Sweeping federal spending cuts scheduled to take effect next month have sparked a quiet lobbying campaign and veiled threats of lawsuits from renewable energy interests expecting smaller project grants.
Much remains unknown about the depth of the cuts or how many grantees would be affected. But if Congress and the White House are unable to reach a deal to avoid “sequestration” before March 1, spending cuts will hit virtually every line in the federal government’s budget, including the clean energy grant program created in the 2009 stimulus law.
Inclusion of the Treasury Department’s so-called 1603 grant program among those subject to the sequester came as a surprise to renewable industries last fall because the grants were designed to have essentially the same function as renewable energy tax credits, which are not affected by the sequester. Developers – especially in the solar sector – worry the sequester could undermine their investments, some of which were made years ago with the expectation of recouping 30 percent via a 1603 grant upon a project’s completion.
“Such developers have expended billions of dollars based upon the clearly defined rules for 1603 eligibility,” the Solar Energy Industries Association said in a Jan. 24 letter to Treasury and the Office of Management and Budget. “They could not have foreseen that the 1603 grants that they relied upon in making their investment decisions would subsequently face the risk of being reduced, notwithstanding full compliance with the eligibility requirements for the grants (some of which had to be satisfied years in advance).”
SEIA asks OMB to reconsider its initial determination that the sequester would apply to 1603 because Treasury does not have any discretion in deciding whether to reimburse developers’ qualified costs. It cites a 2011 Court of Federal Claims case, ARRA Energy Co. 1 et al. v. U.S., in which a judge ruled that 1603 is a “money-mandating statute” that compels money to be paid.
Based on that decision, “we believe that payments under the Section 1603 Treasury Grant Program are very closely analogous to ‘obligated balances,’ which the Office of Management and Budget defines as ‘obligations already incurred (for example, contracts signed) for which payment has not yet been made but will be required, i.e. undelivered orders and accounts payable,’” SEIA President Rhone Resch writes in the letter. “In accordance with Sections 45 and 48 of the Internal Revenue Code, such payments are obligatory to reimburse grant recipients for a portion of their costs already incurred.”
The trade group doesn’t directly threaten a lawsuit, but its citation serves a similar function as a plot device known as Chekhov’s gun – there’s no sense showing it in the play’s first act if it’s not going to be fired by the third.
Legal experts say the industry may have a tough case to make in court because merely being eligible for 1603 is different from having a signed contract with Treasury, but they acknowledge that the issue is not cut-and-dried and would be likely to at least get a hearing.
“I think the court is going to give Treasury a fair amount of discretion as to how they’re going to apply” the sequester, said David Burton, a partner with the Akin Gump law firm whose practice focuses on the tax aspects of finance and energy transactions.
Sources in the wind and solar industries say their trade associations have received no response from OMB or Treasury but are hoping for additional guidance before the sequester deadline.
The wind industry is taking a different approach in trying to shield its developers. Because wind projects had to be completed by the end of last year to be 1603 eligible – whereas solar projects have until 2016 to come online – they are less exposed to worries about the sequester, industry sources say. However, several projects have yet to be reimbursed by Treasury, and it remains an open question whether anyone still awaiting payment would see their reward cut.
The wind industry is urging Treasury and OMB to consider unpaid 1603 balances “obligated” as soon as an eligible project is placed in service – a narrower request than solar’s request that all 1603 funds be shielded from the sequester, wind industry lobbyists said.
As set forth in the American Recovery and Reinvestment Act, the 1603 program replaced an investment tax credit that allows energy developers to recoup 30 percent of their costs after a wind, solar or other renewable energy project comes online. At the height of the financial crisis, virtually no capital was available in private “tax equity” markets, in which developers essentially sell their future tax benefits to banks in exchange for upfront financing, so the federal government promised to provide grants instead.
About $16 billion in 1603 grants had been distributed as of December 2012, according to the Treasury Department.
According to a September report from OMB, more than $3.6 billion of 1603 funding would be subject to the sequester, which would cut the available funds by 7.6 percent, or $279 million. That report was based on an assumption that the sequester would go into effect Jan. 1, but Congress delayed its implementation until next month as part of the broader “fiscal cliff” deal.
Updated agency-specific figures have not yet been released. OMB now estimates the cuts would amount to a roughly 5 percent reduction compared to annual appropriation levels; however, because the cuts would be compressed into the final seven months of the fiscal year, effective reductions to spending levels would be closer to 9 percent, according to a White House fact sheet released earlier this month.
OMB and Treasury didn’t respond to requests for comment on how the sequester would affect 1603, specifically, and industry groups say they have not yet received guidance from the agencies.
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