Lawsuit Moves Forward Against Renewable Energy Grant Program

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A federal Treasury grant program popular among renewable energy developers has become the subject of a lawsuit, and a federal judge recently denied part of the government’s wish for a dismissal of the case.

The lawsuit could have wide-ranging ramifications, from opening the door to follow-on lawsuits from companies, to limiting the amount of discretion the government has to deny grants to companies that don’t fit the bill. The program comes from the stimulus package passed by Congress in early 2009 to boost renewable energy generation and create jobs, and the government has given out $5.83 billion to solar, wind and other project developers so far.

The lawsuit was brought by three California companies, named ARRA Energy Co. I, ARRA Energy Co. II and ARRA Energy Co. III, which claimed they have spent about $7.78 million installing and leasing 25 “mobile solar-powered generating systems” in 2009 (they are off-grid systems). As a result, the companies say they should get about $2.33 million, or 30 percent of the costs, from the grant program plus damages. The government denied the applications, saying the companies didn’t provide adequate documents to support the costs.

The American Recovery and Reinvestment Act of 2009 created the grant program to help fund renewable energy projects at a time when banks were in trouble and didn’t want to loan much money. The program, found in the Section 1603 of the tax code, said the government should pay project developers an equivalent of 10 percent or 30 percent of the cost for building a renewable energy generation project. The percentage of payment depends on the source of energy. Most of them, including wind, solar and biomass, get 30 percent while certain types of geothermal systems get 10 percent (scroll down this document to see the list).

The program became so popular that renewable energy advocates fought for its extension last year and won a 1-year reprieve right before the program was to end on Dec. 31.

The plaintiffs in the case argued that the government has no choice but to provide the 30 percent reimbursement. They said the program creates an automatic contract between them and the government and the government needs to honor that. The government disagrees and says the federal claims court has no jurisdiction over the case.

Judge Lynn Bush of the U.S. Court of Federal Claims rules that the court does have jurisdiction over the case. At the same time the judge also doesn’t side with the plaintiffs’ belief that the program automatically creates a contract between the government and applicants. The ruling goes to say that the two sides have to report back to court by Feb. 18 and decide whether they want to continue the lawsuit or settle.

The ruling, issued on Jan. 18, is narrow and doesn’t say whether the plaintiffs are entitled to back payments from the government. But her ruling indicates that the government doesn’t have a lot of leeway in denying an application. She points out that the criteria for getting the grant are straightforward. The two main rules are: the project has to use a qualifying renewable source, and it has to be brought online in 2009 or later. The government can’t create new sets of rules that conflict what is written into law.

“The court concludes that section 1603 compels the payment of money by the government and does not provide the government with any discretion to refuse such payments when the specific requirements of the statute are met,” Bush writes.

But she also writes that, “There is no question that the government has the authority to deny fraudulent claims and applications that do not meet the requirements set forth in the statute.”

In an alert emailed by law firm Bunton and Williams, which is not involved in the case, the firm said the Treasury Department has lowered payments to project developers in some cases based on what the government believed to be adequate costs of the project.

The government expressed concerns about developers inflating their projects’ costs to take advantage of the program. And that is indeed a serious issue. Some other government incentive programs circumvent this problem by giving out money based on the generation capacity of a project.

California’s solar program gives rebates based on the generation capacity and, in some cases, on the actual amount a system generates. Though its collection of installation data from developers, the state has found some projects that cost way higher than the norm. So the state set a rule last year that denies payments to projects costing more than$14.70 per watt unless developers can show proof justifying the high costs. The state said the reason for the cap is “part of efforts to protect consumers from over-priced solar systems and thwart fraudulent federal tax claims.”

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