On May 26, 2020, FERC staff issued an order determining that additional information provided by the South Carolina Public Service Authority (Santee Cooper) was sufficient for FERC to determine that certain investments made over the term of the existing license for the Santee Cooper Project (FERC No. 199) satisfied the criteria under section 36(b) of the Federal Power Act (FPA), and should be considered when the Commission establishes the length of the next license term for the Project. Continue Reading FERC Approves Additional Early Action Investments to Support Longer License Term on Relicensing

On May 27, 2020, the IRS issued Notice 2020-41, which provides much-anticipated relief for delays caused by the COVID-19 pandemic with respect to the “beginning of construction” requirements for renewable energy projects eligible for the production tax credit (“PTC”) or investment tax credit (“ITC”).

Notice 2020-41 modifies the guidance provided in Notices 2013-29, 2013-60, 2014-46, 2015-25, 2016-31, 2017-04, 2018-59, and 2019-43 (the “Prior Notices”) by (i) extending the Continuity Safe Harbor from four to five years for projects on which construction began in 2016 or 2017 and (ii) providing a safe harbor delivery date for property, the costs of which were intended to qualify for the so-called 3½ Month Rule.

Continuity Safe Harbor

The Prior Notices provide two methods by which a taxpayer can satisfy the applicable beginning of construction requirement: (i) starting physical work of a significant nature (the “Physical Work Test”) or (ii) incurring 5% or more of the costs of the project (the “5% Safe Harbor”). Both methods require that a taxpayer make continuous progress toward completion once construction has begun (the “Continuity Requirement”). The Prior Notices also provide a safe harbor (the “Continuity Safe Harbor”) pursuant to which the Continuity Requirement is deemed to be satisfied if a taxpayer places the project in service by the end of a calendar year that is no more than four calendar years after the calendar year during which construction began. For prior coverage on the Continuity Safe Harbor, please see our prior analysis of Notice 2017-04.

Notice 2020-41 modifies the Continuity Safe Harbor for any project that began construction in either 2016 or 2017 by providing that the Continuity Safe Harbor will be satisfied if the project is placed in service by the end of a calendar year that is no more than five calendar years after the calendar year in which construction began.

Accordingly, wind projects the construction of which begin in 2016 (the last year a project could begin construction and qualify for the full PTC) or 2017, which otherwise would have had placed-in-service deadlines of 2020 or 2021, respectively, to satisfy the Continuity Safe Harbor, now have an additional year to complete development and construction. The panoply of structuring issues raised by the possibility that the placed-in-service date could slip into the next year (tax opinions on the facts-and-circumstances test in the Continuity Requirement, tax insurance to cover off the risk, etc.) may become largely irrelevant.

3½ Month Safe Harbor

For purposes of the 5% Safe Harbor, the Prior Notices and applicable regulations provide that a liability is incurred for federal income tax purposes in the taxable year in which all events have occurred that establish the fact of the liability, the amount of the liability can be determined with reasonable accuracy, and economic performance has occurred with respect to the liability. Applicable regulations further provide that a taxpayer may treat services or property as provided to the taxpayer (and, therefore, economic performance as having occurred) as the taxpayer makes payment to the person providing property or services, if the taxpayer reasonably expects the services or property to be provided within 3½ months after the date of payment (the so-called “3½ Month Rule”).

Notice 2020-41 clarifies that if the taxpayer’s reasonable expectation at the time of payment was that the services or property would be provided in 3½ months, the 3½ Month Rule will be satisfied regardless of whether subsequent events delay the provision of the services or property. However, to provide certainty and assurance, Notice 2020-41 provides that for services or property paid for by a taxpayer on or after September 16, 2019, the taxpayer will be deemed to have had a reasonable expectation that the services or property would be received within 3½ months after payment if the services or property are actually received by October 15, 2020 (the “3½ Month Safe Harbor”). The 3½ Month Safe Harbor applies only for purposes of the “beginning of construction requirements” for the PTC and the ITC.

Many sponsors, relying on the 3½ Month Rule, paid in full for equipment at the end of 2019 (the last year a solar project could begin construction and qualify for the 30% ITC) and expected delivery within 3½ months. The timing of the COVID-19 pandemic created supply chain delays that meant that many sponsors did not in fact take delivery within 3½ months of the date of payment, raising the question as to whether their expectations as to delivery were reasonable in the first place. The 3½ Month Safe Harbor should eliminate the need for an analysis of the reasonableness of the expectations in most cases.

We note that the 3½ Month Safe Harbor requires that the property be “received” by October 15, 2020. The key concepts in the applicable regulations are title transfer, delivery, and acceptance; the concept of receipt does not exist. However, because the October 15 date is so generous, we do not expect the imprecise drafting in Notice 2020-41 to be relevant in most circumstances.

Summary

The extension of the Continuity Safe Harbor is an extremely important development for the wind industry. Industry reports had suggested that a significant portion of wind projects scheduled to be placed in service in 2020 were at risk of slipping into 2021, with potentially disastrous consequences for the projects. The one-year extension provides crucial relief.

The 3½ Month Safe Harbor also provides welcome relief for both the solar and wind industries. As a practical matter, it should help most sponsors avoid awkward questions as to whether their expectations of delivery were reasonable and therefore should promote the stated goals of providing certainty and assurance as to the year in which the relevant costs were incurred.

On May 21, 2020, FERC issued a proposed policy statement setting forth a revised approach to addressing requests for waiver, including: waiver of rates; non-rate terms and conditions; market rules; and procedural deadlines that are set forth in tariffs, rate schedules, service agreements, and contracts on file with FERC (“Proposed Policy Statement”). FERC specifically proposes to:

  1. discontinue granting retroactive waivers of tariff provisions, with a few specified exceptions; and
  2. grant requests for “remedial relief” only when applicants demonstrate that (a) such a request does not violate the filed rate doctrine or rule against retroactive ratemaking, or (b) the requested relief is within FERC’s remedial authority under section 309 of the Federal Power Act (“FPA”) or section 16 of the Natural Gas Act (“NGA”).

Continue Reading FERC Proposes and Seeks Comment on Changes to its Policies on Retroactive Waivers

On May 21, 2020, FERC found PJM Interconnection, L.LC.’s (“PJM”) existing reserve market design to be unjust and unreasonable and established a replacement market design that includes, among other elements, a downward-sloping Operating Reserve Demand Curve (“ORCD”) and a $2,000/MWh price ceiling. In addition, FERC found that the changes to PJM’s reserve market would render PJM’s existing methodology for calculating its energy and ancillary services offset (“E&AS Offset”) unjust and unreasonable, and directed PJM to implement a forward-looking E&AS Offset on compliance. In a separate dissenting statement, Commissioner Richard Glick stated that PJM’s proposal would result in over procurement of reserves and impose billions of dollars of additional costs on consumers. Pointing to FERC’s recent orders accepting PJM’s Variable Resource Requirement Curve (see April 23, 2020 edition of the WER) and Minimum Offer Price Rule (see April 22, 2020 edition of the WER), Commissioner Glick characterized the May 21 order as the latest installment in a series of decisions prioritizing high prices over efficient markets. Continue Reading FERC Orders Changes to PJM Reserve Market Design and E&AS Offset Calculation

On May 21, 2020, FERC issued Opinion No. 569-A, which revised the Commission’s methodology for determining whether an established rate of return on equity (“ROE”) is just and reasonable under section 206 of the Federal Power Act (“FPA”). Among other things, Opinion No. 569-A accepts the use of a third financial model for establishing just and reasonable ROE for Transmission Owners (“TOs”)—the “Risk Premium Model” (which was rejected in an earlier opinion)—in addition to the previously accepted two-step discount cash flow (“DCF”) model and capital asset pricing model (“CAPM”). Commissioner Richard Glick dissented in part, arguing that FERC was “once again changing course and revamping [its] ROE methodology” to the detriment of regulatory certainty among TOs and investors. In a related action, FERC contemporaneously issued a Policy Statement clarifying that the newly revised ROE methodology in Opinion No. 569-A applies to natural gas and oil pipelines, with certain exceptions. Continue Reading FERC Revises Public Utility ROE Methodology; Sets Policy for Natural Gas, Oil Pipelines

On May 1, 2020, the U.S. Department of Energy (“DOE”) issued a Notice of Proposed Rulemaking (“NOPR”) to update its National Environmental Policy Act (“NEPA”) implementing regulations concerning applications to import to, or export from, liquid natural gas (“LNG”) terminals. In particular, DOE has previously determined that the transportation of natural gas by marine vessels normally does not pose the potential for significant environmental impacts, and accordingly, exports of LNG should be considered a “categorical exclusion” from NEPA review.  Comments are due June 1, 2020.  Continue Reading DOE Proposes to Limit NEPA Review for LNG Export Applications

On May 12, 2020, FERC clarified that the offer floor price calculation for Special Case Resources (“SCRs”)—demand response resources participating in the New York Independent System Operator, Inc.’s (“NYISO”) Installed Capacity market (“ICAP”)—must include any payment or other benefit provided by state-sponsored programs. FERC’s order follows a February 2020 order directing NYISO to apply its buyer-side mitigation (“BSM”) rules to all new SCRs, and finding that the offer floor calculation for SCRs should include only the incremental costs of providing wholesale-level capacity services rather than payments from retail-level demand response programs designed to address distribution-level reliability needs. Commissioner Richard Glick issued a separate statement concurring with FERC’s clarification as to the SCR offer floor price calculation, but added that NYISO’s BSM regime will impose arbitrarily high offer floors on SCRs that are not exercising market power. Continue Reading FERC Clarifies Offer Floor Calculation for NYISO Special Case Resources Includes State-Sponsored Benefits

Due to the unprecedented and rapidly changing landscape caused by the COVID-19 pandemic, FERC has provided multiple resources and notices over the last two weeks. Three of those relevant releases include an Epidemic/Pandemic Response Plan Resource, a policy statement providing guidance to oil pipelines impacted by the pandemic, and a notice that FERC is temporarily delaying the processing of all hardcopy submissions. Continue Reading Update on FERC’s COVID-19 Response

On May 1, 2020, FERC accepted two agreements—an unexecuted Network Integration Transmission Service Agreement (“NITSA”) and a Network Operating Agreement (“NOA”) (together, “Agreements”)—filed by Southwest Power Pool Inc. (“SPP”) to be effective February 1, 2020, subject to the outcome of pending rehearing proceedings. Consistent with FERC’s prior notice policies, SPP had requested waiver of the 60-day prior notice requirement to permit the Agreements to become effective February 1, 2020. While Commissioner Danly concurred with the decision to grant an effective date prior to the filing date, he noted that this practice appears to run afoul of the rule against retroactive ratemaking and urged FERC to reexamine its practice. Continue Reading Short Danly Concurrence May Signal Big Changes to FERC Waiver Policies

On April 30, 2020, the United States Court of Appeals for the Eighth Circuit (“Eighth Circuit”) denied Nebraska Public Power District’s (“NPPD”) petition for review of FERC’s approval of the Southwest Power Pool, Inc.’s (“SPP”) placement of Tri-State Generation & Transmission Association’s (“Tri-State”) transmission facilities in SPP Zone 17. NPPD challenged FERC’s approval on cost causation grounds, arguing that FERC’s ruling was arbitrary and capricious because it failed to find that the benefits accruing to NPPD are roughly commensurate with the costs. The Eighth Circuit denied NPPD’s petition, concluding that FERC provided plausible and articulable reasons for why the costs and benefits of placing Tri-State’s transmission facilities in Zone 17 were comparable, and that FERC’s cost-causation analysis was not arbitrary and capricious.

Continue Reading Eighth Circuit Denies Petition for Review of Tri-State’s Placement in SPP Zone 17