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Key Takeaways | How the Inflation Reduction Act Impacts the Oil and Gas Industry + The Role of Natural Gas Moving Forward

The landmark Inflation Reduction Act of 2022 (IRA) was a long-anticipated legislative package for the industry because it promotes investment in alternative forms of energy. During this webinar, Partners Denmon Sigler and Philip Tingle hosted David Herr, managing director of corporate finance at Kroll, and Chris Culver, director of natural gas supply and strategy at Valero, for an engaging discussion on how the IRA impacts the oil and gas and natural gas industries.

Below are key takeaways from the discussion:

1. A combination of the war in the Ukraine, issues with the Nord Stream 2 pipeline stemming from said war, widespread corporate commitments to net-zero emissions targets, and the passage of the IRA have created immense levels of volatility in the natural gas market and created a lack of clarity as to what the future for natural gas will look like.

2. An additional knock-on effect from the conflict in the Ukraine is that Europe has had to seek natural gas sources from outside of Russia, with a significant portion of that coming from the United States. An upshot of that trend is that natural gas has become much more of a global commodity and is priced like crude oil historically has been.

3. At its core, the IRA is a mechanism for transitioning away from fossil fuel-based energy production, however, there are features within it that apply to traditional energy sources. For example, renewable natural gas (RNG) has received a 10-year credit, credits for carbon sequestration at natural gas-fired facilities are covered under the IRA and nuclear energy is now entitled to a production tax credit.

4. For renewable fuel development, the 10-year horizon for tax credits granted by the IRA allows investors to participate in the full industry development cycle (pilot stage, development stage and maturity stage) to see overall production cost reductions that were evident in renewable energy development over the past decade, all under the umbrella of tax credits during that time horizon.

5. The current demand for RNG faces a multitude of production challenges as today’s prevailing prices for RNG are much higher than traditional natural gas. However, those high RNG prices are expected to drop over the medium term as RNG production benefits from tax credits under the IRA help boost overall supply.

6. There has been significant growth in the demand for greener motor fuels, which will drive up the overall market demand for green hydrogen because green hydrogen serves as a necessary feedstock for the production of green motor fuels.

To access past webinars in the Navigating the New Energy Landscape series and to begin receiving Energy updates, including invitations to the webinar series, please click here.




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Key Takeaways | Technology-Neutral Tax Credits: When Will ITC and PTC Disappear?

During this webinar, McDermott Partners Heather Cooper and Joel Hugenberger hosted Jay Chang, managing director at CCA Group, for a discussion on how the new technology-neutral tax credit will work and how it may impact the industry moving forward.

Below are key takeaways from the discussion:

1. The newly introduced technology-neutral tax credits (for both the investment tax credit (ITC) and production tax credit (PTC) regimes) are unique in that they can be applied to any facility producing energy so long as the greenhouse gas emissions from said facility are net zero. At this time, emission classes have not yet been established by the Internal Revenue Service (IRS), although carbon dioxide capture can be taken into account for calculating the emissions rate under the new technology-neutral tax credit regime. (More guidance surrounding this topic is expected before 2025.) However, it is expected that traditional renewables facilities (e., solar and wind) will be treated as having net zero emissions. Nonetheless, all technologies will have the option to select either ITCs or PTCs and not be restricted by their respective industry (as was previously the case).

2. Generally, the technology-neutral tax credits will follow the ITC and PTC mechanism; there will be 30% ITCs and 100% PTCs, each with potential adders or penalties against each, respectively. The technology-neutral tax credits will also be subject to identical wage and apprenticeship rules that apply to the current tax credits in connection with PTCs and ITCs.

3. Technology-neutral ITCs and PTCs are applicable to projects placed in service after 2024 (e., on or after January 1, 2025). The old ITC and PTC regimes are set to apply to projects that begin construction prior to or during the year 2024. For those projects that overlap between both periods, it is unclear as to which regime would apply. Taxpayers are still awaiting additional guidance from the IRS concerning this inquiry.

4. Technology-neutral PTCs are available to taxpayers without them having to provide evidence of a sale of output. Now, so long as the output is verified by a third-party meter reader, a taxpayer can take advantage of these new credits. Additionally, taxpayers can now claim these technology-neutral tax credits for new additions to existing facilities (which could be particularly beneficial for facilities that might be upsized post-2024.)

5. To note, assuming greenhouse gas emissions reach a target of 25% of the current 2022 rates, technology-neutral ITCs and PTCs will begin to be phased out starting in 2034. Projects beginning construction in 2034 will be entitled to 75% of tax credits. In the following year, projects will be entitled to 50% of tax credits, with projects being entitled to 0% of tax credits in 2036. However, if the proposed greenhouse gas emissions goal is not reached by 2034, this proposed timeline will be extended.

6. In the past, renewable technologies have had to quickly [...]

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Key Takeaways | Tax Credit Bonuses for Low-Income and Coal, Oil and Gas Energy Communities

On September 13, McDermott Partners Heather Cooper and Philip Tingle provided a detailed overview of the bonus tax credits under the Inflation Reduction Act of 2022 for projects satisfying low-income thresholds or built-in energy communities with ties to coal, oil and natural gas, including the technical requirements for each bonus and how these new rules will impact deal pipeline, planning and negotiations.

Below are key takeaways from the discussion:

1. There is an annual capacity limitation of 1.8 gigawatts direct current for low-income bonuses. It’s unknown whether this capacity will be allocated to projects on a first-come, first-served basis or shared amongst all applicants annually in the event capacity is reached. The Internal Revenue Service must provide guidance on this point within 180 days of enactment.

2. Projects that fail to satisfy relevant low-income/poverty metrics are subject to recapture (with a one-time opportunity to cure). It remains to be seen whether circumstances outside taxpayer control (e.g., local economic improvement) will trigger recapture.

3. At present, it is difficult to transact on the energy community bonus-based projects located in brownfield or MSA/non-MSA because of a lack of guidance. Projects located in census tracts with retired coal fired EGUs or coal mines, however, can be transacted based on the statute alone.

4. Projects will require researching, tracking and targeting areas where coal mines closed, coal fired EGUs retired and (after relevant guidance is released) brownfields are located.

To access past webinars in the Navigating the New Energy Landscape series and to begin receiving Energy updates, including invitations to the webinar series, please click here.




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Key Takeaways | The Growth of Early Stage Technology Company Investment and Development in Energy and Oil and Gas

How is technology affecting the energy industry? In the latest webinar in the Energy Transition series, McDermott Will & Emery Partner Parker A. Lee hosted Shawn Helms, co-head of McDermott’s Technology and Outsourcing Practice Group, Nadine Herrwerth, managing director at TWTG, and BJ Walker, managing director at Tudor, Pickering, Holt & Co for a 30-minute discussion where they opined on the current and future impact technology plays on conventional and renewable energy companies.

Below are key takeaways from the webinar:

1. Industrial Internet of Things (I-IOT). I-IOT products and services can be used to improve site safety and efficiency. I-IOT products have the capability to monitor equipment, such as valves and temperature sensors on machinery, and record data on external dashboards for analysis and alerting. Through the use of data analysis, data gathered by I-IOT products can identify trends, build models and detect future equipment failure. As a result, I-IOT products and services can increase the efficiency, reliability and safety of equipment.

Though the application of I-IOT devices is relatively new to the industry, these products are capable of being retrofitted to established and already operational sites.

2. Technology Companies and Energy. While technology companies are large consumers of energy output, they can also provide significant insights and intelligence in regard to energy use and production. Synergies between technology and energy industries are continuously evolving and providing improvements in energy investments, efficiencies and reliability. For example, drones are capable of leveraging artificial intelligence to increase efficiency and consistency of equipment monitoring and inspections, particularly equipment that is located in remote areas (such as offshore).

3. Investor Focus on the Energy Space. An important theme in the oil and gas industry is the recent focus on transforming the industry to a generator of cashflow. In attracting new investors to the energy industry, particularly as new technologies are introduced, investors should know there is typically a longer wait period to receive a return on investment than what a general investor would commonly expect. In addition to general investors, technology companies are investing in renewable energy sources for purposes of environmental responsibility and in order to power their own enterprise. It is expected that this trend will continue to grow in energy intensive areas, such as the cryptocurrency space.

4. Technology in Traditional Oil and Gas. Although not widely appreciated, the oil and gas industry has always been heavily reliant on technology and an area where revolutionary technologies are developed—and that is certainly the case today. Because oil and gas professionals are proficient with, and conversant in, the application of new technologies, look to those professionals to be industry leaders in the energy transition as new businesses and products are developed.

To access past webinars in this series and to begin receiving Energy updates, including invitations to the webinar series, please click here.




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Does the ADP in Your LNG SPA Meet Your Needs?

It’s that time of year again when the sellers and buyers of many of the world’s long-term liquefied natural gas (LNG) sales and purchase agreements (SPAs) must agree on the Annual Delivery Programme (ADP). In past years, this has typically been a mildly contentious process where both parties’ operations teams discuss, haggle and settle on an LNG delivery programme that roughly meets both parties’ needs. The discussions are framed by the terms of the applicable SPA but guided by cooperation and the goodwill generally found in long-term buyer-seller LNG relationships. Lawyers tend not to be involved. However, this is not the case this year.

With a global gas/LNG shortage and spot prices reaching record highs, there is a huge discrepancy between long-term LNG and spot LNG prices. At the time of drafting this article, Platts JKM is quoted at US$ 33.85 / MMBtu and Title Transfer Facility (TTF) is quoted at US$ 32.15/ MMBtu for January 2022 delivery. However, a long-term LNG SPA at a relatively good LNG price of 13.5% Brent would be at US$11.34/MMBtu with Brent at US$ 84/ bbl. An approximate US$ 20 / MMBtu difference or, for a mid-range LNG cargo size of 3,800,000 MMBtu, a US$76 million difference per cargo.

With this level of price difference, every cargo is vital. For sellers, any cargo that can be delivered spot rather than under a term SPA can provide significantly greater profits, and the converse is true for buyers. Many LNG buyers have recently adopted a strategy of buying a significant proportion of their LNG demand on a term basis but with spot purchases covering demand growth and swing. For these buyers, ensuring as many of their (currently lower priced) term cargoes arrive during the high demand, high cost winter months with lower price summer spot purchases making up any annual demand shortfall can significantly reduce their weighted average LNG purchase price.

The early long-term SPAs were developed for a point-to-point trade, often with a fleet of ships sailing continuously between a loading terminal and one or two particular receiving terminals serving a single SPA. Discussions on an ADP were relatively simple with both parties strongly incentivised to align delivery windows to reduce shipping and demurrage costs and ensure sufficient LNG supplies. But if the parties could not agree on a delivery programme, typically the seller had the final say.

However, the LNG industry has changed significantly since those early days, particularly with the advent of portfolio traders, diversion clauses (with or without profit sharing elements), upward and downward quantity tolerance and, most importantly, the spot market: all driving a more flexible, efficient and commercial LNG market. As the LNG market has developed, so has the drafting of the ADP provisions, with buyers increasingly wanting to set firmer delivery windows and have stronger rights for Upward Quantity Tolerance (UQT), Make-up and Make-Good cargoes.

So how does the gulf between spot and term prices and the development of LNG SPAs impact the ongoing ADP discussions? Instead of coordinated [...]

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International News: Spotlight on the Energy Industry

US RENEWABLES: INVESTMENT OPPORTUNITIES PERSIST IN UNCONVENTIONAL PLACES

Christopher Gladbach | Seth B. Doughty

Apart from a few challenges, the sellers’ market in renewable energy is accelerating under the Biden administration, leading international investors to seek opportunities in non-traditional investments. Read more.

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THE US $2.3 TRILLION AMERICAN JOBS INFRASTRUCTURE PLAN

Elle Hayes | Dominique J. Torsiello | Carl J. Fleming | Ranajoy Basu

In March this year, US President Joe Biden unveiled the American Jobs Plan, the first of a two-part infrastructure package to revive the economy after the COVID-19 pandemic and the second stage of President Biden’s “Build Back Better” agenda. Read more.

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RECENT DEVELOPMENTS IN THE SOUTH EAST ASIA RENEWABLES MARKET

Ignatius K. Hwang | Merrick White

Despite considerable challenges, South East Asia is pulling out all the stops to transition to primarily renewable energy in the coming years. Read more.

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GREEN AMMONIA: AT THE INTERSECTION OF PETROCHEMICALS AND THE ENERGY TRANSITION

John Bridge | Parker A. Lee

As the world seeks to transition to a lower carbon economy, replacing traditional hydrocarbon-based transport fuels in the automobile, aviation, and shipping industries will be important. Read more.

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CLEAN ENERGY EMPLOYERS ARE THE NEW TARGET FOR ORGANISED LABOUR

Ellen M. Bronchetti | Ron Holland | Saniya Ahmed

Employers in the clean energy sector should be prepared to consider how changes to the US labour landscape are likely to impact their workforce. Read more.

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COMPETITION POLICY AND THE EUROPEAN GREEN DEAL: A PATHWAY TOWARDS CLEAN ENERGY AND ENERGY EFFICIENCY

Hendrik Viaene | David Henry | Karolien Van der Putten

EU competition rules—particularly State aid, merger control, and antitrust rules—are playing a key role in supporting the goals of the European Green Deal. Read more.

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NOT YET THE END FOR HYDROCARBONS

Merrick White

There has there been significant activity in the Asian upstream market this year. Who is buying mature oil fields, and why? Read more.

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ENGLISH HIGH COURT SANCTIONS RESTRUCTURING OF DTEK GROUP

Mark Fennessy | Sunay Radia | Alexander Andronikou

The recent restructuring of DTEK Group provides guidance regarding the English High Court’s position on challenges to the international effectiveness of schemes of arrangement and/or restructuring plans post-Brexit. Read more.

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Five Key Takeaways from the Green Transportation Panel at the US and UK Climate Change Business Forum

On September 22, 2021, partner Edward Zaelke moderated a panel on green transportation at the US Embassy in London during the US and UK Climate Change Business Forum, Winning the Race to Zero: Journey to COP26. Panel guests included Richard Currie, Senior Director of Public Affairs for UPS; Jamie Heywood, Regional General Manager, Northern & Eastern Europe for Uber, a representative from a large e-commerce company and Lilli Matson, Chief Safety Health & Environment Officer for Transport for London. The discussion provided remarkable insights into how these three major companies and a forward-looking transportation agency of one of the world’s largest cities are approaching the climate challenge before them. A challenge that Philip T. Reeker, former ambassador of the Bureau of European and Eurasian Affairs, noted in his closing remarks, quoting a proverb, “If you don’t change course, you will likely get to where you are heading.” Steps to change course was the focus of this invitation-only conference and, in the area of green transportation, this panel left the audience with a number of key takeaways.

  1. What’s abundantly clear is that UPS, Uber and many e-commerce companies are fully committed and have set aggressive goals to have their operations reach net zero carbon or carbon neutrality. For example, Uber seeks to electrify its fleet of vehicles in London by 2025 and in the United States by 2030. The e-commerce company on the panel is a significant purchaser of green power and seeks to achieve net zero carbon by 2040. UPS, which operates delivery vehicles and also runs a fleet of long haul trucks and its own airplanes, has set near-term goals of carbon reduction and a target of being carbon neutral by 2050.
  2. London is demonstrating a local commitment to climate change that can serve as an example for other cities around the world. Transport for London, which operates the “Tube” subway system (among its other duties), is the largest user of power in London and currently in negotiation for power purchase agreements for renewable power for its operations. In addition to encouraging use of its rapid transit system, the city bought electric buses, required that all new licensed cabs be electric, created clean air zones and congestion zones to encourage electric vehicles and greatly expanded the bike lanes on roadways throughout London.
  3. Uber, UPS and many e-commerce companies view vehicle electrification for local routes as a key to meeting their climate goals. Uber, with more than 45,000 private commercial drivers in the London area alone, is aggressively meeting the challenge. It has developed an “electric vehicle bank” for each of its drivers, where a portion of each fare goes into a savings account to help the driver replace its present vehicle with an electric vehicle. Uber customers can also request Uber Green at no additional charge. Additionally, since many of its drivers live in the suburbs where less than a third of them have off-street parking, Uber is working with the local government to create [...]

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Carbon Capture, Utilization and Sequestration – An Industry Primed for Explosive Growth? A Summary of the White House Council on Environmental Quality’s Report

On June 30, 2021, the White House Council on Environmental Quality (CEQ) delivered a Carbon Capture, Utilization and Sequestration (CCUS) report to Congress in accordance with the Utilizing Significant Emissions with Innovative Technologies (USE IT) Act passed in December 2020. The CEQ report highlights an inventory of existing permitting requirements for CCUS deployment and identifies best practices for advancing the efficient, orderly and responsible development of CCUS projects at an increased rate.

The Biden Administration is “committed to accelerating the responsible development and deployment of CCUS to make it a widely available, increasing cost-effective, and rapidly scalable climate solution across all industry sectors.” CEQ Chair Brenda Mallory recognized that in order “[t]o avoid the worst impacts of climate change and reach President Biden’s goal of net-zero emissions by 2050, we need to safely develop and deploy technologies that keep carbon pollution from entering the air and remove pollution from the air…The report … outlines a framework for how the U.S. can accelerate carbon capture technologies and projects in a way that benefits all communities.” Development of CCUS projects and related infrastructure will be encouraged and favorably looked upon by the Biden Administration as a demonstrable example of how it’s seeking to combat climate change.

CCUS – OPPORTUNITY OF THE FUTURE FOR MIDSTREAM COMPANIES?

CCUS refers to a set of technologies that remove carbon dioxide (CO2) from the emissions of point sources or the atmosphere and permanently sequesters them. In addition to removing CO2, carbon capture technology has the potential to remove other types of pollution, such as sulfur oxides. According to leading scientists and experts, removal of CO2 from the air is essential to addressing the climate crisis and alleviating the most severe impacts of climate change. Beyond the impact carbon capture technology will have on the climate crisis, CCUS will continue to have a valuable role in the US economy as the technology continues to evolve.

The CEQ report makes it extremely clear that any effective nationwide rollout of CCUS is heavily dependent on a massive buildout of pipelines for CO2 transportation infrastructure. Currently, there are approximately 45 CCUS facilities in operation or in development and 5,200 miles of dedicated CO2 pipelines. The number of CCUS facilities and the breadth of dedicated CO2 pipelines will need to expand at a rapid rate if CCUS is to become an effective tool for meeting net-zero emission by 2050.

Establishing CCUS at scale is going to be heavily dependent on—and presents a great opportunity for—midstream pipeline developers. Despite the 5,200 miles of CO2 pipelines and the potential to employ “orphaned” pipeline networks previously used by the oil and gas industry once remediated, there is no current network of CO2 pipelines at a scale large enough for permanent carbon sequestration across all industrial sectors. Thus, to achieve climate goals set by the Biden Administration, a significant amount of CO2 pipelines will need to be developed. According to the CEQ report, expansion of CO2 pipeline infrastructure in “the near term is [...]

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The Carbon Tax Checklist

Many stakeholders have called for the United States to adopt a carbon tax. Such a tax could raise billions of dollars in annual revenue while simultaneously reducing greenhouse gas emissions. Several carbon tax proposals were introduced in the last Congress (2019-2020 term), and it is likely that several more will be introduced in the new Congress. Several conservative economists have endorsed the idea, as has Janet Yellen, President Biden’s Secretary of the Treasury. But the details of a carbon tax matter—for revenue generation, emissions reductions and fairness. Because Congress is likely to consider several competing carbon tax proposals this year, this article provides a way to compare proposals with a checklist of 10 questions to ask about any specific legislative carbon tax proposal, to help understand that proposal’s design and implications.

1. What form does the tax take: Is it an emissions tax, a fuel tax or a production tax?

The point of a carbon tax is to reduce greenhouse gas emissions by imposing a price on those emissions. But there is more than one way to impose that price. Critically, the range of options depends, to a very large degree, on the type of greenhouse gas the tax is trying to address.

The most ubiquitous greenhouse gas is carbon dioxide (CO2) and the largest source of CO2 emissions is the combustion of fossil fuels. Those emissions can be addressed by imposing a fee on each individual emission source or by taxing the carbon content of the fuel—because carbon content is a reliable predictor of CO2 emissions across different combustion circumstances. Most carbon tax proposals are fuel tax proposals; they impose a tax on fuel sales, corresponding to the amount of CO2 that will be emitted when the fuel is burned.

For CO2 emissions, the fuel tax approach has one significant advantage over the emissions fee approach. The fuel tax can be imposed “upstream,” rather than “downstream,” thereby reducing the total number of taxpayers and the overall administrative burdens associated with collecting the tax. A tax imposed on petroleum products as they leave the refinery, for example, is a way to address CO2 emissions from motor vehicles without the need to tax every individual owner of a gasoline-powered car. Most CO2-related carbon tax proposals work that way—they are upstream fuel taxes rather than downstream emissions taxes.

But not all greenhouse gas emissions can be addressed through a fuel tax, because not all greenhouse gas emissions come from fossil fuel combustion. Methane, for example, is released in significant quantities from cows, coal mines and natural gas production systems. A carbon tax directed at those emissions is likely to take the form of an emissions fee imposed on the owner or operator of the emission source. Many carbon tax proposals, however, simply ignore methane emissions or expressly exempt agricultural sources.

Fluorinated gases are yet another type of greenhouse. If they are subjected to a carbon tax, that tax is likely to take the form of a production tax, which would be imposed [...]

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Six Takeaways: Utilization and Structuring for Section 45Q Carbon Capture Credits

On Thursday, June 11, McDermott partners Phil Tingle, Heather Cooper and Jacob Hollinger were joined by Ken Ditzel, managing director at FTI Consulting, to discuss their insights into the proposed Section 45Q carbon capture and sequestration credit regulations.


The Treasury Department and IRS recently published proposed regulations implementing the Section 45Q carbon capture and sequestration credit. The regulations clarify some questions about the credit, though many questions remain. For further discussion, see our On The Subject.

Below are six key takeaways from this week’s webinar:

      1. Carbon capture projects are likely to be economically important moving forward. Ken Ditzel estimated there are more than 600 economically viable projects, including both secure geological storage at deep saline formations and enhanced oil recovery projects.
      2. The proposed regulations provide a compliance pathway for satisfying the reporting requirements. For long-term storage, taxpayers should comply with Subpart RR of the Clean Air Act’s greenhouse gas reporting rule. For enhanced oil recovery projects, taxpayers may choose either Subpart RR or alternative standards developed by the American National Standards Institute (ANSI).
      3. Taxpayers can claim the credit if they utilize the captured carbon for a purpose for which a commercial market exists, instead of storing it. Additional guidance is needed to determine what commercial markets the IRS will recognize and how they will go about making those determinations.
      4. The proposed regulations offer considerable flexibility to contract with third parties to dispose the captured carbon and to pass the section 45Q credit to the disposing party. Contracts must meet certain procedural requirements, including commercially reasonable terms and not limiting damages to a specified amount.
      5. If the captured carbon dioxide leaks, the carbon capture tax credit is subject to recapture by the IRS. The taxpayer who claimed the credit bears the recapture liability, but IRS guidance permits indemnities and insurance for credit recapture.
      6. The partnership allocation revenue procedure issued in February 2020 provides flexibility for the section 45Q credit relative to other tax equity structures, by only requiring 50% non-contingent contributions by an investor member. This may make projects easier to finance, especially in light of the other contracting flexibility in the proposed regulations.

Download the key takeaways here.

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To access past webinars, please click here.




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