levels” to
be “placed in service.” Id. at 394. It also need not
“generate electricity at its rated capacity.” Id. at 397.
It need only generate some electricity. Id. at 397-98.
The Fifth Circuit relied heavily on legislative history in formulating this rule. Id. at 393-94, 397-98.
The court reasoned that Congress’ intent behind the
tax credit at issue was to encourage spending on renewable, alternative energy sources, not to ensure the
success of the resulting infrastructure. Id. at 393-94.
Thus, the court concluded that requiring “ideal or near
ideal production levels” would improperly shift the focus away from the initial investment decision. Id. at
394. That analysis of the statute’s legislative history
disregarded the environmental impacts of a facility’s
actual operations, yet it dictated Sealy’s outcome, as
17
the core dispute was whether the facility could be
“placed in service” without ever generating its anticipated levels of electricity. Id. at 391.
The court’s erroneous resolution of that legal dispute led it, like the Federal Circuit here, to rest on factual findings under the five-factor Revenue Ruling
test that supported a premature “placed in service”
date. Id. at 394-97. For example, to the Fifth Circuit,
operations were “conducted regularly” at the facility
“even though its performance was sporadic and the
volume of its output was disappointing.” Id. at 396.
Had the court concluded that more than some production of electricity was required to be “placed in service,” it could not have found that such “disappointing” production satisfied the legal standard.
The Fifth Circuit’s attempt to square the logical
inconsistency between its position and the text of
Treasury Regulation § 1.46-3(d)(1)(ii)—i.e., that the
property be available and ready to perform its intended function—fell flat. The court merely observed
that the regulation did not “state[]” or “impl[y]” that
any level of production was required, and pointed to
inapposite examples of “operational” equipment being
“placed in service,” despite the equipment in those examples being impracticable to use or undergoing testing to eliminate defects. Id. at 394 (citing Treas. Reg.
§ 1.46-3(d)(2)). But the court’s holding is contrary to
the fact that an energy facility that cannot function on
a fairly consistent basis as intended is never “operational” under the term’s plain meaning. See Operational, MERRIAM-WEBSTER ONLINE DICTIONARY,
18
https://www.merriam-webster.com/dictionary/operational (defining “operational” as “ready for or in condition to undertake a destined function”).
Notwithstanding these flaws in Sealy, the Federal
Circuit below fully adopted it and held as a legal matter that electric facilities are “placed in service” when
they produce and sell any amount of electricity. See
App.8a-11a; see also App.9a (rejecting contention that
facilities must be able to “produce an anticipated or
projected amount” of electricity before being “placed in
service”). As a result of that legal ruling and the subsequent analysis of the trial court’s findings based on
that ruling, the court of appeals held that petitioners’
biomass facilities were “placed in service” in 2008 even
though they undisputedly “operated below” the capacities specified in their contracts and were seriously
noncompliant with environmental laws. App.13a-16a.
Given these undisputed performance and compliance
issues, it is clear the court of appeals considered the
legal standard dispositive here—the court felt it necessary to answer that question first, and the answer
informed the court’s analysis of all the Revenue Ruling factors.
The court of appeals claimed it was not relying on
legislative history, but it parroted Sealy’s analysis and
concluded that because requiring the facilities to
“achiev[e] ideal or near ideal production” would undermine the tax incentive’s focus on the “initial investment decision,” such production was not required.
App.10a. The court of appeal’s terse “textual” analysis
likewise mirrored Sealy’s, ignoring that being “ready
and available for a specifically assigned function” requires more than producing electricity at roughly half
19
of the facilities’ intended capacity and in violation of
environmental laws. See App.8a-10a. That is especially so given Congress’ exclusion of energy facilities
from certain federal benefits if the facilities cannot operate in compliance with environmental laws. See
JA.8115 (EPA’s Notice of Violation, observing that under the Clean Air Act, “facilities to be used in federal
contracts, grants, and loans must be in full compliance
with the Act and all regulations promulgated pursuant to it”).
3. As a result of these conflicting standards, in
two circuits, taxpayers’ energy facilities will be
deemed “placed in service” as soon as they produce any
electricity, without regard to whether the facilities
produce electricity at their intended capacity or operate in compliance with the law. In another circuit,
such facilities will be held “placed in service” only after they can produce electricity on a fairly consistent
basis as intended, permitting tax incentives only once
the taxpayers’ facilities are capable of reliably producing the clean energy the incentives were designed to
promote. This disparity warrants resolution.
4. Beyond that conflict, there is even broader
confusion in the circuits. For example, the Third Circuit has employed a standard that may represent a
third approach for determining when property has
been “placed in service.” In Armstrong World Industries, Inc. v. Commissioner, 974 F.2d 422, 431-32, 434
(3d Cir. 1992), the Third Circuit required that railroad
property be “ready for regular income-producing use”
before it could be considered “placed in service” for
purposes of sale-leaseback tax benefits.
20
The court’s opinion—like the Eighth Circuit’s in
Tierney—makes clear that property must operate as
intended to be “placed in service.” See id. at 434-36
(citing Consumers Power Co. v. Commissioner, 89 T.C.
710, 724 (1987), which held that a hydroelectric plant
was “placed in service” when it became “available …
to provide electrical power on a regular basis”). And
the Third Circuit was primarily addressing property
that was, based on its intended use, complete with no
further work to be done. Id. But by expressing in one
place a standard that requires only “regular incomeproducing use,” id. at 434 (emphasis added), the Third
Circuit arguably requires less “regularity” than operations on a “fairly consistent basis” as intended. Tierney, 947 F.2d at 866.
Even so, the standard adopted in Armstrong itself
conflicts with the Federal and Fifth Circuits’ standard, which plainly does not require any degree of regularity to be “placed in service.” Sealy, 46 F.3d at 397
(holding that electric facilities can be “placed in service” “regardless of the level of production attained”);
App.12a-13a (holding that the facilities’ specifically
assigned function was merely “to produce and sell
electricity” at any level). Thus, while the Government
relied heavily on Armstrong in the court below and attempted to frame it as consistent with Sealy, Armstrong actually favors petitioners’ position. At a minimum, Armstrong expands the number of differing legal standards.
The broader confusion does not end with the Third
Circuit. The Ninth Circuit has approved of a standard
in line with the Eighth Circuit’s, but only in unpublished decisions. See, e.g., Visser v. Commissioner,
21
19 F.3d 32, 1994 WL 96395, at *1 (9th Cir. 1994) (stating that property is “placed in service” when it is
“available for full operation on a regular basis”). The
Tenth Circuit, on the other hand, has referenced
Sealy’s formulation of the placed-in-service test favorably, but has not itself addressed what degree of production is required. See United States v. RaPower-3,
LLC, 960 F.3d 1240, 1246 (10th Cir. 2020).
Given this division and broader confusion, and
given that many tax benefits and federal incentives
are contingent on when property is “placed in service,”
see infra Part II.A.1, this Court should resolve the
proper legal standard.
B. The standard adopted below is also at
odds with the bodies tasked with interpreting and adjudicating disputes under
the Tax Code.
The IRS—the agency tasked with administering
tax laws—rejected the legal standard adopted by the
Fifth Circuit and now the court of appeals below. And
the Fifth Circuit in Sealy openly disagreed with the
decisions on “placed in service” by the United States
Tax Court, which adjudicates IRS determinations.
Yet the Tax Court and IRS apparently continue to rely
on standards that differ from the Fifth Circuit (and
now the Federal Circuit). While the IRS and Tax
Court generally both employ a placed-in-service
standard that more closely resembles the Eighth Circuit’s, the IRS has taken a somewhat softer stance on
requiring a facility to produce at its intended capacity.
These variations in the legal standard, on top of the
circuit confusion, bolster the need for review.
22
1. The IRS and the Tax Court are in a recognized
conflict with the Fifth Circuit’s position adopted by the
Federal Circuit. First, the IRS published an Action on
Decision expressly stating that it did not “acquiesce”
in the Fifth Circuit’s Sealy opinion. Sealy, 46 F.3d
382, action on dec., 1995-10 (Aug. 7, 1995). In disapproving of Sealy, the IRS reasoned that “[a]t a minimum,” a facility needs to be “in a state of readiness
sufficient to make it available to produce electricity on
a sustained and reliable basis in commercial quantities” to be “placed in service.” Id. (emphasis added).
In doing so, the IRS rejected the Fifth Circuit’s rule
(adopted by the Federal Circuit) that any amount of
production can satisfy the placed-in-service standard. 7
Second, in Sealy, the Fifth Circuit expressly rejected the Tax Court’s Oglethorpe and Consumers
Power Co. decisions because those decisions required
facilities to “consistently sustain[] generation levels
near [their] rated capacit[ies]” and “show sustained,
regular generation of electrical power” to be “placed in
service.” Sealy, 46 F.3d at 391-93. As the Fifth Circuit
recognized, its standard—which permits facilities to
be “placed in service” “regardless of the level of production attained,” id. at 397—cannot be squared with
the Tax Court’s standard, which requires facilities to
be ready and available for “full service.” E.g., Brown
v. Commissioner, 106 T.C.M. (CCH) 630, 636-37
7 Although this Action on Decision is not precedential, the
IRS has consistently invoked its formulation of the placed-in-service standard in its determinations. Infra Part I.B.2.
23
(2013). The Tax Court’s continued reliance on Oglethorpe and Consumers Power Co. post-Sealy confirms
the variations in the placed-in-service rule. See, e.g.,
Green Gas Del. Statutory Tr. v. Commissioner, 147
T.C. 1, 50-52 (2016) (relying on these cases), aff’d, 903
F.3d 138 (D.C. Cir. 2018). And while the Tax Court’s
decisions are not binding on the circuits, taxpayers
will, as a practical matter, justifiably continue to look
to these opinions in assessing whether their property
has been “placed in service” under federal law.
2. Because they require more than some production of electricity, the IRS’s and the Tax Court’s
placed-in-service standards appear to align somewhat
with the Eighth Circuit’s. For example, the IRS requires that facilities be “ready and available to produce on a sustained and reliable basis in commercial
quantities” to be “placed in service.” E.g., I.R.S. Tech.
Adv. Mem. 2011-13-025, 2011 WL 1210325 (Apr. 1,
2011). The Tax Court likewise requires facilities to be
available for “full service,” i.e., reliably operating as
intended, to be “placed in service.” E.g., Brown, 106
T.C.M. (CCH) at 636-39 (functional airplane lacking a
conference table and screens for displaying PowerPoints was not “placed in service” because it was “not
available for its intended use [of facilitating the taxpayer’s business] on a regular basis”); Oglethorpe, 60
T.C.M. (CCH) at 859-60 (rejecting Commissioner’s position that plant was “placed in service” merely because it was synchronized to the transmission grid
and produced “some electricity” on a test basis).
The standards—particularly the IRS’s—however,
are not identical to the Eighth Circuit’s. While the
IRS does require “sustained and reliable” production
24
“in commercial quantities,” it does not require the facility to “have reached design capacity” to be “placed
in service.” E.g., I.R.S. Tech. Adv. Mem. 2011-13-025,
2011 WL 1210325 (Apr. 1, 2011); see also Rev. Rul. 8485, 1984-1 C.B. 10, 1984 WL 262650 (June 18, 1984).
The IRS’s apparent amalgamation of the various
standards further complicates the issue, causes more
confusion, and warrants this Court’s review.
II. The Question Presented Is Important And
Warrants Review In This Case.
A. This question impacts multiple federal
laws and has significant consequences.
Determining the placed-in-service date has significant tax consequences under multiple federal statutes, impacting if and when property qualifies for: tax
credits, Tierney, 947 F.2d at 866; federal grants in lieu
of tax credits, as in this case; depreciation deductions,
Sealy, 46 F.3d at 388-89; and other tax incentives,
App.8a-9a; Armstrong, 974 F.2d at 431. Further, each
of the federal law instances of this term will likely be
interpreted with some reference to the Treasury Department’s regulation. The proper legal standard has
broad-reaching and important consequences.
1. Federal legislation frequently bases a taxpayer’s entitlement to benefits on what year property
was “placed in service.” First, over a dozen federal
statutes base tax credits on this. Tax credits like these
have significant value to taxpayers because they “directly reduce[] the amount of tax that must be paid,
dollar for dollar.” United States v. Hemme, 476 U.S.
558, 561 n.1 (1986).
25
Many such credits relate to renewable energy, and
use the “placed in service” point to determine a property’s eligibility for a credit and, in some cases, even
the credit amount. One set of these credits relates to
production from renewable energy facilities. For example, Section 45 of the Tax Code permits taxpayers
to claim a “renewable electricity production credit”
based on the amount of electricity produced “at a qualified facility during the 10-year period beginning on
the date the facility was originally placed in service.”
26 U.S.C. § 45(a). The section then defines “qualified
facilities” as renewable energy facilities that were
“placed in service” in specific years. E.g., id. § 45(d)(1)
(qualifying wind facilities must be “originally placed
in service after December 31, 1993”). When the facilities are “placed in service” thus dictates the availability and amount of the credit because it determines
which facilities qualify for the credit and how long
that credit is available.
Other tax credits for renewable energy production
follow similar patterns. The credit for advanced nuclear power facility production is based on the amount
of electricity produced at those facilities—partially defined as those “placed in service after the date” of the
statute’s enactment “and before January 1, 2021”—
“during the 8-year period beginning on the date the
facility was originally placed in service.” 26 U.S.C.
§ 45J (a), (d). And the credit for producing fuel from a
nonconventional source likewise applies to qualified
fuels that are produced from facilities “placed in service” in certain years. 26 U.S.C. § 45K(e); see also 26
U.S.C. § 45Q(a) (similar for carbon oxide sequestration credit).
26
Another set of renewable-energy tax credits, similar to the grants in Section 1603 of the ARRA, relate
to placing qualified energy property into service. For
instance, Section 48A of the Tax Code creates a credit
for taxpayers that construct or acquire qualifying advanced coal projects. 26 U.S.C. § 48A(a)-(b). That
credit is limited, however, to a percentage of “eligible
property placed in service by the taxpayer during [a]
taxable year.” Id. The tax credits for placing into service qualifying gasification projects, 26 U.S.C.
§ 48B(a)-(b), and advanced energy projects, 26 U.S.C.
§ 48C(a)-(b), use similar limitations. When such properties are “placed in service” determines the amount
of the credit a taxpayer can claim in any given year. 8
The federal offerings also include tax credits apart
from renewable energy. For example, the Tax Code
provides for low-income housing and building rehabilitation credits based on when qualifying buildings are
“placed in service.” 26 U.S.C. §§ 42(b), 47(a)-(b). It also
limits the amount of certain employer-provided childcare credits based on the year qualifying child care facilities are “placed in service by the taxpayer,” 26
U.S.C. § 45F(d), and curtails the availability of certain
disabled access credits for small businesses by disallowing the credit for expenditures “paid or incurred in
connection with any facility first placed in service” after the section’s enactment, 26 U.S.C. § 44(c)(4).
8 The Tax Code also permits tax credits based on when
other renewable energy properties are “placed in service.” E.g.,
26 U.S.C. §§ 25D(g)-(h) (residential energy efficient property
credits), 30D(a) (“new qualified plug-in electric drive motor vehicle” credit).
27
Like Section 1603 of the ARRA at issue here, each
of these credits contains the “placed in service” term,
which the IRS has interpreted in Treasury Regulation
§ 1.46-3(d)(1)(ii). See Treas. Reg. § 1.46-3(d)(1)(ii) (interpreting meaning of “placed in service” for purposes
of 26 U.S.C. § 38); see also 26 U.S.C. §§ 42(a), 44(a),
45(a), 45F(a), 45J(a), 45K(a), 45Q(a) (referencing
§ 38); 26 U.S.C. §§ 47(a), 48A(a), 48B(a), 48C(a) (referencing § 46, which references § 38). The legal standard should be the same for each of these tax benefits,
which illustrates the importance of resolving the
proper rule. IBP, Inc. v. Alvarez, 546 U.S. 21, 34
(2005) (observing that “identical words used in different parts of the same statute are generally presumed
to have the same meaning”).
Second, and similarly, federal depreciation deductions are based on when property is “placed in service.” See 26 U.S.C. § 167. The depreciation statute
permits taxpayers to deduct “wear and tear” of “property used in [a] trade or business” or “held for the production of income.” Id. § 167(a). This deduction can
be used to offset the taxpayer’s income, reducing its
tax obligation. Hemme, 476 U.S. at 561 n.1. But to
qualify for a depreciation deduction, the taxpayer
must show its property was “placed in service” during
the year for which it is claiming the deduction. Treas.
Reg. § 1.167(a)-10(b) (asset’s depreciation period
“begin[s] when the asset is placed in service” and
“end[s] when the asset is retired from service”). As
with the above-discussed tax credits, according to the
Treasury Department, this includes analysis of when
the property is “placed in a condition or state of read-
28
iness and availability for a specifically assigned function.” Treas. Reg. § 1-167(a)-11(e)(1)(i). Having a uniform legal test for “placed in service” is thus significant for any taxpayer who owns depreciable assets.
Third, large-scale federal legislation, like the
ARRA (at issue here) and the recent Infrastructure Investment and Jobs Act, Pub. L. No. 117-58, 135 Stat.
429 (2021) (“IIJA”), have likewise conditioned tax incentive payments on when qualifying energy properties are placed in service. The IIJA, enacted just last
year, directed the Government to “make incentive
payments to the owners or operators of qualified hydroelectric facilities” for certain capital improvements, if the facilities were “placed into service before
the [section’s] date of enactment.” Id. § 247. Although
“placed into service” is defined in neither Section 247
of the IIJA nor the Energy Policy Act of 2005 that it
amends, 9 it stands to reason the term has the same
meaning as “placed in service” in other federal laws.
See IBP, Inc., 546 U.S. at 34. This consequential new
infrastructure legislation renders the meaning of
“placed in service” all the more important and timely.
2. Congress’ use of the term “placed in service” to
determine such broad-ranging tax consequences underscores the importance of a uniform legal standard.
First, the current lack of uniformity makes it difficult
9 The Energy Policy Act of 2005 also based tax benefits
on when qualifying property was “placed in service.” E.g., Pub.
L. No. 109-58, § 1331, 119 Stat. 594, 1020, 1023 (2005) (creating
deduction for the “cost of energy efficient commercial building
property placed in service during the taxable year,” but limiting
deduction to property “placed in service” before 2008).
29
for taxpayers to plan their activities such that they
can capitalize on Congress’ tax incentives. Many of
the tax benefits that turn on this term are designed to
incentivize investments in large infrastructure projects. See supra Part II.A.1. For these projects, the
significant tax consequences, as determined by the
projects’ “placed in service” date, can be critical to the
economic model. Without certainty on what this term
means, investors and developers can have little confidence as to the timing and amount of the projects’ tax
results. This increased financial risk deters—rather
than promotes—investment, undermining the tax incentives’ intended purposes.
Second, having different legal standards in different places for the same question is inherently problematic, and here it directly impacts the dollar-for-dollar reduction of taxpayers’ tax liability through tax
credits, an overall reduction of taxpayers’ taxable income through deductions, and outright payments to
taxpayers through grants and other incentives. Under the current law, taxpayers in different circuits are
eligible for these benefits on different terms. A taxpayer in the Fifth Circuit can consider its property
“placed in service” as soon as it starts operating.
Sealy, 46 F.3d at 394, 397. That taxpayer’s property
will be “placed in service” earlier than a similarly situated one in the Eighth Circuit, based on its standard
of when the property is functioning as intended on a
“fairly consistent basis.” Tierney, 947 F.2d at 866.
This significantly impacts tax liabilities, and the disparity makes no sense. A uniform rule is needed.
Third, the placed-in-service rule’s formulation impacts other laws. For one, it impacts the taxpayers’
30
compliance with environmental laws. The Fifth and
Federal Circuits’ minimal “placed in service” threshold—especially applied to legislation involving renewable energy facilities—could encourage a taxpayer to
ramp up operations quickly, without regard to state
and federal environmental regulations, in order to
capitalize on federal tax benefits. The Eighth Circuit’s
holding, by contrast, ties federal tax benefits to a time
when taxpayers are operating their properties in compliance with other federal (and state) laws.
Further, the formulation of the “placed in service”
rule impacts federal tax reporting. When there is confusion over the proper legal standard, determining
when an asset is “placed in service” depends largely
on the tax accountant making that determination.
The creation of a bright-line rule—like one requiring
operations as intended on a fairly consistent basis—
increases the likelihood of regularity in reporting and
accounting for assets that qualify for tax benefits.
For all these reasons, the question presented here
has significant consequences.
B. This case squarely presents the question.
1. The question posed here is squarely presented
by the Federal Circuit’s decision. The court recognized that this question of statutory interpretation is
a legal one and expressly agreed with Sealy that to be
placed in service, a property need not “produce an anticipated or projected amount” or “achieve ideal or
near-ideal production levels.” App.8a-9a; see App.74a
(trial court’s recognition that disagreement over the
“legal standard for defining when an asset is placed in
service” is a question of law). The court’s adoption of
31
this legal rule is alone reason for reversal, and it necessarily informed the rest of the court’s analysis of the
trial court’s determinations, including all the findings
and conclusions that went into the notion that the facilities had been placed in service for federal tax purposes in 2008 even though they could not produce sufficient electricity to satisfy their contracts or operate
without violating numerous laws. See infra Part
II.C.2. Deciding the question here will thus affect the
judgment below.
Indeed, the Federal Circuit’s decision to address
this threshold legal question demonstrates that the
outcome here depends on what the proper legal test is:
if energy facilities must function on a consistent basis
as intended to be “placed in service,” the facilities did
not meet that description in 2008, but if facilities must
only produce and sell some electricity, the facilities
were “placed in service” that year.
2. The question presented is a purely legal one.
Issues of statutory interpretation are questions of law.
See Mid-Con Freight Sys., Inc. v. Mich. Pub. Serv.
Comm’n, 545 U.S. 440, 446 (2005). So are questions
about what the proper legal standard is, see Monasky
v. Taglieri, 140 S. Ct. 719, 730 (2020), and whether a
court properly applied that standard “to essentially
undisputed facts,” see United States v. Singer Mfg.
Co., 374 U.S. 174, 193 (1963). The question presented
here has each of these characteristics.
First, the question presented involves the interpretation of the term “placed in service” as used in
Section 1603 of the ARRA (and, by extension, interpretation of that term as used in a large number of
other federal statutes). See supra Part II.A.1. It also
32
involves the interpretation of Treasury Regulation
§ 1.46-3(d)(1)(ii), which defines “placed in service.”
Second, the question presented turns on what is
required for property to be “placed in service” under
federal law, i.e., what the proper legal standard is.
See Sealy, 46 F.3d at 393 (acknowledging “interpretation of the legal standards defining when an asset is
placed in service” is a legal question); accord App.8a.
As discussed, supra Part I.A, courts disagree on the
proper standard. This Court can and should resolve
that issue.
Third, at this stage, the underlying, basic background facts are materially undisputed, leaving this
Court to resolve the legal question presented. See also
infra, Part II.C.2 (further discussing impacts of incorrect legal standard on collateral fact-findings). The
parties do not dispute that in 2008, the facilities “experienc[ed] emissions problems” and “outages,” failed
tests and inspections, received ten Notices of Violation
from the District, and operated at far less than their
intended capacity (and in the Chowchilla facility’s
case, operated under a variance that explicitly required reduced-capacity production). App.42a-45a,
88a; see also JA.3515-16. By 2011, however, the facilities’ compliance issues were largely resolved and
their production levels had increased. See App.50a,
61a-62a, 88a; see also JA.615-16.
Consequently, even if a question of fact might ordinarily exist as to the date property is “placed in service,” see Armstrong, 974 F.2d at 429-30; App.7a-8a,
the resolution of the proper legal standard will matter
here as to whether petitioners’ facilities were placed
33
in service in 2008, when they were undisputedly operating well below the levels specified in their contracts
and in contravention of environmental laws, as opposed to later when they were operating as intended
on a fairly consistent basis. This case is an appropriate vehicle to decide the question presented.
C. The judgment below is wrong.
1. The Federal Circuit erred in concluding that
producing “anticipated or projected amount[s]” does
not matter—and achieving “ideal or near-ideal production levels” is not required—because producing
and selling any amount of electricity is sufficient for
an energy facility to be “placed in service.” App.8a11a. That legal position is contrary to the plain meaning of the term “placed in service.” As even the Treasury Department has recognized, to be “placed in service,” a facility must be “placed in a condition or state
of readiness and availability for a specifically assigned
function.” Treas. Reg. § 1.46-3(d)(1)(ii). As a legal
matter, property that does not function as intended on
a “fairly consistent basis” cannot meet that description. See Tierney, 947 F.2d at 866.
Under the proper legal test, an energy facility that
is producing far less than its intended output, lacks
necessary equipment, and is experiencing repeated
shutdowns is not “ready and available” for consistent
operations, which is a prerequisite to being “placed in
service.” See id. To that end, an energy facility that
cannot operate without significant noncompliance
with environmental laws, like the Clean Air Act, is not
operating as intended, which likewise prevents the asset from being “placed in service.” The courts below
34
erred (and clearly erred) in disregarding or discounting these points. Because the facilities were unable to
operate at their intended capacity on a fairly consistent basis and in compliance with the law in 2008,
the court of appeals erred in holding that the facilities
had been placed in service in 2008. App.16a.
2. Had the court of appeals employed the proper
legal analysis and required production on a “fairly
consistent basis” as intended—rather than just some
electricity—it would have correctly held that the facilities qualified for the Section 1603 grants. Because
the trial court (and the Federal Circuit) accepted and
then applied the wrong legal standard throughout in
assessing when the facilities were “placed in service,”
the trial court’s subsequent factual findings—which
flowed from that incorrect legal framework—are
clearly erroneous, and the court of appeals erred in affirming. See also Sealy, 46 F.3d at 392 (observing that
application of the five-factor test was “clearly influenced” by the legal standard for “placed in service”).
For example, application of the proper legal test
compels a finding that the facilities’ “specifically assigned function” is more than just “produc[ing] and
sell[ing] electricity,” App.75a; it is to produce and sell
electricity on a fairly consistent basis as intended. Additionally, the trial court found that the facilities were
operating on a “daily” basis in 2008 because the facilities “first produced and sold electricity” at that time.
App.88a-89a. But under the correct legal standard,
i.e., that the facilities needed to operate on a fairly consistent basis as intended to be “placed in service,” the
facilities’ production of electricity far below their intended and contractually contemplated levels could
35
not have constituted “daily or normal operations.”
The same applies to the trial court’s findings on permits and testing. For example, the court found the facilities’ ATCs were the only necessary permits because
the facilities “were ready and available to generate
electricity and revenue” once those permits were received and implemented. App.85a. Under the proper
legal standard, merely being “ready and available to
generate electricity and revenue” at any level, regardless of ability to produce as intended, cannot support
a “placed in service” finding.
These findings, among others, flowed from the
trial court’s application of the wrong legal standard
and are clearly erroneous. At minimum, the mere fact
that the courts below assessed petitioners’ claims under the wrong legal standard warrants a remand for
further proceedings consistent with the proper standard. Applying the correct legal test, the court of appeals should have reversed the district court’s decision
and ruled that petitioners are entitled to the Section
1603 grants based on a 2011 placed-in-service date.
36
CONCLUSION
The Court should grant the petition for a writ of
certiorari.
Respectfully submitted,
JEFFREY L. OLDHAM
Counsel of Record
STEPHANI A. MICHEL
BRACEWELL LLP
711 Louisiana St., Suite 2300
Houston, Texas 77002
(713) 221-1225
jeff.oldham@bracewell.com
Counsel for Petitioners
July 22, 2022
APPENDIX
APPENDIX TABLE OF CONTENTS
PAGE
Appendix A
Opinion, United States Court of Appeals for the
Federal Circuit, Ampersand Chowchilla
Biomass, LLC v. United States, No. 20211385 (Feb. 24, 2022) ....................................... 1a
Appendix B
Opinion and Order, United States Court of
Federal Claims, Ampersand Chowchilla
Biomass, LLC v. United States, No. 14841C (reissued Nov. 9, 2020) ....................... 17a
Appendix C
Judgment, United States Court of Federal
Claims, Ampersand Chowchilla Biomass,
LLC v. United States, No. 14-841C
(Oct. 30, 2020) .............................................. 91a
Appendix D
Statutory and Regulatory Provisions
American Recovery and Reinvestment Act
of 2009, Pub. L. No. 111-5, Div. B, tit. I,
§ 1603(a), 123 Stat. 115, 364 (2009) ............ 92a
Treas. Reg. § 1.46-3(d)(1)-(2) ....................... 93a
1a
APPENDIX A
United States Court of Appeals
for the Federal Circuit
_____________________________________
AMPERSAND CHOWCHILLA BIOMASS, LLC,
MERCED POWER, LLC,
Plaintiffs-Appellants
v.
UNITED STATES,
Defendant-Appellee
_____________________________________
2021-1385
_____________________________________
Appeal from the United States Court of Federal
Claims in No. 1:14-cv-00841-MCW,
Senior Judge Mary Ellen Coster Williams.
_____________________________________
Decided: February 24, 2022
_____________________________________
STEPHEN G. LEATHAM, Heurlin, Potter, Jahn,
Leatham, Holtmann & Stoker, P.S., Vancouver, WA,
argued for plaintiffs-appellants.
CLINT A. CARPENTER, Appellate Section, Tax
Division, United States Department of Justice,
Washington, DC, argued for defendant-appellee.
Also represented by BRUCE R. ELLISEN, DAVID
A. HUBBERT.
2a
Before NEWMAN,
Circuit Judges.
HUGHES,
and
STOLL,
HUGHES, Circuit Judge.
This is a tax case. Ampersand Chowchilla
Biomass, LLC and Merced Power, LLC appeal a
decision of the Court of Federal Claims denying their
request for additional payments of Section 1603
grants under the American Recovery and
Reinvestment Act of 2009. Because we agree with the
Court of Federal Claims that the relevant power
facilities did not meet the requirements of the
statute, we affirm.
I
A
In 2007, California Biomass Fund I, LLC (CalBio)
acquired two defunct facilities and began restoring
them and upgrading them to biomass facilities,
expecting the facilities to be operational in 2008.
Before CalBio acquired the facilities, Pacific Gas
& Electric Company had entered into power-purchase
agreements with the facilities’ previous owner. PG&E
had agreed to purchase electricity when (1) the
facilities achieved commercial operations and passed
initial capacity tests, (2) PG&E received performanceassurance payments, and (3) the facilities received
approval from the California Public Utilities
Commission. CalBio assumed these power-purchase
agreements, and CalBio and PG&E later amended
3a
the agreements to loosen their requirements. CalBio
and PG&E also entered into interconnection
agreements that required the facilities to pass preparallel testing, which ensures that the facilities can
operate at the same frequency and in the same phase
as the transmission grid so that the facilities do not
damage the grid.
While renovating in 2007, CalBio secured
Authority to Construct permits for the facilities.
These permits allowed construction on the facilities
and allowed the facilities to generate and sell
electricity. The Authority to Construct permits could
be converted into Permits to Operate after the
facilities met certain conditions, like emissions
tests. Biomass facilities, though, often have some
difficulty passing environmental tests. So instead of
shutting down biomass facilities at the first sign of
noncompliance—which could lead to agricultural
waste being burned in open fields, causing more
environmental pollution—the San Joaquin Valley Air
Pollution Control District has a Notice of Violation
process in which the District fines and oversees
noncompliant facilities until they are brought back
into compliance.
The Chowchilla and Merced facilities had their
“initial fires” in April and July 2008, respectively.
CalBio labeled the facilities “in operation” as of May
15, 2008 and August 23, 2008. And the facilities
passed pre-parallel testing under the PG&E
interconnection agreements on June 17, 2008 and
August 24, 2008.
4a
Following these events, the facilities began selling
electricity on the spot market. On December 12, 2008,
Chowchilla met the requirements under its powerpurchase agreement and accordingly started selling
its electricity exclusively to PG&E. Although Merced
did not start selling its electricity exclusively to
PG&E until February 21, 2009, the parties
recognized that Merced had met the requirements
under its power-purchase agreement based on data
from the third and fourth quarters of 2008.
From May 15, 2008 until the end of that year, the
Chowchilla facility operated at 34.1% of its rated
capacity, generating 20,553 MWh of electricity and
$1,408,941 in revenue. And from August 23, 2008
through the end of 2008, the Merced facility operated
at 42.1% capacity, generating 14,306 MWh of
electricity and $851,152 in revenue. The facilities
operated fairly continuously throughout 2009, during
which the Chowchilla facility operated at 53.9%
capacity and the Merced facility operated at 51.2%
capacity.
The
facilities
occasionally
were
noncompliant with emissions regulations, but the
District allowed the facilities to continue operating
and
never
revoked
their
Authority
to
Construct permits.
B
In 2009, Congress passed the American Recovery
and Reinvestment Act “[t]o assist those most
impacted by the [2008] recession.” American
Recovery and Reinvestment Act of 2009 (ARRA), Pub.
L. No. 111-5, § 3(a), 123 Stat. 115, 115–16. Stated
5a
purposes of this statute were “[t]o provide
investments needed to increase economic efficiency”
and invest in “environmental protection[] and other
infrastructure that will provide long-term economic
benefits.” Id. One provision allowed entities to receive
federal grants if they “placed in service” a renewable
energy facility during 2009 or 2010 or if they began
constructing property in 2009 or 2010 that they later
placed in service before the relevant credittermination date. Id. § 1603(a)(l)–(2), 123 Stat. at
364–66. The government intended that these
“Section 1603” grants would “increase investment in
domestic clean energy production” by “reimburs[ing]
eligible applicants for a portion of the cost of installing
the specified energy property.” See U.S. Dep’t of
Treas., 1603 Program: Payments for Specified Energy
Property
in
Lieu
of
Tax
Credits,
https://home.treasury.gov/
policy-issues/financial-marketsfinancial-institutionsand-fiscal-service/1603-programpayments-forspecified-energy-property-in-lieu-of-taxcredits (last
visited Jan. 18, 2022).
CalBio was experiencing financial difficulties at
that time, so it investigated whether it could apply for
Section 1603 grants for the Chowchilla and Merced
facilities. CalBio ultimately concluded that it could
not apply for Section 1603 grants because its facilities
had been placed in service in 2008, outside of the
statute’s required period. Finding no resolution to its
continuing financial problems, CalBio suspended
operations in June 2010 and decided to sell
the facilities.
6a
On December 28, 2010, Akeida Environmental
Fund LP acquired the facilities. Akeida spent nearly
$15 million improving the facilities, which passed
emissions tests in August 2011. In October 2011,
Akeida applied for Section 1603 grants, claiming that
the facilities were placed in service when Akeida’s
emissions improvements were certified on August
11, 2011.
Akeida requested a $12 million grant for each
facility. The United States Department of Treasury
largely rejected Akeida’s claims because, according to
Treasury, most of the property had been placed in
service in 2008. Instead, Treasury granted only $1.1
million for each facility, awarded for the additional
property that was eligible based on the date Akeida
placed it in service.
Appellants, the direct owners of the two facilities
and subsidiaries of Akeida, sued in the Court of
Federal Claims for the remainder. The Court of
Federal Claims held for the government, agreeing
that the facilities were placed in service in 2008.
In its two-part analysis, the Court of Federal
Claims applied Treasury’s regulatory definition of
“placed in service,” which required it to determine the
“taxable year in which the property is ... availabil[e]
for a specifically assigned function.” Treas. Reg.
§ 1.46-3(d)(l)(ii). First, the Court of Federal Claims
ascertained the facilities’ “specifically assigned
function.” Appellants asserted that the facilities’
specifically assigned function is “to produce electricity
on a baseload basis for sale to PG&E at the quantities
7a
required under the [power-purchase agreements],
reliably, and in compliance with applicable law.”
Ampersand Chowchilla Biomass, LLC v. United
States, 150 Fed. Cl. 620, 643–44 (2020). The Court of
Federal Claims disagreed and found that the
facilities’ specifically assigned function is simply “to
produce and sell electricity.” Id. at 644.
Second, the Court of Federal Claims evaluated
five factors—drawn from the IRS’s published
revenue rulings and formally established in
Oglethorpe Power Corp. v. Comm’r, 60 T.C.M. (CCH)
850 (1990)—to determine when the facilities achieved
their specifically assigned function and were
therefore “placed in service.” The Court of Federal
Claims found that all five factors indicated that the
facilities were placed in service in 2008. Therefore,
the Court of Federal Claims concluded that Akeida
was not owed the money that it claimed because its
property was placed in service outside of the
statute’s designated time period.
Chowchilla and Merced appeal. We
jurisdiction under 28 U.S.C. § 1295(a)(3).
have
II
We review the Court of Federal Claims’
conclusions
of
law,
including
statutory
interpretations, de novo and its findings of fact for
clear error. Bd. of Cnty. Supervisors v. United States,
276 F.3d 1359, 1363 (Fed. Cir. 2002); WestRock Va.
Corp. v. United States, 941 F.3d 1315, 1318 (Fed. Cir.
2019). The Court of Federal Claims’ conclusions
8a
about the facilities’ specifically assigned function and
the year they were placed in service are questions of
fact. See Armstrong World Indus., Inc. v. Comm’r, 974
F.2d 422, 429-30 (3d Cir. 1992).
A
We review de novo the Court of Federal Claims’
conclusion that the applicable statute and
corresponding regulation do not require facilities to
produce power at ideal or near-ideal production levels
to be placed in service. In making this determination,
the Court of Federal Claims relied largely on Sealy
Power Ltd. v. Commissioner, 46 F.3d 382 (5th Cir.
1995). Appellants request that we reject the Fifth
Circuit’s analysis in Sealy, labeling it an “outlier” and
asserting that “courts have consistently rejected this
standard for power plants and repeatedly required a
far higher standard” than merely “generating and
selling power.” Appellant’s Br. 22, 29.
We agree with the trial court’s decision and the
Fifth Circuit’s Sealy opinion: to be placed in service,
a facility need not achieve ideal or near-ideal
production levels.
The statute at issue here states in relevant part:
[T]he Secretary of the Treasury shall ...
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 ....
9a
ARRA, Pub. L. No. 111-5, § 1603, 123 Stat. 115,
364-66 (adding a note to 26 U.S.C. § 48) (now expired).
Treasury defines “placed in service”—as used in a
separate but related statute 1—via regulation:
[P]roperty shall be considered placed in
service in ... [t]he taxable year in which the
property is placed in a condition or state of
readiness and availability for a specifically
assigned function ....
Treas. Reg. § l.46-3(d)(l)(ii). Based on their plain
language, we conclude that neither the statute nor
the regulation “states []or implies that the property
must produce an anticipated or projected amount
before it may be considered ready and available for a
specifically assigned function.” Sealy, 46 F.3d at 394.
In fact, the regulations’ examples of property that
is placed in service suggest the opposite. One example
concerns operational farm equipment that is
impracticable to use, and therefore is not used, in the
year it is purchased. Treas. Reg. § l.46-3(d)(2)(ii).
Despite the farm equipment’s non-use, it is still
“placed in service” in the year of purchase. Id. This
1 This regulation limits itself to “purposes of the credit allowed
by” 26 U.S.C. § 38. Treas. Reg.§ l.46-3(d)(l). But “[g]enerally,
‘identical words used in different parts of the same statute are
... presumed to have the same meaning.’” Merrill Lynch, Pierce,
Fenner & Smith Inc. v. Dabit, 547 U.S. 71, 86 (2006) (quoting
IBP, Inc. v. Alvarez, 546 U.S. 21, 34 (2005)). And the Court of
Federal Claims’ decision and the parties’ briefs invoke this
regulation, so we apply it here. Even if it were not applicable, our
conclusion would be the same.
10a
example implies that the farm does not need to
produce crops near its expected levels (i.e., the levels
that the farm would achieve if it used its new
equipment) for the equipment to be placed in service.
See Sealy, 46 F.3d at 394.
A second example explicitly acknowledges
deficient performance, classifying equipment that
“is operational but is undergoing testing to
eliminate any defects” as “placed in service.” Treas.
Reg. § l.46-3(d)(2)(iii); see Sealy, 46 F.3d at 394.
And although we do not rely on legislative
history to reach our conclusion, we note that
Congress enacted the legislation to “promote
economic recovery” in light of the 2008 recession and
“[t]o invest in ... infrastructure that will provide
long-term economic benefits.” ARRA, Pub. L. No. 1115, § 3(a), 123 Stat. 115, 115–16. Like the tax credits in
Sealy, Section 1603 grants “provide[d] an incentive to
acquire property such as machinery and equipment
by lowering the effective after-tax acquisition cost of
the qualified property,” “lower[ing] the profit risk
that these firms faced in starting out a new venture
and therefore [facilitating] their investment
decisions.” 46 F.3d at 393–94. By incentivizing this
“initial investment decision,” the statute suggests
that the placed-in-service inquiry is primarily focused
on getting a facility online. Reading the statute to
strictly require “achieving ideal or near ideal
production levels demands a hindsight approach to
the success of a taxpayer’s investment expenditures
which undermines the very focus of’ this objective. Id.
at 394.
11a
The statute and regulation simply do not require
the strict construction for which Appellants ask.
Therefore, we agree with the Court of Federal Claims’
statutory interpretation and hold that a specifically
assigned function need not require ideal or near-ideal
production levels.
B
Next, we review for clear error the Court of
Federal Claims’ finding that the facilities’ specifically
assigned function is to produce and sell electricity.
The Court of Federal Claims considered
Appellants’ assertion that the facilities’ specifically
assigned function is “to produce electricity on a
baseload basis for sale to PG&E at the quantities
required under the [power-purchase agreements],
reliably, and in compliance with applicable law.”
Ampersand, 150 Fed. Cl. at 643–44. The Court of Fed
eral Claims recognized that the power-purchase
agreements “were the cornerstone of the Facilities’
functioning” but also found them “not as rigid or
inflexible as [Appellants] portray[ed] them to be.” Id.
at 644. In fact, PG&E had amended the powerpurchase agreements several times, and “Akeida was
aware ... that PG&E was not demanding performance
at the stated capacity levels and was willing to waive
or reduce performance penalties.” Id. at 645. The
Court of Federal Claims concluded that “the parties’
course of dealing under the [power-purchase
agreements]
evinces
a
flexible
contractual
relationship permitting less than consistent baseload
production.” Id.
12a
The Court of Federal Claims also rejected
Appellants’ suggestion that the facilities had to
operate in accordance with environmental laws and
regulations. Id. The trial court determined that
“[a]chieving compliance with environmental law was
not part and parcel of the Facilities’ function to
produce electricity using biomass.” Id. And the trial
court further found that even when the facilities did
not comply with environmental laws, their continued
operation still prevented “burning waste in open
fields—a
circumstance
local
environmental
authorities viewed as more problematic than
operating with emissions violations.” Id. at 646.
These findings were not clearly erroneous.
On appeal, Appellants make largely the same
arguments, asserting that the trial court chose to
overlook whether the facilities were operating in
compliance with applicable law and that the original
power-purchase agreements, not the amended
versions, should dictate the facilities’ specifically
assigned function. The trial court’s finding that the
facilities’ intended use did not include operating at
90 to 95% capacity or any of the other stringent
requirements for which Appellants advocate is not
clearly erroneous. Evidence in the record supports
the trial court’s conclusion. A December 2007 contract
specified that the contractor was to refurbish the
facilities “so as to return their respective 12.5 MW
units to full service for the purpose of generating
electricity for sale.” Id. at 625 (emphasis added)
(quoting Appx5748). The Court of Federal Claims did
not clearly err in rejecting Appellants’ arguments or
finding that the facilities’ specifically assigned
13a
function is to produce and sell electricity, so we affirm
its finding.
C
Finally, we review for clear error the Court of
Federal Claims’ factual findings as to the five-factor
test used to determine when a facility achieves its
specifically assigned function and is therefore placed
in service. The five factors the court weighs are
1. “whether the necessary permits ... for
operation have been obtained,”
2. “whether critical preoperational testing
has been completed,”
3. “whether the taxpayer has control of the
facility,”
4. “whether the unit has been synchronized
with the transmission grid,” and
5. “whether daily or regular operation has
begun.”
Sealy, 46 F.3d at 395; Ampersand, 150 Fed. Cl. at 646
(citing Oglethorpe Power Corp. v. Comm’r, 60 T.C.M.
(CCH) 850 (1990)).
Appellants contest the trial court’s findings only
for factors one, two, and five.
At factor one, the Court of Federal Claims found
that “the only permit necessary to begin generating
power was an” Authority to Construct permit.
Ampersand, 150 Fed. Cl. at 647. The Court of Federal
14a
Claims further found that the Authority to Construct
permits “were the only permits necessary for the
Facilities to begin producing electricity under the”
power-purchase agreements. Id. Because the
Chowchilla facility received its Authority to Construct
permit on April 19, 2007 and Merced received its
Authority to Construct permit on February 3, 2007,
the Court of Federal Claims concluded that the
facilities had obtained their necessary permits for
operation by 2008. Id.
Appellants dispute that conclusion, asserting
that, in 2008, their facilities often did not comply with
the local and federal environmental requirements in
the Authority to Construct permits. The Court of
Federal Claims rejected this argument, finding that
“violations were a fact of life for biomass plants at
that time.” Id. The trial court also emphasized that
the District never revoked Appellants’ Authority to
Construct permits, “permitting them to operate in the
face of” Notices of Violation because continued
operations were “environmentally preferable to
shutting down the Facilities and having agricultural
and wood waste burned in open fields.” Id.
The Court of Federal Claims did not clearly err in
its analysis of factor one. Appellants’ Authority to
Construct permits allowed them to operate the
facilities by producing and selling electricity. While
the facilities occasionally went out of compliance, the
District never revoked Appellants’ permits and
allowed the facilities to continue operating.
15a
At factor two, the Court of Federal Claims first
determined what constituted “critical testing.” Id. at
647–48. Appellants argued that environmental tests
were critical, but the Court of Federal Claims
disagreed, finding that Appellants had “overstate[d]
the role that environmental compliance and testing
have in the placed-in-service analysis.” Id. at 648.
Especially because “in California, a biomass facility’s
noncompliance with emissions requirements d[oes]
not prevent that facility from being ready and
available to perform its specifically assigned function
of generating and selling electricity.” Id. The Court of
Federal Claims also relied on the government’s expert
in engineering, plant operations, and testing, Mr.
Filsinger, to find that “environmental tests required
by the [Authority to Construct permits] were not
critical, given that environmental compliance for a
biomass facility was always ‘difficult.’” Id.
The Court of Federal Claims therefore concluded
that the critical tests were (1) pre-parallel testing and
(2) testing required under the power-purchase
agreements. Id. And because the facilities passed
these tests by 2008, the trial court concluded that the
facilities had passed the critical tests necessary for
proper operations by 2008. Id.
The Court of Federal Claims did not clearly err in
its analysis of factor two. The facilities could and did
operate without passing environmental tests, and the
facilities passed all pre-parallel testing and the
testing required by the power-purchase agreements
by 2008, allowing them to generate and sell electricity
starting that year.
16a
At factor five, the Court of Federal Claims
pointed out “that the Facilities were generating and
selling electricity in 2008, and that they generated
revenue of $2,260,093 that year.” Id. And although
the facilities operated below the capacity required by
the original power-purchase agreements, “PG&E
accepted this level of performance, amend[ing] the
[power-purchase agreements] to waive or reduce
performance penalties, and continued to work with
CalBio to keep the Facilities operational.” Id. at 649.
The Court of Federal Claims did not clearly err in
its analysis of factor five. The facilities were
generating and selling a substantial amount of
electricity in 2008. While the facilities occasionally
shut down, the Court of Federal Claims did not
clearly err in finding that they nonetheless
operated regularly.
Therefore, the Court of Federal Claims did not
clearly err in finding that all five factors indicate that
the facilities were placed in service in 2008. We
accordingly affirm.
III
We have considered Appellants’ other arguments
but find them unpersuasive or unnecessary to reach.
For the reasons above, we affirm the Court of Federal
Claims’ decision.
AFFIRMED
17a
APPENDIX B
In the United States Court of Federal Claims
No. 14-841C
(Filed Under Seal: October 30, 2020)
(Reissued: November 9, 2020) 1
*********************
AMPERSAND CHOWCHILLA *
BIOMASS, LLC, and MERCED *
POWER, LLC,
*
*
Plaintiffs,
*
*
v.
*
*
THE UNITED STATES,
*
*
Defendant.
*
*********************
Stephen G. Leatham, Heurlin, Potter, Jahn,
Leatham, Holtmann & Stoker, P.S., 211 E.
McLoughlin Blvd., Suite 100, Vancouver, Washington
98663, for Plaintiffs.
Richard E. Zuckerman, David I. Pincus, G.
Robson Stewart, Courtney M. Hutson, Margaret E.
Sheer, and Katherine R. Powers, U.S. Department of
Justice, Tax Division, Court of Federal Claims
1 The Court issued its Opinion under seal to provide the parties
an opportunity to submit redactions. The parties did not propose
any redactions. Accordingly, the Court publishes this Opinion.
18a
Section, P.O. Box 26, Ben Franklin
Washington, D.C. 20044, for Defendant.
Station,
OPINION AND ORDER
WILLIAMS, Senior Judge.
In this action, Plaintiffs Ampersand
Chowchilla Biomass, LLC (“Chowchilla LLC”) and
Merced Power, LLC (“Merced LLC”) challenge the
Government’s denial of grants under Section 1603 of
the American Recovery and Reinvestment Act of 2009
(“ARRA”). This statute, which has since expired,
provided grants to entities that “place[d] in service
specified energy property” in 2009, 2010, or 2011.
Pub. Law. No. 111-5, Div. B, tit. I, § 1603, 123 Stat.
115, 364-66 (2009). Each Plaintiff owns an open-loop
biomass facility which qualified as a specified energy
property under the ARRA (“the Facilities”). Plaintiff
Chowchilla LLC sought a grant of $12,282,984, and
Merced LLC, a grant of $12,299,723. The United
States Department of Treasury, which administered
the Section 1603 program, denied a substantial
portion of these grants, finding that Plaintiffs’
Facilities had been “placed in service” in 2008—
outside the 2009-11 statutory window.
Under Treasury Regulations, a facility is
placed in service when it is “in a condition or state of
readiness and availability for a specifically assigned
function.” Treas. Reg. § 1.46-3(d)(1)(ii). Plaintiffs
allege the Facilities were placed in service on August
19a
11, 2011, when the Facilities had passed all required
testing, installed all necessary equipment, were
compliant with environmental laws, and were selling
baseload electricity at amounts required by their
Power Purchase Agreements (“PPAs”) with Pacific
Gas & Electric Company (“PG&E”). Defendant
claims that the Facilities were placed in service in
2008, when the Facilities’ prior owners substantially
completed their refurbishment, acquired permits
from the San Joaquin Valley Air Pollution Control
District, and were producing and selling power and
generating revenue.
This Court finds that both Facilities were
ready and available to perform their specifically
assigned function—to produce and sell electricity—in
2008, when the Facilities had synchronized to the
transmission grid, began selling electricity, operated
under their PPAs, and generated approximately
$2.26 million in revenue. Although the Facilities did
not operate at high capacity and suffered from
emissions violations, these performance problems did
not lead to termination of their PPAs with PG&E or
cessation of the Facilities’ role as a supplier of
electricity. In short, the Facilities’ specifically
assigned function was to produce and sell electricity,
and the Facilities were ready and available to do so
in 2008, precluding their owners from obtaining
additional Section 1603 grants.
20a
Findings of Fact2
The Biomass Facilities
The Chowchilla Facility (“Chowchilla”) and
Merced Facility (“Merced”) are open-loop biomass
facilities, each with a nameplate capacity of 12.5
megawatts. Jt. Stip. ¶ 10; JX 40 at 1; JX 32-4. An
open-loop biomass facility generates electricity by
using various types of organic waste as fuel. Tr.
1158-59. Chowchilla and Merced use a mix of
agricultural and urban wood waste. Tr. 1159.
Producing electricity with biomass is a
thornier operation than producing electricity with
most other fuels. Tr. 1658. Unlike other fuels, a
biomass fuel load consists of a hodge-podge of organic
materials, including orchard prunings, scrap lumber,
sawdust, and construction debris. Tr. 1158-59, 1664;
JX 32-4. This variety makes the precise composition
of a given fuel load unpredictable, making it difficult
to maintain consistent operations and to control
emissions. Tr. 934-35, 1579-80, 1664. The Facilities
connect to an electric transmission grid overseen by
the California Independent System Operator
(“CAISO”) and operated by PG&E. Tr. 193-94.
Biomass facilities are equipped with
emissions-control technology. Burning of wood waste
produces pollutants such as nitrous oxide (“NOx”)
and, depending on the composition of the waste,
2 These findings are derived from the evidentiary record
developed during an 11-day trial. Grammatical and
typographical errors in quotations have not been corrected.
21a
sulfur oxide (“SO2”). Tr. 1126, 1160. Disposal of
wood waste by burning it in a field (an “uncontrolled
burn”) releases those pollutants unadulterated into
the air, contributing to pollution problems. Tr. 483,
1160, 1923-24; JX 45-3.
Biomass facilities produce other pollutants as
well, such as PM10 (visible emissions), VOC (Volatile
Organic Compounds), and NH3 (ammonia), and
under state and federal law, must be outfitted with
technology that reduces emissions. Tr. 594-96, 71920; PX 45-3. Chowchilla and Merced are equipped
with technology that measures and controls such
emissions including:
(1) Continuous
Emissions
Monitoring
System (“CEMS”) which records the
amount of SO2, NOx, CO, and various
pollutants that a facility is emitting,
and transmits it to the District 3
(2) Continuous Opacity Monitoring System
(“COMS”) which records the level of
opacity of the facility’s emissions and
transmits it to the District
(3) Baghouses or asymmetrical filters
which remove particulate matter from
flue gases and store it in siloes
3 The District refers to the San Joaquin Valley Unified Air
Pollution Control District, the local authority which enforces
California’s implementation plan to achieve federal air
quality standards.
22a
(4) Selective
non-catalytic
reduction
(“SNCR”)
system
which
injects
anhydrous ammonia into the combustor
to control NOx emissions
(5) Limestone injection system which
injects limestone into the combustor bed
to control SO2 emissions, and
(6) Multiclone and pulse jet baghouse, a
second particulate control system that
removes large portions of particulate
matter from the airstream.
Tr. 149, 152-53, 155, 933, 1125; PX 13; PX 23.
Ownership of the Facilities
The Merced facility is the only asset owned by
Plaintiff Merced LLC, a California LLC formed on
May 1, 2001. The Chowchilla facility is the only asset
owned by Plaintiff Chowchilla LLC, a Massachusetts
LLC formed on November 20, 2006. Jt. Stip. ¶¶ 8-10.
Plaintiffs Chowchilla LLC and Merced LLC are
owned by a holding company, Global Ampersand
LLC. DX 480. Global Ampersand in turn is owned by
ACM California LLC, which is owned by Akeida
Environmental Fund LP (“Akeida Onshore”). 4 Tr.
171-72; DX 480.
Akeida Onshore is owned by a group of
investors in the United States and is managed by
Akeida Capital Management, LLC (“Akeida
4 Akeida Environmental Fund LP is known as the “onshore
fund.” Tr. 176.
23a
Capital”), a fund management entity run by David
Kandolha and Harvey Abrahams. Tr. 4, 37-38; DX
480. 5 Akeida Capital manages two other funds:
Akeida Environmental Master Fund Ltd. (“Akeida
Master Fund”) and Akeida Environmental Fund Ltd.
(“Akeida Environmental Ltd.”), a fund owned by a
group of foreign investors. DX 480; Tr. 174. Akeida
Onshore and Akeida Environmental Ltd. collectively
own 100 percent of Akeida Master Fund. Tr. 171-74;
DX 480.
The Facilities’ History
The Facilities have had a long and complicated
history. Tr. 30. Constructed by California
Agricultural Power Corporation Energy (“CAPCO
Energy”) in the late 1980s, Merced and Chowchilla
were first operated in October 1988 and February
1990, respectively. Jt. Stip. ¶ 15; DX 483 at 4.
CAPCO Energy sold the Facilities to San Joaquin
Valley Energy Partners in 1992, who then shut down
and “mothballed” them in 1995. Tr. 24; Jt. Stip. ¶ 15.
By 2005, the Facilities were owned by Global
Common, LLC (“Global Common”). JX 19.
On January 4, 2007, Global Common sold its
membership interest in the Plaintiff LLCs to Global
Ampersand, LLC, a holding company created and
owned by a private equity fund, Ampersand
California Biomass Fund I, LLC (“CalBio”). Tr. 1925
Mr. Kandolha and Mr. Abrahams appeared as corporate
representatives of Chowchilla LLC and Merced LLC,
respectively. Tr. 4. Mr. Kandolha is also a limited partner in
Akeida Environmental Fund LP. Tr. 203.
24a
93; Jt. Stip. ¶16. CalBio was created by employees of
London Economics International, LLC (“London
Economics”) 6 in the spring of 2006, as an investment
vehicle for the refurbishment and future operation of
the Chowchilla and Merced facilities. Tr. 1642, 165051; DX 121-15. During CalBio’s ownership, the
Facilities were run by CalBio’s managing partner
and London Economics’ president, A.J. Goulding, 7
along with CalBio’s chief operating officer, Eric
Shumway. Tr. 1648-49.
In January 2007, when CalBio acquired the
Facilities, they were “inoperable” and had been since
1995. Tr. 1653; Jt. Stip. ¶ 15. When powergenerating facilities are restarted after an extended
period of idleness, the owner needs to engage support
personnel, “whether it be construction or
maintenance-type contractors,” to “go through the
power plant from end to end, break it down into
systems, identify[] what needs to be repaired or
replaced, put[] together a planned approach as well as
. . . getting any permitting that is required.” Tr. 347;
JX 02 at 3-4. According to A.J. Goulding, Chowchilla
and Merced faced additional challenges, as the
original plans were not available, and one facility had
been looted for copper causing extensive damage.
Tr. 1665.
6 London Economics is an economic and financial consulting firm
that specializes in energy and infrastructure. Tr. 638-39.
7 Although not admitted as an expert in this case, A.J. Goulding
has testified as a regulatory economics expert in the electricity
and natural gas industries. Tr. 1644-45.
25a
After acquiring the Facilities, CalBio set out to
secure financing for their refurbishment. Tr. 1652. On
June 29, 2007, Global Ampersand received a
$26,500,000 convertible senior secured note from D.E.
Shaw Synoptic Acquisition VII, LLC (“D.E. Shaw”), an
investment vehicle created by D.E. Shaw & Co. for
the specific purpose of investing in Chowchilla and
Merced. Tr. 1191, 1655-57; JX 07. 8 The D.E. Shaw
note was amended several times, with its principal
amount increasing to $39,509,999, with accrued
interest of $17,968,269 by December 15, 2010.
JX 12-2.
CalBio Enters into Refurbishment and
Operations & Maintenance Agreements
On April 3, 2007, CalBio, through Global
Ampersand, engaged Crown Engineering and
Construction, Inc. (“Crown”), to refurbish the
Facilities. DX 258. Crown abandoned the project,
and Global Ampersand terminated its contract for
cause. Tr. 1500, 1649. Mr. Goulding testified that
Crown’s nonperformance and bankruptcy required
the Facilities to find and negotiate with a new
provider, which had to repeat some of the work, “so
the impact was to really delay the schedule and
increase the cost . . . .” Tr. 1755-56.
8 Jeffrey Hoover, a vice president and executive director of D.E.
Shaw & Co., L.P., from 2005 through June 2012, testified that his
primary function at D.E. Shaw was to identify power generation
facilities with power purchase agreements that D.E. Shaw could
acquire and stabilize with cash infusions. Tr. 1484-86. D.E.
Shaw reviewed the Facilities’ PPAs when conducting due
diligence before investing in the Facilities. Tr. 1497.
26a
CalBio,
through
Global
Ampersand,
subsequently hired NAES Power Contractors, Inc.
(“NPC”) in December 2007, to complete the
refurbishment. Tr. 1649; JX 40-1. In an evaluation
report dated December 3, 2007, NPC noted that the
condition of the Facilities was “generally poor,” and
identified
certain
conditions
that
made
refurbishment very challenging, including “the
condition of some of the plant components, the lack
of equipment and material for completion (including
the absence of comprehensive documentation
regarding material/equipment ordered), the partially
completed nature of some of the work (particularly
the electrical work at [Merced]), and the budget and
time constraints.” JX 02-4.
The December 19, 2007 construction contract
stated that Global Ampersand’s intent was to
refurbish the Facilities “so as to return their
respective 12.5 MW units to full service for the
purpose of generating electricity for sale.” JX 40-1.
The NPC Construction Contract estimated that it
would cost $2.34 million to complete refurbishment
of the Chowchilla facility, and $3.92 million to
complete refurbishment of the Merced facility. JX 401. Under the construction contract, NPC’s
refurbishment services were divided into “work
packages,” for a particular system or subsystem. JX
40-1. Once NPC completed a work package, it turned
that package over to Global Ampersand and project
completion would only be declared following final
acceptance of these work packages. JX 40-5. NPC
agreed that Chowchilla would be ready for
commissioning on March 4, 2008, and ready for
27a
commercial operation on April 14, 2008, while Merced
would be ready for commissioning on April 14, 2008,
and commercial operation on May 9, 2008. JX 40-1;
JX 02-4.
When it contracted with NPC to refurbish the
Facilities, Global Ampersand had already engaged
North American Energy Services Company (“NAES”)
to take over maintenance and operation of the
Facilities, once refurbishment was complete. Tr. 25.
That arrangement is memorialized in an Operations
& Maintenance Agreement (“O&M Agreement”)
dated March 27, 2007. JX 01. NAES provided
operation and maintenance services to Merced and
Chowchilla from 2007 through 2014. JX 01.
Interconnection Agreement with PG&E:
Facilities Cleared to Sell Electricity
The Facilities’ owners have sold the electricity
produced at Chowchilla and Merced to PG&E and
CAISO. Tr. 220-21. PG&E required any facility
intending to sell electricity via its transmission grid to
enter into an interconnection agreement. DX 227-6; DX
228-6; Tr. 856. On March 24, 2008, CalBio entered into
interconnection agreements with PG&E with respect
to the Facilities. DX 227-36; DX 228-36. Under these
agreements, the Facilities were required to pass “preparallel testing,” to ensure that they could operate at
the same frequency and in the same phase as the
transmission grid so that the Facilities would not
damage the grid and could operate safely. Tr. 869-70.
28a
PG&E completed its pre-parallel testing and
cleared Chowchilla to generate and sell electricity at its
full rated output on June 17, 2008, and Merced, on
August 24, 2008. DX 153-2; DX 151-1. The Facilities’
passage of pre-parallel testing and subsequent
interconnection with the grid was a “milestone
achieved” and indicative of completing “the
requirements of PG&E.” Tr. 1658-59; DX 153-2.
Power Purchase Agreements
On September 14, 2005, Global Common—the
Facilities’ then owner—entered into a Master Power
Purchase and Sale Agreement with PG&E under
which PG&E agreed to purchase electricity produced
by the Facilities. JX 19; JX 20; JX 21. By the time
CalBio acquired the Facilities in January 2007, there
were two sets of minor amendments to the PPAs, 9 and
on March 30, 2007, CalBio and PG&E agreed to a
third set of amendments. DX 80-2; DX 87-3.
Under the 2005 PPAs between CalBio’s
predecessor, Global Common, and PG&E, and all
amended versions, the Facilities were to provide
PG&E with baseload electricity. JX 20-1; JX 21-1.
The Master Power Purchase Agreement defines
9 Global Common and PG&E amended Chowchilla’s and
Merced’s PPAs, in July and November 2006, to increase the
contract price, extend the Guaranteed Commercial Operation
Date, and add terms relating to the California Renewables
Portfolio Standard, a California state program requiring certain
electricity-generating entities to procure a specified amount of
renewable energy resources. DX 78-1, 5; DX 79-1, 7; DX 85-1,
5; DX 86-1, 7.
29a
baseload as “a Product for which Delivery levels are
uniform for all Delivery Periods.” Tr. 399; JX 19-37.
Facility-specific PPA Confirmation Agreements
provided that “‘baseload’ means unit-contingent firm
energy delivered with the applicable Capacity
Factors provided herein.” Tr. 400; JX 20-2; JX 21-2.
The PPAs provided that the “Contract
Capacity” for each facility was “at any time . . . the
lower of 9.0 MW or the Net Rated Output Capacity”
of each Facility, which was approximately 10.5 MW.
Tr. 401; JX 20 at 2, 8; JX 21 at 2, 8. The PPAs
established performance penalties that CalBio would
incur if the Facilities did not produce at the following
capacity factors, depending on the time of year and
time of day:
TOD [“Time of Delivery”] PERIOD
Period
1. SuperPeak
[weekdays,
1 pm-8 pm]
2. Shoulder 3. Night
[weekdays, [11 pm-7
7 am-1 pm, am]
8 pm-10 pm;
weekends,
7 am-10 pm]
A. June –
September
95%
90%
80%
B. December 90%
& January
90%
80%
30a
C. Feb. –
80%
May, Oct. &
Nov.
80%
60%
***
For each TOD Period, if the applicable
Capacity Factor is less than the applicable
Performance
Requirement,
then
the
Performance Penalty for such TOD Period
shall be calculated as follows:
Performance Penalty = (Performance
R equirement – Payment Capacity
Factor) x Performance Penalty Factor x
Maximum Monthly TOD Payment.
. . . For the purposes of illustration, the
Performance Requirement in Period A2 is 90
percent Capacity Factor and the Performance
Penalty Factor for Period A2 is 2.0. If the
actual Capacity Factor in Period A2 were 88.5
percent, then Seller would pay Buyer the
following Performance Penalty = (90% - 88.5%)
x 2.0 = 1.5% x 2.00 = 3.00 percent of the
Maximum Monthly TOD Payment for TOD
Period A2.
JX 20 at 6-7; JX 21 at 6-7; Tr. 1170-71.
Eric Bomgardner, NAES’ plant manager for
the Facilities from June 2009 until 2014, understood
that CalBio intended Chowchilla and Merced to be
baseload-producing facilities, which he defined as
31a
“continuous operating facilit[ies] subject to
intermittent demands of increase, decrease or don’t
produce at all . . . [at] levels . . . identified further [in]
the PPA.” Tr. 399-400. 10 Chad Curran, PG&E’s
energy contract manager, oversaw the PPAs and
described each Facility as “a baseload facility [that]
would operate more or less continually . . . [m]ost
hours of the day, often at near—at or near the full
capability of the facility.” Tr. 845, 862. 11 David
Kandolha testified that as baseload facilities,
Chowchilla and Merced were “designed to . . . operate
at or near capacity at all times.” Tr. 105. CalBio’s
managing partner, A.J. Goulding, understood the
Facilities to be “baseload continuous production
plants” and that the target production “would have
been expressed in the [PPAs].” Tr. 1620, 1703.
Producing baseload electricity is to be
distinguished from producing “peaking” and
“dispatchable” electricity. Tr. 2122-23; JX 20-1; JX
21-1. A peaking facility would operate only during
10 Mr. Bomgardner has worked in the power generation industry
for approximately 33 years. As the plant manager from 2009 to
2014, Mr. Bomgardner was responsible for day-to-day operations
of Chowchilla and Merced. Tr. 335-39.
11
Chad Remley Curran was PG&E’s Rule 30(b)(6)
representative. Tr. 847. As a PG&E contract manager from
2008 through 2016, Mr. Curran managed “PG&E’s contract
manager from 2008 through 2016, Mr. Curran managed
“PG&E’s contracts to purchase energy from third parties,”
ensuring that “both parties adhere to the terms and conditions
of the contract, resolving disagreements, verifying completion of
milestones under power purchase agreements, interpreting
contract language.” Tr. 844-46. Mr. Curran has a joint MBA
from Berkeley and Columbia. Tr. 847.
32a
peak hours and would only require a capacity factor
of two to eight percent. A dispatchable facility would
operate at PG&E’s request. Tr. 862; JX 19 at 37.
Unlike a baseload facility, peaking and dispatchable
facilities must be able to ramp operations up and
down quickly and do not need to be able to produce
electricity on a continual basis. Tr. 2122.
Activation of the PPAs
Under the PPAs, PG&E’s obligation to
purchase electricity from the Facilities for a 15-year
period was to begin on the “Initial Delivery Date.” JX
20-1; JX 21-1. Establishment of the Initial Delivery
Date depended upon the parties declaring that the
Facilities met three conditions: (1) achievement of
the “commercial operation date;” (2) PG&E’s receipt
of a “Performance Assurance” payment of $2,281,000
from Global Ampersand; and (3) approval of the
PPAs by the California Public Utilities Commission
(“CPUC”). JX 20 at 1-2; JX 21 at 1-2; DX 78-3; DX 852. Obtaining approval of the PPAs from CPUC meant
issuance of a final, nonappealable order approving
the PPAs and a finding by the Commission that the
procurement was “from an eligible renewable energy
resource for purposes of determining Buyer’s
compliance with any obligation it may have to
procure eligible renewable energy resources
pursuant to the California Renewables Portfolio
Standard.” Tr. 867; JX 19 at 10, 34.
Meeting the commercial operation date had
two requirements. First, CalBio needed to declare
“commercial operations,” which the PPA defined as
33a
operating and being able “to produce and deliver
energy to Buyer pursuant to the terms of this
Agreement.” Tr. 854; JX 19-9. PG&E’s contract
manager explained that “the purpose of the
commercial operation date is for both of the parties
to agree and for PG&E to accept that the facility is
prepared to begin the delivery term.” Tr. 857-58.
Second, PG&E needed to accept the results of the
facility’s Initial Capacity Demonstration Test. JX 19
at 9, 40. PG&E’s Initial and Annual Capacity Test
principles, attached to the PPAs, required that the
Facilities demonstrate that they could meet the
“performance requirements specified in [the PPA] . . .
for a duration of 336 consecutive hours,” i.e., 14 days.
Tr. 868; JX 19-40.
Mr. Curran testified that compliance with local
permitting was “not something that PG&E considered
in accepting the Commercial Operation Date.” Tr.
902. Nor did PG&E consider whether the Facilities
had installed and were operating with all of the
equipment required under their permits. Id.
Chowchilla’s Fourth Amended PPA
On December 8, 2008, CalBio and PG&E
agreed to a Fourth Amendment to Chowchilla’s PPA:
(1) extending the Guaranteed Commercial Operation
Date from December 31, 2007, to December 12, 2008,
and waiving the “Daily Delay Damages” for failure to
achieve Commercial Operation by the 2007 deadline;
(2) allowing Chowchilla to announce the Initial
Energy Delivery Date on December 12, 2008, without
upfront payment of the $2,281,000 Performance
34a
Assurance and providing a less rigorous alternative
to the Initial Capacity Test requirements; and (3)
waiving all performance penalties for three months
following the December 12, 2008 Commercial
Operation Date. DX 81 at 2, 5, 7, 8, 9.
PG&E’s energy contract manager, Mr. Curran,
testified that PG&E frequently extended contract
deadlines for the procurement of renewable energy
around the time of CalBio’s 2008-09 contract
negotiations because PG&E, as an investor-owned
utility, had to purchase a certain percentage of
electricity from renewable resources or be subject to
fines by the State of California. Tr. 865-66. 12
Procuring electricity from renewable resources
proved difficult for PG&E in 2008 and 2009 because,
as Mr. Curran described, the facilities using
renewable resources were “newer” and the industries
supporting them were “nascent.” Tr. 866. As a result,
PG&E “often found that [renewable-energy] facilities
were unable to meet the deadlines to deliver energy
to [PG&E] by the date . . . agreed to in the power
purchase agreements” and “amended contracts to
California established the Renewable Portfolio Standard
(“RPS”) Program in 2002. Cal. Pub. Util. Code § 399.11 (2003).
Under the RPS Program, electricity-generating corporations had
to increase their purchase of eligible renewable energy resources
to an amount that equaled 20 percent of their total retail sales or
be forced to procure additional renewable resources in
subsequent years to compensate for the shortfall. Id. The statemandated 20 percent target for purchase of renewable energy by
electricity-generating corporations, originally intended to take
effect in 2017, was accelerated to 2010 by the state legislature in
a 2006 amendment. Cal Pub. Util. Code § 399.11 (2006); see S.B.
1078, 2001-2002 Sess. (Cal. 2002).
12
35a
either reduce performance requirements or allow
extensions of the dates by which the facilities needed
to begin delivering the energy.” Tr. 866-67.
CalBio’s predecessor, Global Common, had
negotiated a Guaranteed Commercial Operation Date
of December 31, 2007 for Chowchilla in the First
Amendment to the PPA, executed on July 27, 2006.
DX 78-2. Although Section 3.8(d) of the Master PPA
authorized PG&E to assess “Daily Delay Damages”
and retain monies from the security deposit as
liquidated damages for each day that the Commercial
Operation Date was delayed, PG&E did not impose
Daily Delay Damages and instead worked with
CalBio to set a new Guaranteed Commercial Date.
DX 81-8. By the time that CalBio negotiated this
Fourth Amendment to the PPA, Chowchilla had not
met its Guaranteed Commercial Date for over a year.
In addition, PG&E agreed to amend the
original Initial Capacity Test which required
Chowchilla to demonstrate that it met the PPA’s
performance requirements for a duration of 336
consecutive hours, or 14 days. JX 19-40. Under the
Fourth Amendment, PG&E opted to review
Chowchilla’s meter data instead of requiring a twoweek performance test “[i]n order to start deliveries
as soon as possible.” Tr. 873-74; JX 18; DX 81-7.
Ultimately, PG&E determined that Chowchilla
passed the Initial Capacity Test, finding that
Chowchilla “would have met the test requirements
during several periods of time during August and
September 2008.” JX 18; Tr. 875.
36a
The Amendment described CalBio’s financial
issues as the impetus for PG&E’s waiver of the
requirement that CalBio pay the $2,281,000
Performance Assurance upfront. The Fourth
Amended PPA stated in the “Whereas” clause that
CalBio could not post the Performance Assurance
“due to liquidity challenges.” DX 81-1. PG&E
extended this payment deadline from December 12,
2008 to July 31, 2009, and authorized a payment
plan. DX 81 at 5-6. Under the payment plan, PG&E
retained 10 percent of the balance it owed on Global
Ampersand’s invoices from the first four months of
performance and 25 percent for the next four months.
Id. at 5.
Finally, the Fourth Amended PPA provided
Chowchilla a three-month grace period from
performance penalties following the Initial Delivery
Date because the Facilities were having difficulty
meeting the performance requirements under the
PPA, and PG&E needed renewable energy sources to
meet its renewable energy goals. Tr. 865; DX 81-8.
Merced’s Fourth Amended PPA
On February 18, 2009, CalBio and PG&E
agreed to a Fourth Amendment to Merced’s PPA,
incorporating most of the modifications in
Chowchilla’s Fourth Amended PPA but granting an
extended, four-year reduction in performance
penalties. DX 88. PG&E agreed to: extend the
Guaranteed Commercial Operation Date from
September 30, 2007 to March 1, 2009, waive the
“Daily Delay Damages” that would accrue if Merced
37a
failed to achieve Commercial Operation by the 2007
deadline, allow Merced to announce the Initial
Energy Delivery Date without upfront payment of the
Performance Assurance, relax the Initial Capacity
Test requirements, and waive performance penalties
following the March 1, 2009 Commercial Operation
Date. DX 88 at 2, 5, 7, 8, 9. For the Initial Capacity
Test, PG&E opted to look at Merced’s meter data from
the third and fourth quarters of 2008, instead of
requiring Merced to undergo a two-week test.
Tr. 872-73.
In Merced’s Fourth Amended PPA, PG&E
granted a more generous multi-year, tiered
exemption from performance penalties. For the first
contract year, PG&E eliminated performance
penalties entirely and reduced them for the next
three years:
Contract Year
Performance
Penalty Reduction
1
100%
2
75%
3
50%
4
25%
5 onwards
0%
DX 88-8.
38a
Chowchilla’s Fifth Amended PPA
On September 23, 2009, CalBio and PG&E
agreed to a Fifth Amendment to Chowchilla’s PPA,
incorporating the four-year performance penalty
reduction in Merced’s Fourth Amended PPA and
granting another extension for payment of the
$2,281,000 Performance Assurance from July 21,
2009, to June 30, 2011. DX 82. This Amendment, like
the Fourth Amendments to the PPAs, acknowledged
that CalBio could not post the Performance
Assurance “due to liquidity challenges” and gave the
Facilities some relief from the performance
requirements. Tr. 865; DX 82-1.
Defendant’s expert, Todd Filsinger, testified
that the performance penalty modifications reflected
the parties’ understanding that “regular operation”
for the Facilities did not mean the kind of consistent
operation that could be achieved, for example, by a
nuclear power plant. Tr. 2014. “[PG&E was] giving
the plant . . . a break . . . in understanding what it
takes to get . . . power into the grid for this type of
facility.” Id.
2007-2008: Initial Refurbishment Activity and
Production
Refurbishment of Chowchilla and Merced
began shortly after CalBio purchased the Facilities
on January 4, 2007. Tr. 192-93; Jt. Stip. ¶ 16.
39a
Permits Required for Refurbishing the
Facilities
Chowchilla and Merced are located in the San
Joaquin Valley, which the United States
Environmental Protection Agency (“EPA”) has
designated as a “nonattainment area”—an area that
exceeds emissions standards mandated by the Clean
Air Act. Tr. 371, 377, 591-92; JX 13-1. Under the
Clean Air Act, states which have nonattainment
areas must establish a “state implementation plan”
to achieve federal air quality standards. Tr. 1900-01;
JX 13-3. The San Joaquin Valley Air Pollution
Control
District
enforces
California’s
implementation plan through its local rules and
permit process. Tr. 24, 586; JX 48 at 18-19.
The District requires one such permit, an
Authority to Construct (“ATC”), for facilities that will
have “equipment that may emit air pollution” or
equipment used for controlling air pollution. Tr. 48586. The ATC is an “initial permit” that grants an
owner permission to construct a facility in accordance
with applicable conditions that enable it to meet the
District’s and EPA’s emissions standards. Tr. 436-37,
486, 1902. The District may issue a facility-wide ATC
comprised of individual ATCs governing different
components of the facility. Tr. 1940-41. The ATCs
are not Permits to Operate (“PTO”), but, as happened
here, facilities may generate and sell electricity under
an ATC. PX 13.
After a facility has complied with all ATC
conditions, the facility may apply to have its ATC
40a
converted into a PTO. Tr. 1905. The PTO
encompasses a set of permits containing the
conditions set forth in the ATCs and any
modifications. Tr. 435-36. It is possible that a facility
could receive a PTO for one component, such as the
boiler, but not others that remain noncompliant with
ATC conditions. Tr. 1940-41.
A District inspector confirms that a facility is
complying with its ATC by performing various tests,
including a source test, a Relative Accuracy Test
Audit (“RATA”), and a seven-day drift test. Tr. 14647. In a source test, an independent testing company
measures emissions to determine compliance with
standards for emissions of NOx, SO2, CO, and PM10.
Tr. 147. In a RATA test, a facility’s Continuous
Emissions Monitoring Systems levels are compared
to readings from independent testing equipment to
ensure the CEMS is producing reliable emissionsmeasurement data. Id. A seven-day drift test
determines whether the CEMS can stay calibrated by
running for a set period of time and assessing how far
the system “drifts” between calibrations. Tr. 148.
Biomass facilities, such as Chowchilla and
Merced, have more difficulty passing these tests than
a typical electricity-producing facility. The Facilities’
former compliance and operations manager testified:
It’s more difficult for a biomass plant to
pass a RATA test or a source test
compared to a gas-fired power
plant. . . . Natural gas . . . [is] consistent
in quality, it doesn’t vary much,
41a
whereas biomass material fuel that is
being [used] as fuel comes from
different sources. So its quality varies
very, very widely. And with that quality
of fuel going into the combustor, it
makes it very difficult to have
consistent operations. It swings up and
down. And so frequent adjustment has
to be made to be able to maintain
operations in compliance with all
the permits.
Tr. 925, 935.
If the facility successfully passes these tests
and proves compliance with the remaining ATC
conditions, the District converts the facility-wide ATC
into a facility-wide PTO. Tr. 719, 1905; DX 201-2.
After the District has granted a facility-wide PTO,
facilities such as Chowchilla and Merced must apply
for a Title V permit, required under the federal Clean
Air Act, for “major sources of air pollution.” Tr. 42829, 1906-07; see 42 U.S.C. §§ 7661a, 7661(2),
7412(a)(1).
When a facility is operating outside of its
permit conditions or District rules, the District has
disciplinary options: (1) issuance of a Notice of
Violation (“NOV”) which carries monetary penalties
and typically additional oversight or testing; (2) for a
willful violation, an abatement order—a rare
occurrence; and (3) rescission or revocation of the
ATC or PTO, which is also rare. Tr. 487-88, 48182, 1942.
42a
In the event a facility is violating, or expects to
violate, the conditions of its ATC or PTO, the owner
can apply for a variance, which permits it to lawfully
operate outside of those conditions for up to a year
from issuance. Tr. 487, 494. The District prefers to
work with biomass facilities through the NOV process
to bring them back into compliance, rather than shut
them down and cause more agricultural waste to be
burned in open fields. Tr. 483-84, 487. Failure to
comply can also subject the operator to enforcement
action from the EPA. 42 U.S.C. § 7413(a)(1); 40 C.F.R.
§ 52.23.
The Facilities’ ATCs
The District granted ATCs for Chowchilla on
April 19, 2007, while Merced, which had been granted
ATCs in October 2005, was issued revised ATCs on
February 5, 2007. PX 13-1; PX 23-1.
2008 Operations: Passage of Pre-Parallel
Testing,
Turnover
of
Facilities
from
Construction
Contractor
to
Owner,
Commencement of Commercial Operations,
and Sale of Electricity to CAISO and PG&E
Refurbishment progressed to the point where
Plaintiffs “restarted” the Chowchilla plant on April
24, 2008, and the Merced plant, on July 5, 2008. Tr.
1864 (stating that these dates marked when the
Facilities had their “initial fire”); JX 137 at 2. As of
June 17, 2008, Chowchilla had “completed the
requirements of PG&E” after passing its pre-parallel
43a
inspection, operating at 12.5 MW, and first selling at
that capacity on the grid. DX 178; DX 180-2. The
Facilities were still experiencing emissions problems,
and Chowchilla failed a RATA test in August 2008,
and a source test in September 2008. PX 108; PX 109;
PX 142-20. Mr. Goulding understood Chowchilla to be
commercially operational as of August 2008, because
the Facility had “completed the testing,” was under
the PPA, and was “released to generate at full
capacity.” Tr. 1514-15.
In September 2008, NPC advised PG&E that it
had completed all work packages for Chowchilla and
Merced and that the plants were ready to begin their
capacity performance tests. DX 35; DX 174.
Defendant’s expert, Todd Filsinger, testified that
these September 2008 dates were important dates for
Section 1603 purposes, because they signaled when
NPC finished its work and were a good estimate of
“when [NPC] felt it was there.” Tr. 1965.
The Facilities experienced outages in 2008,
including one at Chowchilla that lasted six weeks in
October 2008, due to an overheated transformer. Tr.
2067; PX 103-6.
2008
Emissions
and Variances
Problems,
NOVs
Soon after Chowchilla and Merced restarted in
April and July 2008, the San Joaquin Valley Unified
Air Pollution Control District and the United States
Environmental Protection Agency began issuing
Notices of Violation to the Facilities. See e.g., DX 197.
Chowchilla failed an inspection on June 3, 2008, and
44a
received six NOVs in August 2008, for failing to
install a truck tipper (part of the fuel handling
system), various vent filters, an NH3 flow rate
indicator, and a fly ash silo filter as well as for
exceeding emissions limits. Tr. 372-74, 151-52; JX 055; DX 197-1. It then received another NOV in
November 2008, for operating without a certifiable
CEMS. Tr. 414. On October 20, 2008, the District
issued Merced three NOVs—for operating without a
truck tipper, and an ammonia injection system, and
for operating a diesel fire pump driver without a
Permit to Operate. Tr. 600-04; JX 03-3; JX 04-1. For
the entirety of its 2008 operations, Chowchilla
continued to operate without the truck tipper, the
vent filter, as well as with exceedances for NOx, SOx,
CO, and PM10. Tr. 411-12; JX 48.
Faced with emissions exceedances, CalBio in
late 2008, submitted an application to the District
seeking a variance for each Facility. Specifically,
CalBio sought permission to operate Chowchilla from
December 17, 2008, to April 30, 2009, with excess
NOx, SOx, CO, ammonia slip, and visible emissions
“until the ammonia injection system [could] be
managed properly to bring the plant into compliance.”
Tr. 498-99; JX 45 at 2-4. The District granted this
request and found that closing Chowchilla “would be
without a corresponding benefit in reducing air
contaminants, because the closing of this facility
would cause more farmers to burn their agricultural
wastes in the open, uncontrolled.’” Tr. 513; JX 45 at
3-4. Under the December 17, 2008 variance,
Chowchilla was required to operate at a reduced
45a
capacity to maintain emissions below the permitted
limits, except when testing. Tr. 502; JX 45-3.
On December 2, 2008, CalBio sought a
variance to operate Merced from December 2, 2008,
through March 15, 2009, with excess NOx emissions
and without conducting tests by dates required by its
ATC. PX 24 at 1-2, 10. The District denied CalBio’s
request for a variance for Merced, finding that
Plaintiff
Merced
LLC
“demonstrated
an
unwillingness to comply with District Rules and
permit conditions by failing to contact the District for
a start up inspection prior to operation,” “commencing
operation without an ammonia injection system,” and
“operating without a certified or properly working
CEMS.” PX 25 at 3; see Tr. 511-12, 732. Despite their
lack of compliance with emissions requirements in
2008, the Facilities continued to operate and
sell electricity.
The Facilities Generate Approximately
$2.26 Million in Revenue in 2008
In 2008, Chowchilla generated 20,553
Megawatt Hours (“MWh”) of energy, resulting in
revenue of $1,408,941, and Merced generated 14,306
MWh in 2008, resulting in revenue of $851,152. PX
103-7. A.J. Goulding testified that this revenue was a
“big deal” because CalBio had finally reached the
point where it “[got] paid after a long process.” Tr.
1659. Because the Facilities “provided power to the
system” and “got paid” in 2008, Mr. Goulding deemed
the Facilities commercially operational. Tr. 1754.
46a
While the Facilities had the option in 2008 to
sell electricity to PG&E at a reduced or test price
under their PPAs, CalBio decided to sell to third
parties on the CAISO spot market at higher prices.
Tr. 1552-53, 1576. When Chowchilla achieved its
Initial Energy Delivery Date under its PPA on
December 12, 2008, all of its sales then went to
PG&E, accounting for $170,659 in revenue. PX 103-7.
During this time, the Facilities were also selling
Renewable Energy Credits (“RECs”). Tr. 1996; see Tr.
866-67, 1613.
CalBio’s Inability to Monetize PTCs Via a Tax
Equity Transaction
CalBio and D.E. Shaw had originally planned
to create additional revenue by monetizing
production tax credits generated by the Facilities
through a tax-equity transaction. Tr. 1687. As CalBio
expected the Facilities’ Production Tax Credits to
exceed CalBio’s tax liability in 2008, CalBio and D.E.
Shaw worked together to secure a tax-equity
transaction before 2009. Tr. 1555-56. CalBio fielded
tax-equity offers from State Street Bank and G.E.
Energy Financial Services, Inc. (General Electric). Tr.
1614, 1724-25. Negotiations with General Electric
progressed to the point that CalBio and D.E. Shaw
thought a deal was possible, but on July 10, 2008,
General Electric pulled out of the project. Tr. 172526; PX 90. According to CalBio, General Electric’s
unexpected pullout caused “liquidity challenges,
which among other things, ma[de] it impossible for
[CalBio] to fund the Delivery Term Security [the
47a
Performance Assurance] required under the existing
PPA.” JX 23.
CalBio
Takes
PTCs
Depreciation in 2008
and
Recognizes
CalBio did not find a tax equity investor in
2008, and, after consulting with its accountants, took
$347,855 in PTCs for the energy produced by both
Facilities. Tr. 793, 1673, 1691-92; DX 160 at 1, 27. Mr.
Goulding testified, “[i]n 2008, we provided power to
the system and we got paid. From a tax perspective,
we believe that that was sufficient to qualify for the
production tax credits. . . .” Tr. 1754. In addition to
claiming PTCs, CalBio recognized depreciation of
assets for both Facilities on its financial statements
and tax returns in 2008. Tr. 1603; DX 59; see also DX
115-13; DX 122-9; DX 160-1, 9; DX 168-4; DX 186-1.
In its May 25, 2010 financial statements submitted to
Akeida and D.E. Shaw, CalBio stated, “Ultimately,
the continuation of the company is dependent upon
its ability to negotiate new PPAs and achieve a level
of operation sufficient to meet cash flow
requirements.” DX 122-7.
At the time CalBio took these PTCs on its 2008
tax return, it was the parent of Plaintiffs here—the
LLCs that owned the Chowchilla and Merced
facilities then and now. As Plaintiffs were
disregarded entities in 2008, CalBio reported the
PTCs on its tax return Form 1065 on a consolidated
basis without segregating out or separately
identifying Plaintiffs, and reflected the PTCs in Form
48a
8835 (Renewable Electricity Production Credit). JX
39-15.
By late 2008, the Facilities were suffering from
serious cash flow problems. In its December 2008
report, NAES noted continued issues with “start-up,
testing and troubleshooting for all systems,” and
stated that cash flow issues would impact operations
more severely as vendors declined to provide
materials and services to the plants. PX 84-3. The
Facilities also experienced increased operating costs
because the price of biomass rose. DX 121 at 12-13.
2009: More Milestones, Operational Problems,
and NOVs
CalBio and the Plaintiff LLCs entered 2009
with the Facilities producing electricity, albeit
without
properly-functioning
emissions-control
equipment and in excess of emission limits imposed
by their ATCs, District rules, and federal law.
Operating in this manner led to NOVs from the
District for each Facility. JX 45-2; PX 24; PX 17.
Chowchilla received relief via a variance giving it
until April 29, 2009 to reach compliance. JX 45.
Merced was denied a variance, and therefore faced
monetary penalties. Tr. 13; PX 25.
Despite these continuing compliance problems,
the Facilities moved forward with respect to
milestones in their O&M Agreement and their PPAs.
CalBio declared that the “takeover date” under the
O&M agreement occurred on January 1, 2009. Tr.
410-11; JX 06-1. Global Ampersand and PG&E had
declared Chowchilla’s PPA Initial Delivery Date to be
49a
December 12, 2008, signaling that the plant had
begun “commercial operations,” which meant it was
able to deliver baseload power in accordance with the
PPA. PG&E and Global Ampersand declared
Merced’s Initial Delivery Date to be February 21,
2009. Tr. 259; DX 241.
The Facilities Enter the Operational Phase
Under the O&M Agreement in January 2009
According to the January 2009 report Global
Ampersand sent to D.E. Shaw, if it were not for fuel
shortages, the Facilities’ boilers would have been
running 96 percent of the time that month. Tr. 1533;
PX 104-17. Additionally, capital shortages resulted in
temporary employees at the Facilities no longer
working during the early months of 2009 because
they were not being paid. Tr. 1533-34; PX 104-29. In
January 2009, neither Facility had resolved its
emissions issues and, even if fuel had been available,
were prohibited from producing at a 96 percent
capacity factor until those issues were resolved.
In January 2009, Chowchilla’s capacity factor
was 63.7 percent and Merced’s capacity factor was
37.9 percent. Tr. 418-19. Although the Facilities
should have been producing in the 80 to 90 percent
range for baseload as of January 2009, penalties were
waived for Chowchilla for another month. See DX 818. Merced did not begin to deliver power to PG&E
under its PPA until March 1, 2009, with penalties
reduced for four years. See DX 88-8. Instead, Merced
was generating electricity for sale to CAISO and third
parties until that time.
50a
The District Converts Chowchilla’s ATC to a
PTO in April 2009
On April 21, 2009, the District converted
Chowchilla’s facility-wide ATC into a facility-wide
Permit to Operate, indicating that Chowchilla was
compliant with its ATC conditions. Tr. 1939, 1979; DX
437. Around that time, the EPA also deemed
Chowchilla’s
Title
V
permit
application
administratively complete. PX 105. Chowchilla was
granted a Title V permit in August 2009. Tr. 1908.
Merced did not complete its Title V application until
August 2010, and received its Title V permit in 2011.
Tr. 1907-08; PX 125.
On April 15, 2009, CalBio filed a second
variance application for Chowchilla for the period
from April 30, 2009, to December 16, 2009, as
Chowchilla was still experiencing problems with the
ammonia injection system and with continued
exceedances of emission limits on NOx, PM10, and
ammonia. PX 17 at 3, 10; Tr. 503-05.
Continuing Environmental Problems in 2009
On March 25, 2009, the EPA, pursuant to the
Clean Air Act, submitted an information request to
Plaintiff, identifying emissions exceedances and
asking about the Facilities’ testing and results. Tr.
597-98; PX 101. CalBio responded to the EPA’s
request on May 7, 2009, stating that “emission testing
has been and continues to be an ongoing process.” Tr.
425; PX 101 at 8-9. CalBio stated that although
emissions exceedances were substantial, the
51a
emissions were offset by CalBio’s procurement of
Emission Reduction Credits (“ERCs”) through a
California state program and the Facilities’ disposal
of agricultural wood waste that otherwise would have
been burned in open fields. PX 101 at 2. CalBio also
reported that the project continued to face severe
financial hardship, which caused operating
performance to suffer and “limited [CalBio’s] ability
to proactively address several mechanical issues.” Id.
at 2, 6.
On July 23, 2009, the EPA issued Chowchilla
and Merced their first federal NOVs identifying eight
violations of District rules that had been occurring
since startup. JX 13 at 8-9; see Tr. 586. Similar to the
findings made by the District in issuing its NOVs in
2008, the EPA found that Chowchilla and Merced had
violated federal emissions limits and failed to install
required equipment such as a CEMS. Tr. 149-50.
Regarding testing, the Facilities struggled for
most of 2009. Still operating with a malfunctioning
and uncertified CEMS and DAHS, 13 Chowchilla
passed a source test on May 14, 2009. Tr. 394, 728.
Chowchilla completed its initial certification for its
CEMS on August 28, 2009, but then failed source
tests in September and October 2009. PX 144-15.
Chowchilla successfully completed the seven-day
drift test in approximately September or October
2009. Tr. 393. Merced failed source tests on March
17 and 18 and June 26, 2009, and failed a RATA test
on June 29, 2009. PX 123. Merced’s Continuous
The DAHS is a computer system that helps generate
environmental compliance reports. Tr. 394.
13
52a
Opacity Monitoring System was not tested and
certified until September 14, 2009, and issues with
Merced’s CEMS were not resolved until 2011. Tr.
342, 409-10, 729-30.
The Facilities’ Production and Revenue in 2009
In 2009, Chowchilla generated 50,905 MWh
of electricity, resulting in revenue of $4,624,942,
and Merced generated 48,591 MWh, resulting in
revenue of $4,223,825. DX 214-9. In 2009, Chowchilla
had an average capacity factor of 53.9 percent, with a
monthly high of 77.1 percent (April), and Merced had
an average capacity factor of 51.2 percent, with a
monthly high of 64.2 percent (December). DX 214-3
CalBio’s Continuing Financial Problems in 2009 and
the May 25, 2009 Loan from ACM 4 Secured by
the Facilities
On February 17, 2009, Congress passed the
American Recovery and Reinvestment Act of 2009
(“ARRA”), to address the financial crisis that had come to
the fore the previous year. Recognizing that many entities
had severely diminished cash flows as a result of the crisis
that made tax credits of dubious value, Congress
established a mechanism for entities to receive Section
1603 grants in lieu of tax credits when investing in certain
renewable energy facilities. See Alta Wind I Owner Lessor
C v. United States, 897 F.3d 1365, 1368 (Fed. Cir. 2018).
Having failed to monetize the PTCs in 2008, CalBio
and D.E. Shaw were still looking for capital and struggling
with cash flow problems. CalBio and D.E. Shaw did not
believe the Facilities qualified for a Section 1603 grant. D.E.
53a
Shaw’s Kyle Bethancourt and Justin Chan determined
that it would be “an uphill battle” for Chowchilla and
Merced to secure grants because the Facilities were
regularly selling power, even on the spot market, and had
been connected to the grid in 2008. Tr. 1552-54; DX 182-3;
see also Tr. 1560-66; DX 166. D.E. Shaw did not obtain a
formal determination from counsel as to the Facilities’
eligibility for Section 1603 grants because it did not believe
it likely the Facilities would receive awards due to “placedin-service issues.” Tr. 1624-26. Mr. Goulding agreed that
the Facilities were not eligible for a Section 1603 grant. Tr.
1683. Mr. Goulding testified that CalBio “believed it would
have been to [CalBio’s] benefit to be able to attain the cash
grant and explored it, you know, as much as we could and
felt that it was not—not possible.” Tr. 1684; see DX 166-1;
Tr. 1544.
CalBio’s search for funding eventually led it to
Akeida Capital Management, and discussions between
CalBio and Akeida Capital began in February 2009.14 Tr.
1668-69; DX 111. On March 12, 2009, Global Ampersand
and Akeida Master Fund signed a draft term sheet. Tr. 208;
DX 112-9. On March 17, 2009, as part of Akeida’s due
diligence, Akeida requested and received Global
Ampersand’s audited financial statements, which showed
that CalBio recognized depreciation on Chowchilla in May
14 Akeida Capital Management had three funds. Mr. Kandolha
ran the Akeida Environmental Fund LP and Akeida
Environmental Master Fund Ltd.
Tr. 41.
Akeida
Environmental Fund LP owned 100 percent of the membership
interest in ACM California LLC, which in turn owned 100
percent of the membership interest in Global Ampersand. Id.
54a
2008, and on Merced in September 2008. Tr. 1968; DX 11513; DX 122-9.
On May 25, 2009, ACM Corp. 4, LLC (“ACM 4”), a
Cayman Islands entity wholly owned by Akeida Master
Fund and represented by Mr. Kandolha, provided a
$9,000,000 secured term loan to Global Ampersand backed
by the Facilities. Tr. 45-46, 164, 177-78. The loan was
signed by Mr. Kandolha as lender. Tr. 235.
Section 5.20(b) of the Loan Agreement, “Incentives
and Tax Credits,” expressly stated that “[t]he Borrower
and/or the Facilities [was] eligible to receive, and/or
participate in . . . the Incentives and Tax Credits listed on
Schedule 5.20,” and the only tax credits listed on Schedule
5.20 were Production Tax Credits. JX 30 at 57-58, 122. Mr.
Kandolha testified that it was important to ACM 4 that the
Facilities qualified for Production Tax Credits at that time
because CalBio intended to monetize the PTCs in exchange
for an equity investment that would allow it to service its
loans. Tr. 76. According to Mr. Kandolha, taking PTCs was
a condition of ACM 4’s loan because “[t]he understanding
under the loan [was] that [CalBio] would get a tax equity
investor to take those PTCs and pay them so that they
could pay us back.” Id.; see also Tr. 256; Def.’s Cross-Mot.
for Summ. J., Ex. 5 at 16.
The Loan Agreement between ACM 4 and
Global Ampersand provided:
No Borrower shall, until satisfaction in full of
the Obligations and termination of the
Commitments:
***
55a
7.18: Incentives and Tax Credits
(a) Take any action (or fail to take any action) or
permit any event or circumstance to occur
(excluding events or circumstances beyond
its control after the exercise of reasonable
diligence) which would result in any of the
Facilities ceasing to qualify as an open-loop
biomass facility as defined in Code Section
45(d)(3).
(b) Take any action (or fail to take any action) or
permit any event or circumstance to occur
(excluding events or circumstances beyond
its control after the exercise of reasonable
diligence) which would result [in] any
Borrower and/or Facility becoming ineligible
to receive and/or participate in any Incentive
or Tax Credit or Incentive or Tax Credit
Program listed in Schedule 5.20 . . . .
JX 30 at 65, 70.
The Loan Agreement also expressly stated that
“production tax credits [were] currently being distributed to
[Global Ampersand] and its shareholders.” Tr. 234; JX 30122. Mr. Goulding explained that this was an
“acknowledgment that production tax credits [were] being
earned” and “[were] sitting on the tax returns of the
individual investors.” Tr. 1687; see Tr. 1587.
Simultaneously with ACM 4’s loan to Global
Ampersand, on May 25, 2009, D.E. Shaw agreed to
subordinate its loan to ACM 4’s loan. Tr. 1200-02, 1217; JX
09. CalBio, through Global Ampersand, used the funds to
56a
refurbish the Facilities. Tr. 1722. Despite the cash injection
from the ACM 4 loan, as of September 2009, Global
Ampersand had still not paid PG&E the $2,281,000
Performance Assurance.
On October 27, 2009, Global Ampersand was in
default on the ACM 4 loan, and the default had not been
cured by December 15, 2009. Tr. 83; DX 245.
2010: Environmental Violations Continue, the
Facilities Cease Operations Due to Financial Issues,
and Akeida Onshore Purchases the Facilities
The joint monthly operations report for the month
ending June 30, 2010, showed that Chowchilla had an
average capacity factor of 35.8 percent for the first six
months of 2010 and that Merced had an average capacity
factor of 15.7 percent, for this timeframe. DX 222-4.
In May 2010, the United States Department of
Justice (“DOJ”), at the request of the EPA and the District,
sent a letter to Global Ampersand raising several issues
with emissions controls, stating that the Facilities
“exceeded permitted [emissions] levels several fold, and in
some instances greater than ten-fold,” and that both lacked
an operational Selective Non-Catalytic Reduction
(“SNCR”) system. Tr. 615-16; PX 97-2; PX 94-2. DOJ stated
that the Facilities’ failure to install these systems alone
would support penalties of $32,500 per day and proposed
$1.6 million in penalties to settle the Facilities’ alleged
violations of the Clean Air Act. Tr. 614; PX 94-2. DOJ and
Akeida, CalBio’s successor, ultimately settled for $835,000
in penalties. JX 41 at 6-7; JX 42 at 6-7.
57a
Due to funding issues, Merced ceased operations
temporarily in April 2010, and Chowchilla temporarily in
May 2010, both at Global Ampersand’s direction. DX 2186; DX 220-5. In June 2010, CalBio made the decision to
suspend operations completely, also due to funding issues.
Tr. 277; DX 222 at 5-6.
2010: Continuing Financial Problems
CalBio’s financial struggles with the Facilities
continued in 2010. In May 2010, Akeida Master Fund,
through ACM 4, accelerated the due date of its May 25,
2009 loan to Global Ampersand, because no payments were
being made. Tr. 85-87; JX 31 at 2. By July 2010, CalBio,
lacking funds for refurbishment, was exploring options to
sell the Facilities while attempting to negotiate another
amended PPA with PG&E, to no avail. Tr. 99-100; 567-68.
In 2010, CalBio was still looking to sell or
recapitalize the Facilities with the assistance of its
creditors, D.E. Shaw, and Akeida Master Fund. As part of
those efforts, CalBio retained Shaw Consultants
International, an independent engineering firm, to write a
technical evaluation study that presented a fulsome picture
of the state of the Facilities. Tr. 99, 2005-06; JX 32-33. After
assessing the Facilities, Shaw Consultants International
issued its report on December 1, 2010, finding that the
Facilities had experienced poor operational performance
since 2008, directly resulting from the lack of funding for
maintenance and CAPEX projects. DX 249-11; Tr. 2005.
The report identified deficiencies affecting production and
emissions compliance, and detailed a lengthy list of projects
that would enable the Facilities to “significantly improve
both plant capacity factor and fuel heat rates in addition to
58a
allowing plant personnel to stay ahead of the curve in terms
of maintenance.” DX 284 at 24-30; Tr. 443-44.
After accelerating Global Ampersand’s loan, Akeida
Capital, which managed Akeida Master Fund, considered
a few options—finding a buyer for the Facilities, foreclosing
on the Facilities, or buying the Facilities itself. In a
September 2010 memorandum, Akeida Capital’s Travis
Windholz positively assessed the viability of purchasing the
Facilities, stating the Facilities had the permits needed for
ongoing operations, that construction had been
substantially completed in 2008, and that the expenditures
needed to reach “optimal levels” of performance were
“limited.” JX 31 at 5-6 (estimating about $3 million in
capital expenditures and deferred maintenance). Mr.
Windholz expected Akeida Capital would pay no more than
$2 million to acquire Global Ampersand: $500,000 in cash
and $1.5 million in contingent payments. JX 31-4. The
memo also reflected that, as a part of its plan to acquire the
Facilities, Akeida intended to purchase D.E. Shaw’s debt.
JX 31-3; Tr. 1358.
On December 15, 2010, ACM Corp. 6, LLC (“ACM
6”), a special purpose LLC wholly owned by Akeida Master
Fund, paid $350,000 to D.E. Shaw for the outstanding debt
related to D.E. Shaw’s construction loan. Tr. 29; JX 11-2;
JX 12. At the time, the loan had a principal amount of
$39,509,999, plus accrued interest of $17,968,269. JX 12-2;
see Tr. 1207-09, 1221.
59a
Akeida’s Acquisition of CalBio
On December 28, 2010, twelve days after the LLC
owned by Akeida Master Fund purchased the D.E. Shaw
debt, a different Akeida Capital managed fund, Akeida
Onshore, through a wholly owned special purpose LLC,
ACM California LLC, acquired 100 percent of CalBio’s
membership interest in Global Ampersand, pursuant to a
Membership Interest Purchase Agreement (“MIPA”). Tr.
95, 190, 532; JX 33. The following diagram represents the
ownership structure of the Akeida entities at the time of
Akeida Onshore’s purchase of the Facilities on December
28, 2010:
DX 480 (“El Nido Biomass” refers to the Merced facility).
CalBio recognized a sales price of $74.4 million on its 2010
tax return along with a taxable gain of $26 million. JX 3912; Tr. 1432. Akeida Onshore treated the acquisition as an
60a
asset acquisition for tax purposes because “both CalBio and
ACM California are pass-through entities” and disregarded
for tax purposes. Tr. 532.
According to the MIPA, which was signed by Akeida
Capital’s principal, David Kandolha, ACM California paid
$100,000 up front and agreed to $1.3 million in additional
payments. JX 33-19; see Tr. 535. The MIPA expressly
stated that PTCs were “currently being distributed to
Ampersand California Biomass Fund I, LLC [i.e., CalBio]
and its members” as of December 28, 2010. JX 33-90; see
also Tr. 539, 1700. As part of the December 28, 2010
transaction, ACM California LLC assumed Global
Ampersand’s liabilities. Tr. 95; see JX 33.
Akeida Onshore did not take depreciation or PTCs
in 2010. Tr. 96.
2011: The Facilities Enter A Consent Decree with
EPA and District
On February 14, 2011, due to the Facilities’ history
of NOVs and failed emissions-related tests, the United
States Department of Justice and the District jointly filed
an 18-count Complaint against Plaintiff Merced LLC and a
20-count Complaint against Plaintiff Chowchilla LLC,
seeking injunctive relief to stop operations at both
Facilities, though Global Ampersand had already ceased
operations in June 2010. JX 47, JX 48. The United States
and the District alleged that the Facilities failed to install
necessary equipment such as a certified CEMS, SNCR
system, failed to utilize other required equipment (such as
a bin bent filter and truck tipper), and exceeded emissions
limits. Tr. 1912-13; JX 48; JX 47 at ¶¶ 88, 164, 174, 181.
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On the same date that suit was filed, Chowchilla
LLC and Merced LLC entered consent decrees with the
EPA and the District. Tr. 157; JX 41-34; JX 42-34. The
consent decrees required the Facilities to install, test, and
certify certain equipment, notify the EPA and the District
of any potential violations, and pay stipulated penalties of
$835,000 for violations. Tr. 157-58. Akeida Onshore was
ultimately responsible for those penalties. Tr. 158-59.
Prior to the acquisition closing on December 28,
2010, David Kandolha had received the December 1, 2010
technical evaluation report issued by Shaw Consultants
International, and Akeida Onshore hired Shaw
Consultants International to oversee the implementation of
the report’s recommendations. Tr. 99. Improvements made
by Akeida Onshore cost $7.56 million for Chowchilla and
$7.39 million for Merced. PX 87-4; PX 88-4. Akeida Onshore
replaced a variety of equipment: automated ammonia
injection systems were installed and certified in June 2011,
and the CEMS and flow monitor were certified on August
11, 2011, along with the CEMS quality assurance and
control program. DX 272; DX 273; DX 299; DX 300; DX 354.
With new emissions equipment, Chowchilla and Merced
were able to pass the source test, RATA test, and seven-day
drift test on August 2 and 5, 2011, respectively. Tr. 668-70,
1152-53; PX 155-6.
2011: Global Ampersand Obtains Amendments to
the PPAs and Applies for State and Federal Grants
On February 3, 2011, Global Ampersand entered
into another set of PPA amendments with PG&E, the sixth
for Chowchilla and the fifth for Merced. Tr. 864; DX 83; DX
89. In these PPA Amendments, the parties expressly
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recognized two circumstances: (1) that both the Chowchilla
and Merced Facilities would be “unable to continue to
operate” without additional revenue from the PPAs and (2)
that PG&E and Global Ampersand desired “to amend the
PPA[s] to enable Global to continue to operate . . . producing
RPS-eligible energy, and contributing to [PG&E’s]
achievement of its RPS compliance requirements.” DX 831; DX 89-1. These Amendments increased the contract
price and the Performance Assurance, created a new
formula to calculate performance penalties, waived all
performance penalties previously incurred, and waived all
performance penalties for the rest of the year. Tr. 864-65,
904; DX 83 at 2,5,6,14; DX 89 at 2, 5, 6, 14.
On January 26, 2011, Global Ampersand submitted
an application to the California Energy Commission
seeking funding under the Commission’s Existing
Renewable Facilities Program (“ERFP”) and anticipated
receiving $2.3 million in incentive payments per Facility, by
December 31, 2011. Tr. 813-14; JX 51-3; DX 29-3. However,
as Mr. Kandolha testified, “the [ERFP] program was
discontinued in 2011. So there again I think we got a few
hundred thousand from this program.” Tr. 814.
The Section 1603 Grant Applications
In early 2011, Akeida Capital decided to apply for
Section 1603 grants and retained Novogradac & Company
LLP, a public accounting firm, to act as independent
auditor and certify Global Ampersand’s Section 1603
applications. Tr. 127; PX 87; PX 88. Nathaniel Eng, a
California-licensed CPA and the Novogradac manager
responsible for the Facilities’ audits agreed that the sales
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price listed by CalBio in its 2010 tax return of $74.5 million
was the correct acquisition price. Tr. 688-90.
Novogradac determined that Chowchilla had an
eligible cost basis of $40,943,280, which would yield a 30
percent Section 1603 grant of $12,282,984. Tr. 687; PX 874. Novogradac concluded that Merced had an eligible cost
basis of $40,999,077, yielding a Section 1603 grant of
$12,299,723. Tr. 687; PX 88-4. In October 2011, Plaintiffs
applied for grants in these amounts and indicated on their
applications that their properties were placed in service on
August 11, 2011. Tr. 116-17; see Tr. 1428-32; PX 87; PX 88.
2012-2015 Operations
After August 2011, the Facilities still had some
operational issues. According to their submissions to the
EPA and the District, the Facilities exceeded emission
limits in some respects for limited periods in 2012. Tr. 642;
see DX 303 at 39. The Facilities continued to receive NOVs,
but most were for “procedural violations,” i.e., for
“submitting incorrect information in certain reports.” Tr.
738-39. Ryan Hayashi, the District’s Director for
Compliance, testified that at this time the Facilities were
no more on his “radar” than other facilities under his
jurisdiction. Tr. 739; see also Tr. 446-47.
In the 2012 report covering August 2011 through
August 2012 regarding Chowchilla, Mr. Kandolha
represented that the Facility produced approximately 52.7
million KWh, although he had estimated in his Section
1603 application that annual production would be 93
million KWh. Tr. 780; DX 28; DX 142-3. In its 2013 report
covering August 2012 through August 2013 regarding
Chowchilla, Mr. Kandhola represented that the Facility
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produced approximately 64.6 million KWh. Tr. 405; DX
143. In subsequent reports, Chowchilla stated that annual
production for the Facility was approximately 82.6 million
KWh in 2014, approximately 68.7 million KWh in 2015,
and approximately 78.7 million KWh in 2016. Tr. 787; DX
144-3; DX 145-3; DX 435. In all these reports, Chowchilla
stated that there were no “interruptions in production
during the year, other than routine maintenance[.]” DX
142-3; DX 143-3; DX 144-3; DX 145-3; DX 435. Merced
similarly represented from 2012 through 2016 that it did
not experience “any interruptions in production” during
these years, other than routine maintenance. DX 138-3; DX
139-3; DX 140-3; DX 141-3; see also Tr. 787.15
The only penalty assessed against the Facilities
from 2011 to 2014 was associated with a failed 2013 source
test for visible emissions that was imposed by the District.
Tr. 561; DX 303-39. The consent decrees were terminated
in 2015. Tr. 159.
The Denial of the Section 1603 Grant and
Continuing Financial Problems
On September 10, 2012, Treasury issued Merced
LLC, a Section 1603 grant of $1,136,519, and on January
10, 2013, Chowchilla LLC, a grant of $1,136,207. DX 467;
DX 468. In the award letters, Treasury stated:
We have determined that most of the
property which is the subject of the
application was placed in service in 2008
15 The Government vigorously disputes that there were no
interruptions in production at these times with respect to both
Chowchilla and Merced. Def.’s Am. Post-Trial Br. 55.
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and is ineligible for payment. Of the
remaining costs indicated as eligible in the
cost certification, we adjusted the
construction loan interest expense to more
closely reflect the interest incurred on the
portion of the eligible cost between
December 28, 2010 and August 11, 2011.
Tr. 1789; DX 467; see also DX 468.16
Ms. Ellen Neubauer, Treasury’s Section 1603
Program Director, explained that Treasury denied the
remaining grant amounts because “the prior owners of the
project company treated the project, for federal tax
purposes, as having been placed in service in 2008” and
“[t]he Section 1603 program is not in a position to revisit
that treatment.” Tr. 1776; PX 160-1. In Treasury’s view, if
a facility had received PTCs, it was ineligible to receive a
grant, regardless of whether the prior award of PTCs was
appropriate. Tr. 1778. Treasury did not evaluate whether
the prior owner’s determination was correct because “the
16 The Treasury Department’s Office of Housing and Energy
oversees the Section 1603 program. Tr. 1762. Grants may be
given for both refurbished facilities and new facilities, although
more grants were provided for the latter. Tr. 1786. As part of its
administration of the Section 1603 program, Treasury had an
interagency agreement with the Department of Energy (“DOE”),
and a DOE subdivision, National Renewable Energy Laboratory
(“NREL”) reviewed Section 1603 grant applications to determine
eligibility, including an analysis of the placed-in-service date. Tr.
1763. NREL would then make a recommendation to Treasury,
which would decide whether the application should be granted.
Tr. 1772, 1788. Treasury and NREL primarily focused on
electricity production and testing relating to electricity, with a
lesser focus on emissions testing. Tr. 1764-65.
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Section 1603 program doesn’t make tax determinations” or
amend an erroneous return. Tr. 1776-77.
On December 28, 2012, after Treasury denied
Merced the bulk of the grant, ACM 6 and Global
Ampersand agreed to write down the ACM 6 loan by
$25,820,044. DX 02-2. On December 30, 2013, Akeida
Master Fund wrote down the D.E. Shaw loan by an
additional $16,500,000 and reduced the interest rate on the
note to 0.1 percent on any rem
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