# In the United States Court of Federal Claims

No. 14–1228C

(Filed: November 8, 2016)

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Grants Made Under the American Recovery and Reinvest ment Act of 2009, Section 1603; Cogene ration Plants; CostBasis Allocation; Recapture *
GUSC ENERGY, INC., *

* Plaintiff, *

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v. *

* THE UNITED STATES, *

*

Defendant. *

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Timothy L. Jacobs , with whom was Hilary B. Lefko , Hunton & Williams, LLP, Washington, D.C., for Plaintiff.

Jennifer D. Auchterlonie and Jason S. Selmont , Trial Attorneys, with whom were Caroline

D. Ciraolo , Principal Deputy Assist ant Attorney General, David I. Pincus , Chief, and G.

Robson Stewart , Assistant Chief, Court of Federal Cl aims Section, Tax Division, U.S. Department of Justice, Wash ington, D.C., for Defendant.

OPINION AND ORDER

WHEELER, Judge.

Plaintiff GUSC Energy, Inc. (“GUSC Ener gy”) is the owner and operator of an open-loop biomass facility (the “Biomass Plant” ). It brought this action on December 22, 2014, alleging that the Government underpaid it by more than five million dollars when it issued a grant to GUSC Ener gy under Section 1603 of the American Recovery and Reinvestment Act of 2009, Pub. L. No. 1 11-5, 123 Stat. 115 (“ARRA”). Section 1603 allows certain owners of renewable energy f acilities to apply for cash grants. Owners of open-loop biomass facilities lik e GUSC Energy became entitled to cash grants equal to thirty percent of the facilities’ cost basis. Id. § 1603(b)(1)–(2)( A). The Government responded to GUSC Energy’s claims by filing a counterclaim for re capture of the entire2 awarded grant, alleging that GUSC Energy ha s permanently ceased el ectricity production

at the Biomass Plant.

The Court held a two-day trial in this case on June 21–22, 2016. During that trial, the Court heard the testimony of four witnesse s. GUSC Energy’s two fact witnesses were Daniel Maneen and Christopher Lindsey, and its expert witne ss was Michael Oswald. The Government’s expert witness was Trent Markell.

At trial and in the post-trial briefing, it became clear that the parties primarily disagree on the allocation the Government is required to perform between qualifying and non-qualifying activities in this case. The partie s agree that the Biomass Plant is a qualified facility, and that all of the prop erty in the plant is qualifie d property for the purposes of Section 1603. However, the st eam used to generate electr icity from the biomass in the plant is also used to heat th e business and technology park in which the plant is located. Therefore, under this Court’s holding in W.E. Partners II, LLC v. United States, 119 Fed. Cl. 684 (2015), aff’d without published opinion, 636 F. App’x 796 (Fed . Cir. 2016), GUSC Energy was required to present it s version of a reasonable cost basis allocation between the Biomass Plant’s qualifying electricity genera tion and the non-qualifyi ng heating activities. Instead, GUSC Energy argues that no such a llocation is necessary because all of the qualified property in the Biomass Plant is used to generate electricity. The Court rejected this argument in W.E. Partners, and it rejects it again here.

GUSC Energy did not present a competing ac tivity-based allocation at trial, but the testimony of the Government’s own expert undermined the Government’s allocation. Therefore, the Court finds that some damage s are appropriate, and should be calculated using Mr. Markell’s activity-based allocation method. The Court also finds that GUSC Energy has not permanently ceased production of electricity at the Biomass Pl ant, so the Government’s counterclaim for recapture is dismissed.

Findings of Fact

A. The Griffiss Business and Technology Park

The Biomass Plant is locat ed in the Griffiss Busine ss and Technology Park (the “Park”). Stip. ¶ 5. 1 The Park is located in Rome, New York, on th e site of the former

Griffiss Air Force Base. Id. When the base closed for all military purposes in 1995, the closure was a major blow to the city of Rome. Stip. ¶ 6; Mane en, Tr. 38–40. Griffiss Local Development Corporation (“GLDC”) was form ed in 1995 as a not-for-profit corporation

in order to transform the Base into the Park. Stip. ¶ 7; Man een, Tr. 41. GL DC became the successor to the U.S. Department of Defense as the owner and operator of the Base. Stip. ¶ 7. The Base included (1) an electric dist ribution system with a pproximately 300 miles

1 References to “Stip. ¶ _” refer to the parties’ Joint Stipulations of F act, filed June 2, 2016 (Dkt. No. 39).3 of overhead and underground electrical wires, transformers, and other equipment, (2) a 26- mile steam distribution system, and (3) a pre- existing steam production plant. Stip. ¶ 8; Maneen, Tr. 41.

GLDC became the Park’s steam heat provi der in September 1999. Stip. ¶ 9. In May 2002, GLDC also began to own and operate the Park’s electricity facilities and to provide electricity to the park’s tenants. Id. The Park curre ntly is home to more than 60 private companies and governmental entities, a nd over 5,600 employees. Stip. ¶ 10. In 2000, GLDC transferred to Gr iffiss Utility Service Corp. (“ Griffis Utility”) ownership and operational responsibility for the electric distri bution system, the steam distribution system, and the steam plant. Stip. ¶ 13. Griffiss Utility now is regulated by the New York State

Public Service Commission as an electric corporation and a steam corporation. Stip. ¶ 13. It is authorized to provide retail electric and steam service to tenants within the Park. Id. As such, Griffiss Utility is the “provider of last resort”— the default provider for the Park tenants—and must provide electricity and steam service to those tenants that desire one or both services. Id.; Maneen, Tr. 50–51. Customers may purchase electricity from outside the Park if Griffiss Utility’s rates are not co mpetitive, but Griffiss Utility has been able to keep its electricity rates lo w in order to avoid customer attrition. Maneen, Tr. 51.

Griffiss Utility is not an electricity produc er. Stip. ¶ 14. Rather, it traditionally has purchased the electricity that it distributes to Park customers (e.g., from the wholesale market). Id. Griffiss Utility uses both the Bi omass Plant and outside sources to satisfy its customers’ electricity needs. Maneen, Tr. 53–54. Th e base electricity load of the Park is approximately eight megawatts (“MW”) and the peak load is approxim ately fourteen MW. Stip. ¶ 14.

B. The Biomass Plant

In approximately 2011, Gr iffiss Utility decided to cons truct an open-loop biomass facility to be a combin ed heat and power plant, Stip. ¶ 16, generating stea m to meet the Park’s steam heat needs and electricity to o ffset in small part th e electricity that it previously had been purchasi ng. Stip. ¶¶ 22e, 23. Grif fiss Utility formed GUSC Energy for the purpose of owning and operating the Bi omass Plant, and to ope rate the preexisting steam plant. Stip. ¶ 16. GUSC Energy sells the steam and electricity generated from the biomass facility to Griffiss Utility, which in turn sells the steam heat and electricity to the Park tenants. Stip. ¶¶ 23, 24 , 25. GUSC Energy also operate s the preexisting steam plant’s natural gas boilers on behalf of Griffiss Utility, and Griffiss Utility sells this steam to Park tenants. Stip. ¶¶ 24–25.

GUSC Energy constructed the Biomass Plant next to the preexisting steam plant. A biomass boiler burns biomass—here, wood chips— as its fuel source to produce steam. Stip. ¶ 26. This steam can then be used to generate electr icity by running the steam through a steam turbine and gene rator system (“STG”). Stip. ¶¶ 22c, 22e.4 The Biomass Plant is a cogeneration plant. A cogeneration plant (also known as a combined heat and power plant) provides steam for both indu strial processes (like steam heating) and power generation. DX 20 at 4. Steam generated by its boiler system first is used to power its turbine, and th en is piped into the Park’s di strict heating system. Id. at 21. The Biomass Plant contains the following relevant components: (1) a biomass-fueled, field-erected boiler, designed to produce 40,000 pounds of steam per hour, and (2) a backpressure STG with a full load electrical outpu t of 885 kilowatts (“kW”). Stip. ¶¶ 22b, 22c; PX 28 at GEN000561. In actual operation, during the 2013–2014 heating season, the facility provided for appr oximately 2.8 percent of the overa ll electrical needs of the Park, and it provided for 46.7 percent of the overall st eam heat needs of the Park. Markell, Tr.

304.

In addition to the Biomass Plant, GUSC Energy retained its preexisting steam plant’s natural gas-fired boilers. Stip. ¶ 24. Retaining these boilers allowed GUSC Energy to meet the Park’s peak st eam demands, to add redundancy if the biomass boiler was nonfunctional, and to have options as to which facility to use depending on comparative fuel prices. Id.; Maneen, Tr. 401–06, 408–09. Additionally, neither Griffiss Utility nor GUSC Energy operated the Biomass Plant during the summer months when the Business Park did

not need steam heat. Maneen, Tr. 408.

The Government concedes that all of th e property costs GUSC Energy included in its grant application relate to pr operty that is integral to the production of electricity at the

Biomass Plant. See Def. Post-Trial Br. at 23 , Dkt. No. 47 (Aug. 17 , 2016); Second Supp. Stip. of Fact, Dkt. No. 56 (f iled Sept. 29, 2016). The wei ght of the evidence further

confirms this conclusion—the Biomass Plant did not contain property that could only be used for generating steam for heating purposes.

C. Operating and Idling the Biomass Plant

The Biomass Plant only operated con tinuously during the 2013–2014 heating season, from November 2013 to May 2014. See Stip. ¶ 37; Markell, Tr. 303–04. GUSC Energy idled the facility in Ma y 2014 for the summer, and de cided in the fall of 2014 not to restart operations. Stip. ¶ 37. GUSC Energy decided not to restart the Biomass Plant because natural gas prices had fallen so low that operating the plant was not economical. Id.; Maneen Tr. 407. The pl ant briefly operated in April 2 016, but otherwise has remained idle. Stip. ¶ 42. Testimony at trial showed that GUSC Ener gy has maintained the Biomass Plant in good working order for the entire time the plant has been idle. Maneen, Tr. 424– 27. The Government seeks to recapture the Section 1603 grant it paid to GUSC Energy, claiming that the extended idling of the Biomas s Plant is really a permanent cessation of electricity production at the plant.5 D. GUSC Energy’s Section 16 03 Grant Application

GUSC Energy submitted its final Secti on 1603 application and supporting documentation to the Treasury on or about March 6, 2014. Stip. ¶ 27. GUSC Energy stated that its qualified cost basis was $18,230,094 , and therefore its requested payment was $5,469,028 (30 percent of its cl aimed basis). Stip. ¶¶ 32, 33. With its application, GUSC Energy submitted an independent accountant repor t that opined its cost basis was fairly stated. Stip. ¶ 32. In additional co mmunications, GUSC Energy confirmed that “approximately 6.6 percent of the total steam en ergy available for end-use is converted to electricity.” DX 4 at 333–34; see Lindsey, Tr. at 172. Therefore, the Treasury reduced GUSC Energy’s eligible cost basis to 6.6 pe rcent of the claimed cost basis submitted on the application, and on June 26, 2014, awarded a grant equa l to $316,609 (30 percent of the eligible basis, minus a 7.2 percent de duction for sequestration). Stip. ¶ 34.

At trial, the Government’s expert, Mr. Ma rkell, took issue with the Government’s analysis. Mr. Markell instead proposed a meth od (the “efficiency me thod”) that allocates between qualifying and nonqualifying ac tivities by focusing on the energy used for electricity generation, and compares that ge neration efficiency to the efficiency of a hypothetical electricity-only biomass plan t. DX 20 at 33; Markell, Tr. 316–18. Specifically, Mr. Markell examined the actual heat input of pl aintiff’s facility (66,602,690 Btu/hr), and divided that number by the heat rate of a typi cal biomass facility that produces only electricity (13,500 Btu/kWh ). DX 20 at 33. Mr. Marke ll found that GUSC Energy’s heat input could generate 4,934 kW of electricity. Id. Duri ng the period when the Biomass Plant was operational, it actually generated only 752.1 kW. Therefore, according to Mr. Markell, GUSC Energy’s facility generates only 15.24 percent of the electricity it would generate if it only generated electricity. So , under Mr. Markell’s analysis, 15.24 percent, rather than 6.6 percent, of GUSC Energy’s claimed costs should have been counted as eligible cost basis.

In contrast, Plaintiff’s expert Mr. Os wald argued that all costs GUSC Energy incurred should be treated as qualifying, reas oning that all of the equipment GUSC Energy used was necessary for electric ity generation. PX 178 at 14–15 , 17. Mr. Oswald testified that no other engineering ba sis existed to allocate costs between qualifying and nonqualifying activities. Oswald, Tr. 210.

Further, GUSC Energy and th e Government disagreed at trial on whether certain

costs could be included in GUSC Energy’s eligible cost basis. Specifically, the parties did not agree on whether total costs of $65,938 a ssociated with “iron wo rks,” site clean-up, paving, and landscaping were eligible. See Seco nd Supp. Stip. of Fact, Dkt. No. 56 (filed Sept. 29, 2016). The parties now agree that thes e costs are properly includable in Plaintiff’s eligible cost basis. Id. GUSC Energy seek s reimbursement of the difference between its claimed cash grant and the grant it actually received.6 Discussion

A. GUSC Energy is Entitled to Dama ges Based on a Reasonable Activity-Based Allocation

In W.E. Partners, this Court set out a thr ee-step inquiry that applies when a court analyzes whether a Section 1603 grant should be awarded to the owner of an open-loop biomass facility: (1) the facility must be a “qualified facility,” (2) the property costs the plaintiff claims as its cost basis in the facility must relate to “qualif ied property,” and (3) the cost basis claimed for qualifie d property must relate to a “qualifying activity.” See 119 Fed. Cl. at 692, 694. The Court will address each step in turn.

1. The Biomass Plant is a Qualified Facility

First, the facility must be a “qualified facility” under ARRA Section 1603. Openloop biomass facilities are one type of “qualified facility” that constitutes specified energy property under Section 1603, see ARRA § 1603(a), 45 U.S.C. 45( d)(3) (2012), and the parties do not dispute that the Biomass Plant at issue in this case is an open-loop biomass facility. Therefore, the Biomass Plant is a qualified facility.

2. All of GUSC Energy’s Claimed Co sts Relate to Qualified Property

Second, the cost basis GUSC Energy claims in the qualified facility must relate only to “qualified property.” Section 1603 incor porates the definitions in Section 48 of the Internal Revenue Code (“IRC”), see § 1603 (h), which defines “qualified property” as “tangible property . . . used as an integral pa rt” of grant-eligible facilities. 26 U.S.C. § 48(a)(5)(D) (2012). Treasury Guidance for the Section 1603 program excludes as qualified property “electrical transmission equi pment, such as transmission lines and towers, or any equipment beyond the electrical transmission stage, su ch as transformers

and distribution lines.” Treasury Guidance at 12. 2 Here, the parties now agree that all property for which GUSC Energy claims a grant is qualified property because it is integral to electricity generation. Still, as noted ab ove, the Government’s original grant did not take into account $65,938 in e ligible costs associat ed with “iron works,” site clean-up, paving, and landscaping, which the parties no w agree are eligible costs that relate to qualified property. Thus, to calculate dama ges, GUSC Energy’s qualified property costs must be revised upward in an amount equal to these stipulated costs.

2 References to “Treasury Guidance” refer to U.S. Treasu ry Dep’t, Payments for Specified Energy Property

in Lieu of Tax Credits under the American Recove ry and Reinvestment Act of 2009 (Rev’d Apr. 2011), available at https://www.treasury.gov/initiatives/r ecovery/Documents/GUIDANCE.pdf. The Guidance “is entitled to considerable weight as a reasonable interpreta tion” of Section 1603. W. E. Partners, 119 Fed. Cl.

at 692.7 3. GUSC Energy has not Presented an Activity-Based Allocation Method,

but the Government’s Allo cation Method Also Fails

The third step is where GUS C Energy hits a snag. Apparently disagreeing with the W.E. Partners analysis, it argues that all cost s associated with qualified property must be includable as eligible cost ba sis for the purposes of a Section 1603 grant. As a result, GUSC Energy presents no activity-based alloca tion, but rather only a property-based one. The Court rejected this argument in W.E. Partners. In that case, the Court similarly found that all property costs the plaintiff had claime d as eligible cost basis related to qualified property. 119 Fed. Cl. at 693. This finding did not preven t the Court from concluding that “the eligible cost basis of qualifying proper ty must be reasonably allocated between the non-qualifying chicken rendering pr ocesses and the qualifying el ectricity generation.” Id. at 694. The Treasury found that the steam from one of the three boilers at issue in that case was necessary to produce the amount of electr icity that the turbine produced, so only the

costs associated with on e of the three boilers was includable in the plaintiff’s eligible cost

basis. Id.

GUSC Energy argues that th is case is different from W.E. Partners because there is only one boiler at the Biomass Plant, so all th e steam that boiler generates is necessary for electricity production. Mr. Oswald testifie d that this approach made sense from an engineering perspective. Still, this approach misses the activ ity-based nature of the W.E.

Partners allocation scheme. In W.E. Partners , the Treasury determined that only one boiler was necessary to produce the electricity, but the Court merely ex amined whether the Treasury’s determination reasonably allocate d qualified property costs associated with eligible and ineligible activities . The Court’s analysis mean s that the result would have been the same had there been only one larg e boiler that supplied steam to generate electricity, with the exhaust steam going to the chicken rendering processes.

In effect, that is the situation in this ca se. Just as in W.E. Partners, the Biomass Plant here was designed as a cogeneration pl ant. While the steam from the plant’s single boiler powers the turbine, the steam is predomin antly significant for its role in the Park’s district heating system. The Biomass Plan t supplied 46.7 percent of the Park’s steam heating needs when it was operational, but supplied only 2.8 percent of the Park’s electricity. Furthermore, the Park does not operate during the summer months because its cogeneration design means it cannot oper ate when GUSC Energy’s customers do not require steam heat. These factors mean that costs associated with the Biomass Plant’s qualified property must be allocated between th at property’s roles in electricity generation and thermal heat generation.

GUSC Energy did not present an activity-bas ed allocation at trial. On the other hand, the Government’s activity-b ased allocation, which it used in making its grant award, also lacks merit. Mr. Markell, the Gove rnment’s own expert, testified that the Government’s allocation method unrealistically assumes a perfect conversion of energy in8 the electricity generation process. DX 20 at 32 ; Markell, Tr. 314–15. Mr. Markell instead applied an approach that focu ses on the energy used to genera te electricity. His approach compares the generation efficiency to that of a typical biomass plant producing only electricity. Mr. Markell’s efficiency met hod would allow GUSC Energy to claim 15.24 percent of its costs as eligib le cost basis. This result means that while GUSC Energy presented no activity-based a llocation method at trial, the Government likew ise could not support its position. Therefore, the Court fi nds it appropriate to aw ard damages, but only to the extent that these damages are suppor ted by Mr. Markell’s efficiency method.

GUSC Energy protests that this result discourages the construction of cogeneration plants, citing several sources that recommend cogeneration in biomass plants and the expenses associated with non-c ogeneration plants. This polic y argument is not convincing. In passing Section 1603, Congre ss created 30 percent grants to subsidize electricity production, not steam heat production. In effect, cogeneration allows the owner of a biomass plant to further “subsidize” the produc tion of electricity by taking in additional

revenue from steam heat customer s, so a lower Government s ubsidy in such instances is appropriate from a policy perspective. Indeed, in W.E. Partners, this Court approved an activity-based allocation scheme because it reco gnized the added benefits a biomass plant

owner could receive from steam heat use. The Court sees no reason to depart from this methodology here.

4. GUSC Energy is Entitled to Damages

In sum, the Court awards GUSC Energy damages using Mr. Markell’s “efficiency” allocation method. The eligible net costs relati ng to qualified property, as stipulated by the parties, are $18,230,094 (this figure includes the stipulated $65,938 in iron works, landscaping, paving, and site clean-up costs). Mr. Markell found that 15.24 percent of these costs related to a qualifying activity. Th erefore, GUSC Energy’s eligible cost basis for a Section 1603 grant is $2,778,266. Gran ts under Section 1603 are calculated by taking 30 percent of this eligible cost basis, which is $833,480.

This grant award also woul d have been reduced under sequestration. Sequestration is the name given to a series of discretionary spending cuts made under the Budget Control Act of 2011, Pub. L. 112-25, 125 Stat. 240. While the Government does not argue the point in its post-trial briefing, Section 1603 grants were subj ect to a 7.2 percent reduction for sequestration during the time period in whic h GUSC Energy received its grant. See IRS Notice 2014-39, 2014-26 I.R .B. 1109 (June 11, 2014) (“[A ] Section 1603 Award made to a Section 1603 applicant on or after October 1, 2013, a nd on or before September 30, 2014, is subject to a sequestration rate of 7.2 percent, irrespective of when the application was received by Treasury.”). GUSC Energy rece ived its award letter on June 26, 2014, so its award was subject to a 7.2 percent sequest ration reduction. Indeed, the Government’s original grant took this reduction into account. See Stip. ¶ 34.9 GUSC Energy argues that a sequestration re duction is not appropriate because this

is a de novo proceeding, and judgments of this Court are not subj ect to sequestration. See Pl. Post-Trial Response Br. at 60, Dkt. No. 53 (filed Sept. 6, 2016). This argument misses the mark. Allowing GUSC Energy to claim damages in the amount of a Section 1603 award without a sequestration reduction essentia lly would turn this Court into a backdoor maneuver around sequestration. The point of da mages in these cases is to place plaintiffs in the position they would have been in ha d the Treasury awarded correct grants under Section 1603. Here, the Treas ury’s award would have been reduced under sequestration, so the Court’s award must take the sequestra tion reduction into acco unt. Therefore, the grant GUSC Energy should have received was $773,469 ($833,480 minus a 7.2 percent sequestration reduction of $60,011). The Co urt awards GUSC Energy damages equal to

the difference between this amount and Treasu ry’s $316,609 award, which is $456,860.

B. GUSC Energy has not Permanently Ceas ed Production at the Biomass Plant

A Section 1603 grant is subject to reca pture by the Government if the specified energy property use on which th e grant was predicated “changes so that [the property] no longer qualifies as specified en ergy property.” Treasury Guidan ce at 19. One such change is a “permanent cessation of production” at th e energy facility. Id. The Government argues that the extended idling of the Biomass Pl ant is, in reality, a permanent cessation of production. If one can idle a plant with only gene ral plans to restart operations at some point, the Government reasons, owners of biomass plants c ould keep their grants while idling their facilities indefinite ly. Therefore, the Government proposes a strict intent standard that would find a permanent cessati on of production whenev er a facility owner idled its plant without the intent to restart operations at the plant at a specific time.

The Court finds that the Government’s prop osed intent requirement is too stringent. The Treasury Guidance does not support the Go vernment’s interpretation. The Guidance notes that “[t]emporary cessation of energy pr oduction will not result in recapture provided the owner of the property intends to resume pr oduction at the time prod uction ceases.” Id.

The Guidance does no t attach a specific date or time requi rement to the “intent to resume production” requirement. Therefore, a better approach would require evidence of an affirmative intent to perman ently cease production at the energy facility before allowing recapture. There is no such evidence here, as GUSC Ener gy has maintained the Biomass Plant in good working order fo r the entire time the plant has been idle. Reasonable business persons do not generally construct multimillion-dollar energy facilities, idle them, and then maintain them in good working order, never to use them ag ain. Therefore, the Court finds that GUSC Energy has not permanently ceased production at the Biomass Plant, and the Government’s counterclaim for recapture is dismissed.10 Conclusion

The Clerk is directed to enter final judgment for Plaintiff and against the

Government in the amount of $456,860. No costs.

IT IS SO ORDERED.

s/Thomas C. Wheeler

THOMAS C. WHEELER Judge