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Energy Business Law

Insights for the Global Energy Industry

Italy: Incentive Regimes for Renewable Energy Plants

Posted in Renewables

The introduction of retrospective tariff cuts to photovoltaic (PV) plants and the abolition of the Robin Tax by the Italian Constitutional Court, combined with simplified regulation and taxation of new forms of debt financing, have turned the attention of foreign investors from PV assets to other renewable energy sources (RES) assets.

Italian plants producing energy from RES other than PV have been supported by public incentive schemes since 1999, and have not been hit by the tariff cuts introduced by legislative decree 91/2014 (the so-called “spalma incentivi”). It is, however, easy for foreign investors to become confused by the complex set of rules governing the incentives granted to RES plants.

This Special Report provides a complete and updated overview on the Italian regulation of incentives given to RES plants. It will help investors find their way through the jungle of rules and identify and understand the incentives that apply to a potential investment.

Read the full Special Report here.

Certificated Natural Gas Storage Capacity Is Based on Science, Not Sales, FERC Rules

Posted in FERC, Natural Gas

The Federal Energy Regulatory Commission (the Commission) issued an order on Thursday, March 19, 2015, refusing to allow the abandonment of certificated working gas capacity when the reason for the request was unrelated to the physical characteristics of the storage facility and unsupported by engineering or geological data.  The applicant had sought the abandonment authorization for the sole purpose of reducing its lease payments, which are largely based on the certificated working gas capacity of the facility.

The order, Tres Palacios Gas Storage LLC, 150 FERC ¶ 61,197 (2015), was issued following an  application by Tres Palacios Gas Storage LLC (Tres Palacios) for authorization to abandon a significant amount of its certificated working gas storage capacity in a salt dome storage facility in Matagorda and Wharton Counties, Texas.  Tres Palacios claimed that abandonment was justified because market conditions were such that it could not sell the capacity at rates that it considered acceptable.

In denying the application, the Commission ruled that Tres Palacios’s request was inconsistent with Commission policy, which requires specific facility parameters for each cavern, such as cushion gas capacity, working gas capacity and minimum pressures, and was inconsistent with Tres Palacios’s certificate authority, which authorizes specific parameters for each cavern.  In addition, the Commission explained that no geological or engineering data was submitted to support the change.  The order reaffirmed that certificated capacity is based on the physical attributes of a facility and that certificated working gas capacity is “unrelated to the amount of working gas capacity the storage company is able to sell.”

Karol Lyn Newman and Jessica Bayles represented the lessor, Underground Services Markham, LLC, in the proceeding before the Commission.

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

Posted in Renewables, Tax

The Internal Revenue Service issued Notice 2015-25 on March 11, 2015, to provide further guidance on meeting the beginning of construction requirements for wind and other qualified facilities. The Notice extends the date by which a facility can meet the beginning of construction deadline to correspond with the extension of Code Section 45 passed by Congress at the end of 2014.

Read the full article.

Key Energy-Related Tax Provisions in the 2016 Budget Proposal

Posted in Renewables, Tax

President Obama’s recently released budget proposal for the 2016 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 Special Report offers a summary of the key energy-related tax provisions contained in the budget proposal and discussed further in the U.S. Department of the Treasury’s general explanation of the proposal.

Read the full Special Report here.

Senate Approves Energy Tax Extenders

Posted in Renewables, Tax, U.S. Congress

On Tuesday, December 16, 2014, the U.S. Senate passed the tax extenders bill by a vote of 76-16, extending a number of energy tax incentives through the end of the year.  The Senate’s passage of H.R. 5771 followed the U.S. House of Representatives’ (House) approval earlier this month (see our post on December 8), and the bill is expected to be signed into law by President Obama as early as this week.

The $42 billion bill includes extensions through the end of the year of nearly $10 billion in energy tax incentives, including the New Market Tax Credit in Section 45D, the Production Tax Credit in Section 45 (the PTC), and the bonus depreciation rules in Section 168(k).

Many were disappointed that some of the tax incentives – including the PTC – were extended retroactively only through the end of the year, meaning that tax payers have just a few weeks left to take advantage of them. There would have been far more certainty for companies looking to invest in renewable energy projects if the tax incentives were extended for one or more years beyond the end of 2014.  Several lawmakers suggested that the two week extension was better than nothing, but the short extension period means that Congress has merely punted the need for greater tax reform in this area into 2015.  As it stands, the energy tax incentives extended by this bill will have expired by the time Congress returns to Washington, D.C., on January 6, 2015, following its winter break.  That means that Congress may be in the same place again next year under pressure to pass a year-end bill – instead of focusing on more comprehensive reform and a possible phase-out of the PTC.

Hazardous Waste Recycling Regulations – the Latest Chapter

Posted in Environmental

“A long time ago in a [May 19, 1980 Federal Register] far, far away [or so it seems],” the U.S. Environmental Protection Agency (EPA) declared its authority to regulate all hazardous secondary material, whether discarded or reused, under the Resource Conservation and Recovery Act (RCRA), and that it would exercise its authority to promote properly conducted waste reclamation.  Ever since then, a kind of Empire/Rebellion struggle has played out over the scope and extent of broad-based recycling exclusions to the RCRA’s solid waste definition.

Over the years, recycling exclusions generally focused on particular industries.  However, EPA’s last final rule, issued in the October 30, 2008 Federal Register during the Bush administration, contained several much broader exclusions.  Those exclusions covered a waste generator’s onsite recycling, offsite recycling in the United States, and transfers of hazardous secondary materials for recycling conducted outside the United States.

The 2008 rule prompted litigation from both industry and the Sierra Club.  The Sierra Club also filed an administrative petition seeking EPA repeal of the final rule.  On September 7, 2010, EPA reached a settlement agreement with the Sierra Club under which EPA agreed to issue a notice of proposed rulemaking and a final rule that addressed the Sierra Club’s concerns.  EPA’s final rule announced on December 10 is the latest chapter in the ongoing saga.

The new final rule rolls back many of the Bush-era provisions that minimized agency filings and involvement.  It contains revisions to the onsite generator recycling exclusion, replaces the exclusion for offsite recycling in the United States, eliminates the exclusion covering recycling outside the United States, and introduces a new exclusion for recycling of certain solvents.  It also contains some new requirements applicable to all recycling activities, and to new variances and non-waste determinations for recycled materials.

EPA’s new final rule is intended to provide greater safeguards against sloppy and sham recycling.  These provisions address accumulation of hazardous secondary materials when there is no near-term prospect for recycling, and require an up-front demonstration that the recycling process will generate a valuable product suitable for reuse.  They also require offsite recycling by a facility with a Part B permit or interim status under the RCRA regulations, or by facility that has obtained a variance after meeting the same types of requirements imposed upon permitted and interim status facilities.

Offsite recyclers and waste generators engaged in onsite recycling must adopt new procedures that include notification and periodic updates of recycling activity, demonstration that the recycling is legitimate, documentation of when accumulation has commenced for the material being recycled, and compliance with recordkeeping requirements and with emergency response and preparedness procedures like those imposed on hazardous waste generators.  In addition, the new rule provides a definition of “contained” that is intended to ensure proper storage of hazardous secondary materials.

Beside adding safeguards to two of the three exclusions instituted in 2008 and eliminating the third one, the new rule introduces an exclusion to cover the recycling of 18 commercial grade solvents.  Under that exclusion, such solvents must be used in one of four industrial sectors that do not include waste management, and the remanufactured solvents must be employed for specified uses that do not include cleaning or degreasing.

The solvent exclusion is subject to notification and recordkeeping requirements similar to those contained in the previously described recycling exclusions.  In addition, there must be compliance with the tank and container standards covering Part B permitted facilities and with air emission control requirements imposed under the federal Clean Air Act or, where not applicable, to the air emission standards covering Part B permitted facilities.

In its 2011 proposal, EPA sought to impose the new notification and containment requirements on facilities covered by a pre-2008 exclusion or exemption.  In the preamble to its new rule, EPA has deferred adoption of those requirements have been deferred in order to more fully consider the comments and concerns that were raised.  One pre-2008 exclusion that received particular attention is scrap metal recycling, since scrap metal being recycled may be left on the ground rather than in a receptacle.

The new provisions and a few other items of interest are summarized here.

House Approves Energy Tax Extenders

Posted in Renewables, Tax, U.S. Congress

Last week, the U.S. House of Representatives (House) overwhelming approved a $42 billion tax extenders bill.  The bill, H.R. 5771, includes extensions of nearly $10 billion in energy tax incentives through the end of 2014.  But by failing to extend the tax incentives beyond the end of this year, the House bill has been criticized by industry advocates that wanted stability and predictability as to the future availability of the incentives.

The bill extends the New Market Tax Credit in Section 45D, the Production Tax Credit in Section 45, the Research Credit in Section 41, the bonus depreciation rules in Section 168(k), the Energy Property Credit for individuals in Section 25C, the Second Generation Biofuel Producer Credit in Section 40(a)(4), the incentives for biodiesel and renewable diesel in Section 40A, the New Energy Efficient Home Credit in Section 45L, the Energy Efficient Commercial Buildings Deduction in Section 179D, the special rule for sales or dispositions to implement FERC or state electric restructuring policy for qualified electric utilities in Section 451 and the excise tax credits relating to certain fuels in Section 6427.

By extending the Production Tax Credit (PTC) and other incentives retroactively only through the end of this year, the House bill provides little reassurance to companies in the industry who are looking to invest in renewable energy products, given the long lead time required to get projects off the ground.  With only three weeks left before the PTC expires again, the extension is unlikely to provide much incentive to invest in new renewables projects.  The House Ways and Means Committee expects the extension to cost around $9.6 billion over the next 10 years.  But industry insiders argue that the expiration of the PTC last year and the resulting uncertainty has caused a drop off in new renewables (non-solar) projects, and have called for a multi-year extension that would phase out the PTC over three years.  This kind of phase-out generated bipartisan support in a Senate bill last month, but the bill ultimately died after the White House threatened to veto it over other matters.  Although some in the Senate are still pushing for a two-year extenders bill, it is currently expected that the extenders package will ultimately be passed in the form adopted by the House.

An Update on EPA’s Approach to Methane Emissions from the Oil & Gas Sector – Including a Summary of the Agency’s Proposed New Reporting Rule

Posted in Environmental

The U.S. Environmental Protection Agency (EPA) is expected to announce between now and December 31, 2014 its plan for pursuing methane reductions from the oil and gas sector – including whether it will propose new emission reduction regulations.  Additionally, the agency recently modified its greenhouse gas (GHG) reporting rules for oil and gas systems and also proposed expanding those rules so that they would cover many additional oil- and gas-related sources.  This blog post briefly summarizes these recent developments.

Where is EPA Headed with Respect to New Emission Reduction Requirements?

In his March 2014 Methane Reduction Strategy, President Obama directed EPA to study opportunities for reducing methane emissions from the oil and gas sector and to make a determination by this fall as to how best to pursue further reductions.  EPA has yet to announce its “determination” but it is widely anticipated that EPA will not propose new methane capture or leak detection and repair (LDAR) regulations; instead, EPA is generally expected to continue promoting voluntary emission reduction efforts.  But the agency remains under pressure from environmental organizations to actually require emission reduction measures, such as new mandatory LDAR requirements.  For example a recent report by a coalition of environmental organizations asserts that new LDAR regulations focused on methane, coupled with other mandatory methane reduction measures, could “reduce the sector’s methane pollution in half in just a few years.”

New GHG Reporting Requirements Take Effect January 1, 2015, and EPA has also Proposed a Significant Expansion of the Reporting Rules

Although EPA may not propose new methane emission reduction regulations, it is clearly interested in improving the range and quality of methane emission data that it receives – and that it makes available to the public.  Thus, on November 13, 2014, EPA signed a final rule (published in the Federal Register on November 25, 2014) modifying the existing GHG reporting requirements for the oil and gas sector to clarify the exact equipment covered by the regulations and the precise methods that can be used to calculate emissions from that equipment.  The modifications take effect on January 1, 2015 and apply to emissions occurring in 2015.

EPA also just signed a proposed rule that would expand the oil and gas sector GHG reporting requirements to several additional categories of equipment and activities.  The proposed rule has not yet been published in the Federal Register, but it would expand the reporting requirements to include, among other sources, gathering and boosting facilities, completions of fractured oil wells (currently, the rules cover fractured gas wells) and natural gas transmission pipeline blowdowns.  The proposed rule also discusses emission calculation methodologies and the confidentiality of data reported to EPA.  Indeed, the proposed rule lists several categories of emission and equipment-related data and proposes to designate much of that information as not confidential.  That feature of the proposal reflects the agency’s ongoing emphasis on “next generation compliance,” one element of which is greater public availability of environmental data.  Comments will be due 60 days after the proposed rule is published in the Federal Register.

Bankruptcy Courts Fail to Enlighten on Electricity as Goods or Services

Posted in Power Markets

Is electricity goods or services?  That seemingly simple yet confounding question is illustrated by three recent bankruptcy cases (all of which consider whether an electricity provider is entitled to an administrative expense priority under Bankruptcy Code Section 503(b)(9) for “the value of goods received by the debtor” in the ordinary course within 20 days prior to the automatic stay):

  • In Hudson Energy Services, LLC v. Great Atlantic & Pacific Tea Co, Inc., 2013 WL 5212141 (S.D.N.Y. Sept. 16, 2013) (A&P), the court held that because electricity is consumed only after it is measured (at the customer’s meter), electricity is a “thing that is movable at the time of identification” (UCC 2-105) and accordingly should be characterized as goods under the UCC, which is the reference standard for Section 503(b)(9).
  • The bankruptcy court in In re NE OPCO, Inc., 501 B.R. 233 (Bankr. D. Del. 2013), agreed with A&P that the meaning of goods under Section 503(b)(9) “is primarily informed by the meaning of goods under the UCC,” but disagreed with A&P  that electricity is goods, holding that because “the period between identification and consumption must be meaningful,” the “infinitesimal delay” between those acts in the case of electricity makes it unidentifiable and thus not goods.
  • In contrast to A&P and OPCO, the lower bankruptcy court in Puerto Rico Electric Power Authority v. Rentas, B.A.P. 1st Cir. No. PR 13-050 (Sept. 23, 2014) (PREPA), rejected the UCC definition as controlling § 503(b)(9) and relied instead on the public utility’s monopoly status as the basis for denying the administrative expense priority.  The First Circuit Bankruptcy Appellate Panel rejected that reasoning and remanded with instructions to determine whether furnishing electricity is goods, but declined to instruct the lower court to use the UCC definition (with the exception of PREPA, nearly all bankruptcy courts have agreed that the UCC controls the §503(b)(9) definition of “goods”).

This lack of agreement on a seemingly elementary question is not confined to bankruptcy — it existed before Section 503(b)(9) was enacted (2005) and continues.  Courts peering into the sub-atomic qualities of electricity have reached opposite conclusions whether electricity is goods or services.  Other courts have gone the opposite direction, eschewing quantum physics and comparing the “common understanding of electricity” (which is to say the common misconception that an electricity customer is buying a “stream of electrons”) to severed oil, gas and other things that are UCC goods in hopes of finding the UCC equivalent of a “unified field theory” (as in physics, that search continues).  Still other courts have concluded that electricity in “its raw state” is a service, but when it passes the end user’s meter it becomes goods.

This leaves lawyers with the quandary of identifying (a) which state’s laws do or should apply to the power purchase transaction (keeping in mind that not always will the forum court enforce a contractual choice of law if that foreign state’s substantive law fails to bear a reasonable relationship to the transaction) and (b) whether that state’s laws will treat the power purchase agreement as a contract for sale of goods or as a services contract.  Then, the power purchase counterparties must presciently evaluate which permutation of outcomes (UCC goods or common law services) will most likely benefit their respective positions. Resolution of the goods-versus-services issue can lead to different construction of a contract for the sale of electricity in at least five respects:

  • Contract formation—common law requires mirror acceptance, while the UCC permits additional terms to be added by acceptance;
  • Contract administration—common law seldom recognizes modification of an existing contract without new consideration, while the UCC foregoes the need for new consideration;
  • Contract interpretation—common law only sometimes admits trade practices and the parties’ past conduct to interpret terms, while the UCC always admits such evidence;
  • Contract enforcement—common law can require impossibility to excuse performance, while the UCC recognizes the lesser standard of commercial impracticability; common law does not always recognize anticipatory repudiation or the right to demand adequate assurances, while the UCC recognizes both; and
  • Contract rights and remedies—common law statutes of limitations for breach of contract often differ from the UCC’s four-year statute of limitations; common law does not generally recognize cover, while the UCC requires cover.

Even if electricity is initially characterized as goods, when electricity is bundled with services (such as transmission/distribution services), yet another issue arises: should the predominant factor test be applied to assess whether the provision of electricity is predominantly goods or services, or should the apportionment test apply as it did in the OPCO case, which treated natural gas deliveries as goods entitled to the administrative expense priority and electricity deliveries as services not so entitled.  Further, even if the parties to a power transaction can agree on the substantive law to be applied — UCC or common law — their agreement must clearly identify that choice as the court held in Lockheed Electronics Company, Inc. v. Keronix, Inc., 114 Cal. App.3d 304 (1981).

CFTC Finalizes Exception for Swaps with Utility Special Entities

Posted in CFTC, Natural Gas

The Commodity Futures Trading Commission (CFTC) last week released a final rule excluding certain electricity and natural gas swaps with governmental agencies and municipalities from the lower de minimis threshold for swaps with special entities.  The rule makes permanent currently existing no-action relief previously issued by CFTC Staff.  The final rule is the result of a petition filed by advocates for public energy companies claiming that subjecting swap transactions with governmental entities to a lower de minimis threshold would reduce the number of available counterparties, raise market liquidity concerns and make it more difficult for public energy companies to mitigate risk.  To address these concerns the CFTC will allow certain swaps with special entities to be counted as regular swaps for purposes of swap dealer registration.

Under the Commodity Exchange Act and the CFTC’s regulations, an entity is exempt from registration as a swap dealer if the aggregate notional value of the swaps it entered into during the preceding 12 month period does not exceed the de minimis threshold of $3 billion (subject to a phase-in level of $8 billion).  However, for swaps with special entities—federal or state agencies, municipalities, employee benefits plans, governmental plans and endowments—the de minimis threshold is only $25 million.  As a result, companies entering into swaps with special entities have to be aware of their counterparty’s special entity status and take care not to exceed the substantially lower de minimis threshold.

The CFTC’s new rule creates an exception to the $25 million special entity threshold, so that “utility operations-related swaps” entered into with “utility special entities” are subject to the general $3 billion de minimis threshold.  To qualify for the exception the swap must be with a special entity that owns or operates electric or natural gas facilities; associated with the generation, production, purchase or sale of electricity or natural gas; and for the purpose of hedging or mitigating commercial risk.  In explaining why the exception is necessary, the CFTC recognized that utility special entities have unique responsibilities to provide electricity or natural gas services that must be continuous and are important to public safety.  The CFTC also acknowledged that utility special entities often conduct swaps in localized and specialized markets, and the lower de minimis threshold could limit the number of willing counterparties to these important risk mitigation transactions.  The new rule treats utility special entities similarly to non-governmental entities and will reduce regulatory barriers to transacting with special entities.  The rule will become effective October 27, 2014.