IRS Revises Recent Begin Construction Guidance

On May 18, 2016, the Internal Revenue Service (IRS) revised Notice 2016-31 (Notice), its recent guidance on meeting the beginning of construction requirements for wind and other qualified facilities (including biomass, geothermal, landfill gas, trash, hydropower, and marine and hydrokinetic facilities). For a discussion of the Notice, click here. The revisions clarify that the Continuity Safe Harbor is satisfied if a taxpayer places a facility into service by the later of (1) the calendar year that is no more than four calendar years after the calendar year during which construction of the facility began, or (2) December 31, 2016. The revisions also include additional language that the Notice applies to any project for which a taxpayer claims the Section 45 production tax credit (PTC) or the Section 48 investment tax credit (ITC) that is placed in service after January 2, 2013.

The revised Notice also corrects mathematical errors in an example illustrating the application of the begin construction guidance in the Notice to retrofitted facilities. The revised example is as follows:

A taxpayer owns a wind farm composed of 13 turbines, pad and towers that no longer qualify for either the PTC or the ITC. Each facility has a fair market value of $1 million. The taxpayer replaces components worth $900,000 on 11 of the 13 facilities at a cost of $1.4 million for each facility. The fair market value of the remaining original components at each upgraded facility is $100,000. Thus, the total fair market value of each upgraded facility is $1.5 million. The total expenditures to retrofit the 11 facilities are $15.4 million. The taxpayer applies the single project rule. Because the fair market value of the remaining original components of each upgraded facility ($100,000) is not more than 20 percent of each facility’s total value of $1.5 million, each upgraded facility will be considered newly placed in service for purposes of the PTC and the ITC. Accordingly, if the taxpayer pays or incurs at least $770,000 (or 5 percent of $15.4 million) of qualified expenditures in 2016, the single project will be considered to have begun construction in 2016. Provided the taxpayer also meets the Continuous Efforts Test, each upgraded facility will be treated as a qualified facility for purposes of the PTC. However, no additional PTC or ITC will be allowed with respect to the two facilities that were not upgraded.

Taxpayers should consider talking with their advisors to discuss the application of these rules to their projects.

CFTC Proposes Reversing Course, Granting Private Right of Action in Energy Market Manipulation

Last week the Commodity Futures Trading Commission (CFTC) issued a notice of proposed order and request for comment proposing to allow a private right of action to enforce violations of the anti-manipulation, anti-fraud or scienter based provisions (Anti-fraud provisions) of the Commodity Exchange Act (CEA) in organized electricity markets.  The proposal is a controversial reversal of policy that critics say could open electricity market participants to increased costs and liability. Continue Reading

Key Developments in the Photovoltaic Sector in Italy

The regulatory framework for solar photovoltaic plants in Italy is constantly evolving. Plant owners, asset managers and investors need to stay informed in order to adapt to developments in this sector and avoid adverse outcomes. The following highlights the key updates in this market in the last 12 months.

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IRS Issues Guidance on the Beginning of Construction Rules for Renewable Projects

The Internal Revenue Service recently issued Notice 2016-31, which provides much-needed guidance for wind and other qualified facilities on meeting the beginning of construction requirements in light of the 2015 statutory extension and modification of the production tax credit and the investment tax credit. The Notice also revises and adds to the list of excusable disruptions that will not be taken into account when determining whether the continuity requirement has been met, and provides additional examples demonstrating “physical work of a significant nature” for different types of qualified facilities.

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Short-Term Reauthorization of FAA Programs Potentially Paves the Way For Omitted Energy Credit Extenders

As discussed in our post on March 16, the Congressional extension of the Production Tax Credit (PTC) under Internal Revenue Code (IRC) Section 45 and the Investment Tax Credit (ITC) under IRC Section 48 in December 2015 failed to include extensions for certain types of renewable energy property, including fuel cell power plants, stationary microturbine power plants, small wind energy property, combined heat and power system property, and geothermal heat pump property. Congressional leaders have stated that the omission was an oversight that would be addressed in 2016.

On March 30, 2016, President Barack Obama signed into law the Airway and Airport Extension Act of 2016 (H.R. 4721) (the Act), which extends certain Federal Aviation Administration (FAA) programs and revenue provisions only through July 15, 2016. Expiring in less than four months, the FAA extension was apparently crafted with an intentionally short timeframe to allow inclusion of the omitted PTC and ITC provisions in long-term FAA reauthorization legislation that will likely follow this summer.  Accordingly, while the Act does not directly address the energy tax provisions omitted from last year’s extenders package, experts hope that it paves the way to addressing the omission in a few months.

Senator Ron Wyden (D-WY) has said that he hopes to introduce a long-term FAA bill addressing the omitted energy tax credit extenders after the Senate returns this week. House Ways and Means Committee Chair Kevin Brady (R-TX) has expressed opposition to attaching energy credit tax extenders to the FAA reauthorization legislation. As developments occur, we will update this blog.

President Obama Signs Consolidated Appropriations Act

Renewable Energy Industry Seeks Additional Energy Credit Clarifications

On December 18, 2015, President Barack Obama signed into law the Consolidated Appropriations Act, 2016 (H.R. 2029) (the Act). The Act includes multi-year extensions of the Production Tax Credit (the PTC) under Internal Revenue Code (IRC) Section 45 and the Investment Tax Credit (the ITC) under IRC Section 48 for wind and solar projects—both of which are gradually phased out. The Act, however, did not extend the ITC for other types of renewable energy property, including fuel cell power plants, stationary microturbine power plants, small wind energy property, combined heat and power system property, and geothermal heat pump property. Read further discussion of the Act’s extension of renewable energy tax incentives. Continue Reading

Timing Is (Almost) Everything: FERC Implements D.C. Circuit Guidance on NEPA Review of Multiple Pipeline Construction Projects

In the wake of two recent D.C. Circuit decisions, the Federal Energy Regulatory Commission (FERC) has begun to implement its new policy concerning the review of natural gas pipeline construction proposals under the National Environmental Policy Act (NEPA). To decide whether a NEPA review must include other projects proposed by the pipeline, FERC will look at the timing and maturity of other proposals and the independence of the projects.

In the first decision, Delaware Riverkeeper Network, the U.S. Court of Appeals for the D.C. Circuit held that FERC failed to consider the cumulative environmental impact of four projects that had been separately proposed by the same pipeline. The D.C. Circuit held that the projects were not financially independent and were “a single pipeline” that was “linear and physically interdependent,” so the cumulative environmental impacts must be considered concurrently.

In the second decision, Minisink Residents for Environmental Preservation and Safety, the D.C. Circuit held that FERC had properly considered and rejected an alternative site to build a natural gas pipeline compressor station. Contrasting the decision to Delaware Riverkeeper, the court clarified that the “critical” factor in the previous decision was that all of the pipeline’s projects were either under construction or pending before FERC for environmental review at the same time.

In several recent orders, FERC has implemented the D.C. Circuit’s guidance in addressing claims of improper segmentation.  For example, FERC recently authorized Transcontinental Gas Pipe Line Company (Transco) to construct and operate the Leidy Southeast Project. The Leidy Southeast Project will include nearly 30 miles of new pipeline loop and four compressor stations to provide capacity from supply areas in Pennsylvania to various receipt points as far south as Choctaw County, Alabama. Opponents of the pipeline project (coincidentally Delaware Riverkeeper Network) claimed that FERC should have also considered in its NEPA review three other Transco projects—one already constructed and two proposed projects.

FERC rejected opponents’ request to conduct a joint NEPA review. FERC emphasized that (1) the first Transco project was approved nearly a year before Transco proposed the Leidy Southeast Project; (2) the other two Transco projects “were not fully defined ‘proposals’ at any time during the period that the Leidy Southeast Project was receiving consideration;” and (3) the Leidy Southeast Project was not “connected” to the other Transco projects, as it did not “rely on” other projects for its operation and “would have been built even if” the first project had not been constructed.

New York Staged to Begin Full Community Net Metering Program

Community net metering is relatively new to New York.  Last July, the New York Public Service Commission (PSC) issued an order establishing a “community distributed generation program” that allows multiple customers to net meter from a single solar generation facility.  Community net metering will implement principles that are part of New York’s sweeping energy policy reform efforts in the ongoing Reforming the Energy Vision (REV) proceeding.  In order to coordinate the community net metering program with the broader REV program, the PSC delayed full implementation of its community net metering program until May 1, 2016.

The goal of community net metering is to expand opportunities for participation in solar and other forms of clean distributed generation to utility customers that would not otherwise be able to access that generation directly.  Many utility customers, such as residents of multi-unit buildings, lack control over sites that can be configured into a location for a clean generation facility.

To be eligible for community net metering, a generation facility must meet the requirements for New York’s regular net metering program.  Instead of having one owner, a community net metering project is owned by 10 or more members, all of whom are located within the same load zone and within the same utility’s service territory.  Besides multiple owners, community net metering projects have a sponsor, which may be the generation facility developer, an energy service company, a municipality, a business or non-profit, or other another form of business or civic association.  The sponsor builds the generation facility, owns and operates the generation facility, and acts as the liaison between the community members and the utility.  Each member of a community net metering project owns or contracts for a proportion of the credits accumulated as a percentage of the facility’s output in excess of usage at the host site.  The project sponsor reports these percentages to the utility, and the utility is responsible for distributing the credits to the members in accordance with the sponsor’s instructions.

Due to the PSC’s desire to coordinate community net metering with the REV program, New York’s community net metering is being implemented in two phases.  Phase 1 lasts through April 30, 2016.  During this period, the PSC will permit community net metering projects only if (1) the project site is in a location that will bolster grid reliability or provide other locational benefits or (2) the project meets a threshold level of low-income customer participation.  According to the PSC, these requirements will “advance selected REV principles” above and beyond general clean energy goals.  Phase 2, beginning soon on May 1, 2016, has no such restrictions and will be open to all qualifying projects.

Key Energy-Related Tax Provisions in the 2017 Budget Proposal

President Obama’s recently released budget proposal for the 2017 fiscal year repeats many of his past energy-related tax proposals, including a permanent extension of the renewable energy production tax credit and a provision making it refundable. Making the production tax credit permanent and refundable signals the administration’s continued strong support for renewable energy. This On the Subject summarizes the key energy-related tax provisions contained in the budget proposal and detailed further in the US Department of the Treasury’s general explanation of the proposal.

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Implications of the Clean Power Plan Stay

Late in the day on Tuesday, February 9, the U.S. Supreme Court stayed, for at least a year and possibly longer, the implementation of the Clean Power Plan (CPP), the US Environmental Protection Agency’s (EPA’s) widely-publicized regulations governing greenhouse gas emissions from existing coal-, oil- and gas-fired power plants.  The stay means that the CPP’s requirements and deadlines are on hold, at least until resolution of the pending legal challenges to the CPP.  But what are the broader implications of the Court’s decision?

First, the stay decision bodes poorly for the ultimate fate of the CPP, even though the Supreme Court did not opine as to the CPP’s legality.  The stay decision signals, at a minimum, that a majority of the Supreme Court is sympathetic to the challengers’ claims that the CPP is unlawful.  Indeed, it signals more than that—a distrust of EPA’s assertions about the minimal burdens imposed by the CPP.  That said, the CPP may yet survive judicial review and, even if it does not survive, EPA may be able to promulgate a replacement regulation that achieves similar results, although such a replacement would surely take several years to develop.

Second, environmentally, the stay is unlikely to have any immediate effect on emissions levels, primarily because the CPP itself does not require any immediate emissions reductions.  But that does not mean the stay has no environmental consequences.  The stay fosters uncertainty about the fate of the CPP, and one potential consequence of that uncertainty is that EPA will feel compelled to devote additional resources to reducing greenhouse gas emissions from other sources, especially the oil and gas sector.

The Obama administration has limited time to pursue such alternatives, but the next administration, if it shares President Obama’s commitment to addressing climate change, may focus much more intensively on addressing the carbon content of fuels, to make up for the delays and uncertainties created by the CPP stay decision.

The stay also raises questions about the fate of the recently secured Paris agreement, since some parties to that agreement may now be wondering whether the US is capable of meeting its commitment to reduce domestic greenhouse gas emissions 26 to 28 percent from 2005 levels by 2025.  If other countries doubt the reliability of the US commitment, they may be less bold about seeking emissions reductions themselves.  Indeed, it is precisely such doubts that may drive EPA to pursue more oil and gas regulations.

Finally, lurking in the Supreme Court’s action may be a deeper signal about the fate of the Chevron doctrine, a topic that should be of interest to all entities subject to regulation in the United States, not just to those subject to the Clean Air Act.  A recurring theme in the legal challenges to the CPP is that the CPP raises questions of such extreme economic and political significance that EPA is not entitled to deference as to how those questions should be resolved.  It is not clear what role that theme played in the Supreme Court’s stay decision—because the Court’s order does not explain the Court’s reasoning—but it is striking that the Court took the rare and generally unexpected step of staying the implementation of an agency regulation even before any lower court had ruled on the legality of that regulation.  If nothing else, the stay decision confirms that the Clean Air Act remains a central, if not the central, battleground in questions over the level of deference that courts owe to administrative agencies.

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