RP1 Fuel Cell, LLC v. United States

• Decision Date: 31 March 2015
• Docket Number: No. 13-552C,13-552C
• Parties: RP1 FUEL CELL, LLC and UTS SJ-1, LLC, Plaintiffs, v. UNITED STATES, Defendant.
• Court: U.S. Claims Court

RP1 FUEL CELL, LLC and UTS SJ-1, LLC, Plaintiffs, v. UNITED STATES, Defendant.

No. 13-552C

United States Court of Federal Claims

March 31, 2015

American Recovery and Reinvestment Tax Act; Section 1603; Internal Revenue Code §§ 45, 48; Fuel Cell Power Plant; Gas Conditioning Equipment; Trash Facility; Municipal Solid Waste.

Timothy L. Jacobs, Hunton & Williams LLP, for plaintiffs. With him were David S. Lowman, Jr., and Hilary B. Lefko, Hunton & Williams LLP.

Michael J. Ronickher, Trial Attorney, Court of Federal Claims Section, Tax Division, United States Department of Justice, Washington, D.C., for defendant. With him were Caroline D. Ciraolo, Acting Assistant Attorney General, Tax Division, David I. Pincus, Chief, Court of Federal Claims Section, Tax Division, and G. Robson Stewart, Assistant Chief, Court of Federal Claims Section, Tax Division.

OPINION

HORN, J.

Plaintiffs RP1 Fuel Cell, LLC (RP1), and UTS SJ-1, LLC (SJ-1) have brought suit against the United States alleging they are entitled to "payment of the cash grant amounts mandated by section 1603 of the American Recovery and Reinvestment Tax Act of 2009," Pub. L. No. 111-5, Div. B, tit. I, § 1603, 123 Stat. 115, 364-66 (2009) (ARRTA, § 1603, or Section 1603). Under the Section 1603 program, the Secretary of the Treasury, upon application, "shall, subject to the requirements of this section, provide a grant to each person who places in service specified energy property to reimburse such person for a portion of the expense of such property." Section 1603(a). In plaintiffs' case, the grant is equal to thirty percent of the allowed cost basis of the qualifying energy property. See Section 1603 (b)(2)(A). The parties have stipulated that "[t]he Section 1603 program is administered by the Office of the Fiscal Assistant Secretary at the Department of Treasury ('Treasury')."

Plaintiffs allege that they "placed in service two fuel cell power plants," one by RP1, and the other by SJ-1, and that each of the plaintiffs "filed an application for agrant for the eligible costs of constructing the Fuel Cells" pursuant to Section 1603. Plaintiffs allege that they included in the cost basis for the grants "the Fuel Cells and their associated gas conditioning equipment,"¹ but that the United States Department of the Treasury did not allow as part of the cost basis "all direct and indirect costs relating to the associated gas conditioning equipment." Plaintiffs contend that the government "was required to make payment of the applied-for amounts to RP1 and SJ-1 because the associated gas conditioning equipment is 'specified energy property' under Section 1603," and that including the gas conditioning equipment as part of the cost basis for the grant is "permitted under Section 1603, the Treasury Guidance, and the cost basis rules under the [Internal Revenue] Code." Plaintiffs seek the amount of additional cash grant that they allege should have been awarded if the gas conditioning equipment had been included as part of the grant's cost basis, $1,515,020.00 between the two facilities,² as well as request that the decision by the Secretary of the Treasury be vacated.³

FINDINGS OF FACT

According to the parties' joint stipulation, RP1 and SJ-1 are Delaware, limited liability companies with their principal places of business in California, and both are wholly-owned subsidiaries of UTS BioEnergy, LLC. The parties further stipulated that UTS BioEnergy is more than eighty-percent owned by Anaergia, a Canadian corporation "engaged in the generation of renewable energy from organic waste." Plaintiffs' witness, Arun Sharma, who, at the time of trial, testified he was "president of Anaergia North America," explained that Anaergia "is in the business of resource recovery. Our projects typically include recovery of renewable energy, water, nutrients, and fertilizer from waste streams." Regarding the RP1 and SJ-1 projects, Mr. Sharma stated he was "vice president of development at the time of the projects," in 2010 and 2011, but also indicated that he may have been promoted to "president of UTS BioEnergy," before completion of the projects. Mr. Sharma indicated that these projects were Anaergia's and UTS BioEnergy's first fuel cell projects. Mr. Sharma testified that Anaergia has performed a number of projects in the United States and abroad that create natural gas or electrical power from the digestion of organic waste, whether at a wastewater treatment facility or at another source of organic waste, such as a farm.

Mr. Sharma testified that Anaergia's interest in the fuel cell projects at issue developed because "they had some component of wastewater treatment where the digester gas was available and could be converted into electrical energy." Mr. Sharma further testified that the company's interest in these projects was because, "at the time, section 1603 grant and self-generation incentive program was available, and after discounting or reducing the project costs by that particular incentive, the projects penciled out very well for the municipality, and we were able to offer a low rate for electrical energy to the customers."⁴ According to Mr. Sharma, the RP1 and SJ-1projects were infeasible without the "grants and incentives," including incentives that Mr. Sharma understood covered the gas conditioning equipment. Mr. Sharma also testified that the projects using digester gas were of interest, because, while the digester gas was free, "it's not economic to work on natural gas alone because then you have to pay for natural gas."

The RP1 Fuel Cell Project

The parties have stipulated that the RP1 fuel cell system is located at the Ontario, California, Inland Empire Utilities Agency (or IEUA) Regional Plant No. 1, wastewater, treatment plant. The parties further stipulated that the Regional Plant No. 1 "collects and treats municipal wastewater and biosolids and supplies drinking water." The parties further stipulated that the plant "includes anaerobic digesters, owned and operated by IEUA, that utilize microorganisms to break down the solids portion of the wastewater sludge." According to the parties' joint stipulation, "[t]hese digesters produce both 'biosolids' and 'biogas,' consisting of methane, other gaseous elements, and various contaminants. Biosolids are used to produce compost. Biogas may be discarded by burning it (in a process called 'flaring') or may be used as a fuel source." According to the parties, prior to the installation of the RP1 fuel cell system, the biogas from Regional Plant No. 1 was used as a fuel source for "two 1.4 MW cogeneration engines." The parties stipulated that "[d]ue to concerns with cost, reliability, and regulatory and environmental factors, IEUA desired to replace these engines with a fuel cell system." Mr. Sharma testified at trial:

At the time, the Air Quality Management District, this[,] which is the South Coast Air Quality Management District, was not satisfied with the emissions profile [of the combustion engines] going forward, and they wanted them to have an alternative use for the gas or this fuel. And the only technology that was available to convert this fuel cleanly into electricity far better than internal combustion engine was fuel cell technology.

Mr. Sharma indicated at trial that the IEUA did not have "any interest in a fuel cell that would operate on natural gas alone." A February 17, 2012 press release issued by IEUA, provided as a joint exhibit, stated that "IEUA is also adding fuel cells to its renewable energy portfolio. Installation of 2.8 megawatts powered by fuel cells operating on bio-gas and natural gas is underway and will be operational this spring."

Mr. Sharma testified at trial that part of the financial incentive for the RP1 project came from the California Self-Generation Incentive Program (or SGIP). Mr. Sharma explained:

SGIP is called the Self-Generation Incentive Program, which is administered in the state of California by the utilities, and that is to promote cogeneration and fuel cell-type projects. And that basically provides a grant to make these projects happen.

And this grant was fairly significant for our projects. And it was included as part of the economics for the entire project to provide a rate of electricity to the customer that would be palatable and would be in line with what the customer would have to pay to the utility.

Mr. Sharma explained that, to be eligible for the Self-Generation Incentive Program grant, "at least 75 percent of the fuel has to be renewable fuel, like biogas, and 25 percent could be substituted with natural gas." The June 25, 2012 "Self-Generation Incentive Program Handbook," (emphasis in original), issued by the administrators⁵ of the Self-Generation Incentive Program, and provided as a joint exhibit, also explains that "[i]f it is determined that Directed Biogas Renewable Fuel deliveries fell below 75% of the generator's fuel demand during any 1 year period within the warranty period, a refund of a portion of the incentive will be required."

The request from IEUA for proposals for the Regional Plant No. 1 fuel cell project, which was submitted as a joint exhibit, stated: "[t]he purpose of the proposed fuel cell construction is to replace the current power generation system at RP1 [Regional Plant No. 1] and utilize digester gas as the primary fuel supply." The request for proposal's "SCOPE OF WORK," (emphasis and capitalization in original), stated:

The Agency seeks a Vendor to provide turnkey engineering, design, materials, delivery, installation, testing, and commissioning of a cost-effective and energy efficient fuel cell system that will maximize the use of digester gas and increase the renewable energy resource potential at IEUA. The Vendor shall include in the proposed scope of work all necessary work, labor, taxes, services, equipment, appurtenances, and incidentals necessary to produce a fully functional and operational fuel cell system, including a fuel cleaning system

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