On February 24, 2022, the US Court of Appeals for the Federal Circuit (the Federal Circuit) issued its decision in Ampersand Chowchilla Biomass, LLC v. US, No. 2021-1385 (Fed. Cir. 2022). There, the Federal Circuit affirmed a decision by the Court of Federal Claims (the lower court) largely denying a taxpayer Section 1603 grants – renewable energy grants that were made available in the American Reinvestment and Recovery Act of 2009, Division B, Section 1603.

The denial was based on the Federal Circuit’s concurrence with the lower court that the project was placed in service in 2008 based on an oft-used 5-factor analysis. The Section 1603 grant, however, was not available for projects that were placed in service before 2009. As discussed below, the courts’ analysis of when a project is placed in service has implications for renewable energy projects well beyond the Section 1603 grant program.

The Facts

The Section 1603 grant was made temporarily available following the late-2008 financial crisis. Under the program, taxpayers could seek a cash grant from the Treasury Department in lieu of section 45 PTCs and section 48 ITCs. Among other eligibility requirements, facilities could not be placed in service before 2009.

Akeida Environmental Fund (collectively with its subsidiaries, the Taxpayer) purchased two biomass facilities in 2010 and applied for Section 1603 grants in 2011, which Treasury largely denied. To understand Treasury’s reasoning, it is helpful to review the facilities’ history.

In 2007, California Biomass Fund I, LLC (CalBio) acquired two defunct facilities and began restoring and upgrading the facilities to biomass fired electric generation facilities, with the plan to be operational in 2008. The two facilities each executed separate power purchase agreements (PPAs) with Pacific Gas & Electric Co. (PG&E). In addition to the PPAs, CalBio and PG&E had an interconnection agreement, which required the facilities to pass pre-parallel testing to ensure the facilities could operate in harmony with the grid.

In 2008, the facilities had initial firings, and were subsequently labeled as “in operation” by CalBio. The facilities also passed the pre-parallel testing requirements under the interconnection agreement that year. Both facilities began selling electricity on the spot market in 2008, operating well-below capacity. One facility began selling electricity exclusively to PG&E in December 2008, while the other began doing so in February 2009. In 2009, the facilities operated at approximately 50% capacity and PG&E repeatedly waived the higher performance requirements of the PPAs.

After the Section 1603 grants became available, CalBio determined it was not eligible for the grant because it viewed its two facilities as being placed in service in 2008 when it began selling energy on the market. CalBio subsequently decided to sell the facilities due to financial difficulties.

The Taxpayer purchased the two biomass facilities in 2010 and spent $15 million improving and upgrading them both. In 2011, the Taxpayer applied for Section 1603 grants, claiming that the facilities were placed in service in 2011 when the facilities’ improvements were completed. Treasury denied the majority of the requested grant amount, asserting that most of the property was actually placed in service in 2008. Treasury granted a cash payment with respect the remaining portion of the request as it related to the modifications that began in 2010 and were placed into service in 2011.

The Taxpayer filed suit for the portion of the Section 1603 grant request that had been denied.

The Legal Analysis

The Federal Circuit reviewed the lower court’s conclusions of law de novo and its findings of fact for clear error. Therefore, it is necessary to understand the lower court’s factual findings and analysis.

Before the lower court began its analysis on the question of when the facilities were placed in service, it examined whether Section 1603 required the facilities to produce power at ideal or near-ideal production levels to be placed in service. Citing Treas. Reg. § 1.46-3(d)(1)(ii), the court concluded 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.” Further, looking to legislative history, the court noted that the Section 1603 grants were created to promote economic recovery and did not require strict achievement of ideal or near ideal production levels to consider being placed in service. Therefore, the court held that a specifically assigned function need not require ideal or near-ideal production levels.

The lower court then moved into its two-part analysis addressing:

1. What was the facilities’ “specifically-assigned function”?
2. When did the facilities achieve their specifically-assigned function and, therefore, were placed in service?

Specifically-Assigned Function

The lower court determined that the facilities’ specifically-assigned function was to “produce and sell electricity.” PG&E did not demand performance at the contracted capacity levels and repeatedly waived or reduced performance penalties. The Federal Circuit rejected the Taxpayer’s argument that the facilities’ specifically-assigned function was to operate at the specified capacity levels in the PPAs. Rather, the specifically-assigned function was simply “to produce and sell electricity.”

Placed in Service

The Federal Circuit then reviewed the lower court’s weighing of Sealy’s five-factor test to determine when a facility is placed in service:

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.

The Taxpayer challenged the lower court’s findings for factors one, two, and five.

With respect to factor one, the lower court found the facilities did obtain the necessary “Authority to Construct” permits, and dismissed the facilities’ environmental violations because (i) the facilities never lost their permits and (ii) the “violations were a fact of life for biomass plants at that time.” The Federal Circuit found the lower court did not err in its analysis of factor one.

The lower court looked next at the second factor to determine whether critical preoperational testing had been completed. The court held that critical testing meant (1) the pre-parallel testing under the interconnection agreement and (2) the testing required under the PPAs, both of which were completed in 2008. The Federal Circuit found the lower court did not err in its analysis of factor two.

Moving to factor five, whether daily or regular operation had begun, the lower court found that the facilities were generating and selling a substantial amount of electricity in 2008. While the facilities occasionally shut down, they still “operated regularly.” The Federal Circuit found the lower court did not err in its analysis of factor five.

Having found no error in the lower court’s analysis, the Federal Circuit affirmed the denial of additional Section 1603 grants.

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