The Current: Does Treasury Have Discretion to Deny a 1603 Grant Application?

Published by Forrest D. Milder on Tuesday, March 1, 2011
Journal thumb March 2011

This month we have another brand new case of importance to the renewable energy industry. The decision is ARRA Energy Company I, et al. v. United States (Ct. Cl. No. 10-84C, January 18, 2011), and it involves the Treasury’s processing of Section 1603 grant applications. (Disclaimer: My firm, Nixon Peabody LLP, represents the plaintiff in the litigation.)   

Here are the facts: A company developed a new form of mobile solar powered generator. During 2009 it sold 25 of the generators to the plaintiff-applicant for approximately $7.7 million, a mark-up over the seller’s cost of producing the generators reflecting its innovative design. The plaintiff-applicant then placed the generators in service, and in August 2009 the plaintiffs submitted applications to the Treasury for a grant under the Section 1603 renewable energy cash grant exchange program. After the application was submitted, there was significant follow-up between the Treasury and the plaintiff-applicants about the proper cost of the generators for the purpose of computing the grant. The applicants timely submitted professional valuations, but in the end, the Treasury denied the applications entirely, stating that the claimed cost basis for the power generators was not supported by sufficient documentation.

The plaintiffs brought suit in the U.S. Court of Federal Claims, seeking approximately $2.3 million in damages (i.e., 30 percent of the cost of the generators). In response, the Treasury made a “motion for summary judgment,” on two theories, in particular claiming that the applicant did not have a right to bring suit in the Court of Claims. The Court held that the applicant could bring suit in that Court.
So, what does the decision mean? There are many possible interpretations. For example, one possibility is that any applicant for a Section 1603 grant is entitled to its day in court if it isn’t satisfied with the Treasury’s result. Another is that an applicant need only submit the required paperwork and Treasury is required to make a 30 percent payment. Or lastly, the scope may be limited to these applicants (ARRA Energy Company 1, et. al.) and hold that they are entitled to 30 percent of their submissions.

Or, the Court might be saying only that an applicant is entitled to its day in court if Treasury completely denies its application. Thus, a good argument can be made that Treasury got its hand slapped simply because it gave the applicant zero, and clearly there was some basis that should have been multiplied by 30 percent to yield a grant. In other words, Treasury’s consideration of the applicant’s submission should have resulted in a determination of the reasonable price for the generators, and not a total denial. Because the total denial violated the Section 1603 program, the Court of Federal Claims would not dismiss the suit on a motion for summary judgment.
In our experience, it is unusual for Treasury to totally deny a Section 1603 application. On the other hand, as many readers know, Treasury does sometimes reduce an applicant’s basis for grant purposes, and award something less than what the applicant was seeking (but not to zero, or even nearly zero). We typically see this kind of scrutiny because Treasury thinks that the price per watt is too high, or because it thinks that “insiders” are getting too high a fee for their services, and some of what is being paid to the insiders (say for a development fee) should be backed out. In the ARRA case, Treasury was presumably concerned that the sellers were getting an unreasonable profit, and that led to the denial of any grant.
It seems unlikely that ARRA Energy Company I, et al. v United States stands for the proposition that an applicant can just submit a bill of sale, and get 30 percent back of whatever number it presents. It’s likely that Treasury can still take the position that the costs are too high, and the applicant has to justify its basis computation. Stated differently, the case likely stands, in part, for this proposition: “Even assuming that the government is required to pay 30 percent of ‘basis,’” it is still necessary to determine what the proper “basis” is. Of course, in ARRA Energy Company I, et al. v United States, the applicant did provide appraisals to support its purchase price, bringing us back to my first point – when an applicant provides support for its position, Treasury is not allowed to deny the claim entirely.

This still leaves us wondering just how skeptical Treasury can be if the applicant complies with the published rules. We’ve discussed much of this before, but here’s a short refresher — the Treasury’s guidance requires the applicant to submit design plans stamped by a professional engineer, a commission report, an interconnection agreement, if applicable, and any other documentation that may be required to meet special standards that apply to some kinds of energy, such as nameplate capacity or energy efficiency of the facility. Remember that the guidance also provides as follows:

Applicants must submit with their application for a Section 1603 payment documentation to support the cost basis claimed for the property. Supporting documentation includes a detailed breakdown of all costs included in the basis. Other supporting documentation, such as contracts, copies of invoices, and proof of payment must be retained by the applicant and made available to Treasury upon request. For properties that have a cost basis in excess of $500,000 applicants must submit an independent accountant’s certification attesting to the accuracy of all costs claimed as part of the basis of the property.

So, the question becomes: when an applicant’s records include its invoices and proof of payment, does it also have to have documentation for the costs incurred by the person who built and sold the facility and an explanation of the difference? Plainly, observes the Court, more may be required to establish that there hasn’t been misrepresentation, miscalculation or fraud. But it’s not clear whether the court is stopping short of allowing Treasury to further review grant applications to assure the government doesn’t become a “patsy,” as suggested in the government’s brief. Bear in mind that ARRA Energy Company I, et al. v United States involved a motion for summary judgment, and therefore didn’t reach the actual computation of the applicant’s Section 1603 grant. Thus, this question still remains to be asked. Instead, the Court instructed the parties to confer and determine whether the issue may be settled.

Finally, it’s worth noting that there is good case-law support for applicants obtaining grants based on a significant markup over the seller’s original coast. For example, in the very well-known decision, Sacks v. Commissioner, 69 F.3d 982 (9th Cir.1995), the 9th Circuit blessed a markup for a solar hot water heater from its $1,100 cost to the wholesaler to a $3,800 resale price. So, in the proper case, a seller should be able to mark up the cost significantly, and qualify this larger number for a grant.